GR. No.

196072, September 20, 2017

STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LIMITED, Petitioner, v. SULPICIO

LINES, INC., Respondent.

G.R. NO. 208603

SULPICIO LINES, INC., Petitioner, v. STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA)

LIMITED, Respondent.

DECISION

LEONEN, J.:

An insured member may be compelled to arbitration pursuant to the Rules of the Protection and
Indemnity Club, which were incorporated in the insurance policy by reference. Where there are multiple
parties, the court must refer to arbitration the parties covered by the agreement while proceeding with
the civil action against those who were not bound by the arbitration agreement.

G.R. No. 196072 is a Petition for Review1 seeking to set aside the November 26, 2010 Decision2 and
March 10, 2011 Resolution3 of the Court of Appeals in CA-GR. SP No. 106103.

GR. No. 208603 is a Petition for Indirect Contempt4 filed by Sulpicio Lines, Inc. (Sulpicio) against
Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship). It prays, among others, that
Steamship be (a) declared guilty of indirect contempt; (b) imposed a fine of P30,000.00; and (c) ordered
to restitute to Sulpicio the amount of US$69,570.99 or its equivalent in Philippine currency plus interest,
computed from December 3, 2012 until fully restituted.5

Steamship was a Bermuda-based Protection and Indemnity Club, managed outside London, England.6 It
insures its members-shipowners against "third party risks and liabilities" for claims arising from (a) death
or injury to passengers; (b) loss or damage to cargoes; and (c) loss or damage from collisions.7

Sulpicio insured its fleet of inter-island vessels with Steamship for Protection & Indemnity risks through
local insurance agents, Pioneer Insurance and Surety Corporation (Pioneer Insurance) or Seaboard-
Eastern Insurance Co., Inc. (Seaboard-Eastern).8 One (1) of these vessels was the M/V Princess of the
World, evidenced by a Certificate of Entry and Acceptance issued by Steamship, which provided:

CERTIFICATE OF ENTRY AND ACCEPTANCE 

by the Club of your proposal for entering the ship(s) specified below, and of
the tonnage set out against each, in:

Class 1 PROTECTION AND INDEMNITY

of the Club from
Noon 20th February 2005 to Noon 20th February 2006
or until sold, lost, withdrawn or the entry is terminated in accordance with the rules, to the extent
specified and in accordance with the Act, By(e)-Laws and the Rules from time to time in force and the
special terms specified overleaf.

Your name has been entered in the Register of Members of the Club as a  Member.

FOR ACCOUNT OF CERTIFICATE NUMBER

      Sulpicio Lines Inc.,
155,534
      1st Floor, Reclamation
Area,
      P.O. Box No. 137
      Cebu City, Philippines.

NAME OF SHIP BUILT ENTERED CLASS PORT OF

GROSS REGISTRY
"PRINCESS OF THE 1975 TONNAGE B.V.
OCEAN" 6,150
1983 Cebu City B.V.
"PRINCESS OF THE 13,526
UNIVERSE" 1979 Cebu City B.V.
3,768
"PRINCESS OF THE 1972 Cebu City B.V.
CARIBBEAN" 9,627
1984 (Rebuilt 1990) Cebu City X.X.
"PRINCESS OF THE 19,329
WORLD" Cebu City

"PRINCESS OF THE
STARS"

....

NOTES  

1. REFERENCE IS 2. THE RULES ARE

REQUESTED TO PRINTED ANNUALLY
THE RULES AS TO IN BOOK FORM,
THE INCORPORATING ALL
CIRCUMSTANCES PREVIOUS
OF ENTRY BEING ALTERATIONS AND A
CANCELLED AND AS COPY IS SENT TO
 TO EACH MEMBER.
THE ALTERATIONS CAN
CIRCUMSTANCES BE MADE BY
OF AN ALTERATION ORDINARY
IN THE RULES OR RESOLUTION
BY(E)-LAWS. FOLLOWING A
GENERAL MEETING
NOTIFIED TO ALL
MEMBERS.[9

On July 7, 2005, M/V Princess of the World was gutted by fire while on voyage from Iloilo to Zamboanga
City, resulting in total loss of its cargoes. The fire incident was found by the Department of Interior and
Local Government to be "accidental" in nature.10

Sulpicio claimed indemnity from Steamship under the Protection & Indemnity insurance policy.
Steamship denied the claim and subsequently rescinded the insurance coverage of Sulpicio's other
vessels on the ground that "Sulpicio was grossly negligent in conducting its business regarding safety,
maintaining the seaworthiness of its vessels as well as proper training of its crew."11

On June 28, 2007, Sulpicio filed a Complaint12 with the Regional Trial Court of Makati City against
Steamship; one (1) of its directors, Gary Rynsard; and its local insurance agents Pioneer Insurance and
Seaboard-Eastern for specific performance and damages. This Complaint was docketed as Civil Case No.
07-577, was amended on August 10, 2007,13 and further amended on September 11, 2007.14

Steamship filed its Motion to Dismiss and/or to Refer Case to Arbitration15 pursuant to Republic Act No.
9285, or the Alternative Dispute Resolution Act of 2004 (ADR Law), and to Rule 4716 of the 2005/2006
Club Rules, which supposedly provided for arbitration in London of disputes between Steamship and its
members.17 The other defendants filed separate motions to dismiss.18

Branch 149, Regional Trial Court, Makati City denied the motions to dismiss. In its July 11, 2008
Order,19 denying Steamship's motion and supplemental motion to dismiss and citing20European
Resources and Technologies, Inc. v. Ingenieuburo Birkhann + Nolte, Ingeniurgesellschaft Gmbh 21 the
Regional Trial Court held that "arbitration [did] not appear to be the most prudent action, . . .
considering that the other defendants . . . ha[d] already filed their [respective] [a]nswers."22 Steamship
filed its Motion for Reconsideration,23 but it was likewise denied in the Order24 dated September 24,
2008.

Steamship assailed trial court orders before the Court of Appeals through a Rule 65 Petition, docketed as
CA-G.R. SP No. 106103.25 The Court  of Appeals dismissed the petition in its November 26, 2010
Decision.26 It found no grave abuse of discretion on the part of the trial court in denying Steamship's
Motion to Dismiss and/or to Refer Case to Arbitration27 or any convincing evidence to show that a valid
arbitration agreement existed between the parties.28 Steamship's Motion for Reconsideration of this
Decision was likewise denied in the Resolution29 dated March 10, 2011.
On April 29, 2011, Steamship filed before this Court this Petition for Review, docketed as G.R. No.
196072. In compliance with this Court's June 13, 2011 Resolution,30 Sulpicio filed its Comment31 on
August 31, 2011 and Steamship filed its Reply32 on October 20, 2011.

On September 6, 2013, Sulpicio filed with this Court a Petition for Indirect Contempt33 under Rule 71 of
the Rules of Court against Steamship. This Petition was docketed as GR. No. 208603.

Sulpicio alleges that sometime in September 2012, it settled its judgment liability of P4,121,600.00 in
Civil Case No. CEB-24783, entitled Verna Unabia v. Sulpicio Lines, Inc.34 However, the actual amount
reimbursed by Steamship was not P4,121,600.00, equivalent to US$96,958.47, but only
US$27,387.48.35 Steamship deducted US$69,570.99, which allegedly represented Sulpicio's share in the
arbitration costs for the arbitration in London of the dispute in Civil Case No. 07-577.36

Sulpicio accuses Steamship of indirect contempt for its "improper conduct tending directly, or indirectly,
to impede, obstruct, or degrade the administration of justice"37 consisting of the following acts:

(a) Without Sulpicio's knowledge or consent, Steamship initiated and "concluded" during the pendency
of this case an alleged "arbitration proceeding" in London for the "Arbitrator" there to "resolve" the very
dispute involved in this case;

(b) Without Sulpicio's knowledge or consent, Steamship proclaimed itself the "victor" entitled to
arbitration costs from Sulpicio;

(c) Without Sulpicio's knowledge or consent, Steamship unceremoniously deducted from the refund due
to Sulpicio in the separate "Unabia Case" the huge amount of U.S.$69,570.99 despite the fact that: (a)
Said "Unabia Case" is unrelated to the instant case; (b) The propriety of a London arbitration is still to be
resolved in this case by this Honorable Court; (c) Steamship "enforced" by itself said "arbitration costs"
against Sulpicio without the courtesy of even informing this Honorable Court about it[; and]

(d) Without Sulpicio's knowledge or consent, and more importantly, without the prior approval of this
Honorable Court, Steamship initiated and "concluded" said London "arbitration" during the pendency of
this G.R. No. 196072 and before this Honorable Court could render its ruling or decision.38 (Emphasis in
the original)

Steamship filed its Comment/Opposition39on January 30, 2014, to which Sulpicio filed its Reply40 on July
2, 2014.

In its Resolution41 dated January 15, 2014, this Court resolved to consolidate G.R. Nos. 208603 and
196072.

The issues for this Court's resolution are:

First, whether or not the petition in G.R. No. 196072 is proper under the Rules of Court;
Second, whether or not there is a valid and binding arbitration agreement between Steamship Mutual
Underwriting (Bermuda) Limited and Sulpicio Lines, Inc.;

Third, whether or not the Court of Appeals gravely erred in affirming the Regional Trial Court Order
denying referral of Sulpicio Lines, Inc.'s complaint to arbitration in London in accordance with the
2005/2006 Club Rules; and

Finally, whether or not Steamship Mutual Underwriting (Bermuda) Limited is guilty of indirect contempt.

This Court addresses first the procedural issue raised by Sulpicio.

I.A

Sulpicio contends that Steamship's Petition for Review should be dismissed outright on procedural
grounds.42

First, this Petition, couched as a Rule 45 Petition, is actually a Rule 65 Petition because it contained
arguments dealing with "grave abuse of discretion" allegedly committed by the Court of Appeals.43

Second, the Petition's Verification and Certification Against Forum Shopping is defective because it was
signed and executed by Steamship's lawyer. Additionally, the Power of Attorney appended to the
Petition did not indicate its signatory's name and authority.44

Third, the issue of whether or not Sulpicio has been furnished with the Club's Rulebook, which contained
the arbitration clause, is factual and beyond the realm of a Rule 45 petition.45

In its Reply, Steamship avers that its counsel's law firm was duly authorized to sign its Verification and
Certification against Forum Shopping. Moreover, Sulpicio never assailed this law firm's authority to
represent Steamship before the Regional Trial Court, and therefore, is estopped to deny its authority
before this Court.46 Together with its Reply, Steamship submitted a copy of the Secretary's
Certificate47 to the July 24, 2007 Board of Directors' resolution authorizing Scott Davis (Davis) or his
Assistant Secretaries to sign a Power of Attorney on behalf of Steamship. It also appended a Secretary's
Certificate48 to the Jvly 26, 2011 Board of Directors' resolution re appointing Davis and John Charles Ross
Collis49 to their current positions as Secretary and Assistant Secretary, respectively.

Steamship further contends that the basic issues raised in the petition are questions of law that are
cognizable by this Court.50 It adds that a reversal of some factual findings is warranted because the Court
of Appeals committed a grave abuse of discretion in concluding that Sulpicio was ignorant of the
2005/2006 Club Rules and its arbitration clause, when Steamship had presented ample evidence to
establish otherwise.51 Steamship submits that this Court may exercise its power of review to reverse
errors committed by the lower courts including grave abuse of discretion of the Court of Appeals.52
This Court finds for Steamship.

The appeal from a final disposition of the Court of Appeals is a petition for review under Rule 45 and not
a special civil action under Rule 65.53 Rule 45, Section 1 is clear that:

Section 1. Filing of petition with Supreme Court. A patty desiring to appeal by certiorari  from a judgment
or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other
courts whenever authorized by law, may file with the Supreme Court a verified petition for review
on certiorari.  The petition shall raise only questions of law which must be distinctly set forth.

A Rule 45 petition is the proper remedy to reverse a decision or resolution of the Court of Appeals even
if the error assigned is grave abuse of discretion in the findings of fact or of law. "The existence and
availability of the right of appeal prohibits the resort to certiorari  because one of the requirements for
the latter remedy is that there should be no appeal."54

Allegations in the petition of grave abuse of discretion on the part of the Court of Appeals do not ipso
facto  render the intended remedy that of certiorari  under Rule 65 of the Rules of Court. In Microsoft
Corporation v. Best Deal Computer Center Corporation, 55 this Court discussed the distinction between a
Petition for Certiorari under Rule 65 and a Petition for Review on Certiorari under Rule 45:

Significantly, even assuming that the orders were erroneous, such error would merely be deemed as an
error of judgment that cannot be remedied by certiorari. As long as the respondent acted with
jurisdiction, any error committed by him or it in the exercise thereof will amount to nothing more than
an error of judgment which may be reviewed or corrected only by appeal. The distinction is clear: A
petition for certiorari seeks to correct errors of jurisdiction while a petition for review seeks to correct
errors of judgment committed by the court. Errors of judgment include errors of procedure or mistakes
in the court's findings. Where a court has jurisdiction over the person and subject matter, the decision
on all other questions arising in the case an exercise of that jurisdiction. Consequently, all errors
committed in the exercise of such jurisdiction are merely errors of judgment. Certiorari under Rule 65 is
a remedy designed for the correction of errors of jurisdiction and not errors of judgment.56 (Citations
omitted)

In this case, what Steamship seeks to rectify may be construed as errors of judgment of the Court of
Appeals. These errors pertain to Steamship's allegations of the Court of Appeals' failure to rule that a
valid arbitration agreement existed between the parties and to refer the case to arbitration. It does not
impute any error with respect to the Court of Appeals' exercise of jurisdiction, As such, the Petition is
simply a continuation of the appellate process where a case is elevated from the trial court of origin, to
the Court of Appeals, and to this Court via Rule 45.

The basic issues raised in the Petition for Review are: (1) whether or not an arbitration agreement may
be validly incorporated by reference to a contract; and (2) how the trial court should proceed to trial
upon its finding "that only some and not all of the defendants are bound by an arbitration
agreement[.]"57 These are questions of law properly cognizable in a Rule 45 petition.

In BCDA v. DMCI Project Developers, Inc..58 citing Villamor v. Balmores59:

[T]here is a question of law "when there is doubt or controversy as to what the law is on a certain [set]
of facts." The test is "whether the appellate court can determine the issue raised without reviewing or
evaluating the evidence." Meanwhile, there is a question of fact when there is "doubt . . . as to the truth
or falsehood of facts." The question must involve the examination of probative value of the evidence
presented.60

Sulpicio denies being bound by the arbitration clause in the Club Rules since neither the Certificate of
Entry and Acceptance, which covers M/V Princess of the World, mentioned this arbitration agreement,
nor was it given a copy of the Club Rulebook.

In sustaining the denial of Steamship's Motion to Dismiss and/or to Refer Case to Arbitration, the Court
of Appeals ruled:

Unfortunately, the Court is not convinced that a valid and binding arbitration agreement exists between
the Steamship and Sulpicio. And even assuming that there is such an agreement, it does not comply with
Section 4 of the Arbitration Law which provides that "a contract to arbitrate a controversy thereafter
arising between the parties, as well as a submission to arbitrate an existing controversy shall be in
writing and subscribed by the party sought to be charged, or by his lawful agent."

As correctly pointed out by Sulpicio, there is no proof that it was served a copy of the Club Rules in
question and that it signed therein.61 (Emphasis supplied)

A factual question on whether or not Sulpicio was given a copy of the Club Rulebook must be resolved
because it has a bearing on the legal issue of whether or not a binding arbitration agreement existed
between the parties. Factual review, nonetheless, may be justified: (1) when there is a grave abuse of
discretion in the appreciation of facts;62 (2) when the judgment of the Court of Appeals is premised on a
misapprehension of facts;63 and (3) when the Court of Appeals' findings of fact are premised on the
absence of evidence but such findings are contradicted by the evidence on record.64

Here, this Court finds grave abuse of discretion by the Court of Appeals in its appreciation of facts. As
will be discussed later, the evidence on record shows that Sulpicio was furnished a copy of the Club
Rulebook and was aware of its provisions. Other pieces of evidence were Sulpicio's letters65 to
Steamship and the affidavits of Director and Head of Underwriting of the Club and In-Charge of Far East
membership including the Philippines, Jonathan Andrews;66 Vice-President of Pioneer Insurance who
was in charge of Sulpicio's account, Roderick Gil Narvacan;67 and Manager of Seaboard-Eastern's Marine
Department who was in charge of Sulpicio's account, Elmer Felipe.68

I.B
The Verification and Certification against Forum Shopping signed by Steamship's counsel substantially
complied with the  requirements of the Rules of Court.

Under Rule 45 of the Rules of Court, a petition for review must be verified69 and must contain a sworn
certification against forum shopping.70

"A pleading is verified by an affidavit that the affiant has read the pleading and that the allegations
therein are true and correct of his [or her] personal knowledge or based on authentic records."71

On the other hand, a certification against forum shopping is a petitioner's, statement "under oath that
he [or she] has not . . . commenced any other action involving the same issues in the Supreme Court, the
Court of Appeals or different divisions, or any other tribunal or agency[.]72 In this certification, the
petitioner must state the status of any other action or proceeding, if there is any, and undertakes to
report to the courts and other tribunal within five (5) days from learning of any similar action or
proceeding.73

Failure to comply with the foregoing mandates constitutes a sufficient ground for the denial of the
petition.74

In case the petitioner is a private corporation, the verification and certification may be signed, for and on
behalf of this corporation, by a specifically authorized person, including its retained counsel, who has
personal knowledge of the facts required to be established by the documents.75 The reason is that:

A corporation, such as the petitioner, has no powers except those expressly conferred on it by the
Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly authorized officers and agents.
Physical acts, like the signing of documents, can be performed only by natural persons duly authorized
for the purpose by corporate bylaws or by a specific act of the board of directors. "All acts within the
powers of a corporation may be performed by agents of its selection; and, except so far as limitations or
restrictions which may be imposed by special charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural person govern the officer or agent of
a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents
once appointed, or members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons."
....
For who else knows of the circumstances required in the Certificate but its own retained counsel. Its
regular officers, like its board chairman and president may not even know the details required therein.76

In this case, Steamship's Petition's Verification and Certification against forum shopping was signed by
its counsel. A Power of Attorney77 dated August 1, 2007 was appended to the Petition, which
purportedly authorized "Atty. Charles Jay D. Dela Cruz or any of the partners of Del Rosario & Del
Rosario . . . to sign the verification or certification"78 against forum shopping of petitions and appeals in
appellate courts necessary in representing and defending Steamship. It was notarized, apostilled in
accordance with the law of Bermuda and authenticated by the Philippine consulate in London, United
Kingdom. However, a closer look into the Power of Attorney reveals that the signatory of the document
was not identified. This was pointed out by Sulpicio in its Comment.79

Nonetheless, Steamship subsequent filed its Reply,80 to which it attached two (2) Secretary's
Certificates81 signed by Davis containing excerpts of the July 24, 2007 and July 26, 2011 board
resolutions showing Davis' authority to execute the Power of Attorney on its behalf, and Davis'
reappointment as Corporate Secretary, respectively. The signature in the Power of Attorney was similar
in form and appearance to Davis' signature in the Secretary's Certificates, which lends credence to
Steamship's submission that the Power of Attorney was executed and signed by Davis.82

The rule on verification of a pleading is a formal, not jurisdictional, requirement.83 This Court has held
that:

Non compliance with the verification requirement does not necessarily render the pleading fatally
defective, and is substantially complied with when signed by one who has ample knowledge of the truth
of the allegations in the complaint or petition, and when matters alleged in the petition have been made
in good faith or are true and correct.84 (Citation omitted)

On the other hand, a certification not signed by a duly authorized person renders the petition subject to
dismissal.85 Moreover, the lack of or defect in the certification is not generally curable by its subsequent
submission or correction.86 However, there are cases where this Court exercised leniency due to the
presence of special circumstances or compelling reasons, such as the prima facie  merits of the
petition.87 In some cases, the subsequent submission of proof of authority of the party signing the
certification on behalf of the corporation was considered as substantial compliance with the rules and
the petition was given due course.88

In Shipside Incorporated v. Court of Appeals, 89 this Court held:

Moreover, in Loyola, Roadway,  and Uy,  the Court excused non-compliance with the requirement as to
the certificate of non-forum shopping. With more, reason should we allow the instant petition since
petitioner herein did submit a certification on non-forum shopping, failing only to show proof that the
signatory was authorized to do so. That petitioner subsequently submitted a secretary's certificate
attesting that Balbin was authorized to file an action on behalf of petitioner likewise mitigates this
oversight.90

Likewise, this Court ho1ds that there is substantial compliance with the rules on verification and
certification against forum shopping. Steamship's subsequent submission of the Secretary's Certificates
showing Davis' authority to execute the Power of Attorney in favor of Del Rosario & Del Rosario cured
the defect in the verification and certification appended to the petition. Under the circumstances of this
case, Steamship's counsel would be in the best position to determine the truthfulness of the allegations
in the petition and certify on non-forum shopping considering that "it has handled the case for . . .
Steamship since its inception."91 This Court also considers Steamship's allegations that the same Power
of Attorney was used in its Answer Ad Cautelam filed on August 12, 2008 before the Regional Trial Court
and in its Petition for Certiorari before the Court of Appeals on November 12, 2008. Significantly,
Sulpicio never questioned the authority of Del Rosario & Del Rosario to represent Steamship in the
proceedings before the lower courts.92

The rules on forum-shopping are "designed . . . to promote and facilitate the orderly administration of
justice." They are not to be interpreted with "absolute literalness" as to subvert the procedural rules'
ultimate objective of achieving substantial justice as expeditiously as possible.93 These goals would not
be circumvented by this Court's recognition of the authorized counsel's signature in the verification and
certification of non-forum shopping.

This Court now proceeds to the substantive issues of whether or not there was a valid arbitration
agreement between the parties and whether or not referral to arbitration was imperative.

II

Steamship contends that the arbitration agreement set forth in its Club Rules, which in turn is
incorporated by reference in the Certificate of Entry and Acceptance of M/V  Princess of the World,94 is
valid and binding upon Sulpicio,95 pursuant to this Court's ruling in BF Corporation v. Court of Appeals.96

Steamship further avers that the Court of Appeals' finding that there was no proof that Sulpicio was
given a copy of the Club Rules was incorrect and contradicted by the evidence on record.97 Steamship
adds that by Sulpicio's own declarations in its letter-application98 for membership of its vessels, Sulpicio
acknowledged that it had received a copy of the Club Rules and that its membership in Steamship is
subject to them. 99  It contends that Sulpicio was "provided with copies of the Club's Rule books on an
annual basis by Pioneer Insurance and Seaboard-Eastern who acted as brokers [for Sulpicio's]
entry."100 Moreover, throughout Sulpicio's almost 20 years of membership,101 it has been aware of, and
relied upon, the terms of the Club Rules, as revealed in its various correspondences through its brokers
with Steamship.102 Thus, Sulpicio is estopped to deny that it was aware of, and agreed to be bound by,
the Club Rules and their provisions.103

Steamship argues that a referral of the case to arbitration is imperative pursuant to the mandates of
Republic Act No. 9285 or the ADR Law.104 It adds that the trial court's reliance on the ruling in European
Resources and Technologies, Inc. v. Ingenieuburo Birkhann + Nolte, Ingeniurgesellschaft Gmbh105 was
misplaced. That case was decided on the basis of Republic Act 876 or the Old Arbitration Law, which did
not provide for instances where some of the multiple impleaded parties were not covered by an
arbitration agreement.106 It adds that now, Section 25 of the ADR Law specifically provides that "the
court shall refer to arbitration those parties who are bound by the arbitration agreement although the
civil action may continue as to those who are not bound by such arbitration agreement."107 Even from a
procedural standpoint, Steamship contends that the claim against it may be separated from Pioneer
Insurance and Seaboard-Eastern as these local insurance companies were impleaded as solidary
obligors/debtors.108

Steamship further submits that "a Philippine court is an inconvenient forum to thresh out the issues
involved in Sulpicio's claim."109 First, Sulpicio's claim is governed by the English Law, as expressly stated
in the 2005/2006 Club Rules.110 Second, a Philippine court would be "an ineffective venue" to enforce
any judgment that may be obtained against Steamship, a foreign corporation.111 Thus, on the basis of
the doctrine of forum non conveniens alone, Steamship contends that the claim against it should be
referred to arbitration in London.112
Finally, Steamship holds that "Sulpicio should participate in the London Arbitration as [it] is already
progressing . . . [i]nstead of wasting its time on prosecuting its claim before a Philippine court that is
devoid of jurisdiction[.]113

Sulpicio counters that the Court of Appeals was correct in ruling that there was no arbitration
agreement between the parties.114 The arbitration clause in the 2005/2006 Club Rules is not valid and
binding for failure to comply with Section 4 of the ADR Law, which requires that an arbitration
agreement be in writing and subscribed by the parties or their lawful agent.115 Sulpicio adds that
"[i]n White Gold Marine Services, Inc. vs. Pioneer Insurance and Surety Corporation, . . . Steamship did
not invoke arbitration but filed suit before a Philippine court, which . . . proves that [the 2005/2006 Club
Rules' arbitration clause] is neither mandatory nor binding" upon the parties.116

Sulpicio further contends that the Certificate of Entry and Acceptance did not provide for arbitration as a
mode of dispute resolution, that the rules referred to was not particularly identified or described, and
that it never received a copy of the Club Rules.117

Assuming there was valid arbitration agreement between them, Sulpicio submits that the trial court
correctly relied on the ruling in European Resources in denying the referral of the case to
arbitration.118 Arbitration in London would not be the "most prudent action" because the arbitral
decision will not be binding on Pioneer Insurance and Seaboard-Eastern and it would result in a "split
jurisdiction."119 Sulpicio further contends that the exception laid down in European Resources still applies
because the ADR Law was already in effect when the case was decided by this Court.120

In its Reply, Steamship maintains that there is a valid arbitration clause between them and that Sulpicio
was well aware of its Club Rules. It adds that Sulpicio is merely feigning ignorance of the Club Rules to
escape the obligatory nature of the arbitration agreement. Steamship further reiterates that Section 25
of the ADR Law is plain and clear that when there are multiple parties in an action, the court must "refer
to arbitration those parties bound by the arbitration agreement and let the action remain as to those
who are not bound."121 "Moreover, as the relationship between . . . Steamship and . . . Sulpicio are
governed by English Law[,] it may be more prudent to refer the disgute to arbitration in London under
the doctrine of forum non conveniens."122

Finally, Steamship avers that under Rule 47 of the 2005/2006 Club Rules, it has "the right to pursue legal
action against a [m]ember before any jurisdiction at its sole discretion."123 Even if there is no such
provision, Steamship contends that it may waive its rights to compel arbitration in individual cases.124 It
adds that the waiver of such right in White Gold has no effect to this case because Sulpicio is not a party
in that case.125

II.A

It is the State's policy to promote party autonomy in the mode of resolving disputes.126 Under the
freedom of contract principle, parties to a contract may stipulate on a particular method of settling any
conflict between them.127  Arbitration and other alternative dispute resolution methods like mediation,
negotiation, and conciliation are favored over court action. Republic Act No. 9285128 expresses this
policy:

Section 2. Declaration of Policy. — It is hereby declared the policy of the State to actively promote party
autonomy in the resolution of disputes or the freedom of the parties to make their own arrangements
to resolve their disputes. Towards this end, the State shall encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an important means to achieve speedy and impartial justice and
declog court dockets.  As such, the State shall provide means for the use of ADR as an efficient tool and
an alternative procedure for the resolution of appropriate cases. Likewise, the State shall enlist active
private sector participation in the settlement of disputes through ADR. This Act shall be without
prejudice to the adoption by the Supreme Court of any ADR system, such as mediation, conciliation,
arbitration, or any combination thereof as a means of achieving speedy and efficient means of resolving
cases pending before all courts in the Philippines which shall be governed by such rules as the Supreme
Court may approve from time to time. (Emphasis supplied)

Arbitration, as a mode of settling disputes, was already recognized in the Civil Code.129 In 1953, Republic
Act No. 876 was passed, which reinforced domestic arbitration as a process of dispute resolution.
Foreign arbitration was likewise recognized through the Philippines' adherence to the United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, otherwise known
as the New York Convention.130 Republic Act No. 9285 sets the basic principles in the enforcement of
foreign arbitral awards in the Philippines.131

Consistent with State policy, "arbitration agreements are liberally construed in favor of proceeding to
arbitration."132 Every reasonable interpretation is indulged to give effect to arbitration agreements.
Thus, courts must give effect to the arbitration clause as much as the terms of the agreement would
allow.133 "Any doubt should be resolved in favor of arbitration."134

II.B

Sulpicio contends that there was no valid arbitration agreement between them, and if there were, it was
not aware of it.

This Court rules against Sulpicio's submission.

The contract between Sulpicio and Steamship is more than a contract of insurance between a marine
insurer and a shipowner. By entering its vessels in Steamship, Sulpicio not only obtains insurance
coverage for its vessels but also becomes a member of Steamship.

A protection and indemnity club, like Steamship, is an association composed of shipowners generally
formed for the specific purpose of providing insurance cover against third-party liabilities of its
members.135 A protection and indemnity club is a mutual insurance association, described in White Gold
Marine Services, Inc. v. Pioneer Insurance and Surety Corp. 136 as follows:

[A] mutual insurance company is a cooperative enterprise where the members are both the insurer and
insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a
fund from which all losses and liabilities are paid, and where the profits are divided among themselves,
in proportion to their interest. Additionally, mutual insurance associations, or clubs, provide three types
of coverage, namely, protection and indemnity, war risks, and defense costs.137

A shipowner wishing to enter its fleet of vessels to Steamship must fill in an application for entry form,
which states:

PLEASE ENTER IN THE ASSOCIATION, SUBJECT TO THE RULES, RECEIPT OF WHICH WE ACKNOWLEDGE,
THE UNDERMENTIONED VESSEL(S).138

The application form is signed by the shipowner or its authorized representative.

Steamship then issues a Certificate of Entry and Acceptance of the vessels, showing its acceptance of the
entry. The Certificate of Entry and Acceptance for M/V Princess of the World states:

CERTIFICATE OF ENTRY AND ACCEPTANCE

by the Club of your proposal for entering the ship(s) specified below, and of the tonnage set out against
each, in:

Class 1 PROTECTION AND INDEMNITY

of the Club from
Noon 20th February 2005 to Noon 20th February 2006

or until sold, lost, withdrawn or the entry is terminated in accordance with the rules, to the extent
specified and in accordance with the Act, By(e)-Laws and the Rules from time to time in force and the
special terms specified overleaf.
Your name has been entered in the Register of Members of the Club as a Member.

FOR ACCOUNT OF CERTIFICATE NUMBER

      Sulpicio Lines Inc.,
155,534
      1st Floor, Reclamation
Area,
      P.O. Box No. 137
      Cebu City, Philippines.

NAME OF SHIP BUILT ENTERED CLASS PORT OF

GROSS REGISTRY
"PRINCESS OF THE 1975 TONNAGE B.V.
OCEAN" 6,150
1983 Cebu City B.V.
"PRINCESS OF THE 13,526
UNIVERSE" 1979 Cebu City B.V.
3,768
"PRINCESS OF THE 1972 Cebu City B.V.
CARIBBEAN" 9,627
1984 (Rebuilt 1990) Cebu City X.X.
"PRINCESS OF THE 19,329
WORLD" Cebu City

"PRINCESS OF THE
STARS"

....

NOTES  

1. REFERENCE IS 2. THE RULES ARE

REQUESTED TO PRINTED ANNUALLY
THE RULES AS TO IN BOOK FORM,
THE INCORPORATING ALL
CIRCUMSTANCES PREVIOUS
OF ENTRY BEING ALTERATIONS AND A
CANCELLED AND AS COPY IS SENT TO
TO EACH MEMBER.
THE ALTERATIONS CAN
CIRCUMSTANCES BE MADE BY
OF AN ALTERATION ORDINARY
 IN THE RULES OR RESOLUTION
BY(E)-LAWS. FOLLOWING A
GENERAL MEETING
NOTIFIED TO ALL
MEMBERS.[139

Thus, a contract of insurance is perfected between the parties upon Steamship's issuance of the
Certificate of Entry and Acceptance.

[A] contract of insurance, like other contracts, must be assented to by both parties either in person or by
their agents. So long as an application for insurance has not been either accepted or rejected, it is
merely an offer or proposal to make a contract. The contract, to be binding from the date of application,
must have been a completed contract, one that leaves nothing to be done, nothing to be completed,
nothing to be passed upon, or determined, before it shall take effect. There can be no contract of
insurance unless the minds of the parties have met in agreement.140

Title VI, Section 49 of Presidential Decree No. 612141 or the Insurance Code defines an insurance policy as
"the written instrument in which a contract of insurance is set forth." Section 50 of this Code provides
that the policy, which is required to be in printed form, "may contain blank spaces; and any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of
insurance shall be written on the blank spaces." Any rider, clause, warranty, or endorsement attached
and referred to in the policy by its descriptive title or name is considered part of this policy or contract
of insurance and binds the insured.

Section 51 of the Insurance Code prescribes the information that must be stated in the policy, namely:
the parties in the insurance contract, amount insured, premium, property or life insured, risks insured
against, and period of insurance. However, there is nothing in the law that prohibits the parties from
agreeing to other terms and conditions that would govern their relationship, in which case the general
rules of the Civil Code regulating contracts will apply.142

The Certificate of Entry and Acceptance plainly provides that the Class 1 protection and indemnity
coverage would be to the extent specified and in accordance with the Act, the By-Laws, and the Rules of
the Club in force at the time of the coverage. The "Notes" in the bottom portion of the Certificate states
that these Rules "are printed annually in book form" and disseminated to all members. M/V Princess of
the World was insured from February 20, 2005 to February 20, 2006. Hence, the 2005/2006 Club Rules
apply.

Moreover, attached to the Certificate of Entry and Acceptance is a War Risk Extension clause and Bio-
Chem clause which refer to Rule 21 of the 2005/2006 Club Rules relating to war risk insurance.

WAR RISK EXTENSION

Cover excluded under Rule 21 is hereby reinstated subject to the terms set out in this Certificate of Entry
and any Endorsement thereto, and to the following conditions.
....

At any time or times before, or at the commencement of, or during the currency of any Policy Year of
the Club, the Directors may in their discretion determine that any ports, places, countries, zones or
areas (whether of land or sea) be excluded from the insurance provided by this [Protection and
Indemnity] war risks cover. Save as otherwise provided by the Directors, this [Protection and Indemnity]
war risks cover shall cease in respect of such ports, places, countries, zones or areas at midnight on the
seventh day following the issue to the Members of notice of such detem1ination in accordance with the
terms of the cover provided pursuant to Rule 21 of the Club's Rules
....

Notwithstanding any other term or condition of this insurance, the Directors may in their discretion
cancel this special cover giving 7 days' notice to the Members (such cancellation becoming effective on
the expiry of 7 days from midnight of the day on which notice of cancellation is issued by the Club and
the Directors may at any time after the issue of notice of such cancellation resolve to reinstate special
cover pursuant to the proviso to the terms of the cover issued pursuant to Rule 21 on such terms and
conditions and subject to such limit as the Directors in their discretion may determine.

When either a Demise, Time, Voyage, Space or Slot Charterer and/or the Owner of the Entered Ship are
separately insured for losses, liabilities, or the costs and expenses incidental thereto covered under Rule
21 of the Club and/or the equivalent Rule of any other Association which participates in the Pooling
Agreement and General Excess Loss Reinsurance Contract, the aggregate of claims in respect of such
losses, liabilities, or the costs and expenses incidental thereto covered under Rule 21 of the Club and/or
the equivalent Rule of such other Association(s), shall be limited to the amount set out in the Certificate
of Entry in respect of any one ship, any one incident or occurrence.143

Sulpicio's acceptance of the Certificate of Entry and Acceptance manifests its acquiescence to all its
provisions. There is no showing in the records or in Sulpicio's contentions that it objected to any of the
terms in this Certificate. Its acceptance, likewise, operated as an acceptance of the entire provisions of
the Club Rules.

When a contract is embodied in two (2) or more writings, the writings of the parties should be read and
interpreted together in such a way as to render their intention effective.144

With the exception of the War Risk Extension clause, the Bio-chem clause, and a succinct statement of
the limits of liability, warranties, exclusion, and deductibles, the Certificate of Entry and Acceptance
does not contain the details of the insurance coverage. A person would have to refer to the Club Rules
to have a complete understanding of the contract between the parties.
The Club Rules contain the terms and conditions of the relationship between the Steamship and its
members including the scope, nature, and extent of insurance coverage of its members' vessels. The
2005/2006 Club Rules145 of Class 1, which cover protection and indemnity risks provide, insofar as
relevant:

3 Scope of Cover

i. The terms upon which a Member is entered in the Club are set out in the Rules and any
Certificate of Entry for that Member.

ii. The risks against which a Member is insured by entry in the Club are set out in Rule 25 and are
always subject to the conditions, exceptions, limitations and other terms set out in the
remainder of these Rules and any Certificate of Entry for that Member.

....

6 Entry
....

iv. The provisions of this Rule apply throughout the period of entry of the Ship in the Club . . .

....

8 Members

i. Every Owner who enters any ship in the Club shall (if not already a Member) be and become a
Member of the Club as from the date of the commencement of such entry. Each Member is
bound by the Act and By(e)-Laws of the Club and by these Rules.

....

iv. All contracts of insurance with the Club shall be deemed to be subject to and incorporate all the
provisions of these Rules except to the extent otherwise expressly agreed in writing with the
Managers.

iv. Each Member or other person whose application for insurance or reinsurance is accepted shall
be deemed to have agreed both for itself and its successors and each of them that both it and
they and each and all of them will be subject to and bound by and will perform their obligations
under the Rules, Act and By(e)-Laws of the Club and any contract of insurance with the Club.

....

45 Amendments to Rules

The Rules of this Class may be altered or added to by Ordinary Resolution passed at a separate meeting
of the Members of this Class provided that no such alterations shall be effective unless and until the
same shall be sanctioned by the Directors.146
The 2005/2006 Club Rules also provide the nature of Steamship's Protection and Indemnity cover and
the terms on which it is provided. In particular, Rule 25(i) to (xxi) identify a member's liabilities, costs,
and expenses covered by the insurance, Rules 18 to 24 set out the general exclusions and limitations,
Rule 26 provides the requirements for classification and condition surveys, and Rule 28 addresses
general terms and conditions for recovery of claims. The 2005/2006 Club Rules also contain provisions
on double insurance (Rule 23), claims handling (Rules 30 and 31), cessation of membership (Rule 35),
cessation of insurance of individual vessels (Rule 36) deduction and set-off (Rule 40), and assignment
and subrogation (Rules 41 and 42).

The arbitration clause is found in Rule 47 of the 2005/2006 Club Rules:

47 dispute resolution, Adjudication

i. in the event of any difference or dispute whatsoever, between or affecting a Member and the
Club and concerning the insurance afforded by the Club under these rules or any amounts due
from the Club to the Member or the Member to the Club, such difference or dispute shall in the
first instance be referred to adjudication by the Directors. That adjudication shall be on the basis
of documents and written submissions alone. Notwithstanding the terms of this Rule 47i, the
Managers shall be entitled to refer any difference or dispute to arbitration in accordance with
sub-paragraph ii below without prior adjudication by the Directors.

ii. If the Member does not accept the decision of the Directors, or if the Managers, in their
absolute discretion, so decide, the difference or dispute shall be referred to the arbitration of
three arbitrators, one to be appointed by each of the parties and the third by the two arbitrators
so chosen, in London. The submission to arbitration and all the proceedings therein shall be
subject to the provisions of the English Arbitration Act, 1996 and the schedules thereto or any
statutory modifications or re-enactment thereof.

iii. No Member shall be entitled to maintain any action, suit or other legal proceedings against the
Club upon any such difference or dispute unless and until the same has been submitted to the
Directors and they shall have given their decision thereon, or shall have made default for three
months in so doing; and, if such decision be not accepted by the Member or such default be
made, unless and until the difference or dispute shall have been referred to arbitration in the
manner provided in this Rule, and the Award shall have been published; and then only for such
sum as the Award may direct to be paid by the Club. And the sole obligation of the Club to the
Member under these Rules or otherwise howsoever in respect of any disputed claim made by
the Member shall be to pay such sum as may be directed by such an Award.

iv. In any event no request for adjudication by the Member shall be made to the Directors in
respect of any difference or dispute between, or matter affecting, the Member and the Club
more than two years from the date when that dispute, difference or matter arose unless, prior
to the expiry of this limitation period, the Managers have agreed in writing to extend the same.

v. Nothing in this Rule 47 including paragraph i, or in any other Rule or otherwise shall preclude
the Club from taking any legal action of whatsoever nature in any jurisdiction at its absolute
 discretion in order to pursue or enforce any of its rights whatsoever and howsoever arising
including but not limited to: -

a. Recovering sums it considers to be due from the Member to the Club;

b. Obtaining security for such sums; and/or

c. Enforcement of its right of lien whether arising by law or under these rules.

vi. These rules and any contract of insurance between the Club and the Member shall be governed
by and construed in accordance with English law.147 (Emphasis in the original)

Under Rule 47, any dispute concerning the insurance afforded by Steamship must first be brought by a
claiming member to the Directors for adjudication. If this member disagrees with the decision of the
Director, the dispute must be referred to arbitration in London. Despite the member's disagreement,
the Managers of Steamship may refer the dispute to arbitration without adjudication of the Directors.
This procedure must be complied with before the member can pursue legal proceedings against
Steamship.

There is no ambiguity in the terms and clauses of the Certificate of Entry Acceptance. Contrary to the
ruling of the Court of Appeals, the Certificate clearly incorporates the entire Club Rules—not only those
provisions relating to cancellation and alteration of the policy.148

"[W]hen the text of a contract is explicit and leaves no doubt as to its intention, the court may not read
into it any other intention that would contradict its plain import."149

The incorporation of the Club Rules in the insurance policy is without any qualification. This includes the
arbitration clause even if not particularly stipulated. A basic rule in construction is that the entire
contract, and each and all of its parts, must be read together and given effect, with all its clauses and
provisions harmomonized with one another.150

II.C

The Court of Appeals ruled that the arbitration agreement in the 2005/2006 Club Rules is not valid
because it was not signed by the parties.

In domestic arbitration, the formal requirements of an arbitration agreement are that it must "be in
writing and subscribed by the party sought to be charged, or by his lawful agent."151 In international
commercial arbitration,152 it is likewise required that the arbitration agreement must be in writing.

An arbitration agreement is in writing if it is contained (1) in a document signed by the parties, (2) in an
exchange of letters, telex, telegrams or other means of telecommunication which provide a record of
the agreement, or (3) in an exchange of statements of claim and defense in which the existence of an
agreement is alleged by a party and not denied by another. The reference in a contract to a document
containing an arbitration clause constitutes an arbitration agreement provided that the contract is in
writing and the reference is such as to make that clause part of the contract.153

In BF Corp. v. Court of Appeals,154 one (1) of the parties denied the existence of the arbitration cause on
the ground that it did not sign the Conditions of Contract that contained the clause. This Court held that
the arbitration clause was nonetheless binding because the Conditions of Contract were expressly made
an integral part of the principal contract between the parties. The formal requirements of the law were
deemed complied with because "the subscription of the principal agreement effectively covered the
other documents incorporated by reference [to them]."155 In, arriving at this ruling, this Court explained:

A contract need not be contained in a single writing. It may be collected from several different writings
which do not conflict with each other and which, when connected, show the parties, subject matter,
terms and consideration, as in contracts entered into by correspondence. A contract may be
encompassed in several instruments even though every instrument is not signed by the parties, since
it is sufficient if the unsigned instruments are clearly identified or referred to and made part of the
signed instrument or instruments. Similarly, a written agreement of which there are two copies, one
signed by each of the parties, is binding on both to the same extent as though there had been only one
copy of the agreement and both had signed it.156 (Emphasis supplied)

Thus, an arbitration agreement that was not embodied in the main agreement but set forth in another
document is binding upon the parties, where the document was incorporated by reference to the main
agreement. The arbitration agreement contained in the Club Rules, which in turn was referred to in the
Certificate of Entry and Acceptance, is binding upon Sulpicio even though there was no specific
stipulation on dispute resolution in this Certificate.

Furthermore, as stated earlier, Sulpicio became a member of Steamship by the very act of making a
contract of insurance with it. The Certificate of Entry and Acceptance issued by Steamship states that
"[its] name has been entered in the Register of Members of the Club as a Member."157 Sulpicio admits its
membership and the entry of its vessels to Steamship.

Rule 8(v) of the 2005/2006 Club Rules provides that:

Each Member or other person whose application for insurance or reinsurance is accepted shall be
deemed to have agreed both for itself and its successors and each of them that both it and they and
each and all of them will be subject to and bound by and will perform their obligations under the Rules,
Act and By(e)-Laws of the Club and any contract of insurance with the Club.

Sulpicio's agreement to abide by Steamship's Club Rules, including its arbitration clause, can be
reasonably inferred from its submission of an application for entry of its vessels to Steamship "subject to
the Rules, receipt of which we acknowledge."158
The ruling of this Court in Associated Bank v. Court of Appeals159 is applicable by analogy to this case.

In that case, plaintiffs sought to recover the amount of 16 checks that were honored by Associated Bank
despite the apparent alterations in the name of the payee. Associated Bank filed a Third-Party Complaint
against Philippine Commercial International Bank, Far East Bank & Trust Company, Security Bank and
Trust Company, and Citytrust Banking Corporation for reimbursement, contribution, and indemnity. This
Complaint was based on their being the collecting banks and by virtue of their bank guarantee for all
checks sent for clearing to the Philippine Clearing House Corporation (PCHC). The trial court dismissed
the Third-Party Complaint for lack of jurisdiction, citing Section 36 of the Clearing House Rules and
Regulations of the PCHC, which provides for arbitration. This Court, in affirming the dismissal, held:

Under the rules and regulations of the Philippine Clearing House Corporation (PCHC), the mere act of
participation of the parties concerned in its operations in effect amounts to a manifestation of
agreement by the parties to abide by its rules and regulations. As a consequence of such participation, a
party cannot invoke the jurisdiction of the courts over disputes and controversies which fall under the
PCHC Rules and Regulations without first going through the arbitration processes laid out by
the  body.  Since claims relating to the regularity of checks cleared by banking institutions are among
those claims which should first be submitted for resolution by the PCHC's Arbitration Committee,
petitioner Associated Bank, having voluntarily bound itself to abide by such rules and regulations, is
estopped from seeking relief from the Regional Trial Court on the coattails of a private claim and in the
guise of a third party complaint without first having obtained a decision adverse to its claim from the
said body. lt cannot bypass the arbitration process on the basis of its averment that its third party
complaint is inextricably linked to the original complaint in the Regional Trial Court.

....

Section 36.6 is even more emphatic:

36.6 The fact that a bank participates in the clearing operations of PCHC shall be deemed its written and
subscribed consent to the binding effect of this arbitration agreement as if it had done so in accordance
with Section 4 of the Republic Act No. 876 otherwise known as the Arbitration Law.

Thus, not only do the parties manifest by mere participation their consent to these rules, but such
participation is deemed (their) written and subscribed consent to the binding effect of arbitration
agreements under the PCHC rules. Moreover, a participant subject to the Clearing House Rules and
Regulations of the PCHC may go on appeal to any of the Regional Trial Courts in the National Capital
Region where the head office of any of the parties is located only after a decision or award has been
rendered by the arbitration committee or arbitrator on questions of law.160 (Emphasis supplied, citation
omitted)

This Court held that mere participation by the banks in the clearing operations of the PCHC manifest
their consent to the PCHC Rules, including the binding effect of the arbitration agreements under these
Rules.
In this case, by its act of entering its fleet of vessels to Steamship and accepting without objection the
Certificate of Entry and Acceptance covering its vessels, Sulpicio manifests its consent to be bound by
the Club Rules. The contract between Sulpicio and Steamship gives rise to reciprocal rights and
obligations. Steamship undertakes to provide protection and indemnity cover to Sulpicio's fleet. On the
other hand, Sulpicio, as a member, agrees to observe Steamship's rules and regulations, including its
provisions on arbitration.

III.A

The Court of Appeals' finding that there was no proof that Sulpicio was given a copy of the 2005/2006
Club Rules is contradicted by the evidence on record.

In its Comment, Sulpicio contends that it "was never given or sent a copy" of the Rulebook as stated in
the affidavits of its Executive Vice President, Atty. Eusebio S. Go and its Safety and Quality Assurance
Manager, Engr. Ernelson P. Morales.161 It also quoted a portion of the Affidavit of its Executive Vice
President and Chief Executive Officer, Carlos S. Go, who declared that "[Sulpicio] and Steamship have
not signed any arbitration agreement" and "[n]o such agreement exists."162

Sulpicio cannot feign ignorance of the arbitration clause since it was already charged with notice of the
Club Rules due to an appropriate reference to it in the Certificate of Entry and Acceptance. Assuming its
contentions were true that it was not furnished a copy of the 2005/2006 Club Rules, by the exercise of
ordinary diligence, it could have easily obtained a copy of them from Pioneer Insurance or Seaboard-
Eastern.

In any case, Sulpicio's bare denials cannot succeed in light of the preponderance of evidence submitted
by Steamship.

The Affidavit163 dated August 29, 2007 of Jonathan Andrews, Director and Head of Underwriting of the
Eastern Syndicate of the Managers of Steamship and in charge of Steamship's Far East membership,
including the Philippines, stated:

4. The contract of insurance between the Club and a Member is contained in, and evidenced by:

a) The Rules of the Club for whichever Class or Classes the vessel is entered, for the time being in
force; and

b) A Certificate of Entry.

5.

    . . . .

5. The Club's policy year runs from noon on 20th February of each year until noon on 20th February
of the year following . . . The Rule book is published on an annual basis prior to the
 commencement of the Policy year to which it applies. Although the Rules can be amended
pursuant to Rule 45, the dispute resolution provisions of the Rules have provided for arbitration
in London since well before the Plaintiff's entry in the Club.

    . . . .

10. In addition, it is quite clear that throughout their lengthy membership of the Club, the Plaintiffs
were aware of, and relied upon, the terms of the Club's Rules. Produced and shown to me,
marked "JHDA 4", is a copy of a letter164 from the Plaintiffs, dated 4th June, 1993, seeking a
refund of premium for the "SURIGAO PRINCESS" on the grounds that the vessel was laid up.
That letter's enclosures consist of:

(a) The Club's printed form for returns of premium when a vessel is laid-up . . . signed by Mr. Carlos
S. Go on behalf of the Plaintiffs;

(b) A photocopy of the relevant provision in the Club's Rules dealing with laid-up returns, Rule 29;
and

(c) A Certificate from the Philippines Port Authority . . .

11.

The fact that Sulpicio's application for a laid up return attached a photocopy of the Club's Rule
book demonstrates both that this was physically in their possession and that they were familiar
with its contents.

11. Throughout the lengthy period of this entry, as might be anticipated, there was a considerable
volume of correspondence between the Plaintiffs and the Club via the former's brokers.
Examples of that correspondence are produced and shown to me, marked "JHDA 5". As the
Court will note from that correspondence, it contains numerous and frequent references to
various of the Club's Rules, e.g.:

 Rule 22, dealing with double insurance

 Rule 25 xix, dealing with towage

 Rule 23 i, dealing with classification

 Rule 23 v b and c, dealing with defect warranties

 Rule 23 iv, dealing with safety audits.

12. The fact that Plaintiffs possessed and were fully conversant with the Club's Rules is most clearly
demonstrated by the correspondence provided and shown to me, marked "JHDA 6". After the
grounding of the "PRINCESS OF THE PACIFIC", due to the concerns arising out of this casualty,
the Club initially reserved cover pending further investigation and required an independent
audit of the Plaintiffs Safety Management System. When this decision was conveyed to the
Plaintiffs via their brokers, Seaboard-Eastern, they replied:
As expected, Carlos Go was so upset and expressed disappointment when the undersigned spoke to him
about the report of Noble Denton and the club's decision to suspend any action on the claim especially
so since owners believe the findings of the surveyors to the club are inaccurate and after relating such
findings to the club rules owners find no basis for club's decision to suspend action on the claim.165

Roderick Gil Narvacan, Vice-President of the Hull Unit of Pioneer Insurance which handled Sulpicio's
account, also narrated in his Affidavit[166 dated September 4, 2007:

7. I know for a fact that Sulpicio received a copy of the Club's Rule Book and had full knowledge of the
Club's Rules during the length of time that it was a member of the Club.

8. [I]n all Entry Forms signed and submitted by Sulpicio to the Club throughout its years of membership
in the Club, Sulpicio always acknowledged that it received a copy of Club's Rule Book. A sample of
Sulpicio's duly signed Entry Form submitted to the Club on 6 February 1997 is hereto attached as Annex
"1."

9. The Company, through my department, also makes it a point to remind all the Club's Members
including Sulpicio to familiarize themselves with the Club's Rulebook as the rules therein provided are
applied to all Club related matters including claims procedures. A copy of Ms. May Valles' email167 to
Sulpicio dated 27 August 2002 is hereto attached as Annex "2" and her letter168 to Sulpicio dated 17
October 2002 is hereto attached as Annex "3." Ms. Valles was a former member of the Company's Hull
Department and in both written communications, she reminded Sulpicio through its Executive Vice-
President and CFO Mr. Carlos S. Go of certain Club Rules such as the prescriptive period to claim for lay-
up premium refund.

10. In reply to the 27 August 2002 email, Mr. Carlos S. Go, by a 28 August 2002 email169 to Ms. Valles,
explained his understanding of the provision on the prescriptive period to claim for lay-up premium
refund under the Club's Rules, thereby clearly showing that Sulpicio was  aware of the Club's Rules. A
copy of the 28 August 2002 email of Mr. Go is hereto attached as Annex "4."

11. To further prove Sulpicio's knowledge of Club's Rules, I hereto attach the following copies of letters
from Sulpicio addressed to the Company with attached letter by Sulpicio to the Club:

 Letter-request170 for refund of lay-up premiums for the vessel M/V Surigao Princess dated 4 June
1993 as Annex "5";

 Letter-request171 for refund of lay-up premiums for the vessel M/V Manila Princess dated 10
June 1998 as Annex '"6";

 Letter request172 for refund of lay-up premiums for the vessel M/V Filipina Princess dated 21
June 1999 as Annex  "7";

 Letter-request173 for refund of lay-up premiums for the vessel M/V Manila Princess dated 17
May 2001 as Annex "8"; and
  Letter-request174 for refund of lay-up premiums for the vessel M/V Nasipit Princess dated 16
August 2002 as Annex "9";

In each of the above letters, Sulpicio declared to both the Company and the Club that "(w)e shall
therefore be glad to receive a credit note for the return of premium under the Rules of the
Association."175 (Emphasis in the original)

Finally, Elmer Felipe, Manager of Marine Department of Seaboard-Eastern in charge of Sulpicio's

account, also narrated:

11. As insurers for the Hull & Machinery of Sulpicio's Fleet, the Company, through my department,
assisted Sulpicio in regard to its [Protection and Indemnity] cover by sending copy of the Club's
Rulebook while it was an active Member of the Club.

12. By way of example, in the year 2002, the Company sent five (5) copies of the Club's Rulebook to Mr.
Carlos S. Go, Executive Vice-President and CEO of Sulpicio as evidenced by a transmittal letter dated 11
April 2002 duly signed by the Company's First Vice-President Joli Co-Wu. A copy of said transmittal
letter176 dated 11 April 2002 is hereto attached as Annex "1."

13. The other transmittal letters proving distribution of the Club's Rulebook to Sulpicio in its other years
of membership with the Club were among those discarded by the Company when it moved . . . to a
smaller office . . .

14. [Sulpicio is presumed to] know the Club's Rules as it was provided with copies of the Rulebook on an
annual basis.

15. In fact, in a 8 May 2004 letter addressed to the Company, Sulpicio claimed for refund of lay-up
premiums from the Club in connection with the vessel M/V Princess of the World and in Sulpicio's letter
to the Club attached to the said 8 May 2004 letter, Sulpicio declared that "(w)e shall therefore be glad to
receive a credit note for the return of premium under the Rules of the Association." This was followed
by December 2004 letter for refund of lay-up returns for the vessel M/V Princess of the World where
Sulpicio also invoked the Club Rules. A copy of the 8 May 2004 letter177 with attachment is hereto
attached as Annex "2" and a copy of the 8 December 2004 letter178 is hereto attached as Annex "3."
....

18. More importantly, after the Club denied cover for the vessel M/V Princess of the World and prior to
the date when the termination of Sulpicio's entry in the Club took effect, our EVP, Mr. Jose G. Banzon, Jr.
sent an emai1179 dated 30 November 2005 to Mr. Carlos Go reminding Sulpicio of the remedy of
voluntary arbitration under Rule 47 of the Club's Rulebook and attaching a copy of Rule 47. Copies of
these documents are attached as Annex "4."180

These foregoing affidavits and the attached supporting documents consistently declared that Sulpicio
was given copies of the Rulebook on an annual basis and had even invoked its provisions in making a
claim from Steamship. Sulpicio's previous letters to Steamship referring to provisions of the Club Rules
show its knowledge. Sulpicio was also reminded of the arbitration clause during the negotiations
preceding the institution of the present case.

"[A] party is not relieved of the duty to exercise the ordinary care and prudence that would be exacted
in relation to other contracts. The conformity of the insured to the terms of the policy is implied from
[its] failure to express any disagreement with what is provided for."181 The agreement to submit all
disputes to arbitration is a long standing provision in the Club Rules. It was incumbent upon Sulpicio to
familiarize itself with the Club Rules, under the presumption that a person takes due care of its
concerns. Being a member of Steamship for 20 years,182 it has been bound by its Rules and has been
expected to abide by them in good faith.

In Development Bank of the Philippines v. National Merchandising Corp., 183 the parties, who were acute
businessmen of experience, were presumed to have assented to the assailed documents with full
knowledge:

The principal stockholders and officers of NAMERCO, particularly the Sycips who co-signed the
promissory notes in question, were, as the lower court found, businessmen of experience and
intelligence . . . We might say — paraphrasing Tin Tua Sia vs. Yu Biao Sontua,  56 Phil. 707 — that they
being of age and businessmen of experience, it must be presumed that they had acted with due care
and to have signed the documents in question with full knowledge of their import and the obligations
they were assuming thereby; that this presumption of law may not be overcome by the mere testimony
of the obligor or obligors; that, to permit a party, when, sued upon a contract, to admit that he signed it
but to deny that it expresses the agreement he had made, or to allow him to admit that he signed it
solely on the verbal assurance given by one party, however high his station may be, that he would not
be held liable thereon, would destroy the value of all contracts. Indeed, it would be disastrous to give
more weight and reliability to the self-serving testimony of a party bound by the contract than to the
contents thereof. Verba volant, scripta manent.184

Sulpicio is estopped from denying knowledge of the Rulebook by its own acts and representations, as
evidenced by its various letters to Steamship, showing its familiarity with the Rulebook and its
provisions.

"In estoppel, a person, who by his [or her] deed or conduct has induced another to act in a particular
manner, is barred from adopting an inconsistent position, attitude or course of conduct that thereby
causes loss or injury to another."185 It further bars a party from denying or disproving a fact, which has
become settled by its acts.186

Hence, this Court finds a preponderance of evidence showing that Sulpicio was given a copy and had
knowledge of the 2005/2006 Club Rules. Moreover, the 2005/2006 Club Rules' provision on arbitration
is valid and binding upon Sulpicio.

III.B
The Regional Trial Court should suspend proceedings to give way to arbitration. Even if there are other
defendants who are not parties to the arbitration agreement, arbitration is still proper.

Republic Act No. 9285 was approved on April 2, 2004 and was the controlling law at the time the original
and amended complaints were filed.

Section 25 of Republic Act No. 9285 is explicit that:

[W]here action is commenced by or against multiple parties, one or more of whom are parties to an
arbitration agreement, the court shall refer to arbitration those parties who are bound by the arbitration
agreement although the civil action may continue as to those who are not bound by such arbitration
agreement.

Rule 4.7 of the Special Rules on Alternative Dispute Resolution187 (2009 Special ADR Rules) further
expresses:

The court shall not decline to refer some or all of the parties to arbitration for any of the following
reasons:

a. Not all of the disputes subject of the civil action may be referred to arbitration;

b. Not all of the parties to the civil action are bound by the arbitration agreement and referral to
arbitration would result in multiplicity of suits;

c. The issues raised in the civil action could be speedily and efficiently resolved in its entirety by
the court rather than in arbitration;

d. Referral to arbitration does not appear to be the most prudent action; or

e. The stay of the action would prejudice the rights of the parties to the civil action who are not
bound by the arbitration agreement.

The present rule on multiple parties manifests due regard to the policy of the law in favor of arbitration.
In light of the express mandate of Republic Act No. 9285 and the subsequent 2009 Special ADR Rules,
this Court's ruling in European Resources and Technologies, Inc.  v. Ingenieuburo Birkhann + Nolte,
Ingeniurgesellschaft Gmbh188 is deemed abrogated.

Notably, the Regional Trial Court did not rule on whether or not a valid and existing arbitration
.agreement existed between the parties. It merely stated in its Order. citing European Resources,  that:

["]Even if there is an arbitration clause, there are instances when referral to arbitration does not appear
to be the most prudent action. The object of arbitration is to allow the expeditious determination of a
dispute. Clearly, the issue before us could not be speedily and efficiently resolved in its entirety if we
allow simultaneous arbitration proceedings and trial, or suspension of trial pending arbitration."
Moreover, it is noted that defendants Seaboard-Eastern Insurance Co. Inc. and Pioneer Insurance and
Surety Corporation already filed their respective Answers to the second amended complaint.189

On this basis, the Regional Trial Court denied Steamship's Motion to  Dismiss and/or to Refer Case to
Arbitration and directed it to file an answer.

This Court finds that the Regional Trial Court acted in excess of its jurisdiction.

Where a motion is filed in court for the referral of a dispute to arbitration, Section 24 of Republic Act No.
9285 ordains that the dispute shall be referred "to arbitration unless it finds that the arbitration
agreement is null and void, inoperative or incapable of being performed."

Thus, the Regional Trial Court went beyond its authority of determining only the issue of whether or not
there was a valid arbitration agreement between the parties when it denied Steamship's Motion to
Dismiss and/or to Refer Case to Arbitration solely on the ground that it would not be the most prudent
action under the circumstances of the case. The Regional Trial Court went against the express mandate
of Republic Act No. 9285. Consequently, the Court of Appeals erred in finding no grave abuse of
discretion on the part of the trial court in denying referral to arbitration.

IV

In G.R. No. 208603, Sulpicio contends that Steamship's acts were contumacious because they were
intended to defeat Civil Case No. 07-577 and oust the Regional Trial Court of its jurisdiction, without the
approval of this Court.

Sulpicio further contends that there was no valid off-setting of the amount of US$69,570.99 from the
refund payable to it in the Unabia case because the issue on the propriety of the referral to arbitration
had yet to be resolved by this Court.190 It adds that the "arbitration – anti-suit injuction" cost was not a
debt of Sulpicio but a unilateral charge arising from an arbitration that it had not participated in, or was
enforceable in the Philippines.191

In its Comment/Opposition192 to the Petition for Indirect Contempt, Steamship contends that it
"exercised its right to set-off in good faith"193 and that the amount set-off represents costs of obtaining
the Anti-Suit Injunction awarded to it by the English Commercial Court and are not arbitration costs as
contended by Sulpicio.194 It also holds that Sulpicio's prayer for restitution of the offset amount was
improper in a petition for indirect contempt.195

Steamship emphasizes that even before the denial of its Motion to Dismiss in Civil Case No. 07-577 on
July 11, 2008, it already commenced arbitration in London196 on July 31, 2007.197 It had also "obtained a
permanent Anti-Suit Injunction [with interim award for costs]198 from the English Commercial Court on
4th April 2008[.]"199 The April 4, 2008 Order enjoined Sulpicio from proceeding with Civil Case No. 07-577
and to refer the dispute to arbitration in London.200

Steamship further avers that "Sulpicio was served a copy of an Order to file Claims Submissions in the
London arbitration and a copy of the Anti-Suit Injunction but it refused to participate in the London
Arbitration."201 It also did not pay the costs of the Anti-Suit Injunction. Sulpicio refused "service of all
orders, notices, pleadings and documents related to the London arbitration and the Commercial Court
proceedings."202

Steamship adds that in 2012, Sulpicio filed a claim for reimbursement of US$96,958.47 representing
passenger liabilities arising from the capsizing of one (1) of Sulpicio's fleet in 1998.203 Pursuant to Rule 32
of the Club Rules for the 1998 policy, which gave Steamship "the right to make deduction 'from any
claims . . . due to a Member' of 'any liabilities of such Member to the Club,'"204 Steamship set-off the
costs awarded by the English Commercial Court from the amount reimbursed to Sulpicio. Sulpicio's
brokers and lawyers were informed of the set-off through an email dated December 3, 2012.205

Steamship contends that there was no legal impediment when it initiated arbitration proceedings in
London.206 The action was taken in good faith to preserve its rights while defending its position that
Sulpicio's filing of Civil Case No. 07-577 constituted a breach of the Club Rules.207 On the other hand,
Sulpicio's acts were far from desirable for it did not only fail to participate in the London arbitration
proceedings but also evaded service of all notices so that it could feign ignorance of the existence of
arbitration proceedings."208

This Court finds Sulpicio's arguments to be untenable.

Steamship's commencement of arbitration even before the Regional Trial Court had ruled on its motion
to dismiss and suspend proceedings does not constitute an "improper conduct" that "impede[s],
obstruct[s] or degrade[s] the administration of justice."209

In Heirs of Trinidad de Leon vda. de Roxas v. Court of Appeals, 210 this Court explained the concept of
contempt of court:

Contempt of court is a defiance of the authority, justice or dignity of the court; such conduct as tends to
bring the authority and administration of the law into disrespect or to interfere with or prejudice parties
litigant or their witnesses during litigation . . .

Contempt of court is defined as a disobedience to the Court by acting in opposition to its authority,
justice and dignity. It signifies not only a willful disregard or disobedience of the court's orders, but such
conduct as tends to bring the authority of the court and the administration of law into disrepute or in
some manner to impede the due administration of justice . . .

This Court has thus repeatedly declared that the power to punish for contempt is inherent in all courts
and is essential to the preservation of order in judicial proceedings and to the enforcement of
judgments, orders, and mandates of the court, and consequently, to the due administration of
justice . . .211
The court's contempt power should be exercised with restraint and for a preservative, and not a
vindictive, purpose. "Only in cases of clear and contumacious refusal to obey should the power be
exercised."212

In Lorenzo Shipping Corporation v. Distribution Management Association of the Philippines, 213 this Court
held that:

There is no question that in contempt the intent goes to the gravamen of the offense. Thus, the good
faith, or lack of it, of the alleged contemnor should be considered. Where the act complained of is
ambiguous or does not clearly show on its face that it is contempt, and is one which, if the party is acting
in good faith, is within his rights, the presence or absence of a contumacious intent is, in some instances,
held to be determinative of its character. A person should not be condemned for contempt where he
contends for what he believes to be right and in good faith institutes proceedings for the purpose,
however erroneous may be his conclusion as to his rights. To constitute contempt, the act must be done
willfully and for an illegitimate or improper purpose.214 (Citations omitted)

In Lim Lua v. Lua,215 the father's deferral in giving monthly support pendente lite granted by the trial
court was held not contumacious, considering that "he had not been remiss in actually providing for the
needs of his children." It was also taken into account that he "believed in good faith that the trial and
appellate courts, upon equitable grounds, would allow him to offset the substantial amounts he had
spent or paid directly to his children." This Court explained:

Contempt of court is defined as a disobedience to the court by acting in opposition to its authority,
justice, and dignity. It signifies not only a willful disregard or disobedience of the court's order, but such
conduct which tends to bring the authority of the court and the administration of law into disrepute or,
in some manner, to impede the due administration of justice. To constitute contempt, the act must be
done willfully and for an illegitimate or improper purpose. The good faith, or lack of it, of the alleged
contemnor should be considered.216

This Court finds no dear and contumacious conduct on the part of Steamship. It does not appear that
Steamship was motivated by bad faith in initiating the arbitration proceedings. Rather, its act of
commencing arbitration in London is but a bona fide attempt to preserve and enforce its rights under
the Club Rules.

There was no legal impediment at the time Steamship initiated London arbitration proceedings.
Steamship commenced arbitration on July 31, 2007 even before the Regional Trial Court denied its
Motion to Dismiss and/or Refer Case to Arbitration on July 11, 2008. There was no order from the
Regional Trial Court enjoining Steamship from initiating arbitration proceedings in London. Besides, the
2009 Special ADR Rules specifically provided that arbitration proceedings may be commenced or
continued and an award may be made, while the motion for the stay of civil action and for referral to
arbitration is pending resolution by the court.217

This Court notes that while the arbitration proceeding was commenced as early as July 31, 2007, it is
only six (6) years later that Sulpicio filed its Petition218 to cite Steamship for indirect contempt. Sulpicio
cannot invoke lack of knowledge of the London arbitration proceedings due to several reasons. First, it
received and replied219 to the notice of commencement of arbitration proceedings220 dated July 31,
2007. Second, Steamship presented evidence showing Sulpicio's refusal to receive any notices, orders,
or communications related to the arbitration proceedings. Lastly, the pendency of the London
arbitration was made known to the Court of Appeals and this Court through Steamship's petitions.
Sulpicio's belated filing of its Petition, only after Steamship has deducted from the refund due it the
alleged "arbitration costs," indicates its lack of sincerity and good faith.

Finally, this Court finds Sulpicio's claim for damages to be improperly raised. It should be addressed in an
ordinary civil action. Its petition for indirect contempt is not the proper action to determine the validity
of the set-off and to make a factual determination relating to the propriety of ordering restitution.

WHEREFORE, the Petition for Review in G.R. No. 196072 is GRANTED. The Decision dated November 26,
2010 of the Court of Appeals in CA-G.R. SP No. 106103 and the Order dated July 11, 2008 of the Regional
Trial Court, Branch 149, Makati City in Civil Case No. 07-577 are SET ASIDE. The dispute between Sulpicio
Lines, Inc. and Steamship Mutual Underwriting (Bermuda) Limited is referred to arbitration in London in
accordance with Rule 47 of the 2005/2006 Club Rules.

The Petition for Indirect Contempt in G.R. No. 208603 is DISMISSED for lack of merit.

ORIENTAL ASSURANCE CORPORATION, Petitioner, v. MANUEL ONG, DOING BUSINESS UNDER THE

BUSINESS NAME OF WESTERN PACIFIC TRANSPORT SERVICES AND/OR ASIAN TERMINALS,
INC., Respondents.

DECISION

LEONEN, J.:

The consignee's claim letter that was received by the arrastre operator two (2) days after complete
delivery of the cargo constitutes substantial compliance with the time limitation for filing claims under
the Gate Pass and the Management Contract. However, the arrastre operator's liability for damage to
the cargo is limited to P5,000.00 per package in accordance with the Management Contract.

This Rule 45 Petition for Review on Certiorari1 seeks a review of the February 19, 2009 Decision2 and
August 25, 2009 Resolution3 of the Court of Appeals in CA-GR. CV No. 89311. The Court of Appeals
affirmed the Regional Trial Court's dismissal of the complaint on the ground that the claim of petitioner
Oriental Assurance Corporation (Oriental) had already prescribed.

JEA Steel Industries, Inc. (JEA Steel) imported from South Korea 72 aluminum-zinc-alloy-coated steel
sheets in coils. These steel sheets were transported to Manila on board the vessel M/V Dooyang Glory
as evidenced by Bill of Lading No. HDMUBSOML-214s011.4
Upon arrival of the vessel at the Manila South Harbor on June 10, 2002, the 72 coils were discharged
and stored in Pier 9 under the custody of the arrastre contractor, Asian Terminals, Inc. (Asian
Terminals). 5

From the storage compound of Asian Terminals, the coils were loaded on the trucks of Manuel Ong
(Ong) and delivered to JEA Steel's plant in Barangay Lapidario, Trece Martirez, Cavite on June 14,
20026 and June 17, 2002.7 Eleven of these coils ''were found to be in damaged condition, dented or their
normal round shape deformed."8

JEA Steel filed a claim with Oriental for the value of the 11 damaged coils, pursuant to Marine Insurance
Policy No. OAC/M-12292.9

Oriental paid JEA Steel the sum of P521,530.16 and subsequently demanded indemnity from Ong and
Asian Terminals (respondents), but they refused to pay.10

On May 19, 2003, Oriental filed a Complaint11 before the Regional Trial Court of Manila for sum of
money against respondents.12

Ong countered that the 11 coils were already damaged when they were loaded on board his trucks and
transported to the consignee.13

For its part, Asian Terminals claimed that it exercised due diligence in handling the cargo, that the cargo
was released to the consignee's representative in the same condition as when received from the vessel,
and that the damages were sustained while in the custody of the vessel or the customs broker.14

Asian Terminals further argued that Oriental's claim was barred for the latter's failure to file a notice of
claim within the 15-day period provided in the Gate Pass and in Article VII, Section 7.01 of the Contract
for Cargo Handling Services (Management Contract) between the Philippine Ports Authority and Asian
Terminals.15 The Gate Pass was signed by the consignee's representative to acknowledge the delivery
and receipt of the shipment.16 The dorsal side of this Gate Pass stated:

PROVISIONS

Issuance of this Gate Pass constitutes delivery to and receipt by the consignee of the goods as described
above in good order and condition unless an accompanying B.O. certificate duly signed and noted on the
fact (sic) of this Gate Pass appears.

This Gate Pass is subject to all terms and conditions defined in the Management Contract between the
Philippine Ports Authority and Asian Terminals, Inc. and amendment and alterations thereof particularly
but not limited to the Article VI thereof, limiting the contractor's liability to P5,000 per package unless
the transportation is otherwise specified or manifested or communicated in writing together with the
invoice value and supported by a certified packing list to the contractor by the interested party or
parties before the discharge of the goods and corresponding arrastre charges have been paid providing
exception or restriction from liability among others, unless a formal claim with the required annexes
shall have been filed with the contractor within fifteen (15) days from date of issuance by the
contractor's certificate of loss, damage, injury or certificate of non-delivery.17

Asan Terminals added that its liability, if any, should not exceed P5,000.00, pursuant to said Section
7.01.18
After trial, Branch 39, Regional Trial Court, Manila rendered its Decision19 on August 9, 2006 dismissing
the complaint. It found no preponderance of evidence to establish that respondents were the ones
responsible for the damage to the 11 coils.20 Oriental's Motion for Reconsideration was likewise denied
by the Regional Trial Court in its Resolution21 dated June 6, 2007.

The Court of Appeals dismissed Oriental’s appeal on the ground that its claim had already
prescribed.22 The Court of Appeals found that 11 of the coi1s were already damaged before they were
loaded in Ong's trucks.23 Hence, the legal presumption of negligence applies against Asian Terminals
unless it is able to prove that it exercised extraordinary diligence in the handling of the cargo.24 The
Court of Appeals held that as an arrastre operator, Asian Terminals was bound to observe the same
degree of care required of common carriers.25 The Court of Appeals further ruled that while Asian
Terminals failed to rebut the presumption of negligence against it, it cannot be held liable to pay the
value of the damaged coils because Oriental's claim was filed beyond the 15-day prescriptive period
stated in the Gate Pass. According to the Court of Appeals, it can resolve the issue of prescription
despite not being assigned as an error on appeal as it was already raised, although not tackled, in the
lower court. The Court of Appeals also denied petitioner's subsequent motion for reconsideration.26

Hence, this petition was filed before this Court. Respondents filed their respective Comments,27 and
Oriental filed its Motion to Admit Consolidated Reply28 together with its Consolidated Reply.29

In compliance with this Court's January 18, 2012 Resolution30 Asian Terminals31 and Oriental32 filed their
respective memoranda. Ong filed a Manifestation33 adopting the arguments contained in the
Memorandum of Asian Terminals.

The issues for this Court's resolution are:

First, whether or not the Court of Appeals gravely erred in passing upon the issue of prescription even
though it was not an assigned error in the appeal;

Second, whether or not the claim against Asian Terminals, Inc. is barred by prescription; and

Finally, whether or not the Court of Appeals gravely erred in ruling that Manuel Ong is not liable for the
damage of the cargo.34

Oriental submits that the court of Appeals cannot rule on the issue of prescription as this was not
included in the assignment of errors ... nor was this properly argued by any of the parties in their
respective briefs filed before the Court of Appeals."35

On the other hand, Asian Terminals counters that the Court of Appeals properly reviewed the issue of
prescription even though it was not raised in Oriental's appeal brief. This issue is closely related to the
liability of Asian Terminals for the damaged shipment, the first error in Oriental's appeal. Moreover,
Asian Terminals asserts that it raised the issue of prescription before the trial court, although it was not
resolved.36

This Court agrees with Asian Terminals. The Court of Appeals properly passed upon the issue of
prescription.

Rule 51, Section 8 of the Rules of Court provides:

Section 8.  Questions that may be decided. No error which does not affect the jurisdiction over the
subject matter or the validity of the judgment appealed from or the proceedings therein will be
considered unless stated in the assignment of errors, or closely related to or dependent on an assigned
error and properly argued in the brief, save as the court may pass upon plain errors and clerical errors.

An assignment of error is generally required for appellate review.37 Section 8 provides that only errors
which have been stated in the assignment of errors and properly argued in the brief will be considered
by the appellate court. The exceptions to this rule are errors affecting jurisdiction over the subject
matter as well as plain and clerical errors.38

However, in a number of cases,39 this Court recognized the appellate courts' ample authority to consider
errors that were not assigned. This is in accord with the liberal spirit of the Rules of Court with a view to
securing a ''just, speedy and inexpensive disposition" of every case.40 In Mendoza v. Bautista:41

[A]n appellate court is clothed with ample authority to review rulings even if they are not assigned as
errors in the appeal in these instances: (a) grounds not assigned as errors but affecting jurisdiction over
the subject matter; (b) matters not assigned as errors on appeal but are evidently plain or clerical errors
within contemplation of law; (c) matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case or to serve the interests of
justice or to avoid dispensing piecemeal justice; (d) matters not specifically assigned as errors on appeal
but raised in the trial court and are matters of record having some bearing on the issue submitted which
the parties failed to raise or which the lower court ignored; (e) matters not assigned as errors on appeal
but closely related to an error assigned; and (f) matters not assigned as errors on appeal but upon which
the determination of a question properly assigned, is dependent.42

Exceptions (d) and (e) apply in this case.

The issue of whether or not Oriental's claim has prescribed was raised in the Regional Trial Court and
evidence was presented by Asian Terminals.43 However, this matter was no longer discussed by the
Regional Trial Court in its decision in view of its finding that Oriental failed to clearly establish that
respondents were responsible for the damaged coils.44

Moreover, it was Oriental that appealed to the Court of Appeals. It is comprehensible that respondents
failed to discuss the issue since the arguments in their briefs were limited to refuting the matters raised
by petitioner.

Oriental assigned the following as errors in its appeal to the Court of Appeals:

The trial court erred when it declared that [respondents] are not liable for the loss and damage of the
goods.

....

The trial court erred in dismissing [Oriental's] complaint and in refusing to grant the reliefs prayed
for[.]45

The issue of prescription is closely related to, and determinant of, the propriety of the lower court's
ruling, absolving respondents from liability for the damaged goods and dismissing Oriental's complaint.
Thus, this Court finds no error on the part of the Court of Appeals in passing upon this issue.
II.A

Going to the substantive issue, Oriental contends that it was not aware of the provisions46 of the Gate
Pass or the Management Contract, neither of which it was a party to.47 Consequently, it cannot be
bound by the stipulation limiting the liability of Asian Terminals.48

Asian Terminals counters that "[t]he provisions of the Management Contract and the Gate Pass are
binding on Oriental as insurer-subrogee and successor-in-interest of the consignee."49

This Court finds for Asian Terminals. This issue on whether or not petitioner, who was not a party to the
Gate Pass or Management Contract, is bound by the 15-day prescriptive period fixed in them to file a
claim against the arrastre operator is not new. This has long been settled by this Court.

In Government Service Insurance System v. Manila Railroad Company,50 this Court held that the
provisions of a gate pass or of an arrastre management contract are binding on an insurer-subrogee
even if the latter is not a party to it, viz:

The question whether plaintiff is bound by the stipulation in the Management Contract, Exhibit 1,
requiring the filing of a claim within 15 days from discharge of the goods, as a condition precedent to
the accrual of a cause of action against the defendants, has already been settled in Northern Motors,
Inc. vs. Prince Line et al, 107 Phil., 253, Mendoza vs. Phil. Air Lines, Inc., (9 Phil., 836), and Freixas & Co.
vs. Pacific Mail Steamship Co. (42 Phil., 199), adversely to plaintiff's pretense. We have repeatedly held
that, by availing himself of the services of the arrastre operator and taking delivery therefrom in
pursuance of a permit and a pass issued by the latter, which were "subject to all the terms and
conditions" of said management contract, including, inter alia, the requirement thereof that .a claim is
filed with the Company within 15 days from the date of arrival of the goods", the consignee — and,
hence, the insurer, or plaintiff herein, as successor to the rights of the consignee — became bound by
the provisions of said contract. The second assignment of error is, therefore, untenable.51

This doctrine was reiterated in the later case of Summa Insurance Corporation v. Court of Appeals:52

In the performance of its job, an arrastre operator is bound by the management contract it had
executed with the Bureau of Customs. However, a management contract, which is a sort of a
stipulation pour autrui within the meaning of Article 1311 of the Civil Code, is also binding on a
consignee because it is incorporated in the gate pass and delivery receipt which must be presented by
the consignee before delivery can be effected to it. The insurer, as successor-in-interest of the
consignee, is likewise bound by the management contract. Indeed, upon taking delivery of the cargo, a
consignee (and necessarily its successor-in interest) tacitly accepts the provisions of the management
contract, including those which are intended to limit the liability of one of the contracting parties, the
arrastre operator.53 (Citations omitted)

The fact that Oriental is not a party to the Gate Pass and the Management Contract does not mean that
it cannot be bound by their provisions. Oriental is subrogated to the rights of the consignee simply upon
its payment of the insurance claim.

Article 2207 of the Civil Code provides:

Article 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury. (Emphasis added)

This Court explained the principle of subrogation m insurance contracts:

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured
property is destroyed or damaged through the fault or negligence of a party other than the assured,
then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to
recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the
insurer to the assured operates as an equitable assignment to the former of all remedies which the
latter may have against the third party whose negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim by the insurer[.]54

As subrogee, petitioner merely stepped into the shoes of the consignee and may only exercise those
rights that the consignee may have against the wrongdoer who caused the damage.55 "It can recover
only the amount that is recoverable by the assured."56 And since the right of action of the consignee is
subject to a precedent condition stipulated in the Gate Pass, which includes by reference the terms of
the Management Contract, necessarily a suit by the insurer is subject to the same precedent condition.57

Petitioner's assertion that the 15-day prescriptive period could not be enforced upon it to defeat its
claim since the Gate Pass was pro forma and it was not given notice of the Management Contract58 is
untenable.

As stated earlier, the dorsal side of the Gate Pass signed by the consignee's representative upon receipt
of the cargo expressly refers to the Management Contract between the Philippine Ports Authority and
Asian Terminals. Hence, the consignee and its subrogee, petitioner insurance company, are deemed to
have notice of this Management Contract.59

II.B

Petitioner asserts that under the Gate Pass, the 15-day period was to be reckoned from the "date of
issuance by the contractor's certificate of loss, damage, injury or certificate of non-delivery." Since Asian
Terminals did not issue any certificate of damage, then the 15-day period did not begin to run.60

In both its Comment on the Petition and Memorandum, respondent Asian Terminals no longer raised as
an issue the matter regarding its  responsibility for the 11 damaged coils. However, respondent Asian
Terminals maintains its refusal of liability for such loss, solely on the basis of petitioner's alleged failure
to file a formal claim within 15 days from the date of last delivery of the steel sheet coils to the
consignee's warehouse, in accordance with the Management Contract.

With regard to the reckoning of the 15-day prescriptive period, Asian Terminals posits that "the fifteen
day limit should be counted from the date consignee obtains knowledge of the loss, damage or
misdelivery of the shipment."61 The contractor's issuance of a certificate of loss, damage, or non-delivery
is not an indispensable condition for the period to run.62 Asian Terminals adds that the consignee is
presumed to have learned of the damage on June 17, 2002, the date of complete delivery of the
shipment to the consignee's plant, since there was no showing that the consignee learned of the
damage later than this date.63 Thus, counting 15 days, Oriental had until July 2, 2002 to file its
claim.64 Asian Terminals received Oriental's claim only on July 4, 2002; hence, the claim was barred by
prescription.65

II.C

Again, the dorsal side of the Gate Pass states:

PROVISIONS

Issuance of this Gate Pass constitutes delivery to and receipt by the consignee of the goods as described
above in good order and condition unless an accompanying B.O. certificate duly issued and noted on the
fact (sic) of this Gate Pass appears.

This Gate Pass is subject to all terms and conditions defined in the Management Contract between the
Philippine Ports Authority and Asian Terminals, Inc.  and amendment and alterations thereof particularly
but not limited to the Article VI thereof, limiting the contractor's liability to P5,000 per package unless
the transportation is otherwise specified or manifested or communicated in writing together with the
invoice value and supported by a certified packing list to the contractor by the interested party or
parties before the discharge of the goods and corresponding arrastre charges have been paid providing
exception or restriction from liability among others, unless a formal claim with the required annexes
shall have been filed with the contractor within fifteen (15) days from date of issuance by the contractors
certificate of loss, damage, injury or liability or certificate of non-delivery.66 (Emphasis supplied)

Section 7.01 of the Contract for Cargo Handling Services67 dated March 17, 1992 between Philippine
Ports Authority and then Marina Port Services, Inc., now Asian Terminals, provides:

Section 7.01 Responsibility and Liability for Losses and Damages; Exceptions.—The CONTRACTOR shall,
at its own expense, handle all merchandise in all work undertaken by it hereunder, diligently and in a
skillful, workman-like and efficient manner. The CONTRACTOR shall be solely responsible as an
independent contractor, and hereby agrees to accept liability and to pay to the shipping company,
consignees, consignors or other interested party or parties for the loss, damage or non-delivery of
cargoes in its custody and control to the extent of the actual invoice value of each package which in no
case shall be more than FIVE THOUSAND PESOS (P5,000.00) each, unless the value of the cargo
shipment is otherwise specified or manifested or communicated in writing together with the declared
Bill of Lading value and supported by a certified packing list to the CONTRACTOR by the interested party
or parties before the discharge or loading unto vessel of the goods. This amount of Five Thousand Pesos
(P5,000.00) per package may be reviewed and adjusted by the AUTHORITY from time to time. THE
CONTRACTOR shall not be responsible for the condition or the contents of any package received nor for
the weight nor for any loss, injury or damage to the said cargo before or while the goods are being
received or remains in the piers, sheds, warehouses or facility, if the loss, injury or damage is caused by
force majeure or ,other causes beyond the CONTRACTOR's control or capacity to prevent or
remedy; PROVIDED, that a  formal claim together with the necessary copies of Bill of Lading, Invoice,
Certified Packing List and Computation arrived at covering the loss, injury or damage or non-delivery
of such goods shall have been filed with the CONTRACTOR within fifteen (15) days from day of
issuance by the CONTRACTOR of a certificate of non-delivery; PROVIDED, however, that if said
CONTRACTOR fails to issue such certification within fifteen (15) days from receipt of a written request
by the shipper/consignee or his duly authorized representative or any interested party, said
certification shall be deemed to have been issued, and thereafter, the fifteen (15) day period within
which to file the claim commences; PROVIDED, finally, that the request for certification of loss shall be
made within thirty (30) days from the date of delivery of the package to the consignee.68 (Emphasis
supplied)

The issuance of a certificate is not an indispensable condition for the 15-day limit to run. The
Management Contract expressly states that upon the contractor's failure to issue a certification within
15 days from receipt of a consignee or his duly authorized representative or any interested party's
written request, this certification "shall be deemed to have been issued, and thereafter, the fifteen (15)
day period within which to file the claim commences." Further, neither petitioner alleges nor the facts of
this case show that a request for a certificate of loss or damage was made by the consignee. Hence, the
arrastre operator could not be expected to issue one.

Based on the Management Contract, the consignee has a period of 30 days from the date of delivery of
the package to the consignee within which to request a certificate of loss from the arrastre operator.
From the date of the request for a certificate of loss, the arrastre operator has a period of 15 days within
which to issue a certificate of non-delivery or loss, either actually or constructively. Moreover, from the
date of issuance of a certificate of non-delivery or loss, the consignee has 15 days within which to file a
formal claim covering the loss, injury, damage, or non-delivery of such goods with an accompanying
documentation against the arrastre operator.

This Court has ruled that the purpose of the time limitation for filing claims is "to apprise the arrastre
operator of the existence of a claim and enable it to check on the validity of the claimant's demand
while the facts are still fresh for recollection of the persons who took part in the undertaking and the
pertinent papers are still available."69 Despite the changes introduced in the Management Contract on
filing claims, the purpose is still the same.

This Court, in a number of cases,70 has liberally construed the requirement for filing a formal claim and
allowed claims filed even beyond the 15-day prescriptive period after finding that the request for bad
order survey or the provisional claim filed by the consignee had sufficiently served the purpose of a
formal claim.

In New Zealand Insurance Co., Ltd. v. Navarro,71 5,974 bags of soybean meal were discharged from the
carrying vessel and received by the arrastre operator on June 28, 1974. The arrastre operator completed
its delivery of the shipment to the consignee on July 9, 1974. On that same day, a bad order examination
of the goods delivered was requested by the consignee and was conducted by the arrastre operator's
own inspector, in the presence of representatives of both the Bureau of Customs and the consignee. The
inspector's ensuing bad order examination dated July 9, 1974 certified that 173 out of the 5,974 bags of
soybean meal shipped to Manila were damaged  in transitu and an additional 111 bags were damaged
after discharge from the vessel and receipt of the arrastre operator. On August 9, 1974, the consignee
filed a formal claim with the arrastre operator. New Zealand Insurance Co., Ltd., the insurer of the
goods, indemnified the consignee and subsequently filed a complaint against the arrastre operator.
The trial court dismissed the complaint on the ground that the claim was filed with the arrastre operator
beyond 15 days from the issuance of the bad order examination report, which the trial court considered
as the certificate of loss, damage, and injury referred to in the management contract.

This Court ruled that the request for, and the result of, the bad order examination, filed and done on the
last day of delivery of the cargo to the consignee served the purpose of a formal claim. The arrastre
operator had become aware of and had verified the facts giving rise to its liability. Thus, the arrastre
operator suffered no prejudice by the lack of literal compliance with the 15-day limitation.

New Zealand held:

We took special note of the above pronouncement six (6) years later in Fireman's Fund Insurance Co. v.
Manila Port Service Co., et al.  ...

However,  the trial court has overlooked the significance of the request for, and the result of, the bad
order examination, which were filed and done within fifteen days from the haulage of the goods from
the vessel. Said request and result, in effect, served the purpose of a claim, which is —

'to afford the carrier or depositary reasonable opportunity and facilities to check the validity of the
claims while facts are still fresh in the minds of the persons who took part in the transaction and
documents are still available.’ (Consunji vs. Manila Port Service, L-15551, 29 November 1960)

Indeed, the examination undertake[n] by the defendant's own inspector not only gave the defendant an
opportunity to check the goods but is itself a verification of its own liability ...

In other words, what the Court considered as the crucial factor in declaring the defendant arrastre
operator liable for the loss occasioned, in the Fireman's Fund case) was the fact that defendant, by
virtue of the consignee's request for a bad order examination, had been able formally to verify the
existence and extent of its liability within fifteen (15) days from the date of discharge of the shipment
from the carrying vessel —  i.e., within the same period stipulated under the Management Contract for
the consignee to file a formal claim. That a formal claim had been filed by the consignee beyond the
stipulated period of fifteen (15) days neither relieved defendant of liability nor excused payment
thereof, the purpose of a formal claim, as contemplated in Consunji, having already been fully served
and satisfied by the consignee's timely request for, and the eventual result of, the bad order
examination of the nylon merchandise shipped.

Relating the doctrine of Fireman's Fund to the case at bar, ... as early as 9 July 1974 (the date of last
delivery to the consignee's warehouse), respondent Razon had been able to verify and ascertain for
itself not only the existence of its liability to the consignee but, more significantly, the exact amount
thereof — i.e., P5,746.61, representing the value of 111 bags of soybean meal. We note further
that such verification and ascertainment of liability on the part of respondent Razon, had been
accomplished "within thirty (30) days from the date of delivery of last package to the consignee, broker
or importer" as well as "within fifteen (15) days from the date of issuance by the Contractor [respondent
Razon] of a certificate of loss, damage or injury or certificate of non-delivery" — the periods prescribed
under Article VI, Section 1 of the Management Contract here involved, within which a request for
certificate of loss and a formal claim, respectively, must be filed by the consignee or his
agent.72 (Emphasis supplied, citations omitted)
The same doctrine was adopted in Insurance Co. of North America v. Asian Terminals, Inc.73 This Court
ruled that the Request for Bad Order Survey and the ensuing examination report satisfied the purpose of
a formal claim, as respondent was made aware of and was able to verify that five (5) skids were
damaged or in bad order while in its custody before the last withdrawal of the shipment. Hence, even if
the formal claim was filed beyond the 15-day period stipulated in the Contract, respondent was not
prejudiced by it, since it already knew of the number of skids damaged in its possession per the
examination report on the request for bad order survey.

Thus, in the foregoing cases, "substantial compliance with the 15-day time limitation is allowed provided
that the consignee has made a provisional claim thru a request for bad order survey or examination
report."74

II.D

However, this case presents a new situation in that unlike the previous cases, the facts do not show that
a provisional claim or a request for bad order survey was made by the consignee. Instead, what was only
established is that the consignee's claim letter dated July 2, 2002 was received by respondent on July 4,
2002, or 17 days from last delivery of the coils to the consignee.

Even so, this Court adopts a reasonable interpretation of the stipulations in the Management Contract
and hold that petitioner's complaint is not time-barred.

First, under the express terms of the Management Contract, the consignee had thirty (30) days from
receipt of the cargo to request for a certificate of loss from the arrastre operator. Upon receipt of such
request, the arrastre operator would have 15 days to issue a certificate of loss, either actually or
constructively. From the date of issuance of the certificate of loss or where no certificate was issued,
from the expiration of the 15-day period, the consignee has 15 days within which to file a formal claim
with the arrastre operator.

In other words, the consignee had 45 to 60 days from the date of last delivery of the goods within which
to submit a formal claim to the arrastre operator.

The consignee's claim letter was received by respondent on July 4, 2002,75 or 17 days from the last
delivery of the goods, still within the prescribed 30-day period to request a certificate of loss, damage,
or injury from the arrastre operator.

This Court finds that whether the consignee files a claim letter or requests for a certificate of loss or bad
order examination, the effect would be the same, in that either would afford the arrastre contractor
knowledge that the shipment has been damaged and an opportunity to examine the nature and extent
of the injury. Under the Management Contract, the 30-day period is considered reasonable for the
contractor to make an investigation of a claim.

Hence, the consignee's claim letter is regarded as substantial compliance with the condition precedent
set forth in the Management Contract to hold the arrastre operator liable.

In New Zealand Insurance Co., Ltd. v. Navarro,76 this Court stressed that an arrastre operator, like
respondent, is a public utility, discharging functions which are heavily invested with public interest.
Provisions limiting the liability of a public utility operator through the imposition of multiple prescriptive
periods for the filing of claims by members of the general public who must deal with the public utility
operator, must be carefully scrutinized and reasonably construed so as to protect the legitimate interest
of the public which the utility must serve.77

Second, evidence shows that upon Asian Terminals' request, Ultraphil Marine and Cargo Survey
Corporation78 conducted two (2) surveys.79 These were:

1. On June 17, 2002 at Pier 9, South Harbor,80 where it was observed that 11 of the coils were
damaged before the shipment was loaded on Ong's truck;81 and

2. On June 27, 2002, at the warehouse of the consignee in Trece Martires, Cavite, where the same
quantity of damaged coils was observed.82

The surveyor prepared and submitted to Asian Terminals a Final Report dated June 29, 2002.83

Although its representative was not present during the inspections,84 the fact that Asian Terminals
requested for the cargo survey shows that it had knowledge of the damage of the shipment while in its
possession and that the survey was sought specifically to ascertain the nature and extent of the damage.
Thus, respondent cannot escape liability for the damaged coils, simply by its own act of not sending a
representative, after it had contracted for the survey of the shipment.

II.E

As to the extent of Asian Terminals' liability, Section 7.01 of the Management Contract provides that its
liability is limited to the actual invoice value of each package which should not be more than P5,000.00
each. The exception to this limitation on liability is:

[U]nless the value of the cargo shipment is otherwise specified or manifested or communicated in
writing together with the declared Bill of Lading value and supported by a certified packing list to the
CONTRACTOR by the interested party or parties before the discharge or loading unto vessel of the
goods.85

In this case, the records do not show that the value of the shipment was specified or manifested to
Asian Terminals before discharge from the vessel. There was no evidence proving the amount of
arrastre fees paid by the consignee to Asian Terminals so as to put the latter on notice of the value of
the cargo or that the invoice, packing list, and other shipping documents were presented to the Bureau
of Customs and to Asian Terminals for the proper assessment of the arrastre charges and other fees. The
Cargo Gate Passes86 issued by Asian Terminals do not indicate the value of the cargo.

Accordingly, Asian Terminals' liability should be limited to the maximum recoverable value ofP5,000.00
per package or coil, the customary freight unit. Hence, the total recoverable amount is P55,000.00 for
the 11 damaged coils. This amount shall earn a legal interest at the rate of 6% per annum from the date
of finality of this judgment until its full satisfaction pursuant to Nacar v. Gallery Frames.87

III

Both the Court of Appeals and the Regional Trial Court found that the 11 coils were already damaged
before the coils were loaded on Ong's truck. Hence, Ong could not be responsible for the damaged
shipment.
However, petitioner asserts that Ong should be held solidarily liable with Asian Terminals for acting in
bad faith when it did not apprise the consignee or Asian Terminals about the damaged coils. This Court
finds this contention untenable.

This issue was never raised by petitioner in the lower courts. In fact, Ong and Asian Terminals "[Were]
sued in the alternative because [petitioner was] uncertain against whom it [was] entitled for
relief."88 The rule is well-settled that no question will be considered by the appellate court which has not
been raised in the lower court.89

[A] party cannot change his theory of the case or his cause of action on appeal. Points of law, theories,
issues and arguments not brought to the attention of the lower court will not be considered by the
reviewing court. The defenses not pleaded in the answer cannot, on appeal, change fundamentally the
nature of the issue in the case. To do so would be unfair to the adverse party, who had no opportunity
to present evidence in connection with the new theory; this would offend the basic rules of due process
and fair play.90

Furthermore, there was no proof of Ong's bad faith. Mere allegation cannot take the place of evidence.
Besides, Ong's assertion that the loading of the cargo on the trucks was undertaken by Asian Terminals
and the unloading of the same cargo was undertaken by the consignee at its warehouse91 remains
unrebutted. In fact, Asian Terminals caused the inspection of the shipment before they were loaded on
Ong's trucks on June 17, 2002.92 Moreover, at the consignee's warehouse, the inspection was done in
the presence of the consignee's authorized representative.93 Thus, Ong is not obliged to inform the
consignee or Asian Terminals about the damaged coils as they would have presumably known about
them.

WHEREFORE, the Petition for Review is GRANTED. The February 19, 2009 Decision and August 25, 2009
Resolution of the Court of Appeals in CA-G.R. CV No. 89311 are SET ASIDE. Respondent Asian Terminals,
Inc. is ORDERED to pay petitioner Oriental Assurance Corporation the amount of P55,000.00, with
interest at the legal rate of six percent (6%) per annum from the date of finality of this judgment until
fully paid.

SO ORDERED.

G.R. No. 207526, October 03, 2018

THE INSULAR ASSURANCE CO., LTD., Petitioner, v. THE HEIRS OF JOSE H. ALVAREZ, Respondents.

G.R. No. 210156, October 3, 2018

UNION BANK OF THE PHILIPPINES, Petitioner, v. HEIRS OF JOSE H. ALVAREZ, Respondents.

DECISION

LEONEN, J.:

The Insurance Code dispenses with proof of fraudulent intent in cases of rescission due to concealment,
but not so in cases of rescission due to false representations. When an abundance of available
documentary evidence can be referenced to demonstrate a design to defraud, presenting a singular
document with an erroneous entry does not qualify as clear and convincing proof of fraudulent intent.
Neither does belatedly invoking just one other document, which was not even authored by the alleged
miscreant.

This resolves the consolidated Petitions for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil
Procedure. The first, docketed as G.R. No. 207526,1 was brought by The Insular Life Assurance Co., Ltd.
(Insular Life). The second, docketed as G.R. No. 210156,2 was brought by Union Bank of the Philippines
(UnionBank). These consolidated petitions seek the reversal of the assailed Court of Appeals May 21,
2013 Decision3 and November 6, 2013 Resolution4 in CA-G.R. CV No. 91820.

The assailed Court of Appeals May 21, 2013 Decision denied Insular Life's and UnionBank's separate
appeals and affirmed the January 29, 2007 Decision5 of Branch 148, Regional Trial Court, Makati City.
The Regional Trial Court ruled in favor of Jose H. Alvarez's (Alvarez) heirs6 (the Heirs of Alvarez) in their
action for specific performance against Insular Life and UnionBank. It ordered compliance with the
insurance undertaking on the Group Mortgage Redemption Insurance covering a loan obtained by
Alvarez from UnionBank by applying its proceeds as payment for that loan. It also nullified the
extrajudicial foreclosure ensuing from the non-payment of Alvarez's loan, and required UnionBank to
reconvey title and ownership over the foreclosed property to Alvarez's estate. Lastly, it ordered Insular
Life's and UnionBank's payment of attorney's fees and costs of suit.7

The assailed Court of Appeals November 6, 2013 Resolution denied UnionBank's Motion for
Reconsideration.8

Alvarez and his wife, Adelina, owned a residential lot with improvements covered by Transfer Certificate
of Title (TCT) No. C-315023 and registered in the Caloocan City Registry of Deeds.9

On June 18, 1997, Alvarez applied for and was granted a housing loan by UnionBank in the amount of
P648,000.00. This loan was secured by a promissory note,10 a real estate mortgage over the lot,11 and a
mortgage redemption insurance taken on the life of Alvarez with UnionBank as beneficiary. Alvarez was
among the mortgagors included in the list of qualified debtors covered by the Group Mortgage
Redemption Insurance that UnionBank had with Insular Life.12

Alvarez passed away on April 17, 1998.13 In May 1998, UnionBank filed with Insular Life a death claim
under Alvarez's name pursuant to the Group Mortgage Redemption Insurance. In line with Insular Life's
standard procedures, UnionBank was required to submit documents to support the claim. These
included: (1) Alvarez's birth, marriage, and death certificates; (2) the attending physician's statement; (3)
the claimant's statement; and (4) Alvarez's statement of account.14

Insular Life denied the claim after determining that Alvarez was not eligible for coverage as he was
supposedly more than 60 years old at the time of his loan's approval.15

With the claim's denial, the monthly amortizations of the loan stood unpaid. UnionBank sent the Heirs
of Alvarez a demand letter,16 giving them 10 days to vacate the lot. Subsequently, on October 4, 1999,
the lot was foreclosed and sold at a public auction with UnionBank as the highest bidder.17

On February 14, 2001, the Heirs of Alvarez filed a Complaint18 for Declaration of Nullity of Contract and
Damages against UnionBank, a certain Alfonso P. Miranda (Miranda), who supposedly benefitted from
the loan, and the insurer which was identified only as John Doe.19 The Heirs of Alvarez denied knowledge
of any loan obtained by Alvarez.20
The Heirs of Alvarez claimed that after Alvarez's death, they came upon a document captioned "Letter of
Undertaking," which appeared to have been sent by UnionBank to Miranda. In this document,
UnionBank bound itself to deliver to Miranda P466,000.00 of the approved P648,000.00 housing loan,
provided that Miranda would deliver to it TCT No. C-315023, "free from any liens and/or
encumbrances."21

The Complaint was later amended and converted into one for specific performance22 to include a
demand against Insular Life to fulfill its obligation as an insurer under the Group Mortgage Redemption
Insurance.23

In its defense, UnionBank asserted that the Heirs of Alvarez could not feign ignorance over the existence
of the loan and mortgage considering the Special Power of Attorney24 executed by Adelina in favor of
her late husband, which authorized him to apply for a housing loan with UnionBank.25

For its part, Insular Life maintained that based on the documents submitted by UnionBank, Alvarez was
no longer eligible under the Group Mortgage Redemption Insurance since he was more than 60 years
old when his loan was approved.26

In its January 29, 2007 Decision,27 the Regional Trial Court ruled in favor of the Heirs of Alvarez. It found
no indication that Alvarez had any fraudulent intent when he gave UnionBank information about his age
and date of birth. It explained that UnionBank initiated and negotiated the Group Mortgage Redemption
Insurance with Insular Life, and that "ordinary customers will not know about [insurance policies such as
this] unless it is brought to their knowledge by the bank."28 It noted that if UnionBank's personnel were
mindful of their duties and if Alvarez appeared to be disqualified for the insurance, they should have
immediately informed him of his disqualification. It emphasized that in evaluating Alvarez's worthiness
for the loan, UnionBank had been in possession of materials sufficient to inform itself of Alvarez's
personal circumstances. It added that if Insular Life had any doubt on the information that UnionBank
had provided, it should have inquired further instead of relying solely on the information readily
available to it and immediately refusing to pay.29

The dispositive portion of the Regional Trial Court's January 29, 2007 Decision read:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against
defendants order (sic):

1. Defendants to comply with the insurance undertaking under Mortgage Redemption Insurance Policy
No. G-098496 by paying its proceeds to be applied as payment of the outstanding loan obligation of
deceased Jose H. Alvarez with defendant Union Bank;

2. The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez's TCT No. C-315023 a
nullity and without legal force and effect and to release the mortgage encumbrance thereon;

3. Defendant Union Bank to reconvey the title and ownership over TCT No. C-315023 to the Estate of the
deceased Jose H. Alvarez for the benefit of his heirs and successors-in-interest;

4. Defendants jointly and severally to pay the plaintiffs the sum of P50,000.00 as and for attorney's fees;

5. Defendants jointly and severally to pay the costs of the suit.

SO ORDERED.30
UnionBank31 and Insular Life32 filed separate appeals before the Court of Appeals.

In its assailed May 21, 2013 Decision,33 the Court of Appeals affirmed the Regional Trial Court's ruling. It
noted that the errors assigned by Insular Life and UnionBank to the Regional Trial Court boiled down to
the issue of whether or not Alvarez was guilty of fraudulent misrepresentation as to warrant the
rescission of the Group Mortgage Redemption Insurance obtained by UnionBank on Alvarez's life. It
explained that fraud is never presumed and fraudulent misrepresentation as a defense of the insurer to
avoid liability must be established by convincing evidence. Insular Life, in this case, failed to establish
this defense. It only relied on Alvarez's Health Statement Form where he wrote "1942" as his birth year.
However, this form alone was insufficient to prove that he fraudulently intended to misrepresent his
age. It noted that aside from the Health Statement Form, Alvarez had to fill out an application for
insurance. This application would have supported the conclusion that he consistently wrote "1942" in all
the documents that he had submitted to UnionBank. However, the records made no reference to this
document.34

The Court of Appeals added that assuming that fraudulent misrepresentation entitled Insular Life to
rescind the contract, it should have first complied with certain conditions before it could exercise its
right to rescind. The conditions were:

(1) prior notice of cancellation to [the] insured; (2) notice must be based on the occurrence after
effective date of the policy of one or more grounds mentioned; (3) must be in writing, mailed or
delivered to the insured at the address shown in the policy; and (4) must state the grounds relied upon
provided in Section 64 of the Insurance Code and upon [the] request of [the] insured, to furnish facts on
which cancellation is based.35

None of these conditions were fulfilled. Finally, the letter of denial dated April 8, 1999 was furnished
only to UnionBank.36

Insular Life opted to directly appeal before this Court. Its appeal was docketed as G.R. No.
207526.37 UnionBank, on the other hand, filed its Motion for Reconsideration (of the Decision dated May
21, 2013),38 which the Court of Appeals denied in its November 6, 2013 Resolution.39 UnionBank then
filed before this Court its Petition, docketed as G.R. No. 210156.40

In its March 12, 2014 Resolution, this Court consolidated Insular Life's and UnionBank's Petitions.41

In response to the Court of Appeals' reasoning that intent to defraud must be established, Insular Life
pinpoints concealment, rather than fraudulent misrepresentation, as the key to the validity of its
rescission. It asserts that Alvarez's concealment of his age, whether intentional or unintentional, entitles
it to rescind the insurance contract.42 It claims that proof of fraudulent intent is not necessary for the
insurer to rescind the contract on account of concealment.43 It adds that it did not rely solely on
Alvarez's Health Statement Form but also on his representations during the background check
conducted by UnionBank where he said that he was only 55 years old at the time of application. As an
insurance contract is a contract uberrima fides, it claims that it has every right to rely on Alvarez's good
faith in its dealing with him.44

UnionBank claims that the real estate mortgage is not affected by the status of the Group Mortgage
Redemption Insurance as they are two (2) different contracts. Thus, any concealment made by Alvarez
should not result in the invalidation of the foreclosure.45
For this Court's resolution are the following issues:

First, whether or not petitioner The Insular Life Assurance Co., Ltd. is obliged to pay Union Bank of the
Philippines the balance of Jose H. Alvarez's loan given the claim that he lied about his age at the time of
the approval of his loan; and

Second, whether or not petitioner Union Bank of the Philippines was correct in proceeding with the
foreclosure following Insular Life Assurance Co., Ltd.'s refusal to pay.

I.A

Fraud is not to be presumed, for "otherwise, courts would be indulging in speculations and
surmises."46 Moreover, it is not to be established lightly. Rather, "[i]t must be established by clear and
convincing evidence . . . [; a] mere preponderance of evidence is not even adequate to prove
fraud."47 These precepts hold true when allegations of fraud are raised as grounds justifying the
invalidation of contracts, as the fraud committed by a party tends to vitiate the other party's consent.48

Citing Section 27 of the Insurance Code, however, Insular Life asserts that in cases of rescission due to
concealment, i.e., when a party "neglect[s] to communicate that which [he or she] knows and ought to
communicate,"49 proof of fraudulent intent is not necessary.50

Section 27 reads:

Section 27. A concealment whether intentional or unintentional entitles the injured party to rescind a

contract of insurance. (Emphasis supplied)

The statutory text is unequivocal. Insular Life correctly notes that proof of fraudulent intent is
unnecessary for the rescission of an insurance contract on account of concealment.

This is neither because intent to defraud is intrinsically irrelevant in concealment, nor because
concealment has nothing to do with fraud. To the contrary, it is because in insurance contracts,
concealing material facts51 is inherently fraudulent: "if a material fact is actually known to the [insured],
its concealment must of itself necessarily be a fraud."52 When one knows a material fact and conceals it,
"it is difficult to see how the inference of a fraudulent intent or intentional concealment can be
avoided."53 Thus, a concealment, regardless of actual intent to defraud, "is equivalent to a false
representation."54

This Court has long settled this equivalence. Argente v. West Coast Life Insurance,55 quoting heavily from
Joyce's The Law of Insurance, explained how concealment of material facts in insurance contracts is
tantamount to causal fraud,56 deceptively inducing an insurer into "accepting the risk, or accepting it at
the rate of premium agreed upon."57Argente explained:

One ground for the rescission of a contract of insurance under the Insurance Act is "a concealment,"
which in section 25 is defined as "A neglect to communicate that which a party knows and ought to
communicate." Appellant argues that the alleged concealment was immaterial and insufficient to avoid
the policy. We cannot agree. . . . If the policy was procured by fraudulent representations, the contract
of insurance apparently set forth therein was never legally existent. It can fairly be assumed that had the
true facts been disclosed by the assured, the insurance would never have been granted.

In Joyce, The Law of Insurance, second edition, volume 3, Chapter LV, is found the following:
Concealment exists where the assured has knowledge of a fact material to the risk, and honesty, good
faith, and fair dealing requires that he should communicate it to the assured, but he designedly and
intentionally withholds the same.

Another rule is that if the assured undertakes to state all the circumstances affecting the risk, a full and
fair statement of all is required.

It is also held that the concealment must, in the absence of inquiries, be not only material, but
fraudulent, or the fact must have been intentionally withheld; so it is held under English law that if no
inquiries are made and no fraud or design to conceal enters into the concealment the contract is not
avoided. And it is determined that even though silence may constitute misrepresentation or
concealment it is not of itself necessarily so as it is a question of fact. Nor is there a concealment
justifying a forfeiture where the fact of insanity is not disclosed no questions being asked concerning the
same. . . .

But it would seem that if a material fact is actually known to the assured, its concealment must of itself
necessarily be a fraud, and if the fact is one which the assured ought to know, or is presumed to know,
the presumption of knowledge ought to place the assured in the same position as in the former case
with relation to material facts; and if the jury in such cases find the fact material, and one tending to
increase the risk, it is difficult to see how the inference of a fraudulent intent or intentional concealment
can be avoided. And it is declared that if a material fact is concealed by assured it is equivalent to a false
representation that it does not exist and that the essentials are the truth of the representations whether
they were intended to mislead and did insurer accept them as true and act upon them to his prejudice.
So it is decided that under a stipulation voiding the policy for concealment or misrepresentation of any
material fact or if his interest is not truly stated or is other than the sole and unconditional ownership
the facts are unimportant that insured did not intend to deceive or withhold information as to
encumbrances even though no questions were asked. And if insured while being examined for life
insurance and knowing that she had heart disease, falsely stated that she was in good health, and
though she could not read the application, it was explained to her and the questions asked through an
interpreter, and the application like the policy contained a provision that no liability should be incurred
unless the policy was delivered while the insured was in good health, the court properly directed a
verdict for the insurer, though a witness who was present at the examination testified that the insured
was not asked whether she had heart disease.

....

The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the
insurer into accepting the risk, or accepting it at the rate of premium agreed upon; The insurer, relying
upon the belief that the assured will disclose every material fact within his actual or presumed
knowledge, is misled into a belief that the circumstance withheld does not exist, and he is thereby
induced to estimate the risk upon a false basis that it does not exist. The principal question, therefore,
must be, Was the assurer misled or deceived into entering a contract obligation or in fixing the premium
of insurance by a withholding of material information or facts within the assured's knowledge or
presumed knowledge?

It therefore follows that the assurer in assuming a risk is entitled to know every material fact of which
the assured has exclusive or peculiar knowledge, as well as all material facts which directly tend to
increase the hazard or risk which are known by the assured, or which ought to be or are presumed to be
known by him. And a concealment of such facts vitiates the policy. "It does not seem to be necessary . . .
that the . . . suppression of the truth should have been willful." If it were but an inadvertent omission, yet
if it were material to the risk and such as the plaintiff should have known to be so, it would render the
policy void. But it is held that if untrue or false answers are given in response to inquiries and they relate
to material facts the policy is avoided without regard to the knowledge or fraud of assured, although
under the statute statements are representations which must be fraudulent to avoid the policy. So
under certain codes the important inquiries are whether the concealment was willful and related to a
matter material to the risk.58 (Emphasis supplied)

Echoing Argente, Saturnino v. Philippine American Life Insurance Co.59 stated:

In this jurisdiction, a concealment, whether intentional or unintentional, entitles the insurer to rescind
the contract of insurance, concealment being defined as "negligence to communicate that which a party
knows and ought to communicate" (Sections 25 & 26, Act No. 2427). In the case of Argente vs. West
Coast Life Insurance Co., 51 Phil. 725, 732, this Court said, quoting from Joyce, The Law of Insurance, 2nd
ed. Vol. 3:

The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the
insurer into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying
upon the belief that the assured will disclose every material fact within his actual or presumed
knowledge, is misled into a belief that the circumstance withheld does not exist, and he is thereby
induced to estimate the risk upon a false basis that it does not exist.60

In Vda. de Canilang v. Court of Appeals,61 this Court considered an alternative version of Section 27, i.e.,
prior to the Insurance Code's amendment by Batas Pambansa Blg. 874, which omitted the qualifier
"whether intentional or unintentional." Vda. de Canilang clarified that even without this qualifier,
Section 27 still covers '"any concealment' without regard to whether such concealment is intentional or
unintentional,"62 thus:

The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain
information to the insurer was not "intentional" in nature, for the reason that Jaime Canilang believed
that he was suffering from minor ailment like a common cold. Section 27 of the Insurance Code of 1978
as it existed from 1974 up to 1985, that is, throughout the time range material for present purposes,
provided that:

Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.

The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:

Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a
contract of insurance.

Upon the other hand, in 1985, the Insurance Code of 1978 was amended by B.P. Blg. 874. This
subsequent statute modified Section 27 of the Insurance Code of 1978 so as to read as follows:

Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a

contract of insurance.
The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase
"intentional or unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874)
intended to limit the kinds of concealment which generate a right to rescind on the part of the injured
party to "intentional concealments." This argument is not persuasive. As a simple matter of grammar, it
may be noted that "intentional" and "unintentional" cancel each other out. The net result therefore of
the phrase "whether intentional or unintentional" is precisely to leave unqualified the term
"concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to "any
concealment" without regard to whether such concealment is intentional or unintentional. The phrase
"whether intentional or unintentional" was in fact superfluous. The deletion of the phrase "whether
intentional or unintentional" could not have had the effect of imposing an affirmative requirement that a
concealment must be intentional if it is to entitle the injured party to rescind a contract of insurance. The
restoration in 1985 by B.P. Blg. 874 of the phrase "whether intentional or unintentional" merely
underscored the fact that all throughout (from 1914 to 1985), the statute did not require proof that
concealment must be "intentional" in order to authorize rescission by the injured party.63 (Emphasis
supplied)

Following Vda. de Canilang, this Court was categorical in Sunlife Assurance Co. of Canada v. Court of
Appeals:64 '"good faith' is no defense in concealment."65

I.B

It does not escape this Court's attention that there have been decisions that maintained that in cases of
concealment, "fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract."66 However, these decisions proceed from an inordinately segregated reading
of Argente and have not been heedful of plain statutory text. While focusing on the equivalence
between concealment and false representation, they fail to account for the manifest textual peculiarity
whereby the negation of distinctions between intentional and unintentional acts is found only in Section
27, the provision concerning rescission due to concealment, but not in the counterpart provision
concerning false representations.67

Ng Gan Zee v. Asian Crusader Life,68 decided in 1983, stated:

Section 27 of the Insurance Law [Act 2427] provides:

Sec. 27. Such party to a contract of insurance must communicate to the other, in good faith, all facts
within his knowledge which are material to the contract, and which the other has not the means of
ascertaining, and as to which he makes no warranty.

Thus, "concealment exists where the assured had knowledge of a fact material to the risk, and honesty,
good faith, and fair dealing requires that he should communicate it to the assurer, but he designedly and
intentionally withholds the same."

It has also been held "that the concealment must, in the absence of inquiries, be not only material, but
fraudulent, or the fact must have been intentionally withheld."

Assuming that the aforesaid answer given by the insured is false, as claimed by the appellant. Sec. 27 of
the Insurance Law, above-quoted, nevertheless requires that fraudulent intent on the part of the
insured be established to entitle the insurer to rescind the contract. And as correctly observed by the
lower court, "misrepresentation as a defense of the insurer to avoid liability is an 'affirmative' defense.
The duty to establish such a defense by satisfactory and convincing evidence rests upon the defendant.
The evidence before the Court does not clearly and satisfactorily establish that defense."69 (Emphasis
supplied)

Ng Gan Zee makes a fundamental error in interpretation.

Ng Gan Zee's fourth footnote purports that the phrase quoted in the italicized paragraph was
from Argente.70 While the phrase indeed appears in Argente, it is not Argente itself which stated the
quoted phrase; rather, it was Joyce's The Law of Insurance.

In any case, Ng Gan Zee limited itself to a brief quote from Joyce. It discarded much of the discussion
that Argente lifted from Joyce. Most notably, it discarded the portion where Joyce explained that
concealment is necessarily fraudulent when the matter that was concealed is "a material fact . . .
actually known to the [insured]."71 Thus, Ng Gan Zee omitted the discussion explaining and accounting
for why proof of actual fraudulent intent may be dispensed with in cases of concealment, i.e., that
concealment of material facts is fraudulent in and of itself. Contrast this with Saturnino  which, though
also quoting only briefly from Argente and Joyce, did not cursorily focus on the equivalence between
concealment and false representations, but rather on the underlying reason for this equivalence. Ng
Gan Zee focused on the result, i.e., equivalence, without accounting for the cause.

In like manner as Ng Gan Zee, Great Pacific Life v. Court of Appeals 72 stated:

The second assigned error refers to an alleged concealment that the petitioner interposed as its defense
to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists where the assured had
knowledge of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the same.

....

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. In the
case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable
to pay the proceeds of the insurance.73 (Emphasis supplied)

So too, Philamcare Health Systems, Inc. v. Court of Appeals 74 stated:

The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract. Concealment as a defense for the health care provider or insurer to avoid liability is
an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence
rests upon the provider or insurer.75 (Emphasis supplied)

Great Pacific Life and Philamcare perpetuate Ng Gan Zee's unfortunate error.

Of the two (2) paragraphs this Court quoted from Great Pacific Life, the first cites Argente.76 Much
like Ng Gan Zee, it quotes an isolated portion of Joyce but fails to account for that part of Joyce's
discussion that explains how fraud inheres in concealment. The last sentence in this first quoted
paragraph merely reproduces the first paragraph that Argente lifted from Joyce. The second quoted
paragraph cites Ng Gan Zee77 and confounds concealment with misrepresentation.

The first sentence of the quoted paragraph from Philamcare cites Great Pacific Life and Ng Gan Zee.78 At
this juncture, a contagion of Ng Gan Zee's error can be observed.

More than misreading Argente and Joyce, Ng Gan Zee, Great Pacific Life, and Philamcare contradict
Section 27's plain text. The statute's clear and unmistakable text must prevail. For purposes of
rescission, Section 27 of the Insurance Code unequivocally negates any distinction between intentional
and unintentional concealments. Pronouncements in jurisprudence cannot undermine this explicit
legislative intent.

I.C

While Insular Life correctly reads Section 27 as making no distinction between intentional and
unintentional concealment, it erroneously pleads Section 27 as the proper statutory anchor of this case.

The Insurance Code distinguishes representations from concealments. Chapter 1, Title 4 is on

concealments. It spans Sections 26 to 35 of the Insurance Code;79 it is where Section 27 is found. Chapter
1, Title 5 is on representations. It spans Sections 36 to 48 of the Insurance Code.80

Section 26 defines concealment as "[a] neglect to communicate that which a party knows and ought to
communicate." However, Alvarez did not withhold information on or neglect to state his age. He made
an actual declaration and assertion about it.

What this case involves, instead, is an allegedly false representation. Section 44 of the Insurance Code
states, "A representation is to be deemed false when the facts fail to correspond with its assertions or
stipulations." If indeed Alvarez misdeclared his age such that his assertion fails to correspond with his
factual age, he made a false representation, not a concealment.

At no point does Chapter 1, Title 5 of the Insurance Code replicate Section 27's language negating the
distinction between intentional and unintentional concealment. Section 45 is Chapter 1, Title 5's
counterpart provision to Section 27, and concerns rescission due to false representations. It reads:

Section 45. If a representation is false in a material point, whether affirmative or promissory, the injured
party is entitled to rescind the contract from the time when the representation becomes false.

Not being similarly qualified as rescission under Section 27, rescission under Section 45 remains subject
to the basic precept of fraud having to be proven by clear and convincing evidence. In this respect, Ng
Gan Zee's and similar cases' pronouncements on the need for proof of fraudulent intent in cases of
misrepresentation are logically sound, albeit the specific reference to Argente as ultimate authority is
misplaced. Thus, while Great Pacific Life confounded concealment with misrepresentation by its citation
of Ng Gan Zee, it nevertheless acceptably stated that:

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer.81

Conformably, subsequent fraud cases citing Great Pacific Life which do not exclusively concern
concealment rightly maintain that "[f]raudulent intent on the part of the insured must be established to
entitle the insurer to rescind the contract."82 To illustrate, Manila Bankers Life Insurance Corp. v.
Aban83 was correct in explaining:

With the above crucial finding of fact — that it was Sotero who obtained the insurance for herself —
petitioner's case is severely weakened, if not totally disproved. Allegations of fraud, which are
predicated on respondent's alleged posing as Sotero and forgery of her signature in the insurance
application, are at once belied by the trial and appellate courts' finding that Sotero herself took out the
insurance for herself. "Fraudulent intent on the part of the insured must be established to entitle the
insurer to rescind the contract." In the absence of proof of such fraudulent intent, no right to rescind
arises.84

Concealment applies only with respect to material facts. That is, those facts which by their nature would
clearly, unequivocally, and logically be known by the insured as necessary for the insurer to calculate the
proper risks.

The absence of the requirement of intention definitely increases the onus on the insured. Between the
insured and the insurer, it is true that the latter may have more resources to evaluate risks. Insurance
companies are imbued with public trust in the sense that they have the obligation to ensure that they
will be able to provide succor to those that enter into contracts with them by being both frugal and, at
the same time, diligent in their assessment of the risk which they take with every insurance contract.
However, even with their tremendous resources, a material fact concealed by the insured cannot simply
be considered by the insurance company. The insurance company may have huge resources, but the law
does not require it to be omniscient.

On the other hand, when the insured makes a representation, it is incumbent on them to assure
themselves that a representation on a material fact is not false; and if it is false, that it is not a
fraudulent misrepresentation of a material fact. This returns the burden to insurance companies, which,
in general, have more resources than the insured to check the veracity of the insured's beliefs as to a
statement of fact. Consciousness in defraudation is imperative and it is for the insurer to show this.

There may be a mistaken impression, on the part of the insured, on the extent to which precision on
one's age may alter the calculation of risks with definitiveness. Deliberation attendant to an apparently
inaccurate declaration is vital to ascertaining fraud.

I.D

Spouses Manalo v. Roldan-Confesor85 explained what qualifies as clear and convincing proof:

Clear and convincing proof is ". . . more than mere preponderance, but not to extent of such certainty as
is required beyond reasonable doubt as in criminal cases . . ."while substantial evidence ". . . consists of
more than a mere scintilla of evidence but may be somewhat less than a preponderance . . ."
Consequently, in the hierarchy of evidentiary values, We find proof beyond reasonable doubt at the
highest level, followed by clear and convincing evidence, preponderance of evidence, and substantial
evidence, in that order.86

The assailed Court of Appeals May 21, 2013 Decision discussed the evidentiary deficiency in Insular Life's
cause, i.e., how it relied on nothing but a single piece of evidence to prove fraudulent intent:
At bar, Insular Life basically relied on the Health Statement form personally accomplished by Jose
Alvarez wherein he wrote that his birth year was 1942. However, such form alone is not sufficient absent
any other indications that he purposely wrote 1942 as his birth year. It should be pointed out that, apart
from a health statement form, an application for insurance is required first and foremost to be
answered and filled-up. However, the records are deficient of this application which would eventually
depict to Us Jose Alvarez's fraudulent intent to misrepresent his age. For, if he continually written (sic)
1942 in all the documents he submitted with UBP and Insular Life then there is really a clear precursor of
his fraudulent intent. Otherwise, a mere Health Statement form bearing a wrong birth year should not
be relied at.

As aptly pointed out by the court a quo:

....

If the defendant Insular Life had any doubt about the information, particularly the data which are
material to the risk, such as the age of the insured, which defendant Union Bank provided, it is not
justified for the insurer to rely solely therefrom, but it is obligated under the circumstances to make
further inquiry. . . .87

The Court of Appeals' observations are well-taken. Consistent with the requirement of clear and
convincing evidence, it was Insular Life's burden to establish the merits of its own case. Relative strength
as against respondents' evidence does not suffice.

A single piece of evidence hardly qualifies as clear and convincing. Its contents could just as easily have
been an isolated mistake.

Alvarez must have accomplished and submitted many other documents when he applied for the housing
loan and executed supporting instruments like the promissory note, real estate mortgage, and Group
Mortgage Redemption Insurance. A design to defraud would have demanded his consistency. He
needed to maintain appearances across all documents. Otherwise, he would doom his own ruse.

He needed to have been consistent, not only before Insular Life, but even before UnionBank. Even as it
was only Insular Life's approval that was at stake with the Group Mortgage Redemption Insurance,
Alvarez must have realized that as it was an accessory agreement to his housing loan with UnionBank.
Insular Life was well in a position to verify information, whether through simple cross referencing or
through concerted queries with UnionBank.

Despite these circumstances, the best that Insular Life could come up with before the Regional Trial
Court and the Court of Appeals was a single document. The Court of Appeals was straightforward, i.e.,
the most basic document that Alvarez accomplished in relation to Insular Life must have been an
insurance application form. Strangely, Insular Life failed to adduce even this document—a piece of
evidence that was not only commonsensical, but also one which has always been in its possession and
disposal.

Even now, before this Court, Insular Life has been unable to address the importuning for it to account
for Alvarez's insurance application form. Given the basic presumption under our rules on evidence
"[t]hat evidence willfully suppressed would be adverse if produced,"88 this raises doubts, perhaps not
entirely on Insular Life's good faith, but, at the very least, on the certainty and confidence it has in its
own evidence.
Rather than demonstrate Alvarez's consistent fraudulent design, Insular Life comes before this Court
pleading nothing but just one other instance when Alvarez supposedly declared himself to have been 55
years old. It claims that it did not rely solely on Alvarez's Health Statement Form but also on his
Background Checking Report.89

Reliance on this report is problematic. It was not prepared by Alvarez himself. Rather, it was
accomplished by a UnionBank employee following the conduct of credit investigation. Insular Life notes
a statement by UnionBank's Josefina Barte that all information in the Background Checking Report was
supplied by Alvarez.90 But this is a self-serving statement, wholly reliant on the assumption of that
employee's flawless performance of her duty to record findings. Precisely, it is a claim that needed to be
vetted. It had to be tested under the crucible of a court trial, that is, through the rigors of presentation
and authentication of evidence, cross-examination, and personal perusal by a judge. Yet, Insular Life
would now have this Court sustain its appreciation, solely on the strength of its own representations.

An erroneous statement's dual occurrence in the Health Statement Form and the Background Checking
Report concededly reduces the likelihood of honest mistakes or overlooked inaccuracies. However, in
the context of so many other documents being available to ascertain the error, a mere dual occurrence
does not definitively establish a fraudulent scheme. This is especially so when the errors could not be
directly and exclusively attributed to a single author.

Pleading just one (1) additional document still fails to establish the consistent fraudulent design that was
Insular Life's burden to prove by clear and convincing evidence. Insular Life had all the opportunity to
demonstrate Alvarez's pattern of consistently indicating erroneous entries for his age. All it needed to do
was to inventory the documents submitted by Alvarez and note the statements he made concerning his
age. This was not a cumbersome task, yet it failed at it. Its failure to discharge its burden of proving must
thwart its plea for relief from this Court.

II

Having settled Insular Life's continuing liability under the Group Mortgage Redemption Insurance, this
Court proceeds to the matter of the propriety of UnionBank's foreclosure.

UnionBank insists that the real estate mortgage is a contract separate and distinct from the Group
Mortgage Redemption Insurance; thus, it should not be affected by the validity or invalidity of Insular
Life's rescission.91 It also cites Great Pacific Life, which it claims involves a similar set of facts as this case,
and underscores how this Court in that case did not nullify the foreclosure despite a finding that the
rescission was improper, but instead considered the foreclosure as a supervening event.92

Great Pacific Life similarly involved an insurer's rescission of a mortgage redemption insurance on

account of a supposed concealment. This Court sustained the lower courts' conclusions holding the
rescission invalid and maintaining the insurer's liability to pay the mortgage. However, this Court
considered the foreclosure, which in the interim had been completed, as a supervening event. Ruling on
the basis of equity, this Court concluded that the insurance proceeds, which should have been paid to
the mortgagee, were now due to the heirs of the insured:

However, we noted that the Court of Appeals' decision was promulgated on May 17, 1993. In private
respondent's memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction
of mortgagor's outstanding loan. Considering this supervening event, the insurance proceeds shall inure
to the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should
not unjustly enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it
cannot collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds now
rightly belong to Dr. Leuterio's heirs represented by his widow, herein private respondent Medarda
Leuterio.93

Maglaque v. Planters Development Bank94 sustained a mortgagor's right to foreclose in the event of a

mortgagee's death:

[T]he rule is that a secured creditor holding a real estate mortgage has three (3) options in case of death
of the debtor. These are:

(1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary
claim;

(2) to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and

(3) to rely on the mortgage exclusively, foreclosing the same at anytime before it is barred by
prescription, without right to file a claim for any deficiency.95

This is in keeping with Rule 86, Section 7 of the Rules of Court, which states:

Section 7. Mortgage debt due from estate. — A creditor holding a claim against the deceased secured by
mortgage or other collateral security, may abandon the security and prosecute his claim in the manner
provided in this rule, and share in the general distribution of the assets of the estate; or he may
foreclose his mortgage or realize upon his security, by action in court, making the executor or
administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the
mortgaged premises, or the property pledged, in the foreclosure or other proceeding to realize upon the
security, he may claim his deficiency judgment in the manner provided in the preceding section; or he
may rely upon his mortgage or other security alone, and foreclose the same at any time within the
period of the statute of limitations, and in that event he shall not be admitted as a creditor, and shall
receive no share in the distribution of the other assets of the estate; but nothing herein contained shall
prohibit the executor or administrator from redeeming the property mortgaged or pledged, by paying
the debt for which it is held as security, under the direction of the court, if the court shall adjudge it to
be for the best interest of the estate that such redemption shall be made.

While the mortgagee's right to proceed with foreclosure is settled, this Court finds the debacle at the
heart of this case to have been borne in large, if not equal measure, by UnionBank's oversight.
UnionBank contributed to setting in motion a course of events that culminated in the unjust foreclosure
of Alvarez's mortgaged lot. As such a contributor, its profiting from the wrongful foreclosure cannot be
condoned.

The Regional Trial Court explained how UnionBank was remiss:

If at the time of the application, Jose H. Alvarez appears disqualified, and the personnel of the bank is
mindful of his duties, then the personnel of the bank will immediately tell the late Jose H. Alvarez [that]
he is not qualified. As it would appear in this case, there is nothing to show nor indicate that the late
Jose H. Alvarez exhibited any fraudulent intent when the bank was given certain data such as his age and
date of birth. The bank is already in its possession sufficient materials to inform itself regarding the true
and actual age, civil status and other personal circumstances of Jose Alvarez to merit approval of the
loan applied for. It was the same informative materials from which the defendant Union Bank lifted the
data it provided the defendant Insular Life for the consummation of the insurance contract, without
which, the bank would not have favorably approved the loan.96

These observations are well-taken.

Great Pacific Life, in considering the insurable interest involved in a mortgage redemption insurance,
discussed:

To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to
this type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the
"mortgage redemption insurance," is a device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into such form of contract so that in the event
of the unexpected demise of the mortgagor during the subsistence of the mortgage contract, the
proceeds from such insurance will be applied to the payment of the mortgage debt, thereby relieving the
heirs of the mortgagor from paying the obligation. In a similar vein, ample protection is given to the
mortgagor under such a concept so that in the event of death; the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage indebtedness.97 (Emphasis
supplied)

The Regional Trial Court was correct in emphasizing that Alvarez entered into the Group Mortgage
Redemption Insurance entirely upon UnionBank's prodding. Bank clients are generally unaware of
insurance policies such as a mortgage redemption insurance unless brought to their knowledge by a
bank. The processing of a mortgage redemption insurance was within UnionBank's regular course of
business. It knew the import of truthfully and carefully accomplished applications. To facilitate the
principal contract of the loan and its accessory obligations such as the real estate mortgage and the
mortgage redemption insurance, UnionBank completed credit appraisals and background checks. Thus,
the Regional Trial Court was correct in noting that UnionBank had been in possession of materials
sufficient to inform itself of Alvarez's personal circumstances.98

UnionBank was the indispensable nexus between Alvarez and Insular Life. Not only was it well in a
position to address any erroneous information transmitted to Insular Life, it was also in its best interest
to do so. After all, payments by the insurer relieve it of the otherwise burdensome ordeal of foreclosing
a mortgage.

This is not to say that UnionBank was the consummate guardian of the veracity and accuracy of Alvarez's
representations. It is merely to say that given the circumstances, considering Insular Life's protestation
over supposedly false declarations, UnionBank was in a position to facilitate the inquiry on whether or
not a fraudulent design had been effected. However, rather than actively engaging in an effort to verify,
it appears that UnionBank stood idly by, hardly bothering to ascertain if other pieces of evidence in its
custody would attest to or belie a fraudulent scheme.

UnionBank approved Alvarez's loan and real estate mortgage, and endorsed the mortgage redemption
insurance to Insular Life. Fully aware of considerations that could have disqualified Alvarez, it
nevertheless acted as though nothing was irregular. It itself acted as if, and therefore represented that,
Alvarez was qualified. Yet, when confronted with Insular Life's challenge, it readily abandoned the
stance that it had earlier maintained and capitulated to Insular Life's assertion of fraud.

UnionBank's headlong succumbing casts doubt on its own confidence in the information in its
possession. This, in turn, raises questions on the soundness of the credit investigation and background
checks it had conducted prior to approving Alvarez' loan.

In Poole-Blunden v. Union Bank of the Philippines,99 this Court emphasized that the high degree of
diligence required of banks "equally holds true in their dealing with mortgaged real properties, and
subsequently acquired through foreclosure."100 It specifically drew attention to this requisite high degree
of diligence in relation to "[c]redit investigations [which] are standard practice for banks before
approving loans."101

The foreclosure here may well be a completed intervening occurrence, but Great Pacific Life's leaning to
an irremediable supervening event cannot avail. What is involved here is not the mortgagor's medical
history, as in Great Pacific Life, which the mortgagee bank was otherwise incapable of perfectly
ascertaining. Rather, it is merely the mortgagor's age. This information was easily available from and
verifiable on several documents. UnionBank's passivity and indifference, even when it was in a prime
position to enable a more conscientious consideration, were not just a cause of Insular Life's rescission
bereft of clear and convincing proof of a design to defraud, but also, ultimately, of the unjust seizure of
Alvarez's property. By this complicity, UnionBank cannot be allowed to profit. Its foreclosure must be
annulled.

WHEREFORE, the Petitions are DENIED. The assailed Court of Appeals May 21, 2013 Decision and
November 6, 2013 Resolution in CA G.R. CV No. 91820 are AFFIRMED.

Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd. are ordered to comply
with the insurance undertaking under Mortgage Redemption Insurance Policy No. G-098496 by applying
its proceeds as payment of the outstanding loan obligation of deceased Jose H. Alvarez with respondent
Union Bank of the Philippines;

The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez's TCT No. C-315023 is
declared null and without legal force and effect;

Petitioner Union Bank of the Philippines is ordered to reconvey the title and ownership over the lot
covered by TCT No. C-315023 to the Estate of the deceased Jose H. Alvarez for the benefit of his heirs
and successors-in-interest; and

Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd. are ordered to jointly
and severally pay respondents the Heirs of Jose H. Alvarez attorney's fees and the costs of suit.

SO ORDERED.

G.R. No. 199455, June 27, 2018

FEDERAL EXPRESS CORPORATION, Petitioner, v. LUWALHATI R. ANTONINO AND ELIZA BETTINA RICASA

ANTONINO, Respondents.

DECISION
LEONEN, J.:

The duty of common carriers to observe extraordinary diligence in shipping goods does not terminate
until delivery to the consignee or to the specific person authorized to receive the shipped goods. Failure
to deliver to the person authorized to receive the goods is tantamount to loss of the goods, thereby
engendering the common carrier's liability for loss. Ambiguities in contracts of carriage, which are
contracts of adhesion, must be interpreted against the common carrier that prepared these contracts.

This resolves a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure
praying that the assailed Court of Appeals August 31, 2011 Decision2 and November 21, 2011
Resolution3 in CA-G.R. CV No. 91216 be reversed and set aside and that Luwalhati R. Antonino
(Luwalhati) and Eliza Bettina Ricasa Antonino (Eliza) be held liable on Federal Express Corporation's
(FedEx) counterclaim.

The assailed Court of Appeals August 31, 2011 Decision denied the appeal filed by FedEx and affirmed
the May 8, 2008 Decision4 of Branch 217, Regional Trial Court, Quezon City, awarding moral and
exemplary damages, and attorney's fees to Luwalhati and Eliza.5 In its assailed November 21, 2011
Resolution, the Court of Appeals denied FedEx's Motion for Reconsideration.6

Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium, located at 62 West 62nd St., New
York, United States.7 In November 2003, monthly common charges on the Unit became due. These
charges were for the period of July 2003 to November 2003, and were for a total amount of
US$9,742.81.8

On December 15, 2003, Luwalhati and Eliza were in the Philippines. As the monthly common charges on
the Unit had become due, they decided to send several Citibank checks to Veronica Z. Sison (Sison), who
was based in New York. Citibank checks allegedly amounting to US$17,726.18 for the payment of
monthly charges and US$11,619.35 for the payment of real estate taxes were sent by Luwalhati through
FedEx with Account No. x2546-4948-1 and Tracking No. 8442 4588 4268. The package was addressed to
Sison who was tasked to deliver the checks payable to Maxwell-Kates, Inc. and to the New York County
Department of Finance. Sison allegedly did not receive the package, resulting in the non-payment of
Luwalhati and Eliza's obligations and the foreclosure of the Unit.9

Upon learning that the checks were sent on December 15, 2003, Sison contacted FedEx on February 9,
2004 to inquire about the non-delivery. She was informed that the package was delivered to her
neighbor but there was no signed receipt.10

On March 14, 2004, Luwalhati and Eliza, through their counsel, sent a demand letter to FedEx for
payment of damages due to the non-delivery of the package, but FedEx refused to heed their
demand.11 Hence, on April 5, 2004, they filed their Complaint12 for damages.

FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action against it because [they] failed to
comply with a condition precedent, that of filing a written notice of claim within the 45 calendar days
from the acceptance of the shipment."13 It added that it was absolved of liability as Luwalhati and Eliza
shipped prohibited items and misdeclared these items as "documents."14 It pointed to conditions under
its Air Waybill prohibiting the "transportation of money (including but not limited to coins or negotiable
instruments equivalent to cash such as endorsed stocks and bonds)."15
In its May 8, 2008 Decision,16 the Regional Trial Court ruled for Luwalhati and Eliza, awarding them moral
and exemplary damages, and attorney's fees.17

The Regional Trial Court found that Luwalhati failed to accurately declare the contents of the package as
"checks."18 However, it ruled that a check is not legal tender or a "negotiable instrument equivalent to
cash," as prohibited by the Air Waybill.19 It explained that common carriers are presumed to be at fault
whenever goods are lost.20 Luwalhati testified on the non-delivery of the package. FedEx, on the other
hand, claimed that the shipment was released without the signature of the actual recipient, as
authorized by the shipper or recipient. However, it failed to show that this authorization was made;
thus, it was still liable for the loss of the package.21

On non-compliance with a condition precedent, it ruled that under the Air Waybill, the prescriptive
period for filing an action was "within two (2) years from the date of delivery of the shipment or from
the date on which the shipment should have been delivered."22 Luwalhati and Eliza's demand letter
made on March 11, 2004 was within the two (2)-year period sanctioned by the Air Waybill.23 The trial
court also noted that they were given a "run-around" by FedEx employees, and thus, were deemed to
have complied with the filing of the formal claim.24

The dispositive portion of the Regional Trial Court May 8, 2008 Decision read:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs Luwalhati R. Antonino and Eliza Bettina
Ricasa Antonino ordering the following:

1) The amount of P200,000.00 by way of moral damages;

2) The amount of P100,000.00 by way of exemplary damages; and
[3]) The amount of P150,000.00 as and for attorney's fees. Costs against defendant.

The counterclaim is ordered dismissed.

SO ORDERED.25

In its assailed August 31, 2011 Decision,26 the Court of Appeals affirmed the ruling of the Regional Trial
Court.27 According to it, by accepting the package despite its supposed defect, FedEx was deemed to
have acquiesced to the transaction. Thus, it must deliver the package in good condition and could not
subsequently deny liability for loss.28 The Court of Appeals sustained the Regional Trial Court's
conclusion that checks are not legal tender, and thus, not covered by the Air Waybill's prohibition.29 It
further noted that an Air Waybill is a contract of adhesion and should be construed against the party
that drafted it.30

The dispositive portion of the Court of Appeals August 31, 2011 Decision read:

WHEREFORE, premises considered, the present appeal is hereby DENIED. The assailed May 08, 2008
Decision of the Regional Trial Court, Branch 217, Quezon City in Civil case No. Q-04-52325 is AFFIRMED.
Costs against the herein appellant.

SO ORDERED.31

Following the Court of Appeals' denial32 of its Motion for Reconsideration, FedEx filed the present
Petition.
For resolution of this Court is the sole issue of whether or not petitioner Federal Express Corporation
may be held liable for damages on account of its failure to deliver the checks shipped by respondents
Luwalhati R. Antonino and Eliza Bettina Ricasa Antonino to the consignee Veronica Sison.

Petitioner disclaims liability because of respondents' failure to comply with a condition precedent, that
is, the filing of a written notice of a claim for non-delivery or misdelivery within 45 days from acceptance
of the shipment.33 The Regional Trial Court found the condition precedent to have been substantially
complied with and attributed respondents' noncompliance to FedEx for giving them a run-around.34 This
Court affirms this finding.

A provision in a contract of carriage requiring the filing of a formal claim within a specified period is a
valid stipulation. Jurisprudence maintains that compliance with this provision is a legitimate condition
precedent to an action for damages arising from loss of the shipment:

More particularly, where the contract of shipment contains a reasonable requirement of giving notice of
loss of or injury to the goods, the giving of such notice is a condition precedent to the action for loss or
injury or the right to enforce the carrier's liability. Such requirement is not an empty formalism. The
fundamental reason or purpose of such a stipulation is not to relieve the carrier from just liability, but
reasonably to inform it that the shipment has been damaged and that it is charged with liability
therefor, and to give it an opportunity to examine the nature and extent of the injury. This protects the
carrier by affording it an opportunity to make an investigation of a claim while the matter is fresh and
easily investigated so as to safeguard itself from false and fraudulent claims.35 (Citation omitted)

Petitioner's Air Waybill stipulates the following on filing of claims:

Claims for Loss, Damage, or Delay. All claims must be made in writing and within strict time limits. See
any applicable tariff, our service guide or our standard conditions for carriage for details.

The right to damages against us shall be extinguished unless an action is brought within two (2) years
from the date of delivery of the shipment or from the date on which the shipment should have been
delivered.

Within forty-five (45) days after notification of the claim, it must be documented by sending to us [all
the] relevant information about it.36

For their claim to prosper, respondents must, thus, surpass two (2) hurdles: first, the filing of their
formal claim within 45 days; and second, the subsequent filing of the action within two (2) years.

There is no dispute on respondents' compliance with the second period as their Complaint was filed on
April 5, 2004.37

In appraising respondents' compliance with the first condition, this Court is guided by settled standards
in jurisprudence.

In Philippine Airlines, Inc. v. Court of Appeals, 38 Philippine Airlines alleged that shipper Gilda Mejia
(Mejia) failed to file a formal claim within the period stated in the Air Waybill.39 This Court ruled that
there was substantial compliance with the period because of the zealous efforts demonstrated by Mejia
in following up her claim.40 These efforts coupled with Philippine Airlines' "tossing around the claim and
leaving it unresolved for an indefinite period of time" led this Court to deem the requisite period
satisfied.41 This is pursuant to Article 1186 of the New Civil Code which provides that "[t]he condition
shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment":42

Considering the abovementioned incident and private respondent Mejia's own zealous efforts in
following up the claim, it was clearly not her fault that the letter of demand for damages could only be
filed, after months of exasperating follow-up of the claim, on August 13, 1990. If there was any failure at
all to file the formal claim within the prescriptive period contemplated in the air waybill, this was largely
because of PAL's own doing, the consequences of which cannot, in all fairness, be attributed to private
respondent.

Even if the claim for damages was conditioned on the timely filing of a formal claim, 'under Article 1186
of the Civil Code that condition was deemed fulfilled, considering that the collective action of PAL's
personnel in tossing around the claim and leaving it unresolved for an indefinite period of time was
tantamount to "voluntarily preventing its fulfillment." On grounds of equity, the filing of the baggage
freight claim, which sufficiently informed PAL of the damage sustained by private respondent's cargo,
constituted substantial compliance with the requirement in the contract for the filing of a formal
claim.43 (Citations omitted)

Here, the Court of Appeals detailed the efforts made by respondent Luwalhati and consignee Sison. It
also noted petitioner's ambiguous and evasive responses, nonchalant handling of respondents'
concerns, and how these bogged down respondents' actions and impaired their compliance with the
required 45-day period:

Anent the issues concerning lack of cause of action and their so-called "run-around" matter, We uphold
the lower court's finding that the herein appellees complied with the requirement for the immediate
filing of a formal claim for damages as required in the Air Waybill or, at least, We find that there was
substantial compliance therewith. Luwalhati testified that the addressee, Veronica Z. Sison promptly
traced the whereabouts of the said package, but to no avail. Her testimony narrated what happened
thereafter, thus:

". . .

"COURT: All right. She was informed that it was lost. What steps did you take to find out or to
recover back this package?

"ATTY. ALENTAJAN:

"Q What did you do to Fedex?

". . .

   
WITNESS: First, I asked the secretary here to call Fedex Manila and they said, the record show that it
was sent to New York, Your Honor.

". . .

ATTY. ALENTAJAN:

"Q After calling Fedex, what did Fedex do?

   

"A None, sir. They washed their hands because according to them it is New York because
they have sent it. Their records show that New York received it, Sir.

   

"Q New York Fedex?

   

"A Yes, Sir.

   

"Q Now what else did you do after that?

   

"A And then I asked my friend Mrs. Veronica Sison to trace it, Sir.

   

". . .  

   

"Q What did she report to you?

   

"A She reported to me that first, she checked with the Fedex and the first answer was they
were going to trace it. The second answer was that, it was delivered to the lady, her
 neighbor and the neighbor completely denied it and as they show a signature that is not
my signature, so the next time she called again, another person answered. She called to
say that the neighbor did not receive and the person on the other line I think she got his
name, said that, it is because it is December and we usually do that just leave it and then
they cut the line and so I asked my friend to issue a sworn statement in the form of
affidavit and have it notarized in the Philippine Embassy or Consulate, Sir. That is what she
did.

   

"Q On your part here in the Philippines after doing that, after instructing Veronica Sison,
what else did you do because of this violation?

   

"A I think the next step was to issue a demand letter because any way I do not want to go to
Court, it is so hard, Sir."

The foregoing event show Luwalhati's own ardent campaign in following up the claim. To the Court's
mind, it is beyond her control why the demand letter for damages was only sent subsequent to her
infuriating follow-ups regarding the whereabouts of the said package. We can surmise that if there was
any omission at all to file the said claim within the prescriptive period provided for under the Air Waybill
it was mostly due to herein appellant's own behavior, the outcome thereof cannot, by any chance, be
imputed to the herein appellees.44 (Grammatical errors in the original)

Petitioner has been unable to persuasively refute Luwalhati's recollection of the efforts that she and
Sison exerted, and of the responses it gave them. It instead insists that the 45-day period stated in its Air
Waybill is sacrosanct. This Court is unable to bring itself to sustaining petitioner's appeal to a convenient
reprieve. It is one with the Regional Trial Court and the Court of Appeals in stressing that respondents'
inability to expediently file a formal claim can only be attributed to petitioner hampering its fulfillment.
Thus, respondents must be deemed to have substantially complied with the requisite 45-day period for
filing a formal claim.

II

The Civil Code mandates common carriers to observe extraordinary diligence in caring for the goods
they are transporting:

Article 1733. Common carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by them, according to all the circumstances of each case.

"Extraordinary diligence is that extreme measure of care and caution which persons of unusual
prudence and circumspection use for securing and preserving their own property or rights."45 Consistent
with the mandate of extraordinary diligence, the Civil Code stipulates that in case of loss or damage to
goods, common carriers are presumed to be negligent or at fault,46 except in the following instances:
 (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act or competent public authority.47

In all other cases, common carriers must prove that they exercised extraordinary diligence in the
performance of their duties, if they are to be absolved of liability.48

The responsibility of common carriers to exercise extraordinary diligence lasts from the time the goods
are unconditionally placed in their possession until they are delivered "to the consignee, or to the
person who has a right to receive them."49 Thus, part of the extraordinary responsibility of common
carriers is the duty to ensure that shipments are received by none but "the person who has a right to
receive them."50 Common carriers must ascertain the identity of the recipient. Failing to deliver
shipment to the designated recipient amounts to a failure to deliver. The shipment shall then be
considered lost, and liability for this loss ensues.

Petitioner is unable to prove that it exercised extraordinary diligence in ensuring delivery of the package
to its designated consignee. It claims to have made a delivery but it even admits that it was not to the
designated consignee. It asserts instead that it was authorized to release the package without the
signature of the designated recipient and that the neighbor of the consignee, one identified only as
"LGAA 385507," received it.51 This fails to impress.

The assertion that receipt was made by "LGAA 385507" amounts to little, if any, value in proving
petitioner's successful discharge of its duty. "LGAA 385507" is nothing but an alphanumeric code that
outside of petitioner's personnel and internal systems signifies nothing. This code does not represent a
definite, readily identifiable person, contrary to how commonly accepted identifiers, such as numbers
attached to official, public, or professional identifications like social security numbers and professional
license numbers, function. Reliance on this code is tantamount to reliance on nothing more than
petitioner's bare, self-serving allegations. Certainly, this cannot satisfy the requisite of extraordinary
diligence consummated through delivery to none but "the person who has a right to receive"52 the
package.

Given the circumstances in this case, the more reasonable conclusion is that the package was not
delivered. The package shipped by respondents should then be considered lost, thereby engendering
the liability of a common carrier for this loss.

Petitioner cannot but be liable for this loss. It failed to ensure that the package was delivered to the
named consignee. It admitted to delivering to a mere neighbor. Even as it claimed this, it failed to
identify that neighbor.

III
Petitioner further asserts that respondents violated the terms of the Air Waybill by shipping checks. It
adds that this violation exempts it from liability.53

This is untenable.

Petitioner's International Air Waybill states:

Items Not Acceptable for Transportation. We do not accept transportation of money (including but not
limited to coins or negotiable instruments equivalent to cash such as endorsed stocks and bonds). We
exclude all liability for shipments of such items accepted by mistake. Other items may be accepted for
carriage only to limited destinations or under restricted conditions. We reserve the right to reject
packages based upon these limitations or for reasons of safety or security. You may consult our Service
Guide, Standard Conditions of Carriage, or any applicable tariff for specific details.54 (Emphasis in the
original)

The prohibition has a singular object: money. What follows the phrase "transportation of money" is a
phrase enclosed in parentheses, and commencing with the words "including but not limited to." The
additional phrase, enclosed as it is in parentheses, is not the object of the prohibition, but merely a
postscript to the word "money." Moreover, its introductory words "including but not limited to" signify
that the items that follow are illustrative examples; they are not qualifiers that are integral to or
inseverable from "money." Despite the utterance of the enclosed phrase, the singular prohibition
remains: money.

Money is "what is generally acceptable in exchange for goods."55 It can take many forms, most
commonly as coins and banknotes. Despite its myriad forms, its key element is its general
acceptability.56 Laws usually define what can be considered as a generally acceptable medium of
exchange.57 In the Philippines, Republic Act No. 7653, otherwise known as The New Central Bank Act,
defines "legal tender" as follows:

All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the
Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and
private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal
tender in amounts not exceeding Fifty pesos (P50.00) for denomination of Twenty-five centavos and
above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or
less.58

It is settled in jurisprudence that checks, being only negotiable instruments, are only substitutes for
money and are not legal tender; more so when the check has a named payee and is not payable to
bearer. In Philippine Airlines, Inc. v. Court of Appeals,59 this Court ruled that the payment of a check to
the sheriff did not satisfy the judgment debt as checks are not considered legal tender. This has been
maintained in other cases decided by this Court. In Cebu International Finance Corporation v. Court of
Appeals,60 this Court held that the debts paid in a money market transaction through the use of a check
is not a valid tender of payment as a check is not legal tender in the Philippines. Further, in Bank of the
Philippine Islands v. Court of Appeals,61 this Court held that "a check, whether a manager's check or
ordinary check, is not legal tender."62
The Air Waybill's prohibition mentions "negotiable instruments" only in the course of making an
example. Thus, they are not prohibited items themselves. Moreover, the illustrative example does not
even pertain to negotiable instruments per se but to "negotiable instruments equivalent to cash."63

The checks involved here are payable to specific payees, Maxwell-Kates, Inc. and the New York County
Department of Finance.64 Thus, they are order instruments. They are not payable to their bearer,
i.e., bearer instruments. Order instruments differ from bearer instruments in their manner of
negotiation:

Under Section 30 of the [Negotiable Instruments Law], an order instrument requires an indorsement
from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand,
does not require an indorsement to be validly negotiated.65

There is no question that checks, whether payable to order or to bearer, so long as they comply with the
requirements under Section 1 of the Negotiable Instruments Law, are negotiable instruments.66 The
more relevant consideration is whether checks with a specified payee are negotiable instruments
equivalent to cash, as contemplated in the example added to the Air Waybill's prohibition.

This Court thinks not. An order instrument, which has to be endorsed by the payee before it may be
negotiated,67 cannot be a negotiable instrument equivalent to cash. It is worth emphasizing that the
instruments given as further examples under the Air Waybill must be endorsed to be considered
equivalent to cash:68

Items Not Acceptable for Transportation. We do not accept transportation of money (including but not
limited to coins or negotiable instruments equivalent to cash such as endorsed stocks and bonds). ...
(Emphasis in the original)69

What this Court's protracted discussion reveals is that petitioner's Air Waybill lends itself to a great deal
of confusion. The clarity of its terms leaves much to be desired. This lack of clarity can only militate
against petitioner's cause.

The contract between petitioner and respondents is a contract of adhesion; it was prepared solely by
petitioner for respondents to conform to.70 Although not automatically void, any ambiguity in a contract
of adhesion is construed strictly against the party that prepared it.71 Accordingly, the prohibition against
transporting money must be restrictively construed against petitioner and liberally for respondents.
Viewed through this lens, with greater reason should respondents be exculpated from liability for
shipping documents or instruments, which are reasonably understood as not being money, and for
being unable to declare them as such.

Ultimately, in shipping checks, respondents were not violating petitioner's Air Waybill. From this, it
follows that they committed no breach of warranty that would absolve petitioner of liability.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed August 31, 2011 Decision and
November 21, 2011 Resolution of the Court of Appeals in CA-G.R. CV No. 91216 are AFFIRMED.

SO ORDERED.

G.R. No. 202275, July 17, 2018

THE PROVINCIAL BUS OPERATORS ASSOCIATION OF THE PHILIPPINES (PBOAP), THE SOUTHERN LUZON
BUS OPERATORS ASSOCIATION, INC. (SO-LUBOA), THE INTER CITY BUS OPERATORS ASSOCIATION
(INTERBOA), AND THE CITY OF SAN JOSE DEL MONTE BUS OPERATORS ASSOCIATION
(CSJDMBOA), Petitioners, v. DEPARTMENT OF LABOR AND EMPLOYMENT (DOLE) AND LAND
TRANSPORTATION FRANCHISING AND REGULATORY BOARD (LTFRB), Respondents.

DECISION

LEONEN, J.:

Government created policy based on the finding that the boundary payment scheme that has since
determined the take-home pay of bus drivers and conductors has been proven inadequate in providing
our public utility bus drivers and conductors a decent and living wage. It decided that this was the best
approach to ensure that they get the economic and social welfare benefits that they deserve. This Court
will not stand in its way. Policy questions are not what this Court decides.

This resolves an original action for certiorari and prohibition, assailing the constitutionality of the
following:

First, the Department of Labor and Employment (DOLE) Department Order No. 118-12, otherwise
known as the Rules and Regulations Governing the Employment and Working Conditions of Drivers and
Conductors in the Public Utility Bus Transport Industry;

Second, all the implementing guidelines issued pursuant to Department Order No. 118-12, including the
National Wages and Productivity Commission's Guidelines No. 1, series of 2012, otherwise known as the
Operational Guidelines on Department Order No. 118-12; and

Finally, the Land Transportation Franchising and Regulatory Board (LTFRB) Memorandum Circular No.
2012-001, the subject of which is the Labor Standards Compliance Certificate.

Petitioners Provincial Bus Operators Association of the Philippines, Southern Luzon Bus Operators
Association, Inc., Inter City Bus Operators Association, and City of San Jose Del Monte Bus Operators
Association (collectively, petitioners) argue that Department Order No. 118-12 and Memorandum
Circular No. 2012-001 violate the constitutional rights of public utility bus operators to due process of
law, equal protection of the laws, and non-impairment of obligation of contracts.

The facts of the case are as follows:

To ensure road safety and address the risk-taking behavior of bus drivers as its declared objective, the
LTFRB issued Memorandum Circular No. 2012-0011 on January 4, 2012, requiring "all Public Utility Bus
(PUB) operators ... to secure Labor Standards Compliance Certificates" under pain of revocation of their
existing certificates of public convenience or denial of an application for a new certificate. Memorandum
Circular No. 2012-001 more particularly provides:

MEMORANDUM CIRCULAR
NUMBER 2012-001

SUBJECT: LABOR STANDARDS COMPLIANCE CERTIFICATE

This Memorandum Circular covers all Public Utility Bus (PUB) Operators and is being issued to ensure
road safety through linking of labor standards compliance with franchise regulation.

It is based on a DOLE rapid survey of bus drivers/conductors and operators on the working conditions
and compensation schemes in the bus transport sector. The survey results, as validated in a series of
focus group discussions with bus operators, drivers, government regulating agencies and experts from
the academe in the fields of engineering and traffic psychology, indicate that the risk[-]taking behavior
of drivers is associated with the lack of proper training on motor skills, safety and on traffic rules and
regulations; poor health due to long work hours and exposure to health hazards and; lack of income
security under a purely commission-based compensation scheme. The industry players also cited
problems with the enforcement of traffic rules and regulations as well as the franchising and licensing
systems.

To strictly enforce this Memorandum Circular, the Board, thru the [Department of Transportation and
Communication], shall strengthen cooperation and coordination with the Department of Labor and
Employment.

Labor Standards Compliance Certificate

To ensure compliance with the established standards for employment and the Board's policies on the
promotion of road safety, all Public Utility Bus (PUB) operators are required to secure Labor Standards
Compliance Certificates from the Department of Labor and Employment (DOLE).

The Certificate shall indicate compliance by the PUB operators with all relevant legislations on wages,
labor standards, terms and conditions of employment, and such mandatory benefits as may now or in
the future be provided under Philippine Labor Laws; Provided that –

Compensation Scheme

The compensation scheme set or approved by the DOLE shall cover the PUB drivers and conductors and
shall adopt a part-fixed-part performance[-]based compensation system. The fixed component shall at
no time be lower than the applicable minimum wage in the region. The performance[-]based
component shall be based on the net income of the operator or bus company and on employee safety
records such as that in regard to involvement in road accidents, commission of traffic violations, and
observance of the elementary courtesies of the road.

All PUB drivers and conductors shall be entitled to other mandatory compensation such as but not
limited to overtime, night shift differential, rest day, holiday, birthday, and service incentive leave pays.

Hours of Work

The number of working hours and rest periods of the drivers and conductors shall be determined taking
into consideration the existing conditions, peculiarities and requirements of the transport industry.

Benefits

All PUB drivers and conductors shall likewise be entitled to retirement benefits and to all mandatory
social security benefits such as membership in the SSS, Philhealth and Pag-Ibig as specified by law.

Right to Self Organization

The right of the drivers and conductors to organize themselves to advance their interests and welfare
shall be encouraged. It shall not in any way be abridged or diminished by way of any agreement or
contract entered into in complying with this issuance or in obtaining the Labor Standards Compliance
Certificate.

Nothing herein shall be interpreted to mean as precluding the PUB operators and the drivers or
conductors from entering into collective bargaining agreements granting them more rights, privileges
and benefits.

Company policies and practices, and collective bargaining agreements existing on effectivity of this
issuance which grant more rights, privileges, and benefits to the drivers and conductors than herein
provided shall continue to be in effect and shall not be diminished by virtue hereof or any subsequent
policies or agreements.

The exercise of the right to self-organization shall in no way adversely affect public safety and
convenience.

Effectivity

Failure on the part of the PUB operators to secure and submit to the Board by July 30, 2012 the required
Labor Standards Certificates shall be a ground for the immediate cancellation or revocation of their
franchises/[Certificates of Public Convenience].

No application for new [Certificates of Public Convenience] or renewal of existing [Certificates of Public
Convenience] shall thereafter be granted by the Board without the required Certificates.

This Memorandum Circular shall take effect fifteen (15) days following its publication in at least two (2)
newspapers of general circulation. Let three (3) copies hereof be filed with the UP [L]aw Center pursuant
to Presidential Memorandum Circular No. 11, dated 9 October 1992.

SO ORDERED.

Five (5) days later or on January 9, 2012, the DOLE issued Department Order No. 118-12, elaborating on
the part-fixed-part-performance-based compensation system referred to in the LTFRB Memorandum
Circular No. 2012-001.2 Department Order No. 118-12, among others, provides for the rule for
computing the fixed and the performance-based component of a public utility bus driver's or
conductor's wage. Relevant portions of Department Order No. 118-12 provide:

DEPARTMENT ORDER N0. 118-12

Series of 2012

RULES AND REGULATIONS GOVERNING THE EMPLOYMENT

AND WORKING CONDITIONS OF DRIVERS AND
CONDUCTORS IN THE PUBLIC UTILITY BUS TRANSPORT
INDUSTRY

Pursuant to the provision of Article 5 of the Labor Code of the Philippines, as amended, the following
rules and regulations are hereby issued to ensure the protection and welfare of drivers and conductors
employed in the public utility bus transport industry:
....
RULE II
TERMS AND CONDITIONS OF EMPLOYMENT

SECTION 1. Employment Agreement for Drivers and Conductors. — There shall be an agreement in
writing between the public utility bus owner/operator and the public utility bus driver and/or conductor,
which shall include the following terms:

a)

Driver['s] or conductor's full name, date of birth or age, address, civil status, and SSS ID no.;

  

b)

Public Utility Bus owner's/operator's name and address;

  

c)

Place where and date when the employment agreement is entered into;

  

d)

Amount of the driver's or conductor's fixed wage and formula used for calculating the
performance[-]based compensation in accordance with Rule III (Compensation), as provided hereunder;

  

e)

Hours of work;

  

f)

Wages and wage-related benefits such as overtime pay, holiday pay, premium pay, 13th month pay and
leaves;

  

g)

Social security and welfare benefits;

  

h)

Separation and retirement benefits; and

  

i)

Other benefits under existing laws.

The public utility bus owner/operator shall provide the public utility bus driver/conductor the signed and
notarized original copy of the agreement.

SECTION 2. Minimum Benefits. — The public utility bus drivers and conductors are entitled to the
following benefits:

a)

Wages for all actual work during the normal work hours and days shall not be lower than the applicable
minimum wage rates. Wages shall be paid at least once every two weeks or twice a month at intervals
not exceeding 16 days;

  

b)

Twelve (12) Regular Holidays with pay pursuant to Republic Act 9849 (An Act Declaring The Tenth Day of
Zhul Hijja, The Twelfth Month of The Islamic Calendar, A National Holiday For The Observance of Eidul
Adha, Further Amending For The Purpose Section 26, Chapter 7, Book I of Executive Order No. 292,
Otherwise Known As The Administrative Code of 1987, As Amended). The driver/conductor shall be paid
holiday pay of 100% of the minimum wage even if he/she does not report for work, provided he/she is
present or is on leave of absence with pay on the workday immediately preceding the holiday. If the
driver/conductor is required to work on said holiday, he/she shall be paid 200% of the minimum wage;

  

c)

Rest day of twenty-four (24) consecutive hours for every six (6) consecutive working days. If the
driver/conductor is required to work on a rest day, he/she shall be paid an additional premium pay of
30% of the basic wage. If the driver/conductor is required to work on special days under Republic Act
No. 9849, he/she shall also be paid an additional premium pay of 30% of the basic wage. Whenever
work is performed on a rest day, which happens to be also a special day, he/she is entitled to an
additional 50% of the basic wage;

  

d)

Overtime pay equivalent to at least 25% of the basic wage on ordinary days and 30% on regular holidays,
special days and rest days for work beyond eight (8) hours per day;

  

e)
Night shift pay of an additional 10% of the basic wage for work between 10:00 pm and 6:00 am of the
following day;

  

f)

Paid service incentive leave of five (5) days for every year of service;

  

g)

13th month pay pursuant to Presidential Decree No. 851, as amended, which entitles the employee to
receive an amount equivalent to 1/12 of the total basic salary earned within the calendar year, not later
than 24 December of each year;

  

h)

Paid maternity leave of sixty (60) days for normal delivery or seventy[-]eight (78) days for caesarian
section delivery, pursuant to Republic Act No. 8282, otherwise known as the Social Security Act of 1997;

  

i)

Paid paternity leave of seven (7) days, pursuant to Republic Act No. 8187, otherwise known as the
Paternity Leave Act of 1996;

  

j)

Paid parental leave of seven (7) days for solo parents pursuant to Republic Act No. 8972, otherwise
known as the Solo Parents' Welfare Act of 2000;

  

k)

Paid leave of ten (10) days for victims of violence against women and their children, pursuant to
Republic Act No. 9262, otherwise known as the Anti-Violence Against Women and Their Children Act of
2004;

  

l)

Paid special leave for women who underwent surgery caused by gynecological disorders, pursuant to
Republic Act No. 9710, otherwise known as the Magna Carta for Women; and

  
m)

Retirement pay upon reaching the age of sixty (60) or more, pursuant to Republic Act No. 7641.

SECTION 3. Hours of Work and Hours of Rest. — The normal hours of work of a driver and conductor
shall not exceed eight (8) hours a day.

If the driver/conductor is required to work overtime, the maximum hours of work shall not exceed
twelve (12) hours in any 24-hour period, subject to the overriding safety and operational conditions of
the public utility bus.

Drivers and conductors shall be entitled to rest periods of at least one (1) hour, exclusive of meal breaks,
within a 12-hour shift.

SECTION 4. Right to Security of Tenure. — Drivers and conductors shall enjoy security of tenure in their
employment as provided by law. Their employment can only be terminated for just or authorized causes
pursuant to the provisions of the Labor Code, as amended.
....

RULE III
COMPENSATION

SECTION 1. Fixed and Performance[-]Based Compensation Scheme. — Bus owners and/or operators
shall adopt a mutually-agreed upon "part-fixed, part-performance" based compensation scheme for
their bus drivers and conductors.

SECTION 2. Method of Determining Compensation. — Bus owners and/or operators, in consultation

with their drivers and conductors shall determine the following:

[a]) The fixed component shall be based on an amount mutually agreed upon by the owner/operator
and the driver/conductor, which shall in no case be lower than the applicable minimum wage for work
during normal hours/days. They shall also be entitled to wage[-]related benefits such as overtime pay,
premium pay and holiday pay, among others.

[b]) The performance-based component shall be based on safety performance, business performance
and other related parameters.

SECTION 3. Operational Guidelines. The [National Wages and Productivity Commission] shall develop
operational guidelines to implement the part-fixed, part[-]performance-based compensation scheme
including the formula that should be used by public utility bus companies within fifteen (15) days after
publication of th[ese] Rules.

SECTION 4. Submission of Proposed Compensation Scheme. — All public utility bus owners and/or
operators shall submit a proposed compensation scheme, mutually agreed upon with their
drivers/conductors, to the appropriate [Regional Tripartite Wages and Productivity Board] for
information and reference purposes based on Rule III, Section 2 of th[ese] Rules, within sixty (60) days
after the effectivity of this Order.
....
RULE V
SOCIAL PROTECTION

SECTION 1. Social Welfare Benefits. — Without prejudice to established company policy, collective
bargaining agreement or other applicable employment agreement, all bus drivers and conductors shall
be entitled to coverage for social welfare benefits such as Pagibig Fund (Republic Act No. 7742),
PhilHealth (Republic Act No. 7875, as amended by Republic Act No. 9241), Employees' Compensation
Law (Presidential Decree No. 626), Social Security Law (Republic Act No. 1161 as amended by Republic
Act No. 8282) and other applicable laws.

The cost of health services for the illnesses and injuries suffered by the driver and conductor shall be
covered by mandatory social welfare programs under existing laws.

RULE VI
TRAINING AND DEVELOPMENT

SECTION 1. Assessment and Certification. — The [Technical Education and Skills Development
Authority], in coordination with the [Occupational Safety and Health Center], the [Land Transportation
Office], the LTFRB and the [Metropolitan Manila Development Authority] shall implement an assessment
and certification program for professional drivers. The assessment will focus on knowledge, attitude and
skills.

SECTION 2. Driver Proficiency Standards. — The [Technical Education and Skills Development Authority]
shall work closely with LTFRB in the implementation of its Department Order No. 2011-25 "Inclusion of
Driver Proficiency Standard as Additional Requirement in the Exercise of the Regulatory Powers of LTFRB
to Issue Certificates of Public Convenience (CPC)". Applicants for CPCs shall present sufficient proof and
submit a list of its drivers who are duly certified by the TESDA.
....

RULE VIII
COMPLIANCE AND ENFORCEMENT

....

SECTION 4. Failure to Comply/Restitute. — In case of violations committed by bus owners/operators

and failure to comply or correct such violations, the DOLE shall coordinate with the LTFRB on the matter
of appropriate action, including possible cancellation of franchise after due process.

....

RULE IX
MISCELLANEOUS PROVISIONS

SECTION 1. Transitory Provisions. — Th[ese] Rules shall initially cover the public utility bus transport
companies exclusively serving or plying Metro Manila routes and shall apply to other public utility bus
companies by July 2012.

In the first six months but not later than one year from the effectivity of th[ese] Rules, the provisions
herein stated shall be liberally construed to enable compliance by the public utility bus companies.
SECTION 2. Operational Guidelines. — Operational guidelines to implement th[ese] Rules shall be issued
by concerned DOLE agencies (i.e., [Bureau of Working Conditions], [Occupational Safety and Health
Center], [National Conciliation and Mediation Board], and [Technical Education and Skills Development
Authority]) within fifteen (15) days after its publication.

SECTION 3. Technical Assistance to Public Utility Bus Transport Companies. — Public utility bus
operators may request for technical assistance from concerned DOLE agencies in the implementation of
th[ese] Rules.

SECTION 4. Non-diminution of Benefits. — Nothing herein shall be construed to authorize diminution of

benefits being enjoyed by the bus drivers and conductors at the time of the issuance hereof.

SECTION 5. Effect on Existing Company Policy, Contracts or CBAs. — The minimum benefits provided in
th[ese] Rules shall be without prejudice to any company policy, contract, or Collective Bargaining
Agreement (CBA) providing better terms and conditions of employment.

On January 28, 2012, Atty. Emmanuel A. Mahipus, on behalf of the Provincial Bus Operators Association
of the Philippines, Integrated Metro Manila Bus Operators Association, Inter City Bus Operators
Association, the City of San Jose Del Monte Bus Operators Association, and Pro-Bus, wrote to then
Secretary of Labor and Employment Rosalinda Dimapilis-Baldoz, requesting to defer the implementation
of Department Order No. 118-12.3 The request, however, was not acted upon.

Meanwhile, on February 27, 2012 and in compliance with Rule III, Section 3 of Department Order No.
118-12, the National Wages and Productivity Commission issued NWPC Guidelines No. 1 to serve as
Operational Guidelines on Department Order No. 118-12. NWPC Guidelines No. 1 suggested formulae
for computing the fixed-based and the performance-based components of a bus driver's or conductor's
wage. Relevant portions of the NWPC Guidelines, including its Annex "A" on a sample computation
implementing the part-fixed-part-performance-based compensation scheme, are reproduced below:

NWPC GUIDELINES NO. 1

(series 2012)

OPERATIONAL GUIDELINES ON DEPARTMENT ORDER NO.

118-12 "RULES AND REGULATIONS GOVERNING THE
EMPLOYMENT AND WORKING CONDITIONS OF DRIVERS
AND CONDUCTORS IN THE PUBLIC UTILITY BUS
TRANSPORT INDUSTRY"

Pursuant to Section 3 of Rule III of Department Order No. 118-12 "Rules and Regulations Governing the
Employment and Working Conditions of Drivers and Conductors in the Public Utility Bus Transport
Industry,["] the following operational guidelines on the adoption of a part fixed, part-
performance[-]based compensation scheme is hereby issued:

RULE I
COVERAGE AND DEFINITION OF TERMS

SECTION 1. Coverage. — Th[ese] Guidelines shall apply to all public utility bus owners and/or operators
employing drivers and conductors. Owners/operators of coaches, school, tourist and similar buses who
are holders of Certificates of Public Convenience (CPC) issued by the Land Transportation Franchising
and Regulatory Board (LTFRB), however, are not covered by the provisions of th[ese] Guidelines.

RULE II
COMPENSATION

SECTION 1. Part-Fixed, Part-Performance[-]Based Compensation Scheme.

a)

Bus owners and/or operators shall adopt a mutually-agreed upon "part-fixed, part-performance" based
compensation scheme for bus drivers and conductors. It shall take into consideration revenue, ridership,
safety, specific conditions of routes and other relevant parameters. (Annex A -Sample Computation)

SECTION 2. Fixed Wage Component.

a)

The fixed wage component shall be an amount mutually agreed upon by the owner/operator and the
driver/conductor and shall be paid in legal tender. It shall in no case be lower than the applicable
minimum wage (basic wage + COLA) for work performed during normal hours/days. It shall include
wage[-]related benefits such as overtime pay, nightshift differential, service incentive leave and
premium pay among others. The payment of 13th month pay, holiday and service incentive leave may
be integrated into the daily wage of drivers and conductors, upon agreement of both owners/operators
and drivers and conductors.

b)

The fixed wage may be based on a time unit of work (e.g. hourly, daily or monthly). It may also be based
on a per trip or per kilometer basis where the drivers/conductors and operators may consider the
minimum number of trips or kilometres/distance travelled within an 8-hour period, as basis for
determining regular/normal workload for an 8-hour period. The fixed wage may be computed as
follows:

  

Fixed Wage (Time Rate)= (Basic Wage + Wage-Related Benefits)

OR

  Fixed Wage (Trip Basis)= Rate per Trip x No. of Trips per Day

SECTION 3. Performance-Based Wage Component.

a)

The performance-based wage component shall be based on business performance, safety performance
and other relevant parameters. Business performance shall consider revenue/ridership. Safety
performance shall consider safety records such as the incidence of road accident and traffic violation.
The performance-based wage may be computed as follows:
      Reference Amount of Performance Incentive = (Current Average Daily Earnings - Fixed Wage) x Y%  

Where:

i.

Current average daily earnings shall be estimated based on average daily earnings for 2011 and/or prior
years, as may be agreed upon.

ii.

Y – range of values (in percent) that correspond to various levels of safety performance, such that:

  

• The lower the incidence of traffic violations and road accidents, the higher will be the value of Y and
the performance incentive

  

• The higher the incidence of traffic violations and road accidents, the lower will be the value of Y and
the performance incentive

b)

Bus operators/owners and drivers/conductors may modify or use other formula for their compensation
scheme provided it is in accordance with the part-fixed[-]part-performance[-]based compensation
scheme as provided herein.

....

SECTION 7. Submission of Proposed Compensation Scheme. — All public utility bus owners and/or
operators shall submit their proposed compensation scheme, mutually agreed upon with their
drivers/conductors, to the [Regional Tripartite Wage and Productivity Board] having jurisdiction over the
principal place of business of the public utility bus operator, within sixty (60) days after the effectivity of
the Guidelines using the attached Proposed Compensation Form (Annex B). This form shall be
accomplished in duplicate (2) and shall be accompanied by a duly signed employment agreement
between the bus owner/operator and bus driver and between the bus owner/operator and bus
conductor.

Upon submission, the concerned [Regional Tripartite Wage and Productivity Board] shall review the
compensation scheme for conformity with Rule II of the Guidelines. If found not in conformance with
the Guidelines, the [Regional Tripartite Wage and Productivity Board] shall provide technical assistance
to the concerned bus owner/operator to correct the non-conformance. The [Regional Tripartite Wage
and Productivity Board] shall thereafter furnish the DOLE-[Regional Office] a copy of the compensation
scheme and the agreements.
RULE III
MISCELLANEOUS PROVISIONS

....

SECTION 2. Non-diminution of Benefits. — Nothing herein shall be construed to authorize diminution or

reduction of existing wages and benefits being enjoyed by the bus drivers and conductors.

On July 4, 2012, petitioners filed before this Court a Petition with Urgent Request for Immediate
Issuance of a Temporary Restraining Order and/or a Writ of Preliminary Injunction,4 impleading the
DOLE and the LTFRB as respondents. They pray that this Court enjoin the implementation of Department
Order No. 118-12 and Memorandum Circular No. 2012-001 for being violative of their right to due
process, equal protection, and non impairment of obligation of contracts.

In its July 11, 2012 Resolution,5 this Court deferred the issuance of a status quo ante order and, instead,
required the DOLE and the LTFRB to comment on the Petition.

On July 13, 2012, petitioners filed the Urgent Manifestation with Motion for Clarification,6 alleging that
Atty. Ma. Victoria Gleoresty Guerra announced in a press conference that this Court agreed to issue
a  status quo ante order in the case. They prayed that this Court clarify whether a status quo ante order
was indeed issued.

In its July 13, 2012 Resolution,7 this Court noted without action the Urgent Manifestation with Motion
for Clarification.

A Very Urgent Motion for Reconsideration8 of the July 13, 2012 Resolution was filed by petitioners on
which respondents filed a Comment.9

On July 27, 2012, the Metropolitan Manila Development Authority (MMDA) filed a Motion for Leave to
Intervene,10 alleging "direct and material interest in upholding the constitutionality of [Department
Order No. 118-12 and Memorandum Circular No. 2012-001]."11 This Court granted the MMDA's Motion
in its August 10, 2012 Resolution. 12

On August 22, 2012, the DOLE and the LTFRB filed their Comment13 via registered mail after which
petitioners filed their Reply.14 For intervenor MMDA, it filed its Comment-in-Intervention15 on January 8,
2013.

In its September 3, 2013 Resolution,16 this Court directed the parties to file their respective memoranda.
In compliance, petitioners filed their Memorandum17 on October 10, 2013, while the DOLE, the LTFRB,
and the MMDA filed a Consolidated Memorandum18 on November 6, 2013.

As earlier stated, petitioners assail the constitutionality of Department Order No. 118-12 and
Memorandum Circular No. 2012-001, arguing that these issuances violate petitioners' rights to non-
impairment of obligation of contracts, due process of law, and equal protection of the laws. Particularly
with respect to Department Order No. 118-12, its provisions on the payment of part-fixed-part-
performance-based wage allegedly impair petitioners' obligations under their existing collective
bargaining agreements where they agreed with their bus drivers and conductors on a commission or
boundary basis. They contend that Memorandum Circular No. 2012-001 further requires compliance
with Department Order No. 118-12 under threat of revocation of their franchises, which allegedly
deprive petitioners of the capital they invested in their businesses in violation of their right to due
process of law.

Petitioners add that the initial implementation of Department Order No. 118-12 within Metro Manila
allegedly creates an arbitrary distinction between bus operators operating in Metro Manila and those
operating outside of Metro Manila, in violation of petitioners' right to equal protection of the laws.

Respondents counter that petitioners have no legal standing to file the present Petition considering that
Department Order No. 118-12 and Memorandum Circular No. 2012-001 are directed against bus
operators, not against associations of bus operators such as petitioners. They add that petitioners
violated the doctrine of hierarchy courts in directly filing their Petition before this Court. For these
reasons, respondents pray for the dismissal of the Petition.

On the constitutional issues raised by petitioners, respondents contend that Department Order No. 118-
12 and Memorandum Circular No. 2012-001 are valid issuances promulgated by the DOLE and the LTFRB
in the exercise of their quasi-legislative powers.

Further, they argue that Department Order No. 118-12 and Memorandum Circular No. 2012-001 do not
violate public utility bus operators' rights to non-impairment of obligation of contracts, due process of
law, and equal protection of the laws for the following reasons:

First, Department Order No. 118-12 and Memorandum Circular No. 2012-001 were issued "[to promote
and protect] the welfare of the public utility bus drivers and conductors"19 and "(to ensure] road
safety"20 by imposing a wage system where public utility bus drivers do not have to compete with one
another and drive recklessly for additional income.21 Department Order No. 118-12 and Memorandum
Circular No. 2012-001 are social legislations and police power measures to which petitioners' right
against impairment of obligation of contracts must yield22;

Second, certificates of public convenience are not property and are always subject to amendment,
alteration, or repeal. Therefore, public utility bus operators cannot argue that they were deprived of
their property without due process of law when the LTFRB required further compliance with
Memorandum Circular No. 2012-001 for bus operators to retain their franchises23; and

Finally, Department Order No. 118-12 does not violate Metro Manila public utility bus operators' right to
equal protection of the laws since it applies to all public utility bus operators in the country.24

Based on the pleadings, the issues for this Court's resolution are the following:

First, whether or not petitioners Provincial Bus Operators Association of the Philippines, Southern Luzon
Bus Operators Association, Inc., Inter City Bus Operators Association, and City of San Jose Del Monte Bus
Operators Association have legal standing to sue;

Second, whether or not this case falls under any of the exceptions to the doctrine of hierarchy of courts;

Third, whether or not the DOLE Department Order No. 118-12 and the LTFRB Memorandum Circular No.
2012-001 deprive public utility bus operators of their right to due process of law;

Fourth, whether or not the DOLE Department Order No. 118-12 and the LTFRB Memorandum Circular
No. 2012-001 impair public utility bus operators' right to non-impairment of obligation of contracts; and
Finally, whether or not the DOLE Department Order No. 118-12 and the LTFRB Memorandum Circular
No. 2012-001 deny public utility bus operators of their right to equal protection of the laws.

This Court dismisses the Petition. Petitioners fail to respect the doctrine of hierarchy of courts by directly
invoking this Court's jurisdiction without any special reason. They fail to present an actual controversy
ripe for adjudication and do not even have the requisite standing to file this case. Even if this Court
proceeds on the merits, petitioners fail to show the unconstitutionality of the DOLE Department Order
No. 118-12 and the LTFRB Memorandum Circular No. 2012-001.

The Constitution vests in this Court and such lower courts as may be established by law the power to
"declare executive and legislative acts void if violative of the Constitution."25 This Court's power of
judicial review is anchored on Article VIII, Section 1 of the Constitution:

Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be
established by law.

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the government.

Our governmental structure rests on the principle of separation of powers. Under our constitutional
order, the legislative branch enacts law, the executive branch implements the law, and the judiciary
construes the law. In reality, however, the powers are not as strictly confined or delineated to each
branch. "[T]he growing complexity of modem life, the multiplication of the subjects of governmental
regulation, and the increased difficulty of administering the laws"26 require the delegation of powers
traditionally belonging to the legislative to administrative agencies. The legislature may likewise
apportion competencies or jurisdictions to administrative agencies over certain conflicts involving
special technical expertise.

Administrative actions reviewable by this Court, therefore, may either be quasi-legislative or quasi-
judicial. As the name implies, quasi-legislative or rule-making power is the power of an administrative
agency to make rules and regulations that have the force and effect of law so long as they are issued
"within the confines of the granting statute."27 The enabling law must be complete, with sufficient
standards to guide the administrative agency in exercising its rule-making power.28 As an exception to
the rule on non delegation of legislative power, administrative rules and regulations must be "germane
to the objects and purposes of the law, and be not in contradiction to, but in conformity with, the
standards prescribed by law."29 In Pangasinan Transportation Co., Inc. v. The Public Service
Commission,30 this Court recognized the constitutional permissibility of the grant of quasi-legislative
powers to administrative agencies, thus:

One thing, however, is apparent in the development of the principle of separation of powers and that is
that the maxim of delegatus non potest delegari or delegata potestas non potest delegari, attributed to
Bracton (De Legibus et Consuetedinious Angliae, edited by G.E. Woodbine, Yale University Press, 1922,
vol. 2, p. 167) but which is also recognized in principle in the Roman Law (D. 17.18.3), has been made to
adapt itself to the complexities of modern governments, giving rise to the adoption, within certain
limits, of the principle of "subordinate legislation," not only in the United States and England but in
practically all modem governments. (People vs. Rosenthal and Osmeña, G. R. Nos. 46076 and 46077,
promulgated June 12, 1939.) Accordingly, with the growing complexity of modern life, the multiplication
of the subjects of governmental regulation, and the increased difficulty of administering the laws, there
is a constantly growing tendency toward the delegation of greater powers by the legislature, and toward
the approval of the practice by the courts. (Dillon Catfish Drainage Dist. v. Bank of Dillon, 141 S. E. 274,
275, 143 S. Ct. 178; State v. Knox County, 54 S. W. 2d. 973, 976, 165 Tenn. 319.) In harmony with such
growing tendency, this Court, since the decision in the case of Compañia General de Tabacos de Filipinas
vs. Board of Public Utility Commissioners (34 Phil., 136), relied upon by the petitioner, has, in instances,
extended its seal of approval to the "delegation of greater powers by the legislature." (Inchausti
Steamship Co. vs. Public Utility Commissioner, 44 Phil., 366; Alegre vs. Collector of Customs, 53 Phil.,
394; Cebu Autobus Co. vs. De Jesus, 56 Phil., 446; People vs. Fernandez & Trinidad, G. R. No. 45655,
promulgated June 15, 1938; People vs. Rosenthal & Osmeña, G. R. Nos. 46076, 46077, promulgated June
12, 1939; and Robb and Hilscher vs. People, G.R. No. 45866, promulgated June 12, 1939.)31

On the other hand, quasi-judicial or administrative adjudicatory power is "the power to hear and
determine questions of fact to which the legislative policy is to apply and to decide in accordance with
the standards laid down by the law itself in enforcing and administering the same law."32 The
constitutional permissibility of the grant of quasi-judicial powers to administrative agencies has been
likewise recognized by this Court. In the 1931 case of The Municipal Council of Lemery, Batangas v. The
Provincial Board of Batangas,33 this Court declared that the power of the Municipal Board of Lemery to
approve or disapprove a municipal resolution or ordinance is quasi-judicial in nature and, consequently,
may be the subject of a certiorari proceeding.

Determining whether the act under review is quasi-legislative or quasi-judicial is necessary in

determining when judicial remedies may properly be availed of Rules issued in the exercise of an
administrative agency's quasi-legislative power may be taken cognizance of by courts on the first
instance as part of their judicial power, thus:

[W]here what is assailed is the validity or constitutionality of a rule or regulation issued by the
administrative agency in the performance of its quasi-legislative function, the regular courts have
jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules issued by
an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular
courts. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in
the courts, including the regional trial courts. This is within the scope of judicial power, which includes
the authority of the courts to determine in an appropriate action the validity of the acts of the political
departments. Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.34 (Citations omitted)

However, in cases involving quasi-judicial acts, Congress may require certain quasi-judicial agencies to
first take cognizance of the case before resort to judicial remedies may be allowed. This is to take
advantage of the special technical expertise possessed by administrative agencies. Pambujan Sur United
Mine Workers v. Samar Mining Company, Inc.35 explained the doctrine of primary administrative
jurisdiction, thus:

That the courts cannot or will not determine a controversy involving a question which is within the
jurisdiction of an administrative tribunal prior to the decision of that question by the administrative
tribunal, where the question demands the exercise of sound administrative discretion requiring the
special knowledge, experience, and services of the administrative tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the
regulatory statute administered.36

Usually contrasted with the doctrine of primary jurisdiction is the doctrine of exhaustion of
administrative remedies. Though both concepts aim to maximize the special technical knowledge of
administrative agencies, the doctrine of primary administrative jurisdiction requires courts to not
resolve or "determine a controversy involving a question which is within the jurisdiction of an
administrative tribunal."37 The issue is jurisdictional and the court, when confronted with a case under
the jurisdiction of an administrative agency, has no option but to dismiss it.38

In contrast, exhaustion of administrative remedies requires parties to exhaust all the remedies in the
administrative machinery before resorting to judicial remedies. The doctrine of exhaustion presupposes
that the court and the administrative agency have concurrent jurisdiction to take cognizance of a
matter. However, in deference to the special and technical expertise of the administrative agency,
courts must yield to the administrative agency by suspending the proceedings. As such, parties must
exhaust all the remedies within the administrative machinery before resort to courts is allowed.

Discussion of the doctrines of primary jurisdiction and exhaustion of administrative remedies aside, the
present case does not require the application of either doctrine. Department Order No. 118-12 and
Memorandum Circular No. 2012-001 were issued in the exercise of the DOLE's39 and the LTFRB's40 quasi-
legislative powers and, as discussed, the doctrines of primary jurisdiction and exhaustion of
administrative remedies may only be invoked in matters involving the exercise of quasi-judicial power.
Specifically, Department Order No. 118-12 enforces the application of labor standards provisions, i.e.,
payment of minimum wage and grant of social welfare benefits in the public bus transportation
industry. For its part, Memorandum Circular No. 2012-001 was issued by the LTFRB in the exercise of its
power to prescribe the terms and conditions for the issuance of a certificate of public convenience and
its power to promulgate and enforce rules and regulations on land transportation public utilities.

II

While resort to courts may directly be availed of in questioning the constitutionality of an administrative
rule, parties may not proceed directly before this Court, regardless of its original jurisdiction over certain
matters. This Court's original jurisdiction over petitions for certiorari and Prohibition41 may only be
invoked for special reasons under the doctrine of hierarchy of courts.

The doctrine of hierarchy of courts requires that recourse must first be obtained from lower courts
sharing concurrent jurisdiction with a higher court.42 This is to ensure that this Court remains a court of
last resort so as to "satisfactorily perform the functions assigned to it by the fundamental charter and
immemorial tradition."43
The doctrine was first enunciated in People v. Cuaresma44 where a petition for certiorari assailing a trial
court order granting a motion to quash was directly filed before this Court. Noting that there was no
special reason for invoking this Court's original jurisdiction, this Court dismissed the petition and
required the "strict observance" of the policy of hierarchy of courts, thus:

This Court's original jurisdiction to issue writs of certiorari (as well as prohibition, mandamus, quo
warranto, habeas corpus and injunction) is not exclusive. It is shared by this Court with Regional Trial
Courts (formerly Courts of First Instance), which may issue the writ, enforceable in any part of their
respective regions. It is also shared by this Court, and by the Regional Trial Court, with the Court of
Appeals (formerly, Intermediate Appellate Court), although prior to the effectivity of Batas Pambansa
Bilang 129 on August 14, 1981, the latter's competence to issue the extraordinary writs was restricted to
those "in aid of its appellate jurisdiction." This concurrence of jurisdiction is not, however, to be taken as
according to parties seeking any of the writs an absolute, unrestrained freedom of choice of the court to
which application therefor will be directed. There is after all a hierarchy of courts. That hierarchy is
determinative of the venue of appeals, and should also serve as a general determinant of the
appropriate forum for petitions for the extraordinary writs. A becoming regard for that judicial hierarchy
most certainly indicates that petitions for the issuance of extraordinary writs against first level
("inferior") courts should be filed with the Regional Trial Court, and those against the latter, with the
Court of Appeals. A direct invocation of the Supreme Court's original jurisdiction to issue these writs
should be allowed only when there are special and important reasons therefor, clearly and specifically
set out in the petition. This is established policy. It is a policy that is necessary to prevent inordinate
demands upon the Court's time and attention which are better devoted to those matters within its
exclusive jurisdiction, and to prevent further over-crowding of the Court's docket. Indeed, the removal
of the restriction on the jurisdiction of the Court of Appeals in this regard, supra — resulting from the
deletion of the qualifying phrase, "in aid of its appellate jurisdiction" — was evidently intended precisely
to relieve this Court pro tanto of the burden of dealing with applications for the extraordinary writs
which, but for the expansion of the Appellate Court['s] corresponding jurisdiction, would have had to be
filed with it.

The Court feels the need to reaffirm that policy at this time, and to enjoin strict adherence thereto in the
light of what it perceives to be a growing tendency on the part of litigants and lawyers to have their
applications for the so-called extraordinary writs, and sometime even their appeals, passed upon and
adjudicated directly and immediately by the highest tribunal of the land. The proceeding at bar is a case
in point. The application for the writ of certiorari sought against a City Court was brought directly to this
Court although there is discernible special and important reason for not presenting it to the Regional
Trial Court.

The Court therefore closes this decision with the declaration, for the information and guidance of all
concerned, that it will not only continue to enforce the policy, but will require a more strict observance
thereof.45 (Citations omitted)

More recently, this Court in The Diocese of Bacolod v. Commission on Elections 46 explained the purpose
of the doctrine: to "ensure that every level of the judiciary performs its designated roles in an effective
and efficient manner."47 This Court said:

Trial courts do not only determine the facts from the evaluation of the evidence presented before them.
They are likewise competent to determine issues of law which may include the validity of an ordinance,
statute, or even an executive issuance in relation to the Constitution. To effectively perform these
functions, they are territorially organized into regions and then into branches. Their writs generally
reach within those territorial boundaries. Necessarily, they mostly perform the all-important task of
inferring the facts from the evidence as these are physically presented before them. In many instances,
the facts occur within their territorial jurisdiction, which properly present the 'actual case' that makes
ripe a determination of the constitutionality of such action. The consequences, of course, would be
national in scope. There are, however, some cases where resort to courts at their level would not be
practical considering their decisions could still be appealed before the higher courts, such as the Court of
Appeals.

The Court of Appeals is primarily designated as an appellate court that reviews the determination of
facts and law made by the trial courts. It is collegiate in nature. This nature ensures more standpoints in
the review of the actions of the trial court. But the Court of Appeals also has original jurisdiction over
most special civil actions. Unlike the trial courts, its writs can have a nationwide scope. It is competent to
determine facts and, ideally, should act on constitutional issues that may not necessarily be novel unless
there are factual questions to determine.

This court, on the other hand, leads the judiciary by breaking new ground or further reiterating — in the
light of new circumstances or in the light of some confusions of bench or bar — existing precedents.
Rather than a court of first instance or as a repetition of the actions of the Court of Appeals, this court
promulgates these doctrinal devices in order that it truly performs that role.48 (Citation omitted)

For this Court to take cognizance of original actions, parties must clearly and specifically allege in their
petitions the special and important reasons for such direct invocation.49 One such special reason is that
the case requires "the proper legal interpretation of constitutional and statutory provisions."50 Cases of
national interest and of serious implications,51 and those of transcendental importance52 and of first
impression53 have likewise been resolved by this Court on the first instance.

In exceptional cases, this Court has also overlooked the rule to decide cases that have been pending for
a sufficient period of time.54 This Court has resolved original actions which could have been resolved by
the lower courts in the interest of speedy justice55 and avoidance of delay.56

Generally, the rule on hierarchy of courts may be relaxed when "dictated by public welfare and the
advancement of public policy, or demanded by the broader interest of justice, or the orders complained
of were found to be patent nullities, or the appeal was considered as clearly an inappropriate
remedy."57 For all other cases, the parties must have exhausted the remedies available before the lower
courts. A petition filed in violation of the doctrine shall be dismissed.58

Based on the allegations in the present Petition, this Court finds no special reason for petitioners to
invoke this Court's original jurisdiction.

The alleged "far-reaching consequences"59 and wide "area of coverage"60 of Department Order No. 118-
12 and Memorandum Circular No. 2012-001 are not special reasons. With these justifications,
petitioners could have very well filed their Petition before the Court of Appeals whose writs, as
discussed, are likewise nationwide in scope. The issues raised are not even of first impression.

Petitioners, therefore, failed to respect the hierarchy of courts.

III

Furthermore, the issues raised in this Petition are not justiciable. The Petition presents no actual case or
controversy.

No less than the Constitution in Article VIII, Section 1 requires an actual controversy for the exercise of
judicial power:

Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be
established by law.

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government. (Underscoring supplied)

As a rule, "the constitutionality of a statute will be passed on only if, and to the extent that, it is directly
and necessarily involved in a justiciable controversy and is essential to the protection of the rights of the
parties concerned."61 A controversy is said to be justiciable if: first, there is an actual case or controversy
involving legal rights that are capable of judicial determination; second, the parties raising the issue
must have standing or locus standi to raise the constitutional issue; third, the constitutionality must be
raised at the earliest opportunity; and fourth, resolving the constitutionality must be essential to the
disposition of the case.62

An actual case or controversy is "one which involves a conflict of legal rights, an assertion of opposite
legal claims susceptible of judicial resolution."63 A case is justiciable if the issues presented are "definite
and concrete, touching on the legal relations of parties having adverse legal interests."64 The conflict
must be ripe for judicial determination, not conjectural or anticipatory; otherwise, this Court's decision
will amount to an advisory opinion concerning legislative or executive action.65 In the classic words
of Angara v. Electoral Commission:66

[T]his power of judicial review is limited to actual cases and controversies to be exercised after full
opportunity of argument by the parties, and limited further to the constitutional question raised or the
very lis mota presented. Any attempt at abstraction could only lead to dialectics and barren legal
questions and to sterile conclusions unrelated to actualities. Narrowed as its function is in this manner,
the judiciary does not pass upon questions of wisdom, justice or expediency of legislation. More than
that, courts accord the presumption of constitutionality to legislative enactments, not only because the
legislature is presumed to abide by the Constitution but also because the judiciary in the determination
of actual cases and controversies must reflect the wisdom and justice of the people as expressed
through their representatives in the executive and legislative departments of the governments.67

Even the expanded jurisdiction of this Court under Article VIII, Section 168 does not provide license to
provide advisory opinions. An advisory opinion is one where the factual setting is conjectural or
hypothetical. In such cases, the conflict will not have sufficient concreteness or adversariness so as to
constrain the discretion of this Court. After all, legal arguments from concretely lived facts are chosen
narrowly by the parties. Those who bring theoretical cases will have no such limits. They can argue up to
the level of absurdity. They will bind the future parties who may have more motives to choose specific
legal arguments. In other words, for there to be a real conflict between the parties, there must exist
actual facts from which courts can properly determine whether there has been a breach of constitutional
text.

The absence of actual facts caused the dismissal of the petitions in Southern Hemisphere Engagement
Network, Inc. v. Anti-Terrorism Council.69 In that case, the petitioners challenged the constitutionality of
Republic Act No. 9372 or the Human Security Act of 2007 that defines and punishes the crime of
terrorism. They contended that since the enactment of the statute, they had been subjected to "close
security surveillance by state security forces" and branded as "enemies of the State."70

In dismissing the petitions, this Court said that there were no "sufficient facts to enable the Court to
intelligently adjudicate the issues."71 Petitioners' allegations of "sporadic 'surveillance' and ... being
tagged as 'communist fronts"' were not enough to substantiate their claim of grave abuse of discretion
on the part of public respondents. Absent actual facts, this Court said that the Southern
Hemisphere petitions operated in the "realm of the surreal and merely imagined."72 "Allegations of
abuse must be anchored on real events before courts may step in to settle actual controversies involving
rights which are legally demandable and enforceable."73

The petitioners in Republic of the Philippines v. Herminio Harry Roque, et al.74 likewise challenged
provisions of the Human Security Act, this time, via a petition for declaratory relief filed before the
Regional Trial Court of Quezon City. During the pendency of the case, this Court decided Southern
Hemisphere, where, as just discussed, the challenge against the constitutionality of the Human Security
Act was dismissed. Thus, the Republic filed a motion to dismiss before the Regional Trial Court, arguing
that the declaratory relief case may no longer proceed.

The Regional Trial Court denied the motion to dismiss on the ground that this Court in Southern
Hemisphere did not pass upon the constitutionality issue. However, this Court, on certiorari, set aside
the Regional Trial Court's order and dismissed the declaratory relief petitions because they did not
properly allege a "state of facts indicating imminent and inevitable litigation."75 This Court said:

Pertinently, a justiciable controversy refers to an existing case or controversy that is appropriate or ripe
for judicial determination, not one that is conjectural or merely anticipatory. Corollary thereto, by
"ripening seeds" it is meant, not that sufficient accrued facts may be dispensed with, but that a dispute
may be tried at its inception before it has accumulated the asperity, distemper, animosity, passion, and
violence of a full blown battle that looms ahead. The concept describes a state of facts indicating
imminent and inevitable litigation provided that the issue is not settled and stabilized by tranquilizing
declaration.

A perusal of private respondents' petition for declaratory relief would show that they have failed to
demonstrate how they are left to sustain or are in immediate danger to sustain some direct injury as a
result of the enforcement of the assailed provisions of RA 9372. Not far removed from the factual milieu
in the Southern Hemisphere cases, private respondents only assert general interests as citizens, and
taxpayers and infractions which the government could prospectively commit if the enforcement of the
said law would remain untrammelled. As their petition would disclose, private respondents' fear of
prosecution was solely based on remarks of certain government officials which were addressed to the
general public. They, however, failed to show how these remarks tended towards any prosecutorial or
governmental action geared towards the implementation of RA 9372 against them. In other words,
there was no particular, real or imminent threat to any of them.76 (Citations omitted, emphasis supplied)
Similar to the petitions in Southern Hemisphere and Roque, the present Petition alleges no actual facts
for this Court to infer the supposed unconstitutionality of Department Order No. 118-12 and
Memorandum Circular No. 2012-001.

According to petitioners, implementing Department Order No. 118-12 and Memorandum Circular No.
2012-001 "may [result] in [the] diminution of the income of . . . bus drivers and conductors."77 The
allegation is obviously based on speculation with the use of the word "may." There was even no showing
of how granting bus drivers' and conductors' minimum wage and social welfare benefits would result in
lower income for them.

Petitioners likewise claim that the part-fixed-part-performance-based payment scheme is "unfit to the
nature of operation of public transport system or business."78 This bare allegation, again, is not
supported by facts from which this Court may conclude that the payment scheme under Department
Order No. 118-12 are unfit to the nature of the businesses of public bus operators. The "time-
immemorial" implementation of the boundary system does not mean that it is the only payment scheme
appropriate for the public transport industry.

There being no actual facts from which this Court could conclude that Department Order No. 118-12 and
Memorandum Circular No. 2012-001 are unconstitutional, this case presents no actual controversy.

IV

Not only is this Petition not justiciable for failing to present an actual controversy. Petitioners do not
possess the requisite legal standing to file this suit.

Legal standing or locus standi is the "right of appearance in a court of justice on a given question."79 To
possess legal standing, parties must show "a personal and substantial interest in the case such that [they
have] sustained or will sustain direct injury as a result of the governmental act that is being
challenged."80 The requirement of direct injury guarantees that the party who brings suit has such
personal stake in the outcome of the controversy and, in effect, assures "that concrete adverseness
which sharpens the presentation of issues upon which the court depends for illumination of difficult
constitutional questions."81

The requirements of legal standing and the recently discussed actual case and controversy are both
"built on the principle of separation of powers, sparing as it does unnecessary interference or
invalidation by the judicial branch of the actions rendered by its co-equal branches of government."82 In
addition, economic reasons justify the rule. Thus:

A lesser but not insignificant reason for screening the standing of persons who desire to litigate
constitutional issues is economic in character. Given the sparseness of our resources, the capacity of
courts to render efficient judicial service to our people is severely limited. For courts to indiscriminately
open their doors to all types of suits and suitors is for them to unduly overburden their dockets, and
ultimately render themselves ineffective dispensers of justice. To be sure, this is an evil that clearly
confronts our judiciary today.83

Standing in private suits requires that actions be prosecuted or defended in the name of the real party-
in-interest,84 interest being "material interest or an interest in issue to be affected by the decree or
judgment of the case[,] [not just] mere curiosity about the question involved."85 Whether a suit is public
or private, the parties must have "a present substantial interest,'' not a "mere expectancy or a future,
contingent, subordinate, or consequential interest."86 Those who bring the suit must possess their own
right to the relief sought.

Like any rule, the rule on legal standing has exceptions. This Court has taken cognizance of petitions filed
by those who have no personal or substantial interest in the challenged governmental act but whose
petitions nevertheless raise "constitutional issue[s] of critical significance."87 This Court summarized the
requirements for granting legal standing to "non traditional suitors"88 in Funa v. Villar,89 thus:

1.) For taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure is
unconstitutional;

2.) For voters, there must be a showing of obvious interest in the validity of the election law in question;

3.) For concerned citizens, there must be a showing that the issues raised are of transcendental
importance which must be settled early; and

4.) For legislators, there must be a claim that the official action complained of infringes their
prerogatives as 1egislators.90 (Emphasis in the original)

Another exception is the concept of third-party standing. Under this concept, actions may be brought on
behalf of third parties provided the following criteria are met: first, "the [party bringing suit] must have
suffered an 'injury-in-fact,' thus giving him or her a 'sufficiently concrete interest' in the outcome of the
issue in dispute";91 second, "the party must have a close relation to the third party";92 and third, "there
must exist some hindrance to the third party's ability to protect his or her own interests."93

The concept was first introduced in our jurisdiction in White Light Corp. et al. v. City of Manila,94 which
involved the City of Manila's Ordinance No. 7774 that prohibited "short-time admission" in hotels,
motels, inns, and other similar establishments located in the City. The Ordinance defined short-time
admission as the "admittance and charging of room rate for less than twelve (12) hours at any given
time or the renting out of rooms more than twice a day or any other term that may be concocted by
owners or managers of [hotels and motels]."95 The declared purpose of the Ordinance was to protect
"the morality of its constituents in general and the youth in particular."96

Hotel and motel operators White Light Corporation, Titanium Corporation, and Sta. Mesa Tourist and
Development Corporation filed a complaint to prevent the implementation of the Ordinance. The hotel
and motel operators argued, among others, that the Ordinance violated their clients' rights to
privacy,97 freedom of movement,98 and equal protection of the laws.99

Based on third-party standing, this Court allowed the hotel and motel operators to sue on behalf of their
clients. According to this Court, hotel and motel operators have a close relation to their customers as
they "rely on the patronage of their customers for their continued viability."100 Preventing customers
from availing of short-time rates would clearly injure the business interests of hotel and motel
operators.101 As for the requirement of hindrance, this Court said that "the relative silence in
constitutional litigation of such special interest groups in our nation such as the American Civil Liberties
Union in the United States may also be construed as a hindrance for customers to bring suit."102

Associations were likewise allowed to sue on behalf of their members.

In Pharmaceutical and Health Care Association of the Philippines v. Secretary of Health,103 the
Pharmaceutical and Health Care Association of the Philippines, "representing its members that are
manufacturers of breastmilk substitutes,"104 filed a petition for certiorari to question the
constitutionality of the rules implementing the Milk Code. The association argued that the provisions of
the implementing rules prejudiced the rights of manufacturers of breastmilk substitutes to advertise
their product.

This Court allowed the Pharmaceutical and Health Care Association of the Philippines to sue on behalf of
its members. "[A]n association," this Court said, "has the legal personality to represent its members
because the results of the case will affect their vital interests."105 In granting the Pharmaceutical and
Health Care Association legal standing, this Court considered the amended articles of incorporation of
the association and found that it was formed "to represent directly or through approved representatives
the pharmaceutical and health care industry before the Philippine Government and any of its agencies,
the medical professions and the general public."106 Citing Executive Secretary v. Court of Appeals,107 this
Court declared that "the modern view is that an association has standing to complain of injuries to its
members."108 This Court continued:

[This modem] view fuses the legal identity of an association with that of its members. An association has
standing to file suit for its workers despite its lack of direct interest if its members are affected by the
action. An organization has standing to assert the concerns of its constituents.
....

. . . We note that, under its Articles of Incorporation, the respondent was organized . . . to act as the
representative of any individual, company, entity or association on matters related to the manpower
recruitment industry, and to perform other acts and activities necessary to accomplish the purposes
embodied therein. The respondent is, thus, the appropriate party to assert the rights of its members,
because it and its members are in every practical sense identical ... The respondent [association] is but
the medium through which its individual members seek to make more effective the expression of their
voices and the redress of their grievances.109

In Holy Spirit Homeowners Association, Inc. v. Defensor,110 the Holy Spirit Homeowners Association, Inc.
filed a petition for prohibition, praying that this Court enjoin the National Government Center
Administration Committee from enforcing the rules implementing Republic Act No. 9207. The statute
declared the land occupied by the National Government Center in Constitution Hills, Quezon City
distributable to bona fide beneficiaries. The association argued that the implementing rules went
beyond the provisions of Republic Act No. 9207, unduly limiting the area disposable to the beneficiaries.

The National Government Center Administration Committee questioned the legal standing of the Holy
Spirit Homeowners Association, Inc., contending that the association "is not the duly recognized
people's organization in the [National Government Center]."111

Rejecting the National Government Center Administration Committee's argument, this Court declared
that the Holy Spirit Homeowners Association, Inc. "ha[d] the legal standing to institute the [petition for
prohibition] whether or not it is the duly recognized association of homeowners in the [National
Government Center]."112 This Court noted that the individual members of the association were residents
of the National Government Center. Therefore, "they are covered and stand to be either benefited or
injured by the enforcement of the [implementing rules], particularly as regards the selection process of
beneficiaries and lot allocation to qualified beneficiaries."113

In The Executive Secretary v. The Hon. Court of Appeals,114 cited in the earlier discussed Pharmaceutical
and Health Care Association of the Philippines, the Asian Recruitment Council Philippine Chapter, Inc.
filed a petition for declaratory relief for this Court to declare certain provisions of Republic Act No. 8042
or the Migrant Workers and Overseas Filipinos Act of 1995 unconstitutional. The association sued on
behalf of its members who were recruitment agencies.

This Court took cognizance of the associations' petition and said that an association "is but the medium
through which its individual members seek to make more effective the expression of their voices and
the redress of their grievances."115 It noted that the board resolutions of the individual members of the
Asian Recruitment Council Philippine Chapter, Inc. were attached to the petition, thus, proving that the
individual members authorized the association to sue on their behalf.

The associations in Pharmaceutical and Health Care Association of the Philippines, Holy Spirit
Homeowners Association, Inc., and The Executive Secretary were allowed to sue on behalf of their
members because they sufficiently established who their members were, that their members authorized
the associations to sue on their behalf, and that the members would be directly injured by the
challenged governmental acts.

The liberality of this Court to grant standing for associations or corporations whose members are those
who suffer direct and substantial injury depends on a few factors.

In all these cases, there must be an actual controversy. Furthermore, there should also be a clear and
convincing demonstration of special reasons why the truly injured parties may not be able to sue.

Alternatively, there must be a similarly clear and convincing demonstration that the representation of
the association is more efficient for the petitioners to bring. They must further show that it is more
efficient for this Court to hear only one voice from the association. In other words, the association
should show special reasons for bringing the action themselves rather than as a class suit,116 allowed
when the subject matter of the controversy is one of common or general interest to many persons. In a
class suit, a number of the members of the class are permitted to sue and to defend for the benefit of all
the members so long as they are sufficiently numerous and representative of the class to which they
belong.

In some circumstances similar to those in White Light, the third parties represented by the petitioner
would have special and legitimate reasons why they may not bring the action themselves.
Understandably, the cost to patrons in the White Light case to bring the action themselves—i.e., the
amount they would pay for the lease of the motels—will be too small compared with the cost of the
suit. But viewed in another way, whoever among the patrons files the case even for its transcendental
interest endows benefits on a substantial number of interested parties without recovering their costs.
This is the free rider problem in economics. It is a negative externality which operates as a disincentive
to sue and assert a transcendental right.

In addition to an actual controversy, special reasons to represent, and disincentives for the injured party
to bring the suit themselves, there must be a showing of the transcendent nature of the right involved.
Only constitutional rights shared by many and requiring a grounded level of urgency can be
transcendent. For instance, in The Association of Small Landowners in the Philippines, Inc. v. Secretary of
Agrarian Reform,117 the association was allowed to file on behalf of its members considering the
importance of the issue involved, i.e., the constitutionality of agrarian reform measures, specifically, of
then newly enacted Comprehensive Agrarian Reform Law.

This Court is not a forum to appeal political and policy choices made by the Executive, Legislative, and
other constitutional agencies and organs. This Court dilutes its role in a democracy if it is asked to
substitute its political wisdom for the wisdom of accountable and representative bodies where there is
no unmistakable democratic deficit. It cannot lose this place in the constitutional order. Petitioners'
invocation of our jurisdiction and the justiciability of their claims must be presented with rigor.
Transcendental interest is not a talisman to blur the lines of authority drawn by our most fundamental
law.

As declared at the outset, petitioners in this case do not have standing to bring this suit. As associations,
they failed to establish who their members are and if these members allowed them to sue on their
behalf. While alleging that they are composed of public utility bus operators who will be directly injured
by the implementation of Department Order No. 118-12 and Memorandum Circular No. 2012-001,
petitioners did not present any proof, such as board resolutions of their alleged members or their own
articles of incorporation authorizing them to act as their members' representatives in suits involving
their members' individual rights.

Some of the petitioners here are not even persons or entities authorized by law or by the Rules allowed
to file a suit in court. As intervenor MMDA sufficiently demonstrated, petitioners Provincial Bus
Operators Association of the Philippines, Southern Luzon Bus Operators Association, Inc., and Inter City
Bus Operators Association, Inc. had their certificates of incorporation revoked by the Securities and
Exchange Commission for failure to submit the required general information sheets and financial
statements for the years 1996 to 2003.118 With their certificates of incorporation revoked, petitioners
Provincial Bus Operators Association of the Philippines, Southern Luzon Bus Operators Association, Inc.,
and Inter City Bus Operators Association, Inc. have no corporate existence.119 They have no capacity to
exercise any corporate power, specifically, the power to sue in their respective corporate names.

Again, the reasons cited—the "far-reaching consequences" and "wide area of coverage and extent of
effect"120 of Department Order No. 118-12 and Memorandum Circular No. 2012-001—are reasons not
transcendent considering that most administrative issuances of the national government are of wide
coverage. These reasons are not special reasons for this Court to brush aside the requirement of legal
standing.

Thus far, petitioners have not satisfied any of the following requirements for this Court to exercise its
judicial power. They have not sufficiently demonstrated why this Court should exercise its original
jurisdiction. The issues they raised are not justiciable. Finally, as will be shown, they failed to
demonstrate any breach of constitutional text.

The protection of private property is the primary function of a constitution. This can be gleaned in our
earliest fundamental law where members of the Malolos Congress declared their purpose in decreeing
the Malolos Constitution: "to secure for [the Filipino people] the blessings of liberty." It is understood
that the rights to enjoy and to dispose of property are among these blessings considering that several
provisions on property are found in the Constitution. Article 32 of the Malolos Constitution provided
that "no Filipino shall establish ... institutions restrictive of property rights." Likewise, Article 17 provided
that "no one shall be deprived of his property by expropriation except on grounds of public necessity
and benefit."

At present, the due process clause, the equal protection clause, and the takings clause of the
Constitution serve as protections from the government's taking of property. The non-impairment clause
may likewise be invoked if the property taken is in the nature of a contract. In any case, all these
constitutional limits are subject to the fundamental powers of the State, specifically, police power. As
such, the burden of proving that the taking is unlawful rests on the party invoking the constitutional
right.

Unfortunately for petitioners, they miserably failed to prove why Department Order No. 118-12 and
Memorandum Circular No. 2012-001 are unconstitutional.

VI

Article III, Section 1 of the Constitution provides:

ARTICLE III
Bill of Rights

Section 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall
any person be denied the equal protection of the laws.

The values congealed in the fundamental principle prohibiting the deprivation of life, liberty, and
property "without due process of law" may be those derived within our own cultures even though the
current text is but an incarnation from foreign jurisdictions.

For instance, the phrase "due process of law" does not appear in the Malolos Constitution of 1899. Still,
it had similar provisions in Article 32 stating that "no Filipino shall establish ... institutions restrictive of
property rights." Specific to deprivation of property was Article 17, which stated that "no one shall be
deprived of his property by expropriation except on grounds of public necessity and benefit, previously
declared."

Among the "inviolable rules" found in McKinley's Instructions to the Philippine Commission was "that no
person shall be deprived of life, liberty, or property without due process of law."121

As it is now worded, the due process clause has appeared in the Philippine Bill of 1902, the Jones Law,
the 1935 and 1973 Constitutions and, finally, in the 1987 Constitution.

The right to due process was first conceptualized in England, appearing in an English statute of
1354,122 with some early scholars claiming that the right to due process is fundamentally
procedural.123 The statute in which the phrase "due process of law" first appeared was reportedly
enacted to prevent the outlawing of individuals "without their being summoned to answer for the
charges brought against them."124 The statute, enacted during Edward the Third's reign, thus provided:
That no man of what Estate or Condition that he be, shall be put out of land or Tenement, nor taken, nor
imprisoned, nor disinherited, nor put to death, without being brought in answer by due process of
law.125

Still, other early scholars asserted that the right to due process originally has a substantive dimension,
requiring that any taking of life, liberty, or property be according to "the law of the land."126 This is the
view of Sir Edward Coke in interpreting chapter 39 of the Magna Carta on which the due process clause
of the United States Constitution is based.127 Chapter 39 of the Magna Carta provides:

No free man shall be taken, imprisoned, disseised, outlawed, banished, or in any way destroyed, nor will
We proceed against or prosecute him, except by lawful judgment of his peers and by the law of the land.

Currently, this Court reads the due process clause as requiring both procedural and substantive
elements. In the landmark case of Ermita-Malate Hotel and Motel Operators Association, Inc. v. The
Honorable City Mayor of Manila,128 this Court clarified:

There is no controlling and precise definition of due process. It furnishes though a standard to which
governmental action should conform in order that deprivation of life, liberty or property, in each
appropriate case, be valid. What then is the standard of due process which must exist both as a
procedural and as substantive requisite to free the challenged ordinance, or any government action for
that matter, from the imputation of legal infirmity; sufficient to spell its doom? It is responsiveness to
the supremacy of reason, obedience to the dictates of justice. Negatively put, arbitrariness is ruled out
and unfairness avoided. To satisfy the due process requirement, official action, to paraphrase Cardozo,
must not outrun the bounds of reasons and result in sheer oppression. Due process is thus hostile to any
official action marred by lack of reasonableness. Correctly has it been identified as freedom from
arbitrariness. It is the embodiment of the sporting idea of fair play. It exacts fealty "to those strivings for
justice" and judges the act of officialdom of whatever branch "in the light of reason drawn from
considerations of fairness that reflect [democratic] traditions of legal and political thought." It is not a
narrow or "technical conception with fixed content unrelated to time, place and circumstances,"
decisions based on such a clause requiring a "close and perceptive inquiry into fundamental principles of
our society." Questions of due process are not to be treated narrowly or pedantically in slavery to form
or phrases.129 (Citations omitted)

Despite the debate on the historical meaning of "due process of law," compliance with both procedural
and substantive due process is required in this jurisdiction.

The first aspect of due process—procedural due process—"concerns itself with government action
adhering to the established process when it makes an intrusion into the private sphere."130 It requires
notice and hearing, and, as further clarified in Medenilla v. Civil Service Commission:131

[I]mplies the right of the person affected thereby to be present before the tribunal which pronounces
judgment upon the question of life, liberty, and property in its most comprehensive sense; to be heard,
by testimony or otherwise, and to have the right of controverting, by proof, every material fact which
bears on the question of the right in the matter involved.132

It is said that due process means "a law which hears before it condemns."133 The "law" in the due
process clause includes not only statute but also rules issued in the valid exercise of an administrative
agency's quasi-legislative power.
What procedural due process requires depends on the nature of the action. For instance, judicial
proceedings generally require that:

[First,] [t]here must be a court or tribunal clothed with judicial power to hear and determine the matter
before it; [second,] jurisdiction must be lawfully acquired over the person of the defendant or over the
property which is the subject of the proceeding; [third,] the defendant must be given an opportunity to
be heard; and [fourth,] judgment must be rendered upon lawful hearing.134

For "trials and investigations of an administrative character,"135Ang Tibay v. Court of Industrial

Relations136 lay down the seven (7) cardinal primary rights, thus:

(1) The first of these rights is the right to a hearing which includes the right of the party interested or
affected to present his own case and submit evidence in support thereof. In the language of Chief Justice
Hughes, in Morgan v. U.S., . . ., "the liberty and property of the citizen shall be protected by the
rudimentary requirements of fair play."

(2) Not only must the party be given an opportunity to present his case and to adduce evidence tending
to establish the rights which he asserts but the tribunal must consider the evidence presented . . . In the
language of this court in Edwards vs. McCoy, ..., "the right to adduce evidence, without the
corresponding duty on the part of the board to consider it, is vain. Such right is conspicuously futile if
the person or persons to whom the evidence is presented can thrust it aside without notice or
consideration."

(3) "While the duty to deliberate does not impose the obligation to decide right, it does imply a
necessity which cannot be disregarded, namely, that of having something to support its decision. A
decision with absolutely nothing to support it is a nullity, a place when directly attached." (Edwards vs.
McCoy, supra.) This principle emanates from the more fundamental principle that the genius of
constitutional government is contrary to the vesting of unlimited power anywhere. Law is both a grant
and a limitation upon power.

(4) Not only must there be some evidence to support a finding or conclusion ..., but the evidence must
be "substantial." ... "Substantial evidence is more than a mere scintilla. It means such relevant evidence
as a reasonable mind might accept as adequate to support a conclusion." . . . The statute provides that
'the rules of evidence prevailing in courts of law and equity shall not be controlling.' The obvious
purpose of this and similar provisions is to free administrative boards from the compulsion of technical
rules so that the mere admission of matter which would be deemed incompetent in judicial proceedings
would not invalidate the administrative order.... But this assurance of a desirable flexibility in
administrative procedure does not go so far as to justify orders without a basis in evidence having
rational probative force. Mere uncorroborated hearsay or rumor does not constitute substantial
evidence....

(5) The decision must be rendered on the evidence presented at the hearing, or at least contained in the
record and disclosed to the parties affected ... Only by confining the administrative tribunal to the
evidence disclosed to the parties, can the latter be protected in their right to know and meet the case
against them. It should not, however, detract from their duty actively to see that the law is enforced,
and for that purpose, to use the authorized legal methods of securing evidence and informing itself of
facts material and relevant to the controversy....
(6) [The tribunal or officer], therefore, must act on its or his own independent consideration of the law
and facts of the controversy, and not simply accept the views of a subordinate in arriving at a decision....

(7) [The tribunal or officer] should, in all controversial questions, render its decision in such a manner
that the parties to the proceeding can know the various issues involved, and the reasons for the
decisions rendered. The performance of this duty is inseparable from the authority conferred upon
it.137 (Underscoring supplied; citations omitted)

However, notice and hearing are not required when an administrative agency exercises its quasi-
legislative power. The reason is that in the exercise of quasi-legislative power, the administrative agency
makes no "determination of past events or facts."138

The other aspect of due process—substantive due process—requires that laws be grounded on
reason139 and be free from arbitrariness. The government must have "sufficient justification for depriving
a person of life, liberty, or property."140 In the words of Justice Felix Frankfurter, due process is "the
embodiment of the sporting idea of fair play."141

Essentially, substantive due process is satisfied if the deprivation is done in the exercise of the police
power of the State. Called "the most essential, insistent and illimitable"142 of the powers of the State,
police power is the "authority to enact legislation that may interfere with personal liberty or property in
order to promote the general welfare."143 In the negative, it is the "inherent and plenary power in the
State which enables it to prohibit all that is hurtful to the comfort, safety, and welfare of
society."144 "The reservation of essential attributes of sovereign power is ... read into contracts as a
postulate of the legal order."145

"[P]olice power is lodged primarily in the National Legislature."146 However, it "may delegate this power
to the President and administrative boards as well as the lawmaking bodies of municipal corporations or
local government units."147 "Once delegated, the agents can exercise only such legislative powers as are
conferred on them by the [National Legislature]."148

Laws requiring the payment of minimum wage, security of tenure, and traffic safety149 have been
declared not violative of due process for being valid police power legislations. In these cases, the test or
standard is whether the law is reasonable. The interests of the State to promote the general welfare, on
the one hand, and the right to property, on the other, must be balanced. As expounded in Ichong v.
Hernandez:150

The conflict, therefore, between police power and the guarantees of due process and equal protection
of the laws is more apparent than real. Properly related, the power and the guarantees are supposed to
coexist. The balancing is the essence or, shall it be said, the indispensable means for the attainment of
legitimate aspirations of any democratic society. There can be no absolute power, whoever exercise it,
for that would be tyranny. Yet there can neither be absolute liberty, for that would mean license and
anarchy. So the State can deprive persons of life, liberty and property, provided there is due process of
law; and persons may be classified into classes and groups, provided everyone is given the equal
protection of the law. The test or standard, as always, is reason. The police power legislation must be
firmly grounded on public interest and welfare, and a reasonable relation must exist between purposes
and means. And if distinction and classification ha[ve] been made, there must be a reasonable basis for
said distinction.151
Given the foregoing, this Court finds that Department Order No. 118-12 and Memorandum Circular No.
2012-001 are not violative of due process, either procedural or substantive.

Department Order No. 118-12 and Memorandum Circular No. 2012-001 were issued in the exercise of
quasi-legislative powers of the DOLE and the LTFRB, respectively. As such, notice and hearing are not
required for their validity.

In any case, it is undisputed that the DOLE created a Technical Working Group that conducted several
meetings and consultations with interested sectors before promulgating Department Order No. 118-12.
Among those invited were bus drivers, conductors, and operators with whom officials of the DOLE
conducted focused group discussions.152 The conduct of these discussions more than complied with the
requirements of procedural due process.

Neither are Department Order No. 118-12 and Memorandum Circular No. 2012-001 offensive of
substantive due process.

Department Order No. 118-12 and Memorandum Circular No. 2012-001 are reasonable and are valid
police power issuances. The pressing need for Department Order No. 118-12 is obvious considering
petitioners' admission that the payment schemes prior to the Order's promulgation consisted of the
"payment by results," the "commission basis," or the boundary system. These payment schemes do not
guarantee the payment of minimum wages to bus drivers and conductors. There is also no mention of
payment of social welfare benefits to bus drivers and conductors under these payment schemes which
have allegedly been in effect since "time immemorial."

There can be no meaningful implementation of Department Order No. 118-12 if violating it has no
consequence. As such, the LTFRB was not unreasonable when it required bus operators to comply with
the part-fixed-part-performance-based payment scheme under pain of revocation of their certificates of
public convenience. The LTFRB has required applicants or current holders of franchises to comply with
labor standards as regards their employees, and bus operators must be reminded that certificates of
public convenience are not property. Certificates of public convenience are franchises always subject to
amendment, repeal, or cancellation. Additional requirements may be added for their issuance, and
there can be no violation of due process when a franchise is cancelled for non-compliance with the new
requirement.

An equally important reason for the issuance of Department Order No. 118-12 and Memorandum
Circular No. 2012-001 is to ensure "road safety" by eliminating the "risk-taking behaviors" of bus drivers
and conductors. This Court in Hernandez v. Dolor153 observed that the boundary system "place[s] the
riding public at the mercy of reckless and irresponsible drivers—reckless because the measure of their
earnings depends largely upon the number of trips they make and, hence, the speed at which they
drive."154

Behavioral economics explains this phenomenon. The boundary system puts drivers in a "scarcity
mindset" that creates a tunnel vision where bus drivers are nothing but focused on meeting the
boundary required and will do so by any means possible and regardless of risks.155 They stop for
passengers even outside of the designated bus stops, impeding traffic flow. They compete with other
bus drivers for more income without regard to speed limits and bus lanes. Some drivers even take in
performance-enhancing drugs and, reportedly, even illegal drugs such as shabu, just to get additional
trips. This scarcity mindset is eliminated by providing drivers with a fixed income plus variable income
based on performance. The fixed income equalizes the playing field, so to speak, so that competition
and racing among bus drivers are prevented. The variable pay provided in Department Order No. 118-12
is based on safety parameters, incentivizing prudent driving.

In sum, Department Order No. 118-12 and Memorandum Circular No. 2012-001 are in the nature of
social legislations to enhance the economic status of bus drivers and conductors, and to promote the
general welfare of the riding public. They are reasonable and are not violative of due process.

VII

Related to due process is the non-impairment clause. The Constitution's Article III, Section 10 provides:

ARTICLE III
Bill of Rights

....
Section 10. No law impairing the obligation of contracts shall be passed.

The non-impairment clause was first incorporated into the United States Constitution after the American
Revolution, an unstable time when worthless money was routinely issued and the States enacted
moratorium laws to extend periods to pay contractual obligations that further contributed to the lack of
confidence to the monetary system during that time.156 These practices were prohibited under the
clause to limit State interference with free markets and debtor-creditor relationships.157

The clause was first adopted in our jurisdiction through the Philippine Bill of 1902 and, similar to the due
process clause, has consistently appeared in subsequent Constitutions.

Since the non-impairment clause was adopted here, this Court has said that its purpose is to protect
purely private agreements from State interference.158 This is to "encourage trade and credit by
promoting confidence in the stability of contractual relations."159

There are views, however, that the non-impairment clause is obsolete and redundant because contracts
are considered property, and thus, are protected by the due process clause. On the other hand, studies
show why the non-impairment clause should be maintained. Aside from its traditional purpose of
prohibiting State interference in purely private transactions, the non-impairment clause serves as a
guarantee of the separation of powers between the judicial and legislative branches of the
government.160 The non impairment clause serves as a check on the legislature "to act only through
generally applicable laws prescribing rules of conduct that operate prospectively." 161

This approach, called the institutional regularity approach, was applied in United States v. Diaz Conde
and R. Conde.162 The accused in the case lent P300.00 to two (2) debtors with 5% interest per month,
payable within the first 10 days of each and every month. The Usury Law was subsequently passed in
1916, outlawing the lending of money with usurious interests.

In 1921, the accused were charged for violating the Usury Law for money lending done in 1915. The
accused were initially convicted but they were subsequently acquitted. This Court held that the loan
contract was valid when it was entered into; thus, to render a previously valid contract illegal for
violating a subsequent law is against the non-impairment clause. This Court explained:
A law imposing a new penalty, or a new liability or disability, or giving a new right of action, must not be
construed as having a retroactive effect. It is an elementary rule of contract that the laws in force at the
time the contract was made must govern its interpretation and application. Laws must be construed
prospectively and not retrospectively. If a contract is legal at its inception, it cannot be rendered illegal
by any subsequent legislation. If that were permitted then the obligations of a contract might be
impaired, which is prohibited by the organic law of the Philippine Islands.163

It is claimed that the institutional regularity approach "offers the soundest theoretical basis for reviving
the [non-impairment clause] as a meaningful constitutional constraint."164 It is consistent with the
government's right to regulate itself, but prevents "majoritarian abuse."165 With the non-impairment
clause, legislature cannot enact "retroactive laws, selective laws, and laws not supported by a public
purpose."166

At any rate, so long as the non-impairment clause appears in the Constitution, it may be invoked to
question the constitutionality of State actions.

There is an impairment when, either by statute or any administrative rule issued in the exercise of the
agency's quasi-legislative power, the terms of the contracts are changed either in the time or mode of
the performance of the obligation.167 There is likewise impairment when new conditions are imposed or
existing conditions are dispensed with.168

Not all contracts, however, are protected under the non-impairment clause. Contracts whose subject
matters are so related to the public welfare are subject to the police power of the State and, therefore,
some of its terms may be changed or the whole contract even set aside without offending the
Constitution;169 otherwise, "important and valuable reforms may be precluded by the simple device of
entering into contracts for the purpose of doing that which otherwise may be prohibited."170

Likewise, contracts which relate to rights not considered property, such as a franchise or permit, are also
not protected by the non-impairment clause. The reason is that the public right or franchise is always
subject to amendment or repeal by the State,171 the grant being a mere privilege. In other words, there
can be no vested right in the continued grant of a franchise. Additional conditions for the grant of the
franchise may be made and the grantee cannot claim impairment.

Similar to the right to due process, the right to non-impairment yields to the police power of the State.

In Anucension v. National Labor Union,172 Hacienda Luisita and the exclusive bargaining agent of its
agricultural workers, National Labor Union, entered into a collective bargaining agreement. The
agreement had a union security clause that required membership in the union as a condition for
employment. Republic Act No. 3350 was then subsequently enacted in 1961, exempting workers who
were members of religious sects which prohibit affiliation of their members with any labor organization
from the operation of union security clauses.

On the claim that Republic Act No. 3350 violated the obligation of contract, specifically, of the union
security clause found in the collective bargaining agreement, this Court conceded that "there was
indeed an impairment of [the] union security clause."173 Nevertheless, this Court noted that the
"prohibition to impair the obligation of contracts is not absolute and unqualified"174 and that "the policy
of protecting contracts against impairment presupposes the maintenance of a government by virtue of
which contractual relations are worthwhile — a government which retains adequate authority to secure
the peace and good order of society."175 A statute passed to protect labor is a "legitimate exercise of
police power, although it incidentally destroys existing contract rights."176 "[C]ontracts regulating
relations between capital and labor ... are not merely contractual, and said labor contracts ... [are]
impressed with public interest, [and] must yield to the common good."177

This Court found the purpose behind Republic Act No. 3350 legitimate. Republic Act No. 3350 protected
labor by "preventing discrimination against those members of religious sects which prohibit their
members from joining labor unions, confirming thereby their natural, statutory and constitutional right
to work, the fruits of which work are usually the only means whereby they can maintain their own life
and the life of their dependents."178 This Court, therefore, upheld the constitutionality of Republic Act
No. 3350.

Laws regulating public utilities are likewise police power legislations. In Pangasinan Transportation Co.,
Inc. v. The Public Service Commission,179 Pangasinan Transportation Co., Inc. (Pangasinan Transportation)
filed an application with the Public Service Commission to operate 10 additional buses for transporting
passengers in Pangasinan and Tarlac. The Public Service Commission granted the application on the
condition that the authority shall only be for 25 years.

When the Public Service Commission denied Pangasinan Transportation's motion for reconsideration
with respect to the imposition of the 25-year validity period, the bus company filed a petition for
certiorari before this Court. It claimed that it acquired its certificates of public convenience to operate
public utility buses when the Public Service Act did not provide for a definite period of validity of a
certificate of public convenience. Thus, Pangasinan Transportation claimed that it "must be deemed to
have the right [to hold its certificates of public convenience] in perpetuity."180

Rejecting Pangasinan Transportation's argument, this Court declared that certificates of public
convenience are granted subject to amendment, alteration, or repeal by Congress. Statutes enacted for
the regulation of public utilities, such as the Public Service Act, are police power legislations "applicable
not only to those public utilities coming into existence after [their] passage, but likewise to those already
established and in operation."181

Here, petitioners claim that Department Order No. 118-12 and Memorandum Circular No. 2012-001
violate bus operators' right to non-impairment of obligation of contracts because these issuances force
them to abandon their "time-honored"182 employment contracts or arrangements with their drivers and
conductors. Further, these issuances violate the terms of the franchise of bus operators by imposing
additional requirements after the franchise has been validly issued.

Petitioners' arguments deserve scant consideration. For one, the relations between capital and labor are
not merely contractual as provided in Article 1700 of the Civil Code.183 By statutory declaration, labor
contracts are impressed with public interest and, therefore, must yield to the common good. Labor
contracts are subject to special laws on wages, working conditions, hours of labor, and similar subjects.
In other words, labor contracts are subject to the police power of the State.

As previously discussed on the part on due process, Department Order No. 118-12 was issued to grant
bus drivers and conductors minimum wages and social welfare benefits. Further, petitioners repeatedly
admitted that in paying their bus drivers and conductors, they employ the boundary system or
commission basis, payment schemes which cause drivers to drive recklessly. Not only does Department
Order No. 118-12 aim to uplift the economic status of bus drivers and conductors; it also promotes road
and traffic safety.

Further, certificates ofpub1ic convenience granted to bus operators are subject to amendment. When
certificates of public convenience were granted in 2012, Memorandum Circular No. 2011-004 on the
"Revised Terms and Conditions of [Certificates of Public Convenience] and Providing Penalties for
Violations Thereof” was already in place. This Memorandum Circular, issued before Memorandum
Circular No. 2012-001, already required public utility vehicle operators to comply with labor and social
legislations. Franchise holders cannot object to the reiteration made in Memorandum Circular No. 2012-
001.

All told, there is no violation of the non-impairment clause.

VIII

The equal protection clause was first incorporated in the United States Constitution through the
Fourteenth Amendment, mainly to protect the slaves liberated after the Civil War from racially
discriminatory state laws.184This was in 1868. When the Philippines was ceded by Spain to the United
States in 1898, provisions of the United States Constitution were held not to have been automatically
applicable here, except those "parts [falling] within the general principles of fundamental limitations in
favor of personal rights formulated in the Constitution and its amendments."185 It is said that the equal
protection clause, "[b]eing one such limitation in favor of personal rights enshrined in the Fourteenth
Amendment," was deemed extended in this jurisdiction upon our cession to the United States.186 The
text of the equal protection clause first appeared in the Philippine Bill of 1902 and has since appeared in
our subsequent Constitutions.

"Equal protection of the laws" requires that "all persons ... be treated alike, under like circumstances
and conditions both as to privileges conferred and liabilities enforced."187 "The purpose of the equal
protection clause is to secure every person within a state's jurisdiction against intentional and arbitrary
discrimination, whether occasioned by the express terms of a statute or by its improper execution
through the state's duly constituted authorities."188

However, the clause does not prevent the legislature from enacting laws making valid classifications.
Classification is "the grouping of persons or things similar to each other in certain particulars and
different from all others in these same particulars."189 To be valid, the classification must be: first, based
on "substantial distinctions which make real differences";190 second, it must be "germane to the
purposes of the law";191 third, it must "not be limited to existing conditions only";192 and fourth, it must
apply to each member of the class.193

In Ichong v. Hernandez,194 the constitutionality of Republic Act No. 1180 was assailed for alleged
violation of the equal protection clause. The law prohibited aliens from engaging in retail business in the
Philippines. This Court sustained the classification by citizenship created by Republic Act No. 1180. This
Court observed how our economy primarily relied on retailers to distribute goods to consumers; thus,
the legislature saw it fit to limit the conduct of retail business to Filipinos to protect the country's
economic freedom. This Court said:

Broadly speaking, the power of the legislature to make distinctions and classifications among persons is
not curtailed or denied by the equal protection of the laws clause. The legislative power admits of a
wide scope of discretion, and a law can be violative of the constitutional limitation only when the
classification is without reasonable basis. In addition to the authorities we have earlier cited, we can also
refer to the case of Lindsley vs. Natural Carbonic Gas Co. (1911), 55 L. ed., 369, which clearly and
succinctly defined the application of equal protection clause to a law sought to be voided as contrary
thereto:

". . . '1. The equal protection clause of the Fourteenth Amendment does not take from the state the
power to classify in the adoption of police laws, but admits of tl1e exercise of the wide scope of
discretion in that regard, and avoids what is done only when it is without any reasonable basis, and
therefore is purely arbitrary. 2. A classification having some reasonable basis does not offend against
that clause merely because it is not made with mathematical nicety, or because in practice it results in
some inequality. 3. When the classification in such a law is called in question, if any state of facts
reasonably can be conceived that would sustain it, the existence of that state of facts at the time the law
was enacted must be assumed. 4. One who assails the classification in such a law must carry the burden
of showing that it does not rest upon any reasonable basis, but is essentially arbitrary.'"195

The petitioners in Basco v. Philippine Amusement and Gaming Corporation 196 claimed that Presidential
Decree No. 1869, the charter of the Philippine Amusement and Gaming Corporation, was violative of the
equal protection guarantee because it only allowed gambling activities conducted by the Philippine
Amusement and Gaming Corporation but outlawed the other forms. This Court upheld the
constitutionality of Presidential Decree No. 1869 mainly because "[t]he [equal protection] clause does
not preclude classification of individuals who may be accorded different treatment under the law as long
as the classification is not unreasonable or arbitrary."197

In the recent case of Garcia v. Drilon,198 this Court rejected the argument that Republic Act No. 9262 or
the Anti-Violence Against Women and Children violated the equal protection guarantee. According to
this Court, the "unequal power relationship between women and men; the fact that women are more
likely than men to be victims of violence; and the widespread gender bias and prejudice against
women"199 justify the enactment of a law that specifically punishes violence against women.

In the present case, petitioners' sole claim on their equal protection argument is that the initial
implementation of Department Order No. 118-12 in Metro Manila "is not only discriminatory but is also
prejudicial to petitioners."200 However, petitioners did not even bother explaining how exactly
Department Order No. 118-12 infringed on their right to equal protection.

At any rate, the initial implementation of Department Order No. 118-12 is not violative of the equal
protection clause. In Taxicab Operators of Metro Manila, Inc. v. The Board of Transportation,201 this
Court upheld the initial implementation of the phase-out of old taxicab units in Metro Manila because of
the "heavier traffic pressure and more constant use" of the roads. The difference in the traffic conditions
in Metro Manila and in other parts of the country presented a substantial distinction.

The same substantial distinction can be inferred here. Department Order No. 118-12 has also been
implemented in other parts of the country. Petitioners' weak argument is now not only moot. It also
deserves no merit.

IX
In constitutional litigation, this Court presumes that official acts of the other branches of government
are constitutional. This Court proceeds on the theory that "before the act was done or the law was
enacted, earnest studies were made by Congress or the President, or both, to insure that the
Constitution would not be breached."202 Absent a clear showing of breach of constitutional text, the
validity of the law or action shall be sustained.

WHEREFORE, the Petition is DISMISSED.

SO ORDERED.

G.R. No. 220400, March 20, 2019

ANNIE TAN, PETITIONER, v. GREAT HARVEST ENTERPRISES, INC., RESPONDENT.

DECISION

LEONEN, J.:

Common carriers are obligated to exercise extraordinary diligence over the goods entrusted to their
care. This is due to the nature of their business, with the public policy behind it geared toward achieving
allocative efficiency and minimizing the inherently inequitable dynamics between the parties to the
transaction.

This resolves a Petition for Review on Certiorari1 filed under Rule 45 of the Rules of Civil Procedure by
Annie Tan (Tan), assailing the Court of Appeals March 13, 2015 Decision2 and September 15, 2015
Resolution3 in CA-G.R. CV No. 100412. The assailed judgments upheld the Regional Trial Court January 3,
2012 Decision4 in Civil Case No. Q-94-20745, which granted Great Harvest Enterprises, Inc.'s (Great
Harvest) Complaint for sum of money against Tan.

On February 3, 1994, Great Harvest hired Tan to transport 430 bags of soya beans worth P230,000.00
from Tacoma Integrated Port Services, Inc. (Tacoma) in Port Area, Manila to Selecta Feeds in Camarin,
Novaliches, Quezon City.5

That same day, the bags of soya beans were loaded into Tan's hauling truck. Her employee, Rannie
Sultan Cabugatan (Cabugatan), then delivered the goods to Selecta Feeds.6

At Selecta Feeds, however, the shipment was rejected. Upon learning of the rejection, Great Harvest
instructed Cabugatan to deliver and unload the soya beans at its warehouse in Malabon. Yet, the truck
and its shipment never reached Great Harvest's warehouse.7

On February 7, 1994, Great Harvest asked Tan about the missing delivery. At first, Tan assured Great
Harvest that she would verify the whereabouts of its shipment, but after a series of follow-ups, she
eventually admitted that she could not locate both her truck and Great Harvest's goods.8 She reported
her missing truck to the Western Police District Anti-Carnapping Unit and the National Bureau of
Investigation.9

On February 19, 1994, the National Bureau of Investigation informed Tan that her missing truck had
been found in Cavite. However, the truck had been cannibalized and had no cargo in it.10 Tan spent over
P200,000.00 to have it fixed.11
Tan filed a Complaint against Cabugatan and Rody Karamihan (Karamihan), whom she accused of
conspiring with each other to steal the shipment entrusted to her.12 An Information13 for theft was filed
against Karamihan, while Cabugatan was charged with qualified theft.14

On March 2, 1994, Great Harvest, through counsel, sent Tan a letter demanding full payment for the
missing bags of soya beans. On April 26, 1994, it sent her another demand letter. Still, she refused to pay
for the missing shipment or settle the matter with Great Harvest.15 Thus, on June 2, 1994, Great Harvest
filed a Complaint for sum of money against Tan.16

In her Answer, Tan denied that she entered into a hauling contract with Great Harvest, insisting that she
merely accommodated it. Tan also pointed out that since Great Harvest instructed her driver to change
the point of delivery without her consent, it should bear the loss brought about by its deviation from the
original unloading point.17

In its August 4, 2000 Decision,18 the Regional Trial Court of Manila found Karamihan guilty as an
accessory after the fact of theft, and sentenced him to serve a prison sentence between six (6) months
of  arresto mayor  maximum to one (1) year of prision correccional minimum. He was also ordered to
indemnify Tan P75,000.00, the amount he had paid Cabugatan for the 430 bags of soya beans.19

In its January 3, 2012 Decision,20 the Regional Trial Court of Quezon City granted Great Harvest's
Complaint for sum of money. It found that Tan entered into a verbal contract of hauling with Great
Harvest, and held her responsible for her driver's failure to deliver the soya beans to Great
Harvest.21 The dispositive portion of the Decision read:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering
the latter:

1. To pay the sum of P230,000.00 with interest thereon at the rate of 12% per annum starting from
June 2, 1994 (when the case was filed) and until paid;

2. To pay the sum of P50,000.00 as Attorney's fees; and

3. Costs against the defendant.

SO ORDERED.22

Tan moved for reconsideration of the January 3, 2012 Decision, but her Motion was denied by the trial
court in its November 21, 2012 Order.23

Tan filed an Appeal, but the Court of Appeals dismissed it in its March 13, 2015 Decision.24

In affirming the January 3, 2012 Decision, the Court of Appeals found that the parties' standard business
practice when the recipient would reject the cargo was to deliver it to Great Harvest's warehouse. Thus,
contrary to Tan's claim, there was no deviation from the original destination.25

The Court of Appeals also held that the cargo loss was due to Tan's failure to exercise the extraordinary
level of diligence required of her as a common carrier, as she did not provide security for the cargo or
take out insurance on it.26

The dispositive portion of the Court of Appeals Decision read:

WHEREFORE, the premises considered, the instant appeal is hereby DISMISSED and the assailed
Decision dated January 3, 2012 [is] AFFIRMED in toto.

IT IS SO ORDERED.27 (Emphasis in the original)

Tan moved for reconsideration, but her Motion was denied by the Court of Appeals in its September 15,
2015 Resolution.28

Thus, Tan filed her Petition for Review on Certiorari,29 maintaining that her Petition falls under the
exceptions to a Rule 45 petition since the assailed Court of Appeals Decision was based on a
misapprehension of facts.30

Petitioner contends that she is not liable for the loss of the soya beans and points out that the
agreement with respondent Great Harvest was to deliver them to Selecta Feeds, an obligation with
which she complied. She claims that what happened after that was beyond her control. When Selecta
Feeds rejected the soya beans and respondent directed Cabugatan to deliver the goods to its
warehouse, respondent superseded her previous instruction to Cabugatan to return the goods to
Tacoma, the loading point. Hence, she was no longer required to exercise the extraordinary diligence
demanded of her as a common carrier.31

Tan opines that she is not liable for the value of the lost soya beans since the truck hijacking was a
fortuitous event and because "the carrier is not an insurer against all risks of travel."32

She prayed for: (1) P500,000.00 in actual damages to compensate for the expenses she incurred in
looking for and fixing her truck; (2) P500,000.00 in moral damages for the stress and mental anguish she
experienced in searching for her truck and the missing soya beans; (3) P500,000.00 in exemplary
damages to deter respondent from filing a similar baseless complaint in the future; and (4) P200,000.00
as attorney's fees. On the other hand, if she is found liable to respondent, petitioner concedes that her
liability should only be pegged at P75,000.00, the actual price Karamihan paid for respondent's
shipment.33

On January 25, 2016,34 respondent was directed to comment on the petition but it manifested35 that it
was waiving its right to file a comment.

The sole issue for this Court's resolution is whether or not petitioner Annie Tan should be held liable for
the value of the stolen soya beans.

The Petition must fail.

The Rules of Court is categorical that only questions of law may be raised in petitions filed under Rule
45, as this Court is not a trier of facts. Further, factual findings of appellate courts, when supported by
substantial evidence, are binding upon this Court.36

However, these rules do admit of exceptions.37 In particular, petitioner referred to the exception
"[w]hen the judgment is based on a misapprehension of facts"38 to justify the questions of fact in her
Petition for Review on Certiorari.

A careful review of the records of this case convinces us that the assailed judgments of the Court of
Appeals are supported by substantial evidence.
Article 1732 of the Civil Code defines common carriers as "persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or both, by land, water or air,
for compensation, offering their services to the public." The Civil Code outlines the degree of diligence
required of common carriers in Articles 1733, 1755, and 1756:

ARTICLE 1733. Common carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by them, according to all the circumstances of each case.

....

ARTICLE 1755. A common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the
circumstances.

ARTICLE 1756. In case of death of or injuries to passengers, common carriers are presumed to have been
at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as
prescribed in articles 1733 and 1755.

Law and economics provide the policy justification of our existing jurisprudence. The extraordinary
diligence required by the law of common carriers is primarily due to the nature of their business, with
the public policy behind it geared toward achieving allocative efficiency between the parties to the
transaction.

Allocative efficiency is an economic term that describes an optimal market where customers are willing
to pay for the goods produced.39 Thus, both consumers and producers benefit and stability is achieved.

The notion of common carriers is synonymous with public service under Commonwealth Act No. 146 or
the Public Service Act.40 Due to the public nature of their business, common carriers are compelled to
exercise extraordinary diligence since they will be burdened with the externalities or the cost of the
consequences of their contract of carriage if they fail to take the precautions expected of them.

Common carriers are mandated to internalize or shoulder the costs under the contracts of carriage. This
is so because a contract of carriage is structured in such a way that passengers or shippers surrender
total control over their persons or goods to common carriers, fully trusting that the latter will safely and
timely deliver them to their destination. In light of this inherently inequitable dynamics— and the
potential harm that might befall passengers or shippers if common carriers exercise less than
extraordinary diligence— the law is constrained to intervene and impose sanctions on common carriers
for the parties to achieve allocative efficiency.41

Here, petitioner is a common carrier obligated to exercise extraordinary diligence42 over the goods
entrusted to her. Her responsibility began from the time she received the soya beans from respondent's
broker and would only cease after she has delivered them to the consignee or any person with the right
to receive them.43

Petitioner's argument is that her contract of carriage with respondent was limited to delivering the soya
beans to Selecta Feeds. Thus, when Selecta Feeds refused to accept the delivery, she directed her driver
to return the shipment to the loading point. Respondent refutes petitioner's claims and asserts that
their standing agreement was to deliver the shipment to respondent's nearest warehouse in case the
consignee refused the delivery.

After listening to the testimonies of both parties, the trial court found that respondent was able to prove
its contract of carriage with petitioner. It also found the testimony of respondent's witness, Cynthia
Chua (Chua), to be more believable over that of petitioner when it came to the details of their contract
of carriage:

Defendant's assertion that the diversion of the goods was done without her consent and knowledge is
self-serving and is effectively belied by the positive testimony of witness Cynthia Chua, Account Officer
of plaintiff corporation (page 23, TSN, March 26, 1996). Equally self-serving is defendant's claim that she
is not liable for the loss of the soyabeans (sic) considering that the plaintiff has no existing contract with
her. Such a sweeping submission is also belied by the testimony of plaintiff's witness Cynthia Chua who
categorically confirmed the existing business relationship of plaintiff and defendant for hauling and
delivery of goods as well as the arrangement to deliver the rejected goods to the plaintiff's nearest
warehouse in the event that goods are rejected by the consignee with prior approval of the consignor
(page 11, TSN, March 26, 1996).44

The trial court's appreciation of Chua's testimony was upheld by the Court of Appeals:

Verily, the testimony alone of appellee's Account Officer, Cynthia Chua, dispels the contrary allegations
made by appellant in so far as the nature of their business relationship is concerned. Consistently and
without qualms, said witness narrated the details respecting the company's relations with the appellant
and the events that transpired before, during and after the perfection of the contract and the
subsequent loss of the subject cargo. Said testimony and the documentary exhibits, i.e., the Tacoma
waybill and the appellee's waybill, prove the perfection and existence of the disputed verbal contract.

Emphatically, from the aforesaid waybills, it was duly established that while verbal, the parties herein
has (sic) agreed for the hauling and delivery of the soya beans from the company's broker to the
intended recipient. It was further proven by evidence that appellant had agreed and consented to the
delivery of the soya beans to the company's nearest warehouse in case the cargo goods had been
rejected by the recipient as it had been the practice between the parties.45 (Citation omitted)

This Court accords the highest respect to the trial court's assessment of a witness' credibility, as it was in
a better position to observe the witness' demeanor while testifying.46 We see no reason to disturb the
factual findings of the lower courts, especially since they were supported by substantial evidence.

Furthermore, Article 1734 of the Civil Code holds a common carrier fully responsible for the goods
entrusted to him or her, unless there is enough evidence to show that the loss, destruction, or
deterioration of the goods falls under any of the enumerated exceptions:

ARTICLE 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods,
unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

 (3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority.

Nothing in the records shows that any of these exceptions caused the loss of the soya beans. Petitioner
failed to deliver the soya beans to respondent because her driver absconded with them. She cannot shift
the blame for the loss to respondent's supposed diversion of the soya beans from the loading point to
respondent's warehouse, as the evidence has conclusively shown that she had agreed beforehand to
deliver the cargo to respondent's warehouse if the consignee refused to accept it.47

Finally, petitioner's reliance on De Guzman v. Court of Appeals48 is misplaced. There, the common carrier
was absolved of liability because the goods were stolen by robbers who used "grave or irresistible
threat, violence[,] or force"49 to hijack the goods. De Guzman viewed the armed hijack as a fortuitous
event:

Under Article 1745 (6) above, a common carrier is held responsible — and will not be allowed to divest
or to diminish such responsibility — even for acts of strangers like thieves or robbers, except where such
thieves or robbers in fact acted "with grave or irresistible threat, violence or force." We believe and so
hold that the limits of the duty of extraordinary diligence in the vigilance over the goods carried are
reached where the goods are lost as a result of a robbery which is attended by "grave or irresistible
threat, violence[,] or force."50

In contrast to De Guzman, the loss of the soya beans here was not attended by grave or irresistible
threat, violence, or force. Instead, it was brought about by petitioner's failure to exercise extraordinary
diligence when she neglected vetting her driver or providing security for the cargo and failing to take out
insurance on the shipment's value. As the Court of Appeals held:

Besides, as the records would show, appellant did not observe extra-ordinary (sic) diligence in the
conduct of her business as a common carrier. In breach of their agreement, appellant did not provide
security while the goods were in transit and she also did not pay for the insurance coverage of said
goods. These measures could have prevented the hijacking (sic) or could have ensured the payment of
the damages sustained by the appellee.51

WHEREFORE, the Petition is DENIED. Petitioner Annie Tan is directed to pay respondent Great Harvest
Enterprises, Inc. the sum of Two Hundred Thirty Thousand Pesos (P230,000.00) with interest at the rate
of twelve percent (12%) per annum from June 2, 1994 until June 30, 2013, and at the rate of six percent
(6%) per annum from July 1, 2013 until its full satisfaction. She is further directed to pay Fifty Thousand
Pesos (P50,000.00) as attorney's fees and the costs of suit.

SO ORDERED.

 G.R. No. 218593, June 15, 2020 ]

BAGONG REPORMANG1 SAMAHAN NG MGA TSUPER AT OPERATOR SA ROTANG PASIG QUIAPO VIA

PALENGKE SAN JOAQUIN IKOT, INC., REPRESENTED BY ITS PRESIDENT, CORNELIO R. SADSAD, JR.,
PETITIONER, VS. CITY OF MANDALUYONG, HON. BENJAMIN C. ABALOS, JR., LUISITO ESPINOSA, AND
AMAR SANTDAS, RESPONDENTS.

DECISION

LEONEN, J.:

A certificate of public convenience does not vest property rights to its holder to conduct business along
the route covered in it. This privilege is subject to compliance with local traffic regulations, because the
Land Transportation Franchising and Regulatory Board's authority to issue such certificates is only
supplemental to the right of local governments to control and regulate traffic in their localities.

This Court resolves the Petition for Review2 assailing the Court of Appeals Decision,3 which affirmed the
Regional Trial Court Decision4 denying the Petition for Injunction filed by Bagong Repormang Samahan
ng mga Tsuper at Operator sa Rotang Pasig Quiapo via Palengke San Joaquin Ikot, Inc. (Bagong
Repormang Samahan) against the City of Mandaluyong.

In filing the Petition for Injunction with prayer for a temporary restraining order and writ of preliminary
injunction, Bagong Repormang Samahan sought to enforce its members' rightful passage through the
road under the Shaw Boulevard-EDSA flyover, and to enjoin the City of Mandaluyong from violating that
right.5 It hinged this right based on its members' certificates of public convenience to ply along this
route:6

Pasig (TP) – Quiapo (Echague) via Sta. Mesa, C. Palanca

Pasig TP terminal, Caruncho Ave., Pasig Blvd., Shaw Blvd., P. Sanchez, V. Mapa, Ramon Magsaysay,
Legarda, P. Casal, Palanca to terminal and back via Quezon Blvd., Service Rd., C.M. Recto, Legarda to
origin via same route.7 (Citation omitted)

Allegedly, the group's drivers were prohibited from passing under the Shaw Boulevard-EDSA flyover
where they would usually load and unload passengers. It added that the city's traffic enforcers would
harass its members by issuing several ordinance violation receipts for "obstruction," "no seat belt,"
"disobedience," and "out of route."8 Yet, the group claimed, no ordinance expressly prohibited them
from passing under the flyover; thus, the prohibition violated their certificates of public convenience.9

For its part, the City of Mandaluyong invoked Ordinance No. 358, Series of 2005, or the City's Traffic
Management Code. Under the Ordinance, it noted, the Traffic and Parking Management Office is
authorized to adjust the turning points and terminals of public utility buses and jeepneys.10 Jeepneys
and buses are prohibited from loading and unloading along the Shaw Boulevard-EDSA crossing area
because of traffic congestion.11

On August 10, 2009, the Regional Trial Court denied the application for temporary restraining order. On
January 4, 2010, it also denied the writ of preliminary injunction.12

On December 28, 2012, the Regional Trial Court issued its Decision13 denying the Petition for Injunction:

WHEREFORE, premises considered, the prayer for injunction of petitioner, the Bagong Reformang
Samahan ng mga Tsuper at Operator sa Rotang Pasig Quiapo via Palengke San Joaquin Ikot, Inc.,
represented by its President Cornelio R. Sadsad, Jr., is hereby DENIED.
SO ORDERED.14

In denying the main action for injunction, the Regional Trial Court found that Bagong Repormang
Samahan failed to show its members' clear legal right to ply the road under the flyover.15 It upheld the
Traffic Management Code as a valid exercise of the City of Mandaluyong's power to maintain and
promote order in its locality. It noted that injury would redound to the general public if the
unauthorized loading and unloading were allowed.16

The Court of Appeals, in its May 26, 2015 Decision,17 denied the group's appeal. It held that the City of
Mandaluyong is vested with delegated legislative power to enact traffic rules under Section 458, in
relation to Section 16, of the Local Government Code. It found that the prohibition against plying under
the Shaw Boulevard-EDSA flyover did not violate the drivers' certificates of public convenience, but was
a valid exercise of the City of Mandaluyong's power to address traffic congestion.18

Thus, Bagong Repormang Samahan filed this Petition for Review.19

On September 2, 2016, respondents filed their Comment.20 On May 4, 2017, petitioner filed its Reply.21

In a February 4, 2018 Letter, petitioner's president Cornelio R. Sadsad, Jr. (Sadsad) notified this Court of
the administrative cases he has filed before the Land Transportation Office, the Land Transportation
Franchise and Regulatory Board, and the Office of the Ombudsman.22

The Land Transportation Franchise and Regulatory Board had earlier found that UV Express vehicles and
passenger jeepneys were guilty of having illegal terminals, thus ordering that certain vehicles be
impounded.23 In another case, the Land Transportation Office had directed Ricardo V. Zafra, the chief of
the SMVIC of Pasay City, to "exert extra effort and formulate action plans" on the illegal transactions in
his area of responsibility.24 Lastly, the Office of the Ombudsman dismissed the case Sadsad filed against
Hearing Officer Atty. Lucia V. Oliveros, who had ruled against his complaint for selective apprehension
against a traffic enforcer.25

Incidentally, petitioner also notified this Court that he has impugned former President Fidel V.
Ramos,26 former President Benigno Simeon Aquino III,27 and President Rodrigo Duterte,28 all of whom
he essentially claimed are liable for the plight of the jeepney drivers.

In another letter, Sadsad manifested that the illegal operations of UV Express vehicles were killing the
jeepney drivers' livelihood.29 He later requested that a case be filed against government agencies who
continue to allow the illegal operations of UV Express.30

Petitioner filed its Memorandum31 on May 15, 2019, while the respondents filed theirs32 on April 3,
2019.

Petitioner implores this Court to review the factual findings of the Court of Appeals because its
judgment was based on a misapprehension of facts.33 It argues that the injunction should have been
issued in its favor because its members, through their certificates of public convenience, have an
unmistakable right to pass under the Shaw Boulevard-EDSA flyover.34 It asserts that respondent
violated the members' legal right when they were prevented from passage and were issued with
ordinance violation receipts35 despite no express prohibition.36
Respondents counter that the City of Mandaluyong has power to regulate traffic under the Shaw
Boulevard-EDSA flyover.37 They allege that petitioner failed to consider the City Traffic Management
Code, which tasks the Traffic and Parking Management Office with adjusting the turning points of public
utility vehicles without modification of their routes.38 They further note that only public utility vehicles
with legal terminals along the Shaw Boulevard-EDSA crossing area are exempted from the prohibition,
and since petitioner does not have such terminal, its members have been prohibited from passing under
the flyover since 2000.39

The main issue here is whether or not the main action for injunction should have been granted.
Subsumed under it are two issues:

First, whether or not the member-drivers, through their certificates of public convenience, have a clear
legal right to ply through the road under the Shaw Boulevard-EDSA flyover; and

Second, whether or not respondent City of Mandaluyong violated this right, if any.

The Petition lacks merit.

This Court is not a trier of facts. Generally, only questions of law can be raised in a petition for review on
certiorari under Rule 4540 of the Rules of Court. The limited exceptions to this rule are as follows:

(1) When the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2)
When the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave abuse
of discretion; (4) When the judgment is based on a misapprehension of facts; (5) When the findings of
fact are conflicting; (6) When the Court of Appeals, in making its findings, went beyond the issues of the
case and the same is contrary to the admissions of both appellant and appellee; (7) The findings of the
Court of Appeals are contrary to those of the trial court; (8) When the findings of fact are conclusions
without citation of specific evidence on which they are based; (9) When the facts set forth in the petition
as well as in the petitioner's main and reply briefs are not disputed by the respondents; and (10) The
finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is
contradicted by the evidence on record.41 (Emphasis supplied, citation omitted)

To successfully invoke these exceptions, the petitioner must prove the need for this Court to examine
the lower court's factual findings.42 Merely invoking an exception without proof will not warrant an
examination beyond the limits of Rule 45.43

Here, petitioner alleges that the Court of Appeals Decision was based on a misapprehension of
facts,44 but fails to demonstrate how. On the contrary, as will be discussed, the Court of Appeals'
findings are supported by the evidence on record, applicable laws, and jurisprudence.

II

Petitioner seeks the writ of injunction against respondent City of Mandaluyong for allegedly violating
their legal right. Rule 58, Section 9 of the Rules of Court states when a final injunction may be issued:

SECTION 9. When Final Injunction Granted. — If after the trial of the action it appears that the applicant
is entitled to have the act or acts complained of permanently enjoined, the court shall grant a final
injunction perpetually restraining the party or person enjoined from the commission or continuance of
the act or acts or confirming the preliminary mandatory injunction. (10a)

As explained in Evy Construction and Development Corporation v. Valiant Roll Forming Sales
Corporation,45 an injunction can either be a main action or a provisional remedy:

Injunction is defined as "a judicial writ, process or proceeding whereby a party is ordered to do or refrain
from doing a certain act." It may be filed as a main action before the trial court or as a provisional
remedy in the main action. Bacolod City Water District v. Hon. Labayen expounded:

The main action for injunction is distinct from the provisional or ancillary remedy of preliminary
injunction which cannot exist except only as part or an incident of an independent action or proceeding.
As a matter of course, in an action for injunction, the auxiliary remedy of preliminary injunction,
whether prohibitory or mandatory, may issue. Under the law, the main action for injunction seeks a
judgment embodying a final injunction which is distinct from, and should not be confused with, the
provisional remedy of preliminary injunction, the sole object of which is to preserve the status quo until
the merits can be heard. A preliminary injunction is granted at any stage of an action or proceeding prior
to the judgment or final order. It persists until it is dissolved or until the termination of the action
without the court issuing a final injunction.46

For a main action for injunction to succeed, two requisites must be established: "(1) there must be a
right to be protected and (2) the acts against which the injunction is to be directed are violative of said
right."47

II (A)

In this case, petitioner derives its legal right from the certificates of public convenience that the Land
Transportation Franchise and Regulation Board had issued its members. Supposedly, since Shaw
Boulevard was included in the route authorized in the certificates, petitioner's members cannot be
prohibited from plying the road under the Shaw Boulevard-EDSA flyover without modifying, amending,
or canceling these certificates.48

Petitioner's argument has no basis.

Among the powers of the Land Transportation Franchising and Regulatory Board is to issue certificates
of public convenience:

SECTION 5. Powers and Functions of the Land Transportation Franchising and Regulatory Board. — The
Board shall have the following powers and functions:

b. To issue, amend, revise, suspend or cancel Certificates of Public Convenience or permits authorizing
the operation of public land transportation services provided by motorized vehicles, and to prescribe the
appropriate terms and conditions there for [.]49

A certificate of public convenience is a permit authorizing operations of land transportation services for
public use.50 Before the creation of the Land Transportation Franchising and Regulatory Board, these
permits were issued by the Public Service Commission under Section 16(a) of Commonwealth Act No.
146.51
It is settled that a certificate of public convenience is a mere license or privilege. It does not vest
property rights on the routes covered in it:

Petitioner's argument pales on the face of the fact that the very nature of a certificate of public
convenience is at cross purposes with the concept of vested rights. To this day, the accepted view, at
least insofar as the State is concerned, is that "a certificate of public convenience constitutes neither a
franchise nor a contract, confers no property right, and is a mere license or privilege.'" The holder of
such certificate does not acquire a property right in the route covered thereby. Nor does it confer upon
the holder any proprietary right or interest or franchise in the public highways. Revocation of this
certificate deprives him of no vested right. Little reflection is necessary to show that the certificate of
public convenience is granted with so many strings attached. New and additional burdens, alteration of
the certificate, and even revocation or annulment thereof is reserved to the State.

We need but add that the Public Service Commission, a government agency vested by law with
"jurisdiction, supervision, and control over all public services and their franchises, equipment, and other
properties" is empowered, upon proper notice and hearing, amongst others: (1) "[t]o amend, modify or
revoke at any time a certificate issued under the provisions of this Act [Commonwealth Act 146, as
amended], whenever the facts and circumstances on the strength of which said certificate was issued
have been misrepresented or materially changed"; and (2) "[t]o suspend or revoke any certificate issued
under the provisions of this Act whenever the holder thereof has violated or willfully and
contumaciously refused to comply with any order, rule or regulation of the Commission or any provision
of this Act: Provided, That the Commission, for good cause, may prior to the hearing suspend for a
period not to exceed thirty days any certificate or the exercise of any right or authority issued or granted
under this Act by order of the Commission, whenever such step shall in the judgment of the Commission
be necessary to avoid serious and irreparable damage or inconvenience to the public or to private
interests. Jurisprudence echoes the rule that the Commission is authorized to make reasonable rules
and regulations for the operation of public services and to enforce them. In reality, all certificates of
public convenience issued are subject to the condition that all public services "shall observe and comply
[with] ... all the rules and regulations of the Commission relative to" the service. To further emphasize
the control imposed on public services, before any public service can "adopt, maintain, or apply
practices or measures, rules, or regulations to which the public shall be subject in its relation with the
public service," the Commission's approval must first be had.

And more. Public services must also reckon with provincial resolutions and municipal ordinances relating
to the operation of public utilities within the province or municipality concerned. The Commission can
require compliance with these provincial resolutions or municipal ordinances.52 (Emphasis supplied)

As early as 1966, Lagman v. City of Manila53 clarified that the authority to issue certificates of public
convenience does not remove a local government's power to regulate traffic in its locality. A grantee is
still required to comply with national laws and municipal ordinances:

That the powers conferred by law upon the Public Service Commission were not designated to deny or
supersede the regulatory power of local governments over motor traffic, in the streets subject to their
control, is made evident by section 17 (j) of the Public Service Act (Commonwealth Act No. 146) that
provides as follows:
SEC. 17. Proceedings of Commission without previous hearing. — The Commission shall have power,
without previous hearing, subject to established limitations and exceptions, and saving provisions to the
contrary:

....

(j) To require any public service to comply with the laws of the Philippines, and with any provincial
resolution or municipal ordinance relating thereto, and to conform to the duties imposed upon it
thereby, or by the provisions of its own charter, whether obtained under any general or special law of
the Philippines.

The petitioner's contention that, under this section, the respective ordinances of the City can only be
enforced by the Commission alone is obviously unsound. Subsection (j) refers not only to ordinances but
also to "the laws of the Philippines", and it is plainly absurd to assume that even laws relating to public
services are to remain a dead letter without the placet of the Commission; and the section makes no
distinction whatever between enforcement of laws and that of municipal ordinances.

The very fact, furthermore, that the Commission is empowered, but not required, to demand
compliance with apposite laws and ordinances proves that the Commission's powers are merely
supplementary to those of state organs, such as the police, upon which the enforcement of laws
primarily rests.54 (Emphasis supplied)

Here, it is not disputed that the route in the certificates of public convenience granted to the drivers
includes Shaw Boulevard. However, petitioner is mistaken to claim that these certificates give the
drivers vested right over the route covered. One of the conditions for public utility jeepneys to operate
along such routes is compliance with local government regulations, as clearly stated in the certificates of
public convenience:

The operator must also comply with all the terms and conditions prescribed in Commonwealth Act [No.]
146, as amended, Executive Order [No.] 202, and other laws and, all pertinent Orders and Memorandum
Circulars of the Board and Resolutions of Local Government unit/s in so far as they are applicable.55

Neither does petitioner's previous practice of using the road under the Shaw Boulevard-EDSA
flyover56 give its members the unfettered right to pass along this road. One of the members admitted
that, since the construction of the flyover in 2001, they have been prohibited from using the road under
it, and have been directed to use the flyover:

ATTY. TUTANES [counsel for respondents]:

Q - And when the flyover was constructed, Mr. Witness, were you prevented since the start of the
operation of the flyover from using the under Shaw Boulevard flyover?

A - Yes, sir, when it was constructed it was then that we were prohibited from passing under the flyover,
sir.

Q - And Mr. Witness when you were prevented from using the [road] under Shaw Boulevard flyover did
you raise any objection?

A - Yes, sir, we complained before the MMDA, we were pointed to go to the local government sir and
then the local government told us that it is the jurisdiction of the LTFRB, sir.
Q - So since 2004 you were already prevented from using [the road] under Shaw Boulevard flyover?

A - Since 2001, sir, we were no longer allowed to pass under the flyover.57

Petitioner, therefore, failed to establish its members' clear legal right to pass under the Shaw Boulevard-
EDSA flyover.

II (B)

Local governments possess delegated legislative power to regulate traffic. Section 458 of the Local
Government Code states:

SECTION 458. Powers, Duties, Functions and Compensation. — (a) The sangguniang panlungsod, as the
legislative body of the city, shall enact ordinances, approve resolutions and appropriate funds for the
general welfare of the city and its inhabitants pursuant to Section 16 of this Code and in the proper
exercise of the corporate powers of the city as provided for under Section 22 of this Code, and shall:

....

-5 Approve ordinances which shall ensure the efficient and effective delivery of the basic services and
facilities as provided for under Section 17 of this Code, and in addition to said services and facilities shall:

....

(v) Regulate the use of streets, avenues, alleys, sidewalks, bridges, parks and other public places and
approve the construction, improvement, repair and maintenance of the same; establish bus and vehicle
stops and terminals or regulate the use of the same by privately-owned vehicles which serve the public;
regulate garages and the operation of conveyances for hire; designate stands to be occupied by public
vehicles when not in use; regulate the putting up of signs, signposts, awnings and awning posts on the
streets; and provide for the lighting, cleaning and sprinkling of streets; and public places;

(vi) Regulate traffic on all streets and bridges; prohibit encroachments or obstacles thereon, and when
necessary in the interest of public welfare, authorize the removal or encroachments and illegal
constructions in public places(.)

In Legaspi v. City of Cebu,58 this Court emphasized that local governments are given broad latitude in
crafting traffic rules and regulations because they are familiar with the conditions of their localities:

The CA opined, and correctly so, that vesting cities like the City of Cebu with the legislative power to
enact traffic rules and regulations was expressly done through Section 458 of the LGC, and also generally
by virtue of the General Welfare Clause embodied in Section 16 of the LGC.

....

The foregoing delegation reflected the desire of Congress to leave to the cities themselves the task of
confronting the problem of traffic congestions associated with development and progress because they
were directly familiar with the situations in their respective jurisdictions. Indeed, the LGUs would be in
the best position to craft their traffic codes because of their familiarity with the conditions peculiar to
their communities. With the broad latitude in this regard allowed to the LGUs of the cities, their traffic
regulations must be held valid and effective unless they infringed the constitutional limitations and
statutory safeguards.59 (Emphasis supplied, citation omitted)
Section 458 anchors itself on the delegated police power provided in the general welfare clause of the
Local Government Code.60 Section 16 of the Code provides:

SECTION 16. 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. (Emphasis supplied)

It is settled that restrictions brought about by regulations of local governments addressing traffic
congestion are valid exercises of police power:

It is because of all of these that it has become necessary for the police power of the State to step in, not
for the benefit of the few, but for the benefit of the many. Reasonable restrictions have to be provided
for the use of the thoroughfares. The operation of public services may be subjected to restraints and
burdens, in order to secure the general comfort. No franchise or right can be availed of to defeat the
proper exercise of police power—the authority "to enact rules and regulations for the promotion of the
general welfare." So it is, that by the exercise of the police power, which is a continuing one, "a business
lawful today may in the future, because of the changed situation, the growth of population or other
causes, become a menace to the public health and welfare, and be required to yield to the public good."
Public welfare, we have said, lies at the bottom of any regulatory measure designed "to relieve
congestion of traffic, which is, to say the least, a menace to public safety." As a corollary, measures
calculated to promote the safety and convenience of the people using the thoroughfares by the
regulation of vehicular traffic, present a proper subject for the exercise of police power.61 (Emphasis
supplied, citations omitted)

Pursuant to the Local Government Code, in 2005, respondent City of Mandaluyong enacted Ordinance
No. 358, or the Traffic Management Code of the City of Mandaluyong.

In this case, petitioner does not assail the validity of the Ordinance. What it contends is its lack of
express prohibition that prevents its member-drivers from passing under the Shaw Boulevard-EDSA
flyover.

A simple reading of the provision belies their contention. Section 113 of the Traffic Management Code
clearly states that the Traffic and Parking Management Office is authorized to regulate the turning
points of public utility buses and jeepneys:

SECTION 113 ROUTES OF PUBLIC UTILITY BUSES AND JEEPNEYS. Public utility buses and jeepneys,
including mega-taxis and shuttle vans with valid authorizations from the Land Transportation Franchising
and Regulatory Board and whose routes terminate or originate within the City shall furnish the Traffic
and Parking Management Office a copy of their approved routes. Subject transport groups shall adhere
to their approved routes.
Without necessarily modifying their authorized routes, the Traffic and Parking Management Office may
adjust the turning points and terminal of public utility buses and jeepneys, prescribe their loading or
unloading points, and/or require them to utilize passenger interchange terminals, if so required by an
approved traffic improvement scheme.

It is clear, therefore, that the regulation does not violate the certificates of public convenience of
petitioner's members. It is a valid exercise of respondent City of Mandaluyong's power under the Local
Government Code to address traffic congestion under the Shaw Boulevard-EDSA flyover. Thus, the
second requisite for a final injunction—that there had been a violation of a right—is also absent in this
case.

III

Appendix V of the City Traffic Management Code does not include the road under the Shaw Boulevard-
EDSA flyover in the list of loading and unloading zones. Thus, loading and unloading of passengers in
that road is not allowed:

APPENDIX V
LOADING AND UNLOADING ZONES

a. Between Stanford St. and Princeton St.

b. East bound ten (10) meters from Samat St.

c. West Bound ten (10) meters from Princeton St.

d. Between Governor's Palace Condominium and PNB Building

e. In front of Facilities Center

f. In front of Up-T/own Building before Wack-Wack Road

g. In front of Cherry Foodarama

h. In from of Sunshine Square

i. West bound lane ten (10) meters before Laurel St.

j. In front of Toyota Motors Corporation Buidling

k. East bound lane ten (10) meters before Rodriguez St.

l. East bound land twenty (20) meters after Nueve de Pebrero St.

m. Between Balagtas St. and Gomezville St.

n. Between Acacia Lane and Maligaya Creek 3

o. West bound land ten (10) meter[s] before Guerrero St.

p. Between A. Bonifacio St. and R. Vicencio St.

q. West bound lane ten (10) meters after Araullo St.

r. Between Araullo St. and L. Cruz St.

s. West bound lane ten (10) meters after J. Vargas St.

t. Between Aimologo Industries and Solid Bank

u. East bound lane ten (10) meters from A. Luna Extension

v. In front of Jose Rizal College

w. West bound lane ten (10) meters after the pedestrian lane in front of JRC

x. Across Tiosejo St.62

The Ordinance provides an exemption for public utility vehicles that have terminals in the EDSA-Shaw
Boulevard crossing area along Star Mall and Parklea63 However, petitioner does not claim that its
members fall under this exemption.

Petitioner decries that due to the prohibition, its members' incomes are reduced by at least P500.00
daily. In doing so, they admit that they load and unload passengers even in the no-loading and unloading
zones. As the Court of Appeals observed, instead of owning up to the multiple violations of the Traffic
Management Code, petitioner passes the liability to passengers who get on and off their vehicles in
unauthorized areas:

Further, petitioner-appellant admitted that its members cannot load and/or unload passengers under
the Shaw Boulevard-EDSA flyover. Based on Appendix V of the Traffic Code, which enumerates the
loading and unloading zones in the city, members of petitioner-appellant cannot load and/or unload
passengers under the Shaw Boulevard-EDSA flyover since the said area is not included in the loading and
unloading zone list. Nonetheless, on the pretext that it is the riding public, not the jeepney drivers-
members of petitioner-appellant, who ride on and alight from the jeepneys, there has been an unbridled
violation, albeit it is admitted that members of petitioner-appellant derive income from violating the no
loading-unloading zone in the prohibited area under the Shaw Boulevard-EDSA flyover. When the local
government unit, through its Traffic Enforcement Division, strictly implemented the prohibition and the
no loading-unloading zone to enforce discipline, it was only then that petitioner-appellant, confronted
with the loss of its income, cried foul and filed the petition for injunction. This is evident from the
testimony of Sadsad on cross-examination, viz:

ATTY. FERRER (counsel for respondents-appellees)[:]

Q: What is the source of the damage when you said you incurred Five Hundred Pesos a day for not
using...

COURT:

Or for having been prevented from passing through below that flyover EDSA Shaw Boulevard?

A: Dahil nga po kami padaanin sa flyover...

Q: Precisely, how, how did you quantify that? Na 500 ang nawala sayo apat na beses mong bumibiyahe
dahil hindi kayo pinayagan.
A: Dahil nga po sa kawalan ng pasahero nakukuha namin...

ATTY. FERRER[:]

Q: You just mentioned that you lost income in the amount of P500 at least because you are no longer
allowed to get passengers but Mr. Witness, you testified a while ago that there is no jeepney stop and
you are not allowed to get passengers so how will that affect your income?

A: Ang problema po namin nga ay hindi kami padaanin pero itong mga illegal operation na ito ay
pinapayagan nila sila nakakapagsakay ng mga pasahero...

ATTY. FERRER[:]

The answer of the witness your honor is not responsive.

He further testified, that:

ATTY. TUTANES[:]

Q: Under the Shaw Boulevard Flyover, Mr. Witness, where do you load passengers?

A: Sumasakay lang po ang pasahero pag naka-stop light.

COURT:

Eastbound, Atty. Tutanes?

ATTY. TUTANES[:]

Yes, your Honor.

A: Kapag po nakahinto naka-red yung traffic light saka lang po sila sumasakay.

Q: My question is where do you load passengers?

COURT:

Load and unload

ATTY. TUTANES[:]

Load muna, your honor.

A: Kung (kailan) lang po mag-stop yung traffic light.

Q: So you are admitting to this honorable court that you are loading passenger[s] under Shaw Boulevard
Flyover?

A: Dahil ang pasahero na po talaga nag nagdedesisyon na sumakay sa amin.1âшphi1

ATTY. TUTANES:

No, your honor...

COURT:
Answer the question. Answer that, yes or no.

A: Sumasakay po ang pasahero.

Q: So you don't? Pinasasakay mo?

A: Opo, sumasakay po.

ATTY. REDULA (counsel for petitioner-appellant)[:]

No, you[r] honor. The answer is sumasakay po. The passenger just...

COURT:

That's why I am qualifying it.

ATTY. REDULA:

Yes, your honor.

COURT:

Q: So pinasasakay mo o sumasakay sila?

A: Sumasakay po ang pasahero.

ATTY. TUTANES[:]

Q: How about unloading, where do you unload under Shaw Boulevard Flyover?

A: Basta nalang po nababa ang pasahero pag naka-stop ang traffic light.

ATTY. REDULA:

They just alight from the vehicle.

ATTY. TUTANES:

Q: How about after EDSA, Mr. Witness, after EDSA, eastbound after EDSA, do you load passengers after
EDSA?

A: After St. Francis.

....

Q: When you are passing over Shaw Boulevard Flyover, will you tell this court what is your income?

A: One thousand including the boundary.

Q: How about if you are passing through under Shaw Boulevard Flyover, Mr. Witness?

A: Nadadagdagan po dahil maraming sumasakay sa amin pag dumadaan kami sa ilalim.64 (Emphasis

supplied, citations omitted)

While we empathize with its members' plight, petitioner does not have the absolute right to conduct its
business along the route granted to its members. Its members' decreased income is not sufficient to
grant the remedy of injunction, as respondent committed no violation of any right which this Court may
enjoin.

Finally, petitioner submitted several letters containing records of administrative cases. In all of these, the
issue of the illegal operations of UV Express vehicles allegedly killing their livelihood was repeatedly
raised. Petitioner manifested that this issue and the resolution of the administrative agencies on the
cases will help this Court in resolving the Petition.

This Court cannot grant this manifestation. The Petition here assails the denial of petitioner's Petition for
Injunction against respondent City of Mandaluyong. While petitioner has a right to petition the
government for redress of its grievances, what is at issue here is whether petitioner's members have a
clear legal right that may have been violated.

As the issue of illegal operations of UV Express vehicles was not raised in the Petition, this Court cannot
use it to resolve the issues raised in the Petition. After a full-blown trial on the merits, the trial court was
not satisfied that the two requisites for injunction exist. The Court of Appeals affirmed this decision. This
Court finds no reason to reverse these findings.

WHEREFORE, the Petition is DENIED for lack of merit. The May 26, 2015 Decision of the Court of Appeals
in CA-G.R. CV No. 100496 is AFFIRMED.

SO ORDERED.

ALESON SHIPPING LINES, PETITIONER, VS. CGU INTERNATIONAL INS. PLC. AND CANDADO SHIPPING
LINES, INC., RESPONDENTS.

DECISION

LEONEN, J.:

This resolves a petition for review assailing the Decision and Resolution of the Court of Appeals in CA-
G.R. CV. No. 95628, which held Aleson Shipping Lines, Inc. (Aleson Shipping) liable for the damages
resulting from a vessel collision.

In 2002, Candano Shipping Lines, Inc. (Candano Shipping) signed a time charter agreement with Apo
Cement Corporation (Apo Cement) over the former's vessel, M/V Romeo. The agreement was executed
for the delivery of Apo Cement's cargo consisting of cement from Cebu to Albay.1

M/V Romeo was loaded with 31,250 bags of cement, equivalent to 1,250 metric tons. The cargo was
insured with CGU International Insurance (CGU Insurance).2

On July 14, 2002, at around 12 midnight, M/V Romeo was on its way out of the pier in Apo channel
when it collided with M/V Aleson Carrier 5 (M/V Aleson), which was owned by Aleson Shipping.3 M/V
Aleson's front hull hit the side of M/V Romeo.4 As a result, a gaping hole in the mid-section of M/V
Romeo caused it to instantly sink, taking with it the bags of cement worth P3,427,500.5

Apo Cement demanded payment from Candano Shipping and Aleson Shipping, but to no avail; hence, it
made an insurance claim with CGU Insurance, which was granted.6

CGU Insurance then filed a case against Candano Shipping and Aleson Shipping before the Regional Trial
Court, claiming actual damages and attorney's fees.7
Aleson Shipping denied liability and asserted that only Candano Shipping should be held liable because
the latter's vessel, M/V Romeo, was at fault in the collision.8 On the other hand, its officers and crew at
M/V Aleson have exercised diligence and care to avoid the incident.9

Meanwhile, Candano Shipping maintained that M/V Romeo was seaworthy and that it exercised
extraordinary diligence in the care and custody of the cargo, and in the operation of the vessel. It
blamed Aleson Shipping for the incident, claiming that Aleson Shipping was careless in command of M/V
Aleson Carrier 5.10

Further, Candano Shipping argued that the complaint should be dismissed, because CGU Insurance
failed to observe the arbitration clause under the time charter.11

CGU   Insurance's   surveyor   and   investigator,   Teodoro   R.   Lopez (Lopez), testified that based on his
interviews with the Chief Engineer of M/V Romeo and the stevedores and supervisor of the port, M/V
Aleson hit and caused an opening at the mid-section of M/V Romeo.12

Lopez found that the port authority instructed M/V Aleson to wait until M/V Romeo has cleared the last
buoy, but M/V Aleson still proceeded to enter the pier. In an interview with the captain of Apo Cement's
tug boat, Lopez likewise learned that the Captain of M/V Romeo asked the Captain of M/V Aleson to
slow down, but the latter did not heed instructions.13

Captain Ramil Fermin Cabeltes (Captain Cabeltes) of M/V Aleson testified for Aleson Shipping. He
narrated that the sea was calm during the incident and acknowledged that the Apo channel cannot
accommodate two (2) vessels at a time.14 When M/V Aleson was about to enter the pier, he admitted
that he failed to verify from the radio operator whether it can proceed to enter the pier. He merely
relied on the message relayed to him by a crew that M/V Aleson must "standby for proceeding to
port."15

Further, while Captain Cabeltes initially claimed that he did not know any vessel present at the pier, he
later admitted that he knew M/V Romeo was loading cargo at that time. Moreover, when M/V Aleson
was in stop position, he neither contacted nor used its horn to signal the M/V Romeo. He likewise
admitted that there was still around 200 meters of space on the right side of the vessel where he can
maneuver to avoid the mishap, but he did not do so, fearing that M/V Aleson will run aground.16

Maria Tessie Jadulco Flores (Flores), operations manager of Candano Shipping, claimed that M/V Aleson
was at fault in the collision. She averred that under the rule of the Apo channel, the vessel going out of
the wharf has the right of way, and vessels which are about to enter must wait until the wharf is cleared.
Hence, M/V Aleson should have waited until M/V Romeo exited the pier.17

Flores added that due to the incident, M/V Romeo's master of the vessel died instantly. While 14
members of the crew survived, two (2) remained missing. She further narrated that M/V Romeo was no
longer retrieved due to the depth of the sea, while M/V Aleson remained afloat.18

In its Decision,19 the Regional Trial Court found Aleson Shipping solely liable for the collision. Thus:

WHEREFORE, in view of the foregoing considerations, this Court hereby FINDS in favor of the plaintiff
against the defendant ALESON, hence it hereby ORDERS defendant ALESON, to pay plaintiff the sum of
Philippine Pesos: THREE MILLION THREE HUNDRED SIXTY EIGHT THOUSAND SEVEN HUNDRED FIFTY
(P3,368,750.00) with interest at 6% percent per annum from date hereof until the finality of this
decision and 12% per annum from finality of this decision until fully paid and attorney's fee of
P50,000.00 plus cost of suit.

The complaint against Candano is hereby DISMISSED in accordance with the provision of Article 826 of
the Code of Commerce. It states: "If a vessel would collide with another, through the fault, negligence,
or lack of skill of the captain, sailing mate, or any other member of the complement, the owner of the
vessel at fault shall indemnify the losses and damages suffered after expert appraisal.

Finally, the counterclaims filed by defendant Aleson against defendant Candano are
hereby DISMISSED for insufficiency of evidence.

SO ORDERED.20 (Emphasis in the original)

The trial court ruled that under Article 1733 of the New Civil Code, Aleson Shipping and Candano
Shipping are bound to observe extraordinary diligence as common carriers. If there was loss,
destruction, or deterioration of the goods it carries, common carriers are presumed responsible, unless
they can prove that they observed extraordinary diligence.21 Aleson Shipping failed to overcome this
presumption. On the other hand, Candano Shipping appeared to have observed the diligence
required.22

The trial court admitted in evidence the testimonies of Flores and Lopez which were treated as part of
res gestae, being startling statements made immediately by persons who were near and at the place of
the incident.23 Moreover, it relied on the testimony of Captain Cabeltes, who admitted several lapses in
his duty as the captain of M/V Aleson.24

Based on the evidence, the impact of the collision was strong, as M/V Aleson created a gaping hole on
the side of M/V Romeo, causing the vessel to instantly sink after five (5) minutes. The trial court noted
that Captain Cabletes of M/V Aleson failed to wait until M/V Romeo has exited from the wharf, and
merely assumed that it can enter the port when he knew for a fact that there was a vessel loading at
that time. Moreover, Captain Cabletes of M/V Aleson admitted that the collision could have been
avoided if only he maneuvered the vessel; but he chose not to, fearing that M/V Aleson may be
aground.25

In its Appeal, Aleson Shipping maintained that it was not at fault in the collision. It claimed that Captain
Cabeltes exerted all efforts to avoid the collision, and that the trial court twisted his testimony to make
Aleson Shipping liable.26

Further, it claimed that M/V Aleson dropped its anchor at some 3,200 meters from the pier while
waiting for their turn to approach the loading berth. Captain Cabeltes could not see the loading bay
from its position and, thus, relied on the instructions of the port operators, who relayed that it can
already proceed to the loading bay.27It then went towards the pier at a slow speed of two (2) knots,
while M/V Romeo was navigating at full speed.28

Aleson Shipping claimed that this version of the story is more believable, as it coincides with Lopez's
testimony which confirmed that the collision site was three (3) kilometers away from the pier's last
buoy. Thus, the trial court erred in its observation that M/V Aleson failed to wait until M/V Romeo has
exited the last buoy.29
Moreover, Aleson Shipping claimed that it was M/V Romeo that failed to maneuver the vessel to avoid
the collision.30 The trial court faulted Aleson Shipping for its failure to blow its horn, but there was no
need to signal M/V Romeo, since both ships have communicated with each other and have explicitly
agreed to do a port-to-port passing to avoid a collision. Further, sending a sound signal would only do
more harm than good, since the master's instructions to the crew will not be heard over the horn's
sound.31

Aleson Shipping argued that the testimony of Captain Cabeltes must be given credence because of all
the witnesses, only he has first-hand knowledge of what transpired before, during, and after the
collision. On the other hand, Candano Shipping failed to present any of the surviving crew of M/V
Romeo.32

Further, Aleson Shipping asserted that the trial court erred in relying on hearsay testimony and in
applying the res gestae rule.33 Candano Shipping's witness, Flores, was incompetent to testify on
matters regarding the collision.34 She admitted to having no personal knowledge of the incident, and
even though she was not presented as an expert witness, the trial court allowed her to inject her
opinion as to who is at fault between the two (2) vessels.35

Similarly, Aleson Shipping claimed that the trial court erred in considering the testimony of Lopez as part
of res gestae because, as the inspector, he only had secondary information and none of the sources of
these information were present at the site of the incident.36

The Court of Appeals affirmed the decision of the lower court.37 Thus:

IN VIEW OF ALL THESE, the Appeal is DENIED. The Decision of the lower court is AFFIRMED.

SO ORDERED.38 (Emphasis in the original)

The appellate court further held that it found no strong and cogent reason to depart from the
conclusions and findings of the trial court.39 It ruled that the evidence defeats Aleson Shipping's
arguments. As the records bare, the collision was due to the fault of M/V Aleson's Captain. Despite
being informed that M/V Romeo was loading at the pier, M/V Aleson still proceeded to enter. Captain
Cabeltes likewise failed to blow its horn to alert M/V Romeo.40

Considering Captain Cabeltes' testimony, the Court of Appeals found that there is sufficient evidence to
ascribe fault to Aleson Shipping. Hence, Aleson Shipping's argument assailing the testimony of Flores is
irrelevant.41

Aleson Shipping moved for the reconsideration of the decision, but it was denied.42

In this Petition, petitioner argues that the lower courts erred in applying the law on common carriers in
determining its liability, considering that it has no contract of carriage with respondent CGU Insurance
or Apo Cement.43

It explains that in claiming subrogation rights, respondent CGU Insurance can only have as much rights
and causes of action as Apo Cement, which springs from the contract of insurance. Thus, it cannot be
sued based on contract, because it is a complete stranger to the time charter between respondent
Candano Shipping and Apo Cement, as well as to the contract of insurance between respondents.44
Thus, petitioner claims that respondent CGU Insurance's action against it is based on maritime tort
governed by the Code of Commerce.45 It follows that there can be no presumption of negligence
against petitioner. It is not a common carrier under a contract of carriage which must exercise
extraordinary diligence. Moreover, the doctrine of last clear chance will not then be applicable in this
case, because under Article 827 of the Code of Commerce, if both vessels may be blamed, both shall be
jointly responsible for the damages.46

Necessarily, the trial court erred in applying laws and jurisprudence on common carriers, because the
cause of action in this case is based on maritime tort and not on the breach of contract of carriage.47

Petitioner further claims that respondent Candano Shipping was solely at fault for the collision which
was due to the error and negligence of its officers and crew. On the other hand, petitioner asserts that it
exercised ordinary diligence—the degree of diligence demanded from it under the Code of
Commerce.48

When it saw M/V Romeo, M/V Aleson immediately requested for a port-to-port passing to avoid
collision which the former granted.49 Still, M/V Romeo did not change course. In its last attempt to
avoid the collision, Captain Cabeltes ordered to stop M/V Aleson's engine, but to no avail.50

For the sake of argument that it was negligent, petitioner avers that it should be made solidarily liable
with respondent Candano Shipping under Article 827 of the Code of Commerced.51

Further, petitioner questions the application of the res gestae rule to admit the testimonies of
respondents' witnesses.52

In particular, witness Floras, who admitted to having no personal lcnowledge on the incident, was
allowed to inject her own opinion as to who between the two (2) vessels was at fault. Petitioner claims
this is against Rule 130, Section 48 of the Rules of Court, which provides that the opinion of a witness is
inadmissible unless presented as an expert witness.53

Moreover, it alleges that Lopez's testimony was mere hearsay. As respondents' surveyor, the
information he proffered were obtained from the witnesses to the incident. Thus, these testimonies do
not qualify as part of res gestae.54

Lastly, petitioner maintains that Captain Cabeltes' testimony cannot be rejected for being self-serving,
considering that respondents were given the opportunity to cross-examine the witness in court.55

In its Comment, respondent CGU Insurance avers that the petition must be denied because it raises only
questions of facts, which are not within the ambit of a Rule 45 petition. Further, findings of facts in this
case must be deemed final and conclusive since the findings of the trial court are affirmed by the
appellate court.56

Further, petitioner's claim that Captain Cabletes' testimony was misconstrued by the trial court is
baseless.57 As shown by the evidence, it was M/V Aleson that hit M/V Romeo. Petitioner claims that
M/V Romeo failed to maneuver the vessel to avoid the collision. But, as the lower courts found, the
front hull of M/V Aleson rammed and hit the portside section of M/V Romeo.58

Respondent also claims that it is not true that the collision could have been avoided if there was a port-
to-port passing, considering that the Apo channel cannot accommodate two (2) vessels at a time.59
Further, it alleges that Captain Cabletes gave an inconsistent testimony. The trial judge, who had
witnessed and observed the demeanor of Captain Cabletes, concluded that his testimony was not quite
straightforward.60

For instance, Captain Cabletes claimed that it was his first time in the Apo channel when the incident
happened, but later retracted this statement and said that he has navigated the port at least eight (8)
times.61 Further, he testified that he did not know any vessels around the area at that time, but
contradicted himself by saying that he knew M/V Romeo was about to exit the channel. Lastly, he
agreed during trial that a bigger vessel like M/V Romeo is harder to maneuver than a small vessel like
M/V Aleson, which does not have any cargo, but again, retracted this statement later on.62

Apart from these inconsistent statements, it claimed that Captain Cabletes made several admissions
demonstrating his and his crew's negligence. Primarily, he admitted that the radio message allegedly
stating that M/V Aleson can proceed to the channel was only relayed to him by his crew, and that he did
not verify this information with the channel operator.63 His testimony further shows that the
instruction from the operator is to "stand by," which, in maritime parlance, merely meant to start the
engine, and not to the actual moving of the vessel.64

Moreover, Captain Cabletes admitted that M/V Aleson had sufficient time to maneuver the vessel to
avoid the collision. He testified that from the time he knew the radio message, it had more or less 20 to
30 minutes to reach the pier.65 Even when Captain Cabletes saw that M/V Romeo did not alter its
course, he did not attempt to call the latter nor to blow the vessel's horn to warn M/V
Romeo.66 Petitioner points out that this is against the Collision Regulations, which states that when
maneuvering is authorized or required, sound blasts are required to signal their course of action to the
other vessel.67

Lastly, petitioner argues that Captain Cabletes had the last clear chance to avoid the collision. He
divulged during his testimony that he had more or less 200 meters to maneuver the vessel, but chose
not to, fearing that M/V Aleson would run aground.68

In a separate Comment, respondent Candano Shipping points out that the petition raises purely
questions of fact. While petitioner questions the applicable law, what petitioner actually seeks is the
reversal of the factual findings of the trial court.69

Respondent Candano Shipping asserts that the decision and findings of the trial court should not be
disturbed, because it is based on evidence and is in accordance with the law. Petitioner argues that
respondents' evidence must be rejected for being hearsay, but in reality, it only rejects the finding of
liability which is based on the testimony of its own witness.70

Lastly, respondent Candano Shipping argues that it is immaterial whether the lower courts erred in
applying the presumption of negligence against common carriers, because it is clear from the evidence
on record that only petitioner is at fault for the collision.71

The case raises the following issues for resolution:

First, whether or not the petition may raise questions of fact;

Second, whether or not the testimonies of respondents' witnesses are inadmissible for being hearsay;
and
Third, whether or not there is cause of action against the petitioner. Subsumed under this are the
following issues: (1) whether or not the lower courts erred in applying the civil law provisions on
common carriers; and (2) whether or not the petitioner exercised the degree of diligence required.

As a rule, only questions of law may be raised in a Rule 45 petition. This Court is not a trier of facts, and
it will not delve into factual questions already settled by the lower courts.72 While this rule admits
exceptions, the party must demonstrate and prove that the petition falls under the exceptions.73

Here, the petition's resolution necessarily requires a re-evaluation of the lower courts' factual findings.
To resolve petitioner's liability, this Court is being asked to assess and weigh the evidence. Failing to
allege and demonstrate that this petition is an exception to the rule, We are bound to affirm the lower
courts' factual findings.

In any case, even if this Court proceeds to resolve the petition, it must still be denied.

II

Generally, a witness can only give a testimony with respect to matters of which he or she has personal
knowledge.74 Testimonies which are hearsay are inadmissible as evidence. The rules, however, allow for
certain exceptions. One of which is when the evidence is part of res gestae.15 Rule 130, Section 42
states:

SECTION 42. Part of res gestae. — Statements made by a person while a starting occurrence is taking
place or immediately prior or subsequent thereto with respect to the circumstances thereof, may be
given in evidence as part of res gestae. So, also, statements accompanying an equivocal act material to
the issue, and giving it a legal significance, may be received as part of the res gestae.76

Res gestae refers to "those circumstances which are the undesigned incidents of a particular litigated act
and which are admissible when illustrative of such act."77 It contemplates statements that were
"voluntarily and spontaneously made so nearly contemporaneous as to be in the presence of the
transaction which they illustrate and explain, and were made under such circumstances as necessarily to
exclude the idea of design or deliberation[.]"78

There are two (2) acts which form part of the res gestae: (1) in spontaneous exclamations where the res
gestae is the startling occurrence; and (2) in verbal acts where res gestae is the statement accompanying
the equivocal act.79

To be admissible under the first class of res gestae, the following elements must be present: (1) that the
principal act, the res gestae, be a startling occurrence; (2) that the statements were made before the
declarant had time to contrive or devise; (3) that the statements made must concern the occurrence in
question and its immediately attending circumstances.80

Under the second class of res gestae, the following requisites must be present: 1) the principal act to be
characterized must be equivocal; (2) the equivocal act must be material to the issue; (3) the statement
must accompany the equivocal act; and (4) the statements give a legal significance to the equivocal
act.81
In general, the test is whether or not an act, declaration, or exclamation is "so intimately interwoven or
connected with the principal fact or event that it characterizes as to be regarded as a part of the
transaction itself, and also whether it clearly negatives any premeditation or purpose to manufacture
testimony."82

The element of spontaneity is critical because the admissibility of res gestae is premised on human
experience. The rule presumes that an utterance made, immediately following a strong and stressful
stimulus, is an honest and uncontrolled reaction. In People v. Cudal,83 this Court explained:

The spontaneity of the utterance and its logical connection with the principal event, coupled with the
fact that the utterance was made while the declarant was still "strong" and subject to the stimulus of the
nervous excitement of the principal event, are deemed to preclude contrivance, deliberation, design or
fabrication, and to give to the utterance an inherent guaranty of trustworthiness. The admissibility of
such exclamation is based on experience that, under certain external circumstances of physical or
mental shock, a stress of nervous excitement may be produced in a spectator which stills the reflective
faculties and removes their control, so that the utterance which then occurs is a spontaneous and
sincere response to the actual sensations and perceptions already produced by the external shock. Since
this utterance is made under the immediate and uncontrolled domination of the senses, rather than
reason and reflection, and during the brief period when consideration of self-interest could not have
been fully brought to bear, the utterance may be taken as expressing the real belief of the speaker as to
the facts just observed by him.84 (Citations omitted)

However, there is no fixed rule in determining the time interval within which the statement must be
made for it to be deemed spontaneous. The factual parameters of each case will require a different
resolution.85 Nevertheless, the following factors may guide courts in determining whether there is
spontaneity in the declarant's statements, to wit: (1) the time that lapsed between the occurrence of
the act or transaction and the making of the statement; (2) the place where the statement was made;
(3) the condition of the declarant when he made the statement; (4) the presence or absence of
intervening events between the occurrence and the statement relative thereto; and (5) the nature and
circumstances of the statement itself.86

Here, petitioner assails the admissibility of witnesses Lopez and Flores' testimony, because they did not
have personal knowledge of what immediately transpired before, during, and after the collision of the
vessels.87 It claims that this is an erroneous application of the res gestae rule. We disagree.

Res gestae is one of the exceptions to the hearsay rule. It contemplates testimonial evidence on matters
not personally witnessed by the witness, but is relayed to him or her by a declarant.

Here, it appears that petitioner misconstrued the rule in assailing the application of res gestae merely on
the basis that the testimonies are hearsay.

The testimonies of the witnesses satisfy the requirements of the rule, in that: (1) the collision of the
vessels and sinking of M/V Romeo is a startling occurrence; (2) the statements made are with respect to
the collision; and (3) the statements of the declarants were made immediately after the incident.

As testified to by Lopez and Flores, when the collision happened in midnight of July 14, 2002, they
immediately went to the pier the following day, which was a few hours after the incident. The people
they interviewed witnessed the incident. In particular, Lopez was able to interview M/V Romeo's Chief
Engineer, along with the stevedores and the port's supervisors,88 while Flores's testimony was based on
the narration of M/V Romeo's chief mate.89

These declarants witnessed a collision and a sinking of a vessel which almost claimed their lives. The
spontaneity of their statements with respect to the incident satisfies the rule on res gestae, making
these testimonies admissible even if the declarants were not presented in the witness stand.

In any case, even if this Court disregards the testimonies of Flores and Lopez, the remaining evidence
still supports a finding of petitioners' liability.

III

A vessel, functioning as a common carrier, may be held liable for damages under Article 1759 of the Civil
Code. It states:

ARTICLE 1759. Common carriers are liable for the death of or injuries to passengers through the
negligence or wilful acts of the former's employees, although such employees may have acted beyond
the scope of their authority or in violation of the orders of the common carriers.

This liability of the common carriers does not cease upon proof that they exercised all the diligence of a
good father of a family in the selection and supervision of their employees.90

Further, a vessel is "bound to observe extraordinary diligence in the vigilance over the goods" it
transports.91 Eastern Shipping Lines, Inc. v. BPI/MS Insurance Corp.92 explains:

Common carriers, from the nature of their business and on public policy considerations, are bound to
observe extraordinary diligence in the vigilance over the goods transported by them. Subject to certain
exceptions enumerated under Article 1734 of the Civil Code, common carriers are responsible for the
loss, destruction, or deterioration of the goods. The extraordinary responsibility of the common carrier
lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier
for transportation until the same are delivered, actually or constructively, by the carrier to the
consignee, or to the person who has a right to receive them.

In maritime transportation, a bill of lading is issued by a common carrier as a contract, receipt and
symbol of the goods covered by it. If it has no notation of any defect or damage in the goods, it is
considered as a "clean bill of lading." A clean bill of lading constitutes prima facie evidence of the receipt
by the carrier of the goods as therein described.93 (Citations omitted)

The high degree of diligence exacted by the law creates a presumption against common carriers when
goods are lost, destroyed or deteriorated.  To overcome this presumption, common carriers must prove
that they exercised extraordinary diligence in the handling and transportation of the goods.94

In Regional Container Lines of Singapore v. The Netherlands Insurance Co. (Philippines),95 this Court
summarized the rules on the liability of a common carrier:

(1)    Common earners are bound to observe extraordinary diligence over the goods they transport,
according to all the circumstances of each case;
(2)    In the event of loss, destruction, or deterioration of the insured goods, common carriers are
responsible, unless they can prove that such loss, destruction, or deterioration was brought about by,
among others, "flood, storm, earthquake, lightning, or other natural disaster or calamity"; and

(3)    In all other cases not specified under Article 1734 of the Civil Code, common carriers are presumed
to have been at fault or to have acted negligently,  unless they observed  extraordinary
diligence.96  (Citation omitted)

In cases where cargos are lost, destroyed, or deteriorated, an action based on the contract of carriage
may be filed against the shipowner of the vessel based on Civil Code provisions on common earner.

For instance, in Eastern Shipping Lines, Inc., this Court held a shipowner liable because as a common
carrier, the shipowner failed to observe extraordinary diligence in the transportation of goods required
under Article 1734. It held that based on the bills of lading issued, the shipowner received the cargo in
good condition, and their arrival in bad order at their destination constitutes a presumption that the
carrier was negligent.97

Similarly, in cases of damages resulting from maritime collision, the Civil Code provisions on common
carrier are applicable if the cause of action is based on contract of carriage.

In Maritime Co. of the Philippines v. Court of Appeals?98 an insurer-subrogee filed an action for
damages against the shipowner based on a bill of lading. In this case, Acme Electrical and National
Development Company and Maritime Company (the Company) executed a bill of lading for the transport
of 800 packages of PVC compound loaded on the latter's vessel, SS Doña Nati. While in transit, the goods
were damaged after SS Dona Nati was rammed by M/V Yasushima Maru. Rizal Surety, the insurer of the
packages, paid the value of the lost goods and filed an action for damages against the Company.

The trial court dismissed the complaint and held that the case should have been filed against the owner
of M/V Yasushima Maru, who was at fault in the collision. It ruled that under the Code of Commerce, the
vessel at fault should be made responsible for the damage to the cargo; hence, Rizal Surety has no cause
of action against the Company.99

Ultimately, this ruling was reversed. This Court held that Rizal Surety has a cause of action against the
Company based on their contract. Further, this Court ruled that as the subrogee, Rizal Surety has a cause
of action against the Company based on the contract of carriage as evidenced by the bill of lading. Since
there are specific provisions in the Civil Code regulating the liability of a common carrier, it follows that
the Code of Commerce, which only applies supplementarily, need not be applied. Thus, Rizal Surety's
rights are to be determined by the Civil Code and not the Code of Commerce. This Court then ruled that
under Article 1734 of the Civil Code, the Company is a common carrier bound to exercise extraordinary
diligence in the transport of the cargo. Failing to do so, it was held responsible for the loss of goods.100

However, if the cause of action is based on maritime tort, the provisions of the Code of Commerce are
applicable. An action based on quasi-delict resulting from maritime collision is not specifically regulated
by the Civil Code, but by the Code of Commerce.101 Thus, if the cause of action is based on quasi-delict
and not on contract, the rules provided by the Code of Commerce applies.
This was clarified in National Development Company v. Court of Appeals and Development Insurance &
Surety Corporation.102 In this case, Development Insurance filed an action for damages against National
Development Company and Maritime Company (the Company). Similarly, the insured cargo loaded on
the latter's vessel SS Dona Nati were lost after the vessel was rammed by M/V Yasushima Maru. The trial
and appellate courts ruled in favor of the Development Insurance. The lower courts held the Company
liable under Article 827 of the Code of Commerce and    A concluded that both vessels are at fault.

This Court affirmed the ruling and held that the provisions of the Code of Commerce on collision applies.
Specifically, under Article 827, if the collision is imputable to both vessels, the vessels are solidarily liable
for the damages. In disregarding the Civil Code provisions on common carrier, this Court held that the
Code of Commerce must be applied because maritime "collision falls among matters not specifically
regulated by the Civil Code[.]"103 It appears, however, that the cause of action in this case was based on
tort and not contract. This Court held:

Moreover, the Couil held that both the owner and agent (Naviero) should be declared jointly and
severally liable, since the obligation which is the subject of the action had its origin in a tortious act and
did not arise from contract. Consequently, the agent, even though he may not be the owner of the
vessel, is liable to the shippers and owners of the cargo transported by it, for losses and damages
occasioned to such cargo, without prejudice, however, to his rights against the owner of the ship, to the
extent of the value of the vessel, its equipment, and the freight.104 (Citations omitted)

Taking into consideration the ruling of this Court in these cases, the applicable law in resolving
complaints for damages would depend on the complainant's cause of action. If the action is based on
contract of carriage, the Civil Code provisions on common carrier are applicable. On the other hand, if
the cause of action is based on tort, the provisions of the Code of Commerce on vessel collision would
govern.

Here, the cause of action of respondent CGU Insurance against petitioner is not based on the time
charter but on tort. Petitioner is not a common carrier with respect to any of the parties.

Accordingly, the applicable provisions are found in Articles 826 and 827 of the Code of Commerce, which
state:

ARTICLE 826. If a vessel should collide with another through the fault, negligence, or lack of skill of the
captain, sailing mate, or any other member of the complement, the owner of the vessel at fault shall
indemnify the losses and damages suffered, after an expert appraisal.

ARTICLE 827. If both vessels may be blamed for the collision, each one shall be liable for his own
damages, and both shall be jointly responsible for the losses and damages suffered by their cargoes.

To be cleared of liability under these provisions, a vessel must show that it exercised ordinary
diligence.105 This level of diligence is the diligence which "an ordinary prudent man would exercise with
regard to his own property."106

Applying this standard to petitioner, this Court finds that it failed to observe the diligence by the law.
Based on the testimony of its own witness, M/V Aleson was recklessly operated. Captain Cabeltes
admitted that M/V Romeo was still in the pier when M/V Aleson was about to enter the Apo channel.
Despite knowledge of this information, Captain Cabeltes failed to act with caution. He himself declared
that he was informed by the pier operator to standby and to not enter the wharf yet, but it still
proceeded.107

He later recanted this statement and claimed that a message was relayed to him saying that he may
enter the wharf already. Nevertheless, he confessed that he did not verify the veracity of the message.

In his testimony:

Atty. Abesames:

Q. Were you the one who personally received that radio message?

Witness:

A. Iyong duty officer.

Q. Did you verify if that message was correct?

A. Sinabi niya sa akin na, Sir, (umawag iyong Apo, papasok na tayo.

Q. So you had a radio officer?

A. Iyong in-charge na duly sa bridge. Everytime may duty ako sa bridge. Iyong ma-duty diyan, pay may
tawag iyong Apo Cement na papasok, sabihin mo sa akin. Gisingin mo ako ako dahil matulog ako.
Paggising sa akin, Sir, (umawag, Sir, papasok na raw tayo. Ganoon.

Q. So you did not go, take the radio personally to confirm whether that radio advice was correct or not?

A. Everytime ganoon man kami, Hang trip na kami do on medyo mat a gal lang na byahe, every time
ganoon sila tumatawag tapos hindi ko na kino-conjirm.108 (Emphasis supplied)

This   nonchalant  attitude  towards  his   duty   demonstrates   Captain Cabeltes'  lack of caution in
commanding M/V Aleson.    Due diligence demands that Captain Cabeltes ensures that every decision he
made is deliberate and calculated to guarantee the safety of M/V Aleson and nearby vessels. As the
captain, he is required under the law "[t]o be on deck at the time of sighting land and to take command
on entering and leaving ports[.]"109 Instead, Captain Cabeltes slept in and waited for his crew to
confirm whether they can proceed to enter. Thus, it is highly imprudent that Captain Cabeltes piloted
the vessel to the pier without personally verifying if M/V Romeo had already exited.

Moreover, even if Captain Cabeltes admittedly had the chance to avoid the collision, he chose not to
maneuver M/V Aleson, because he was worried that the vessel would run aground.110 This is despite
his acknowledgment that M/V Aleson was easier to maneuver than M/V Romeo because the latter was a
bigger vessel and was fully loaded at that time.111 His testimony reveals:

Q.   So, most probably when you saw for the first time that there was an outgoing vessel when you were
already going towards Apo wharf, more or less, you concluded that it was the M/V "Romeo"?

A.    Opo, Sir.

Q.    And you knew it was fully loaded. It... just came from loading?

A.    Opo, Sir.
Q.    It was a lot bigger than your vessel?

A.    Yes, Sir.

Q.    And as a master mariner or as the captain of the vessel or as a seafarer, you would understand and
you would agree with me that a fully loaded big vessel is much harder to maneuver than a small vessel
that does not carry anything?

A.    Tama po.

Q.   Because at that time you saw it for the first time and when you made that request for a port to port
passing, you knew already that given the things you see the courses of your vessel, you will meet each
other?

A.    Yes, Sir.

Q. That early, you knew of the danger of collision, correct? A. Yes, Sir, dahil head on kami, nakaganito
ang mga barko namin eh.112 (emphasis supplied)

He likewise acknowledged that he failed to send sound signals to M/V Romeo in violation of the rules of
navigation.113

Further, Captain Cabeltes' claim that M/V Aleson was navigating slowly is contradicted by evidence. The
strong impact of the collision is evidenced by the gaping hole created by the front hull of M/V Aleson,
which has caused M/V Romeo to instantly sink within five (5) minutes. Further, the impact and location
of the collision readily confirms that M/V Aleson was not navigating slowly as Captain Cabeltes
claims.114

Petitioner's contention that Captain Cabeltes's testimony was twisted and misinterpreted by the lower
courts fails to convince. It is a settled rule that the lower court's appreciation of the witnesses' testimony
deserves the highest respect because it "is best equipped to make the assessment of the witnesses'
credibility and demeanor on the witness stand[.]"115 Absent any showing of clear misappreciation, the
trial court's findings are generally not disturbed by this Court. In any case, petitioner did not address
how Captain Cabeltes's testimony was misappreciated when his clear statements on record support the
finding of the lower courts.

Considering the evidence and the relevant law, this Court finds no cogent reason to depart from the
ruling of the lower courts.1âшphi1 With respect to respondent Candano Shipping, this Court affirms the
findings of the lower courts which held that respondent Candano Shipping exercised the required
diligence as a common carrier. As established in the trial court, M/V Romeo was, in all respects,
seaworthy and with full complement of officers and crew.116 The testimony likewise confirmed that
M/V Romeo called and requested M/V Aleson to slow down, because it had the right of way. On the
other hand, petitioner must be held liable for the damages caused by its vessel, M/V Aleson. Despite
petitioner's contention, this Court is not convinced that Captain Cabeltes exercised ordinary diligence in
commanding M/V Aleson.

Petitioner failed to show that the trial and appellate courts overlooked or misconstrued significant
evidence that would alter the resolution of the case. To reiterate, findings of the trial court, especially
when affirmed by the Court of Appeals, deserve great respect and are binding upon this Court. In this
case, a review of the evidence and law fails to compel this Court to disregard the factual findings of the
lower courts.

WHEREFORE, premises considered, the petition for review is hereby DENIED. The Decision and
Resolution of the Court of Appeals in CA-G.R. CV. No. 95628 is AFFIRMED.

SO ORDERED.

G.R. No.197530               July 9, 2014

ABOITIZ EQUITY VENTURES, INC., Petitioner,

vs.
VICTOR S. CHIONGBIAN, BENJAMIN D. GOTHONG, and CARLOS A. GOTHONG LINES, INC.
(CAGLI), Respondents.

DECISION

LEONEN, J.:

This is a petition for review on certiorari with an application for the issuance of a temporary restraining
order and/or writ of preliminary injunction under Rule 45 of the Rules of Court. This petition prays that
the assailed orders dated May 5, 20111 and June 24, 20112 of the Regional Trial Court, Cebu City, Branch
10 in Civil Case No. CEB-37004 be nullified and set aside and that judgment be rendered dismissing with
prejudice the complaint3 dated July 20, 2010 filed by respondents Carlos A. Gothong Lines, Inc. ("CAGLI")
and Benjamin D. Gothong. On January 8, 1996, Aboitiz Shipping Corporation ("ASC"), principally owned
by the Aboitiz family, CAGLI, principally owned by the Gothong family, and William Lines, Inc.("WLI"),
principally owned by the Chiongbian family, entered into anagreement (the "Agreement"),4 whereby
ASC and CAGLI would transfer their shipping assets to WLI in exchange for WLI’s shares of stock.5 WLI, in
turn, would run their merged shipping businesses and, henceforth, be known as WG&A, Inc. ("WG&A").6

Sec. 11.06 of the Agreement required all disputes arising out of or in connection with the Agreement
tobe settled by arbitration:

11.06 Arbitration

All disputes arising out of or in connection with this Agreement including any issue as to this
Agreement’s validity or enforceability, which cannot be settled amicably among the parties, shall be
finally settled by arbitration in accordance with the Arbitration Law (Republic Act No. 876) by an
arbitration tribunal composed of four (4) arbitrators. Each of the parties shall appoint one (1) arbitrator,
the three (3) to appoint the fourth arbitrator who shall act as Chairman. Any award by the arbitration
tribunal shall be final and binding upon the parties and shall be enforced by judgment of the Courts of
Cebu or Metro Manila.7

Among the attachments to the Agreement was Annex SL-V.8 This was a letter dated January 8,1996,
from WLI, through its President (herein respondent) Victor S. Chiongbian addressed to CAGLI, through
its Chief Executive Officer Bob D. Gothong and Executive Vice President for Engineering (herein
respondent) Benjamin D. Gothong. On its second page, Aqnnex SL-V bore the signatures ofBob D.
Gothong and respondent Benjamin D. Gothong by way of a conforme on behalf of CAGLI.
Annex SL-V confirmed WLI’s commitment to acquire certain inventories of CAGLI. These inventories
would havea total aggregate value of, at most, ₱400 million, "as determinedafter a special examination
of the [i]nventories."9 Annex SL-V also specificallystated that such acquisition was "pursuant to the
Agreement."10

The entirety of Annex SL-V’s substantive portion reads:

We refer to the Agreement dated January 8, 1996 (the "Agreement") among William Lines, Inc.
("Company C"), Aboitiz Shipping Corporation ("Company A") and Carlos A. Gothong Lines, Inc.
("Company B") regarding the transfer of various assets of Company A and Company B to Company C in
exchangefor shares of capital stock of Company C. Terms defined in the Agreement are used herein as
therein defined.

This will confirm our commitment to acquire certain spare parts and materials inventory (the
"Inventories") of Company B pursuant to the Agreement.

The total aggregate value of the Inventories to be acquired shall not exceed ₱400 Million as determined
after a special examination of the Inventories as performed by SGV & Co. to be completed on or before
the Closing Date under the agreed procedures determined by the parties.

Subject to documentation acceptable to both parties, the Inventories to be acquired shall be

determined not later than thirty (30) days after the Closing Date and the payments shall be made in
equal quarterly instalments over a period of two years with the first payment due on March 31, 1996.11

Pursuant to Annex SL-V, inventories were transferred from CAGLI to WLI. These inventories were
assessed to have a value of 514 million, which was later adjusted to 558.89 million.12 Of the total
amount of 558.89 million, "CAGLIwas paid the amount of 400 Million."13 In addition to the payment of
400 million,petitioner Aboitiz Equity Ventures ("AEV") noted that WG&A shares with a book value of
38.5 million were transferred to CAGLI.14

As there was still a balance, in2001, CAGLI sent WG&A (the renamed WLI) demand letters "for the return
of or the payment for the excess [i]nventories."15 AEV alleged that to satisfy CAGLI’s demand,
WLI/WG&A returned inventories amounting to 120.04 million.16 As proof of this, AEV attached copies of
delivery receipts signed by CAGLI’s representatives as Annex "K" of the present petition.17

Sometime in 2002, the Chiongbian and Gothong families decided to leave the WG&A enterprise and sell
their interest in WG&A to the Aboitiz family. As such, a share purchase agreement18 ("SPA") was entered
into by petitioner AEV and the respective shareholders groups of the Chiongbians and Gothongs. In the
SPA, AEV agreedto purchase the Chiongbian group's 40.61% share and the Gothong group's 20.66%
share in WG&A’s issued and outstanding stock.19

Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute arising from the SPA.
It reads:

6.5 Arbitration. Should there be any dispute arising between the parties relating to this Agreement
including the interpretation or performance hereof which cannot beresolved by agreement of the
parties within fifteen (15) days after written notice by a party to another, such matter shall then be
finally settled by arbitration in Cebu City in accordance with the Philippine Arbitration Law. Substantive
aspects of the dispute shall be settled by applying the laws of the Philippines. The decision of the
arbitrators shall be final and binding upon the parties hereto and the expense of arbitration (including
without limitation the award of attorney’s fees to the prevailing party) shall be paid as the arbitrators
shall determine.20

Section 6.8 of the SPA further provided that the Agreement (of January 8, 1996) shall be deemed
terminated except its Annex SL-V. It reads:

6.8 Termination of Shareholders Agreement. The Buyer and the Sellers hereby agree that on Closing, the
Agreement among Aboitiz Shipping Corporation, Carlos A. Gothong Lines, Inc. and William Lines, Inc.
dated January 8, 1996, as the same has been amended from time to time (the "Shareholders’
Agreement") shall all be considered terminated, except with respect to such rights and obligations that
the parties to the Shareholders’ Agreement have under a letter dated January 8, 1996 (otherwise known
as "SL-V") from William Lines, Inc. to Carlos A. Gothong Lines, Inc. regarding certain spare parts and
materials inventory, which rights and obligations shall survive through the date prescribed by the
applicable statute of limitations.21

As part of the SPA, the parties entered into an Escrow Agreement22 whereby ING Bank N.V.-Manila
Branch was to take custody of the shares subject of the SPA.23 Section 14.7 of the Escrow Agreement
provided that all disputes arising from it shall be settled through arbitration:

14.7 All disputes, controversies or differences which may arise by and among the parties hereto out of,
or in relation to, or in connection with this Agreement, orfor the breach thereof shall be finally settled
by arbitration in Cebu City in accordance with the Philippine Arbitration Law. The award rendered by the
arbitrator(s) shall be final and binding upon the parties concerned. However, notwithstanding the
foregoing provision, the parties reserve the right to seek redress before the regular court and avail of
any provisional remedies in the event of any misconduct, negligence, fraud or tortuous acts which arise
from any extra-contractual conduct that affects the ability ofa party to comply with his obligations and
responsibilities under this Agreement.24

As a result of the SPA, AEV became a stockholder of WG&A. Subsequently, WG&A was renamed Aboitiz
Transport Shipping Corporation ("ATSC").25

Petitioner AEV alleged that in2008, CAGLI resumed making demands despite having already received
120.04 million worth of excess inventories.26 CAGLI initially made its demand to ATSC (the renamed
WLI/WG&A) through a letter27 dated February 14, 2008. As alleged by AEV, however, CAGLI
subsequently resorted to a "shotgun approach"28 and directed its subsequent demand letters to AEV29 as
well as to FCLC30 (a company related to respondent Chiongbian).

AEV responded to CAGLI’s demands through several letters.31 In these letters, AEV rebuffed CAGLI's
demands noting that: (1) CAGLI already received the excess inventories;(2) it was not a party to CAGLI's
claim as it had a personality distinct from WLI/WG&A/ATSC; and (3) CAGLI's claim was already barred by
prescription.

In a reply-letter32 dated May 5, 2008, CAGLI claimed that it was unaware of the delivery to it of the
excess inventories and asked for copies of the corresponding delivery receipts.33 CAGLI threatened that
unless it received proof of payment or return ofexcess inventories having been made on or before
March 31, 1996, it would pursue arbitration.34
In letters written for AEV (the first dated October 16, 2008 by Aboitiz and Company, Inc.’s Associate
General Counsel Maria Cristina G. Gabutina35 and the second dated October 27, 2008 by SyCip Salazar
Hernandez and Gatmaitan36), it was noted that the excess inventories were delivered to GT Ferry
Warehouse.37 Attached to these letters were a listing and/or samples38 of the corresponding delivery
receipts. In these letters it was also noted that the amount of excess inventories delivered (120.04
million) was actually in excess of the value of the supposedly unreturned inventories (119.89
million).39 Thus, it was pointed out that it was CAGLI which was liable to return the difference between
120.04 million and 119.89 million.40 Its claims not having been satisfied, CAGLI filed on November 6,
2008 the first of two applications for arbitration ("first complaint")41 against respondent Chiongbian,
ATSC, ASC, and petitioner AEV, before the Cebu City Regional Trial Court, Branch 20. The first complaint
was docketed as Civil Case No. CEB-34951.

In response, AEV filed a motion to dismiss42 dated February 5, 2009. AEV argued that CAGLI failed to
state a cause of action as there was no agreement to arbitrate between CAGLI and AEV.43 Specifically,
AEV pointed out that: (1) AEV was never a party to the January 8, 1996 Agreement or to its Annex SL-
V;44 (2) while AEV is a party to the SPA and Escrow Agreement, CAGLI's claim had no connection to either
agreement; (3) the unsigned and unexecuted SPA attached to the complaint cannot be a source of any
right to arbitrate;45 and (4) CAGLI did not say how WLI/WG&A/ATSC's obligation to return the excess
inventories can be charged to AEV.

On December 4, 2009, the Cebu City Regional Trial Court, Branch 20 issued an order46 dismissing the first
complaint with respect to AEV. It sustained AEV’s assertion that there was no agreement binding AEV
and CAGLI to arbitrate CAGLI’s claim.47 Whether by motion for reconsideration, appeal or other means,
CAGLI did not contest this dismissal.

On February 26, 2010, the Cebu CityRegional Trial Court, Branch 20 issued an order48 directing the
parties remaining in the first complaint (after the discharge of AEV) to proceed with arbitration.

The February 26, 2010 order notwithstanding, CAGLI filed a notice of dismissal49 dated July 8, 2010,
withdrawing the first complaint. In an order50 dated August 13, 2010, the Cebu City Regional Trial Court,
Branch 20 allowed this withdrawal.

ATSC (the renamed WLI/WG&A) filed a motion for reconsideration51 dated September 20, 2010 to the
allowance of CAGLI's notice of dismissal. This motion was denied in an order52 dated April 15, 2011.

On September 1, 2010, while the first complaint was still pending (n.b., it was only on April 15, 2011 that
the Cebu City Regional Trial Court, Branch 20 denied ATSC’s motion for reconsideration assailing the
allowance of CAGLI’s notice of disallowance), CAGLI, now joined by respondent Benjamin D. Gothong,
filed a second application for arbitration ("second complaint")53 before the Cebu City Regional Trial
Court, Branch 10. The second complaint was docketed as Civil Case No. CEB-37004 and was also in view
of the return of the same excess inventories subject of the first complaint.

On October 28, 2010, AEV filed a motion to dismiss54 the second complaint on the following
grounds:55 (1) forum shopping; (2) failure to state a cause of action; (3) res judicata; and (4) litis
pendentia.

In the first of the two (2) assailed orders dated May 5, 2011,56 the Cebu City Regional Trial Court, Branch
10 denied AEV's motion to dismiss.
On the matter of litis pendentia, the Regional Trial Court, Branch 10 noted that the first complaint was
dismissed with respect to AEV on December 4, 2009, while the second complaint was filed on
September 1, 2010. As such, the first complaint was no longer pending at the time of the filing of the
second complaint.57 On the matter of res judicata, the trial court noted that the dismissal without
prejudice of the first complaint "[left] the parties free to litigate the matter in a subsequent action, as
though the dismiss[ed] action had not been commenced."58 It added that since litis pendentia and res
judicata did not exist, CAGLI could not be charged with forum shopping.59 On the matter of an
agreement to arbitrate, the Regional Trial Court, Branch 10 pointed to the SPA as "clearly express[ing]
the intention of the parties to bring to arbitration process all disputes, if amicable settlement fails."60 It
further dismissed AEV’s claim that it was not a party to the SPA, as "already touching on the merits of
the case"61 and therefore beyond its duty "to determine if they should proceed to arbitration or not."62

In the second assailed order63 dated June 24, 2011, the Cebu City Regional Trial Court, Branch 10
deniedAEV's motion for reconsideration.

Aggrieved, AEV filed the present petition.64 AEV asserts that the second complaint is barred by res
judicata and litis pendentia and that CAGLI engaged in blatant forum shopping.65 It insists that it is not
bound by an agreement to arbitrate with CAGLI and that, even assuming that it may be required to
arbitrate, it is being ordered to do so under terms that are "manifestly contrary to the . . . agreements
on which CAGLI based its demand for arbitration."66

For resolution are the following issues:

I. Whether the complaint in Civil Case No. CEB-37004 constitutes forum shopping and/or is barred by res
judicata and/or litis pendentia

II. Whether petitioner, Aboitiz Equity Ventures, Inc., is bound by an agreement to arbitrate with Carlos
A. Gothong Lines, Inc., with respect to the latter’s claims for unreturned inventories delivered to William
Lines, Inc./WG&A, Inc./Aboitiz Transport System Corporation

AEV availed of the wrong

remedy in seeking relief from
this court

Before addressing the specific mattersraised by the present petition, we emphasize that AEV is in error
inseeking relief from this court via a petition for review on certiorari under Rule45 of the Rules of Court.
As such, we are well in a position to dismiss the present petition outright. Nevertheless, as the actions of
the Cebu City Regional Trial Court, Branch 10 are tainted with grave abuse of discretion amounting to
lack or excess of jurisdiction, this court treats the present Rule 45 petition as a Rule 65 petition and gives
it due course.

A petition for review on certiorari under Rule 45 is a mode of appeal. This is eminently clear from the
very title and from the first section of Rule 45 (as amended by A.M. No. 07-7-12-SC):

Rule 45
APPEAL BY CERTIORARITO THE SUPREME COURT

SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorarifrom a
judgment, final order or resolution of the Court of Appeals, the Sandiganbayan, the Court of Tax
Appeals, the Regional Trial Court or other courts, whenever authorized by law, may file with the
Supreme Court a verified petition for review on certiorari. The petition may include an application for a
writ of preliminary injunction or other provisional remedies and shall raise only questions of law, which
must be distinctly set forth. The petitioner may seek the same provisional remedies by verified motion
filed inthe same action or proceeding at any time during its pendency. (Emphasis supplied)

Further, it is elementary that anappeal may only be taken from a judgment or final order that
completely disposes of the case.67 As such, no appeal may be taken from an interlocutory order68 (i.e.,
"one which refers to something between the commencement and end of the suit which decides some
point or matter but it is not the final decision of the whole controversy"69). As explained in Sime Darby
Employees Association v. NLRC,70 "[a]n interlocutory order is not appealable until after the rendition of
the judgment on the merits for a contrary rule would delay the administration of justice and unduly
burden the courts."71

An order denying a motion to dismiss is interlocutory in character. Hence, it may not be the subject of
an appeal. The interlocutory nature of an order denying a motion to dismiss and the remedies for
assailing such an order were discussed in Douglas Lu Ym v. Nabua:72

An order denying a motion to dismiss is an interlocutory order which neither terminates nor finally
disposes of a case, as it leaves something to be done by the court before the case is finally decided on
the merits. As such, the general rule is that the denial of a motion to dismiss cannot be questioned in a
special civil action for certiorariwhich is a remedy designed to correct errors ofjurisdiction and not errors
of judgment. Neither can a denial of a motion todismiss be the subject of an appeal unless and until a
final judgment or order is rendered.In order to justify the grant of the extraordinary remedy of
certiorari, the denial of the motion to dismiss must have been tainted with grave abuse of discretion
amounting to lack or excess of jurisdiction.73 (Emphasis supplied)

Thus, where a motion to dismiss is denied, the proper recourse is for the movant to file an
answer.74 Nevertheless, where the order denying the motion to dismiss is tainted with grave abuse of
discretion amounting to lack or excess of jurisdiction, the movant may assail such order via a Rule 65
(i.e., certiorari, prohibition, and/or mandamus) petition. This is expressly recognized in the third
paragraph of Rule 41, Section 1 of the Rules of Court.75 Following the enumeration in the second
paragraph of Rule 41, Section 1 of the instances when an appeal may not be taken, the third paragraph
specifies that "[in] any of the foregoing circumstances, the aggrieved party may file an appropriate
special civil action as provided in Rule 65."76

Per these rules, AEV is in error for having filed what it itself calls a "Petition for Review on Certiorari
[Appeal by Certiorari under Rule 45 of the Rules of Court]."77 Since AEV availed of the improper remedy,
this court is well in a position to dismiss the present petition.

Nevertheless, there have been instances when a petition for review on certiorari under Rule 45 was
treated by this court as a petition for certiorari under Rule 65. As explained in China Banking Corporation
v. Asian Construction and Development Corporation:78

[I]n many instances, the Court has treated a petition for review on certiorariunder Rule 45 as a petition
for certiorari under Rule 65 of the Rules of Court, such as in cases where the subject of the recourse was
one of jurisdiction, or the act complained of was perpetrated by a court with grave abuse of discretion
amounting to lack or excess of jurisdiction.79

In this case, the May 5, 2011 and June 24, 2011 orders of the Cebu City Regional Trial Court, Branch 10 in
Civil Case No. CEB-37004 are assailed for having denied AEV’s motion todismiss despite: first, the second
complaint having been filed in a manner constituting forum shopping; second, the prior judgment on the
merits made in Civil Case No. CEB-34951, thereby violating the principle ofres judicata; and third, the
(then) pendency of Civil Case No. CEB-34951 with respect to the parties that, unlike AEV, were not
discharged from the case, thereby violating the principle of litis pendentia. The same orders are assailed
for having allowed CAGLI’s application for arbitration to continue despite supposedly clear and
unmistakable evidence that AEV is not bound by an agreement to arbitrate with CAGLI.

As such, the Cebu City, Regional Trial Court, Branch 10’s orders are assailed for having been made with
grave abuse of discretion amounting to lack or excess of jurisdiction in that the Cebu City Regional Trial
Court, Branch 10 chose to continue taking cognizance of the second complaint, despite there being
compelling reasons for its dismissal and the Cebu City, Regional Trial Court Branch 20’s desistance.
Conformably, we treat the present petition as a petition for certiorari under Rule 65 of the Rules of
Court and give it due course.

The complaint in Civil Case

No. CEB-37004 constitutes
forum shopping and is barred
by res judicata

The concept of and rationale against forum shopping were explained by this court in Top Rate
Construction & General Services, Inc. v. Paxton Development Corporation:80

FORUM SHOPPING is committed by a party who institutes two or more suits in different courts, either
simultaneously or successively, in order to ask the courts to rule on the same or related causes or to
grant the same or substantially the same reliefs, on the supposition that one or the other court would
make a favorabledisposition or increase a party's chances of obtaining a favorable decision or action. It
is an act of malpractice for it trifles with the courts, abuses their processes, degrades the administration
of justice and adds to the already congested court dockets. What is critical is the vexation brought upon
the courts and the litigants by a party who asks different courts to rule on the same or related causes
and grant the same or substantially the same reliefs and in the process creates the possibility of
conflicting decisions being rendered by the different fora upon the same issues, regardless of whether
the court in which one of the suits was brought has no jurisdiction over the action.81

Equally settled is the test for determining forum shopping. As this court explained in Yap v. Chua:82

To determine whether a party violated the rule against forum shopping, the most important factor toask
is whether the elements of litis pendentiaare present, or whether a final judgment in one case will
amount to res judicatain another; otherwise stated, the test for determining forum shopping is whether
in the two (or more) cases pending, there is identity of parties, rights or causes of action, and reliefs
sought.83

Litis pendentia "refers to that situation wherein another action is pending between the same parties for
the same cause ofaction, such that the second action becomes unnecessary and vexatious."84 It requires
the concurrence of three (3) requisites: "(1)the identity of parties, or at least such as representing the
same interests in both actions; (2) the identity of rights asserted and relief prayed for,the relief being
founded on the same facts; and (3) the identity of the two cases such that judgment in one, regardless
of which party issuccessful, would amount tores judicatain the other."85

In turn, prior judgment or res judicata bars a subsequent case when the following requisites concur: "(1)
the former judgment is final; (2) it is rendered by a court having jurisdiction over the subject matter and
the parties; (3) it is a judgment or an order on the merits; (4) there is — between the first and the
second actions — identityof parties, of subject matter, and of causes of action."86

Applying the cited concepts and requisites, we find that the complaint in Civil Case No. CEB-37004 is
barred byres judicata and constitutes forum shopping.

First, between the first and second complaints, there is identity of parties. The first complaint was
brought by CAGLI as the sole plaintiff against Victor S. Chiongbian, ATSC, and AEV as defendants. In the
second complaint, CAGLI was joined by Benjamin D. Gothong as (co-)plaintiff. As to the defendants,
ATSC was deleted while Chiongbian and AEV were retained.

While it is true that the parties to the first and second complaints are not absolutely identical, this court
has clarified that, for purposes of forum shopping, "[a]bsolute identity of parties is not required [and
that it] is enough that there is substantial identity of parties."87

Even as the second complaint alleges that Benjamin D. Gothong "is . . . suing in his personal
capacity,"88 Gothong failed to show any personal interest in the reliefs sought by the second complaint.
Ultimately, what is at stake in the second complaint is the extent to which CAGLI may compel AEV and
Chiongbian to arbitrate in order that CAGLI may then recover the value of its alleged unreturned
inventories. This claim for recovery is pursuant to the agreement evinced in Annex SL-V. Annex SL-V was
entered into by CAGLI and not by Benjamin D. Gothong. While it is true that Benjamin D. Gothong, along
with Bob D. Gothong, signed Annex SL-V, he did so only in a representative, and not in a personal,
capacity. As such, Benjamin D. Gothong cannot claim any right that personally accrues to him on
account of Annex SL-V. From this, it follows that Benjamin D. Gothong is not a real party in interest —
"one who stands to be benefitted or injured by the judgment in the suit or the party entitled to the
avails of the suit"89 — and that his inclusion in the second complaint is an unnecessary superfluity.

Second, there is identity in subject matter and cause of action. There is identity in subject matter as both
complaints are applications for the same relief. There is identity in cause ofaction as both complaints are
grounded on the right to be paid for or to receive the value of excess inventories (and the supposed
corresponding breach thereof) as spelled out in Annex SL-V.

The first and second complaints are both applications for arbitration and are founded on the same
instrument — Annex SL-V. Moreover, the intended arbitrations in both complaintscater to the
sameultimate purpose, i.e., that CAGLI may recover the value of its supposedly unreturned inventories
earlier delivered to WLI/WG&A/ATSC.

In both complaints, the supposedpropriety of compelling the defendants to submit themselves to

arbitration are anchored on the same bases: (1) Section 6.8 of the SPA, which provides that the January
8, 1996 Agreement shall be deemed terminatedbut that the rights and obligations arising from Annex
SL-V shall continue to subsist;90 (2) Section 6.5 of the SPA, which requires arbitration as the mode for
settling disputes relating to the SPA;91 and, (3) defendants’ refusal to submit themselves to arbitration
vis-a-vis Republic Act No. 876, which provides that "[a] party aggrieved by the failure, neglect or refusal
of another to perform under an agreement in writing providing for arbitration may petition the court for
an order directing that such arbitration proceed in the manner provided for in such agreement."92

Both complaints also rely on the same factual averments:93

1. that ASC, CAGLI, and WLI entered into an agreement on January 8, 1996;

2. that under Annex SL-V of the Agreement, WLI/WG&A "committed to acquire certain [inventories], the
total aggregate value of which shall not exceed ₱400 Million";94

3. that after examination, it was ascertained that the value of the transferred inventories exceeded ₱400
million;

4. that pursuant to Annex SL-V, WG&A paid CAGLI ₱400 million but that the former failed to return or
pay for spare parts representing a value in excess of ₱400 million;

5. "[t]hat on August 31, 2001, [CAGLI] wrote the WG&A through its AVP Materials Management, Ms.
Concepcion M. Magat, asking for the return of the excess spare parts";95

6. that on September 5, 2001, WG&A’s Ms. Magat replied that the matter is beyond her authority level
and that she must elevate it to higher management;

7. that several communications demanding the return of the excess spare parts were sent to WG&Abut
these did not elicit any response; and

8. "[t]hat the issue of excess spare parts, was taken over by events, when on July 31, 2002,"96 the
Chiongbians and Gothongs entered into an Escrow Agreement with AEV.

Third, the order dated December 4, 2009 of the Cebu City Regional Trial Court, Branch 20, which
dismissed the first complaint with respect to AEV, attained finality when CAGLI did not file a motion for
reconsideration, appealed, or, in any other manner, questioned the order.

Fourth, the parties did not dispute that the December 4, 2009 order was issued by a court having
jurisdiction over the subject matter and the parties. Specifically as to jurisdiction over the
parties,jurisdiction was acquired over CAGLI as plaintiff when it filed the first complaint and sought relief
from the Cebu City Regional Trial Court, Branch 20; jurisdiction over defendants AEV, ATSC, and Victor
S.Chiongbian was acquired with the service of summons upon them. Fifth, the dismissal of the first
complaint with respect to AEV was a judgment on the merits. As explained in Cabreza, Jr. v. Cabreza:97

A judgment may be considered as one rendered on the merits "when it determines the rights and
liabilities of the parties based on the disclosed facts, irrespective of formal, technical or
dilatoryobjections"; or when the judgment is rendered "aftera determination of which party is right, as
distinguished from a judgment rendered upon some preliminary or formal or merely technical point."98

Further, as this court clarified in Mendiola v. Court of Appeals,99 "[i]t is not necessary . . . that there [be]
a trial"100 in order that a judgment be considered as one on the merits.

Prior to issuing the December 4, 2009 order dismissing the first complaint with respect to AEV, the Cebu
City Regional Trial Court, Branch 20 allowed the parties the full opportunity to establish the facts and to
ventilate their arguments relevant to the complaint. Specifically, the Cebu City Regional Trial Court,
Branch 20 admitted: 1) AEV’s motion to dismiss;101 2) CAGLI’s opposition to the motion to dismiss;102 3)
AEV’s reply and opposition;103 4) CAGLI’s rejoinder;104 and 5) AEV’s surrejoinder.105

Following these, the Cebu City Regional Trial Court, Branch 20 arrived at the following findings and made
a definitive determination that CAGLI had no right to compel AEV to subject itself to arbitration with
respect to CAGLI’s claims under Annex SL-V:

After going over carefully the contentions and arguments of both parties, the court has found that no
contract or document exists binding CAGLI and AEV to arbitrate the former’s claim. The WLI Letter upon
which the claim is based confirms only the commitment of William Lines, Inc. (WLI) to purchase certain
material inventories from CAGLI. It does not involve AEV. The court has searched in vain for any
agreement or document showing that said commitment was passed on to and assumed by AEV. Such
agreement or document, if one exists, being an actionable document, should have been attached to the
complaint. While the Agreement of January 8, 1996 and the Share Purchase Agreement provide for
arbitration of disputes, they refer to disputes arising from or in connection with the Agreements
themselves. No reference is made, as included therein, to the aforesaid commitment of WLI or to any
claim that CAGLI may pursue based thereon or relative thereto. Section 6.8 of the Share Purchase
Agreement, cited by plaintiff CAGLI, does not incorporate therein, expressly or impliedly, the WLI
commitment above-mentioned. It only declares that the rights and obligations of the parties under the
WLI Letter shall survive even after the termination of the Shareholder’s Agreement. It does not speak of
arbitration. Finally, the complaint does not allege the existence of a contract obliging CAGLI and AEV to
arbitrate CAGLI’s claim under the WLI Letter. Consequently, there is no legal or factual basis for the
present complaint for application for arbitration.106 (Emphasis supplied)

In the assailed order dated May 5, 2011, the Cebu City Regional Trial Court, Branch 10 made much of the
Cebu City Regional Trial Court, Branch 20’s pronouncement in the latter’s December 4, 2009 order that
"the [first] complaint fails to state a cause of action."107 Based on this, the Cebu City Regional Trial Court,
Branch 10 concluded that the dismissal of the first complaint was one made without prejudice, thereby
"leav[ing] the parties free to litigate the matter ina subsequent action, as though the dismissal [sic]
action had not been commenced."108

The Cebu City Regional Trial Court, Branch 10 is in serious error. In holding that the second complaint
was not barred by res judicata, the Cebu City Regional Trial Court, Branch 10 ignored established
jurisprudence.

Referring to the earlier cases of Manalo v. Court of Appeals109 and Mendiola v. Court of Appeals,110 this
court emphasized in Luzon Development Bank v. Conquilla111 that dismissal for failure to state a cause of
action may very well be considered a judgment on the merits and, thereby, operate as res judicata on a
subsequent case:

[E]ven a dismissal on the ground of "failure to state a cause of action" may operate as res judicata on a
subsequent case involving the same parties, subject matter, and causes of action, provided that the
order of dismissalactually ruled on the issues raised.What appears to be essential to a judgment on the
merits is that it be a reasoned decision, which clearly states the facts and the law on which it is
based.112 (Emphasis supplied)
To reiterate, the Cebu City Regional Trial Court, Branch 20 made a definitive determination that CAGLI
had no right to compel AEV to subject itself to arbitrationvis-a-vis CAGLI’s claims under Annex SL-V. This
determination was arrived at after due consideration of the facts established and the arguments
advancedby the parties. Accordingly, the Cebu City Regional Trial Court, Branch 20’s December 4, 2009
order constituted a judgment on the merits and operated as res judicata on the second complaint.

In sum, the requisites for res judicata have been satisfied and the second complaint should, thus, have
been dismissed. From this, it follows that CAGLI committed an act of forum shopping in filing the second
complaint. CAGLI instituted two suits in two regional trial court branches, albeit successively and not
simultaneously. It asked both branches to rule on the exact same cause and to grant the exact same
relief. CAGLI did so after it had obtained an unfavorable decision (at least with respect to AEV) from the
Cebu City Regional Trial Court, Branch 20. These circumstances afford the reasonable inference that the
second complaint was filed in the hopes of a more favorable ruling.

Notwithstanding our pronouncements sustaining AEV’s allegations that CAGLI engaged in forum
shopping and that the second complaint was barred by res judicata, we find that at the time of the filing
of the second complaint, AEV had already been discharged from the proceedings relating to the first
complaint. Thus, asbetween AEV and CAGLI, the first complaint was no longer pending at the time of the
filing of the second complaint. Accordingly, the second complaint could not have been barred by litis
pendentia.

There is no agreement
binding AEV to arbitrate
with CAGLI on the latter’s
claims arising from Annex SL-V

For arbitration to be proper, it is imperative thatit be grounded on an agreement between the parties.
This was adequately explained in Ormoc Sugarcane Planters’ Association,Inc. v. Court of Appeals:113

Section 2 of R.A. No. 876 (the Arbitration Law) pertinently provides:

Sec. 2. Persons and matterssubject to arbitration. – Two or more persons or parties may submit to the
arbitration of one or more arbitrators any controversy existing between them at the time of the
submission and which may be the subject of an action, or the parties to any contract may in such
contract agree to settle by arbitration a controversy thereafter arising between them. Such submission
or contract shall be valid, enforceable and irrevocable, save upon such grounds as exist at law for the
revocation of any contract. . . . (Emphasis ours)

The foregoing provision speaks of two modes of arbitration: (a) an agreement to submit to arbitration
somefuture dispute, usually stipulated upon in a civil contract between the parties, and known as an
agreement to submit to arbitration, and (b) an agreement submitting an existing matter of difference to
arbitrators, termed the submission agreement. Article XX of the milling contract is an agreement to
submit to arbitrationbecause it was made in anticipation of a dispute that might arise between the
parties after the contract’s execution.

Except where a compulsory arbitration is provided by statute, the first step toward the settlement of a
difference by arbitration is the entry by the parties into a valid agreement to arbitrate.An agreement to
arbitrate is a contract, the relation ofthe parties is contractual, and the rights and liabilities of the parties
are controlled by the law of contracts. In an agreement for arbitration, the ordinary elements of a valid
contract must appear, including an agreement toarbitrate some specific thing, and an agreement to
abide by the award, either in express language or by implication.114 (Emphasis supplied)

In this petition, not one of the parties — AEV, CAGLI, Victor S. Chiongbian, and Benjamin D. Gothong —
has alleged and/or shown that the controversy is properly the subject of "compulsory arbitration [as]
provided by statute."115 Thus, the propriety of compelling AEV to submit itself to arbitration must
necessarilybe founded on contract.

Four (4) distinct contracts have been cited in the present petition:

1. The January 8, 1996 Agreement in which ASC, CAGLI, and WLI merged their shipping enterprises, with
WLI (subsequently renamed WG&A) as the surviving entity. Section 11.06 of this Agreement provided
for arbitration as the mechanism for settling all disputes arising out of or in connection with the
Agreement.

2. Annex SL-V of the Agreement between CAGLI and WLI (and excluded ASC and any other Aboitiz-
controlled entity), and which confirmed WLI’s commitment to acquire certain inventories, worth not
more than 400 million, of CAGLI. Annex SL-V stated that the acquisition was "pursuant to the
Agreement."116 It did not contain an arbitration clause.

3. The September 23, 2003 Share Purchase Agreement or SPA in which AEV agreed to purchasethe
Chiongbian and Gothong groups' shares in WG&A’s issued and outstanding stock. Section 6.5 of the SPA
provided for arbitration as the mode of settling any dispute arising from the SPA. Section 6.8 of the SPA
further provided that the Agreement of January 8, 1996 shall be deemed terminatedexcept its Annex SL-
V.

4. The Escrow Agreement whereby ING Bank N.V.-Manila Branch was to take custody of the shares
subject of the SPA. Section 14.7 of the Escrow Agreement provided that all disputes arising from it shall
be settled via arbitration.

The obligation for WLI to acquire certain inventories of CAGLI and which is the subject of the present
petition was contained in Annex SL-V. It is therefore this agreement which deserves foremost
consideration. As to this particular agreement, these points must be underscored: first, that it has no
arbitration clause; second, Annex SL-V is only between WLI and CAGLI.

On the first point, it is clear, pursuant to this court’s pronouncements in Ormoc Sugarcane Planters’
Association, that neither WLI nor CAGLI can compel arbitration under Annex SL-V. Plainly, there is no
agreement to arbitrate.

It is of no moment that Annex SL-Vstates that it was made "pursuant to the Agreement" or that Section
11.06 of the January 8, 1996 Agreement provides for arbitration as the mode of settling disputes arising
out of or in connection with the Agreement.

For one, to say that Annex SL-V was made"pursuant to the Agreement" is merely to acknowledge: (1)
the factual context in which Annex SL-V was executed and (2) that it was that context that facilitated the
agreement embodied in it. Absentany other clear or unequivocal pronouncement integrating Annex SL-V
into the January 8, 1996 Agreement, it would be too much of a conjecture to jump to the conclusion
that Annex SL-V is governed by the exact same stipulations which govern the January 8, 1996
Agreement.

Likewise, a reading of the Agreement’s arbitration clause will reveal that it does not contemplate
disputes arising from Annex SL-V.

Section 11.06 of the January 8, 1996 Agreement requires the formation of an arbitration tribunal
composed of four (4) arbitrators. Each of the parties — WLI, CAGLI, and ASC — shall appoint one (1)
arbitrator, and the fourth arbitrator, who shall actas chairman, shall be appointed by the three (3)
arbitrators appointed by the parties. From the manner by which the arbitration tribunal is to be
constituted, the necessary implication is that the arbitration clause is applicable tothree-party disputes
— as will arise from the tripartite January 8, 1996 Agreement — and not to two-party disputesas will
arise from the two-party Annex SL-V.

From the second point — that Annex SL-V is only between WLI and CAGLI — it necessarily follows that
none but WLI/WG&A/ATSC and CAGLI are bound by the terms of Annex SL-V. It is elementary that
contracts are characterized by relativity or privity, that is, that "[c]ontracts take effect only between the
parties, their assigns and heirs."117 As such, one who is not a party to a contract may not seek relief for
such contract’s breach. Likewise, one who is not a party to a contract may not be held liable for breach
of any its terms.

While the principle of privity or relativity of contracts acknowledges that contractual obligations are
transmissible to a party’s assigns and heirs, AEV is not WLI’s successor-in-interest. In the period relevant
to this petition, the transferee of the inventories transferred by CAGLI pursuant to Annex SL-V assumed
three (3) names: (1) WLI, the original name of the entity that survived the merger under the January 8,
1996 Agreement; (2) WG&A, the name taken by WLI in the wake of the Agreement; and (3) ATSC, the
name taken by WLI/WG&A inthe wake of the SPA. As such, it is now ATSC that is liable under Annex SL-
V.

Pursuant to the January 8, 1996 Agreement, the Aboitiz group (via ASC) and the Gothong group
(viaCAGLI) became stockholders of WLI/WG&A, along with the Chiongbiangroup (which initially
controlled WLI). This continued until, pursuant to the SPA, the Gothong group and the Chiongbian group
transferred their shares to AEV. With the SPA, AEV became a stockholder of WLI/WG&A, which was
subsequently renamed ATSC. Nonetheless, AEV’s status asATSC’s stockholder does not subject it to
ATSC’s obligations

It is basic that a corporation has a personality separate and distinct from that of its individual
stockholders. Thus, a stockholder does not automatically assume the liabilities of the corporation of
which he is a stockholder. As explained in Philippine National Bankv. Hydro Resources Contractors
Corporation:118

A corporation is an artificial entitycreated 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. It has a
personality separate and distinct from that of its stockholders and from that of other corporations to
which it may be connected. As a consequence of its status as a distinct legal entityand as a result of a
conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is
legally responsible for payment of its obligations. In other words, by virtue of the separate juridical
personality ofa corporation, the corporate debt or credit is not the debt or credit of the stockholder.
This protection from liability for shareholders is the principle of limited liability.119

In fact, even the ownership by a single stockholder of all or nearly all the capital stock of a corporation is
not, in and of itself, a ground for disregarding a corporation’s separate personality. As explained in
Secosa v. Heirs of Francisco:120

It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate
from thatof its stockholders or members. 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.A
corporation’s authority to act and its liability for its actions are separate and apart from the individuals
who own it.

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. Also, the corporate entity may be disregarded in the interest of justice in such
cases asfraud 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.121 (Emphasis supplied)

AEV’s status as ATSC’s stockholder is, in and of itself, insufficient to make AEV liable for ATSC’s
obligations. Moreover, the SPA does not contain any stipulation which makes AEV assume ATSC’s
obligations. It is true that Section 6.8 of the SPA stipulates that the rights and obligations arising from
Annex SL-V are not terminated. But all that Section 6.8 does is recognize that the obligations under
Annex SL-V subsist despite the termination of the January 8, 1996 Agreement. At no point does the text
of Section 6.8 support the position that AEV steps into the shoes of the obligor under Annex SL-V and
assumes its obligations.

Neither does Section 6.5 of the SPAsuffice to compel AEV to submit itself to arbitration. While it is true
that Section 6.5 mandates arbitration as the mode for settling disputes between the parties to the SPA,
Section 6.5 does not indiscriminatelycover any and all disputes which may arise between the parties to
the SPA. Rather, Section 6.5 is limited to "dispute[s] arising between the parties relating tothis
Agreement [i.e., the SPA]."122 To belabor the point, the obligation which is subject of the present dispute
pertains to Annex SL-V, not to the SPA. That the SPA, in Section 6.8, recognizes the subsistence of Annex
SL-Vis merely a factual recognition. It does not create new obligations and does not alter or modify the
obligations spelled out in Annex SL-V.

AEV was drawn into the present controversy on account of its having entered into the SPA. This SPA
made AEV a stockholder of WLI/WG&A/ATSC. Even then, AEV retained a personality separate and
distinct from WLI/WG&A/ATSC. The SPA did not render AEV personally liable for the obligations of the
corporation whose stocks it held.
The obligation animating CAGLI’s desire to arbitrate is rooted in Annex SL-V. Annex SL-V is a
contractentirely different from the SPA. It created distinct obligations for distinctparties. AEV was never
a party to Annex SL-V. Rather than pertaining to AEV, Annex SL-V pertained to a different entity: WLI
(renamed WG&A then renamed ATSC). AEV is, thus, not bound by Annex SL-V.

On one hand, Annex SL-V does not stipulate that disputes arising from it are to be settled via
arbitration.On the other hand, the SPA requires arbitration as the mode for settling disputes relating to
it and recognizes the subsistence of the obligations under Annex SL-V. But as a separate contract, the
mere mention of Annex SL-V in the SPA does not suffice to place Annex SL-V under the ambit of the SPA
or to render it subject to the SPA’s terms, such as the requirement to arbitrate.

WHEREFORE, the petition is GRANTED. The assailed orders dated May 5, 2011 and June 24,2011 of the
Regional Trial Court, Cebu City, Branch 10 in Civil Case No. CEB-37004 are declared VOID. The Regional
Trial Court, Cebu City, Branch 10 is ordered to DISMISSCivil Case No. CEB-37004.

SO ORDERED.

G.R. No. 172843, September 24, 2014

ALFREDO L. VILLAMOR, JR., Petitioner, v. JOHN S. UMALE, IN SUBSTITUTION OF HERNANDO F.

BALMORES, Respondent.

G.R. NO. 172881

RODIVAL E. REYES, HANS M. PALMA AND DOROTEO M. PANGILINAN, Petitioners, v. HERNANDO F.

BALMORES, Respondent.

DECISION

LEONEN, J.:

Before us is a petition for review on certiorari 1 under Rule 45 of the Rules of Court, assailing the
decision2 of the Court of Appeals dated March 2, 2006 and its resolution3 dated May 29, 2006, denying
petitioners' motions for reconsideration. The Court of Appeals placed Pasig Printing Corporation (PPC)
under receivership and appointed an interim management committee for the
corporation.4cralawlawlibrary

MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the area
owned by Mid-Pasig Development Corporation (Mid-Pasig).5cralawlawlibrary

On March 1, 2004, PPC obtained an option to lease portions of Mid-Pasig's property, including the
Rockland area.6cralawlawlibrary

On November 11, 2004, PPC's board of directors issued a resolution7 waiving all its rights, interests, and
participation in the option to lease contract in favor o£ the law firm of Atty. Alfredo Villamor, Jr.
(Villamor), petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of
Villamor's law firm.8cralawlawlibrary
On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement
(MOA) with MC Home Depot.9 Under the MO A, MC Home Depot would continue to occupy the area as
PPC's sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of
P4,500,000.00 plus goodwill of P18,000,000.00.10cralawlawlibrary

In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing
rental payments for one year and the goodwill money. The checks were given to Villamor who did not
turn these or the equivalent amount over to PPC, upon encashment.11cralawlawlibrary

Hernando Balmores, respondent in G.R. No. 172843 and G.R. No. 172881 and a stockholder and director
of PPC,12 wrote a letter addressed to PPJC's directors, petitioners in G.R. No. 172881, on April 4,
2005.13 He informed them that Villamor should be made to deliver to PPC and account for MC Home
Depot's checks or their equivalent value.14cralawlawlibrary

Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court an
intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-
Corporate Controversies15 (Interim Rules) against petitioners for their alleged devices or schemes
amounting to fraud or misrepresentation "detrimental to the interest of the Corporation and its
stockholders."16cralawlawlibrary

Respondent Balmores alleged in his complaint that because of petitioners' actions, PPC's assets were
". . . not only in imminent danger, but have actually been dissipated, lost, wasted and
destroyed."17cralawlawlibrary

Respondent Balmores prayed that a receiver be appointed from his list of nominees.18 He also prayed for
petitioners' prohibition from "selling, encumbering, transferring or disposing in any manner any of
[PPC's] properties, including the MC Home [Depot] checks and/or their proceeds."19 He prayed for the
accounting and remittance to PPC of the MC Home Depot checks or their proceeds and for the
annulment of the board's resolution "vaiving PPC's rights in favor of Villamor's law
firm.20cralawlawlibrary

Ruling of the
Regional Trial Court

In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores' prayer for
the appointment of a receiver or the creation of a management committee. The dispositive portion
reads:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered the appointment  of a Receiver and the creation of a Management

Committee applied for by plaintiff Hernando F. Balmores are, as they are hereby, DENIED.22 (Emphasis
in the original)

According to the trial court, PPC's entitlement to the checks was doubtful. The resolution issued by PPC's
board of directors; waiving its rights to the option to lease contract in favor of Villamor's law firm, must
be accorded prima facie validity.23cralawlawlibrary

The trial court also noted that there was a pending case filed by one Leonardo Umale against Villamor,
involving the same checks. Umale was also claiming ownership of the checks.24 This, according to the
trial court, weakened respondent Balmores' claim that the checks were properties of
PPC.25cralawlawlibrary

The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage, or
destruction of [PPC's] assets . . . [that was] prejudicial to the interest of the minority stockholders,
parties-litigants or the general public."26 The board's failure to recover the disputed amounts was not an
indication of mismanagement resulting in the dissipation of assets.27cralawlawlibrary

The trial court noted that PPC was earning substantial rental income from its other sub-
lessees.28cralawlawlibrary

The trial court added that the failure to implead PPC was. fatal. PPC should have been impleaded as an
indispensable party, without which, there would be no final determination of the
action.29cralawlawlibrary

Ruling of the
Court of Appeals

Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of the Rules
of Court.30 He assailed the decision of the trial court, which denied his "application for the appointment
of a [r]eceiver and the creation of a [management [c]ommittee."31cralawlawlibrary

In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to respondent
Balmores' petition. It reversed the trial court's decision, and issued a new order placing PPC under
receivership and creating an interim management committee.32 The dispositive portion
reads:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE

COURSE and the June 15, 2005 Order/Resolution of the commercial court, the Regional Trial Court of
Pasig City, Branch 167, in S.E.C. Case No. 05-62, is hereby REVERSED and SET ASIDE and a NEW
ORDER is ISSUED that, during the pendency of the derivative suit, until judgment on the merits is
rendered by the commercial court, in order to prevent dissipation, loss, wastage or destruction of the
assets, in order to prevent paralization of business operations which may be prejudicial to the interest of
stockholders, parties-litigants or the general public, and in order to prevent violations of the corporation
laws: (1) Pasig Printing Corporation (PPC) is hereby placed under receivership pursuant to the Rules
Governing Intra-Corporate Controversies under R.A. No. 8799; (2) an Interim Management Committee is
hereby created for Pasig Printing Corporation (PPC) composed of Andres Narvasa, Jr., Atty. Francis
Gustilo and Ms Rosemarie Salvio-Leonida; (3) the interim management committee is hereby directed to
forthwith, during the pendency of the derivative suit until judgment on the merits is rendered by the
commercial court, to: (a) take over the business of Pasig Printing Corporation (PPC), (b) take custody and
control of all assets and properties owned and possessed by Pasig Printing Corporation (PPC), (c) take
the place of the management and the board of directors of Pasig Printing Corporation (PPC), (d)
preserve Pasig Printing Corporation's assets and properties, (e) stop and prevent any disposal, in any
manner, of any of the properties of Pasig Printing Corporation (PPC) including the MC Home Depot
checks and/or their proceeds; and (3) [sic] restore the status quo ante prevailing by directing
respondents their associates and agents to account and return to the Interim Management Committee
for Pasig Printing Corporation (PPC) all the money proceeds of the 20 MC Home Depot checks taken by
them and to account and surrender to the Interim Management Committee all subsequent MC Home
Depot checks or proceeds.33 (Citation omitted)

The Court of Appeals characterized the assailed order/resolution of the trial court as an interlocutory
order that is not appealable.34 In reversing tie trial court order/resolution, the Court of Appeals
considered the danger of dissipation, wastage, and loss of PPC's assets if the review of the trial court's
judgment would be delayed.35cralawlawlibrary

The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a
derivative suit because there were allegations of fraud or ultra vires acts ... by [PPC's
directors]."36cralawlawlibrary

According to the Court of Appeals, the trial court abandoned its duty to the stockholders in a derivative
suit when it refused to appoint a receiver or create a management committee, all during the pendency
of the proceedings. The assailed order of the trial court removed from the stockholders their right, in an
intra-corporate controversy, to be allowed the remedy of appointment of a receiver during the
pendency of a derivative suit, leaving the corporation under the control of an outsider and its assets
prone to dissipation.37 The Court of Appeals also ruled that this amounts to "despotic, capricious, or
whimsical exercise of judicial power"38 on the part of the trial court.

In justifying its decision to place PPC under receivership and to create a management committee, the
Court of Appeals stated that the board's waiver of PPC's rights in favor of Villamor's law firm without any
consideration and its inaction on Villamor's failure to turn over the proceeds of rental payments to PPC
warrant the creation of a management committee.39 The circumstances resulted in the imminent danger
of loss, waste, or dissipation of PPC's assets.40cralawlawlibrary

Petitioners filed separate motions for reconsideration. Both motions were denied by the Court of
Appeals on May 29, 2006. The dispositive portion of the Court of Appeals' resolution
reads:chanRoblesvirtualLawlibrary

WHEREFORE, for lack of merit, respondents' March 10/2006 and March 20, 2006 Motions for
Reconsideration are hereby DENIED.41chanrobleslaw

Petitioners filed separate petitions for review under Rule 45, raising the following threshold
issues:chanRoblesvirtualLawlibrary

I. Whether the Court of Appeals correctly characterized respondent Balmores' action as a

derivative suit
 II. Whether the Court of Appeals properly placed PPC under receivership and created a receiver or
management committee

PPC's directors argued that the Court of Appeals erred in characterizing respondent Balmores' suit as a
derivative suit because of his failure to implead PPC as party in the case. Hence, the appellate court did
not acquire jurisdiction over the corporation, and the appointment of a receiver or management
committee is not valid.42cralawlawlibrary

The directors further argued that the requirements for the appointment of a receiver or management
committee under Rule 943 of the Interim Rules were not satisfied. The directors pointed out that
respondent Balmores failed to prove that the assets of the corporation were in imminent danger of
being dissipated.44cralawlawlibrary

According to the directors, assuming that a receiver or management committee may be appointed in the
case, it is the Regional Trial Court only arid not the. Court of Appeals that must appoint
them.45cralawlawlibrary

Meanwhile, Villamor argued that PPC's entitlement to the checks or their proceeds was still in dispute.
In a separate civil case against Villamor, a certain Leonardo Umale was claiming ownership of the
checks.46cralawlawlibrary

Villamor also argued that the Court of Appeals' order to place PPC under receivership and to appoint a
management committee does not endanger PPC's assets because the MC Home Depot checks were not
the only assets of PPC.47 Therefore, it would not affect the operation of PPC or result in its
paralysation.48cralawlawlibrary

In his comment, respondent Balmores argued that Villamor's and the directors' petitions raise questions
of facts, which cannot be allowed in a petition for review under Rule 45.49cralawlawlibrary

On the appointment of a receiver or management committee, respondent Balmores stated that the ". . .
very practice of waiving assets and income for no consideration can in fact lead, not only to the
paralyzation of business, but to the complete loss or cessation of business of PPC[.] It is precisely
because of this fraudulent practice that a receiver/management committee must be appointed to
protect the assets of PPC from further fraudulent acts, devices and schemes."50cralawlawlibrary

The petitions have merit.

Petition for review on

certiorari under Rule 45
was proper

First, we rule on the issue of whether petitioners properly filed a petition for review on certiorari under
Rule 45.

Respondent Balmores argued that the petition raises questions of fact.

Under Rule 45, only questions of law may be raised.51 There is a question of law "when there is doubt or
controversy as to what the law is on a certain [set] of facts."52 The test is "whether the appellate court
can determine the issue-raised without reviewing or evaluating the evidence."53 Meanwhile, there is a
question of fact when there is "doubt... as to the truth or falsehood of facts."54 The question must
involve the examination of probative value of the evidence presented.

In this case, petitioners raise issues on the correctness of the Court of Appeals' conclusions.

Specifically, petitioners ask (1) whether respondent Balmores' failure to implead PPC in his action with
the trial court was fatal; (2) whether the Court of Appeals correctly characterized respondent Balmores'
action as a derivative suit; (3) whether the Court of Appeals' appointment of a management committee
was proper; and (4) whether the Court of Appeals may exercise the power to appoint a management
committee.

These are questions of law that may be determined without looking into the evidence presented. The
question of whether the conclusion drawn by the Court of Appeals from a set of facts is correct is a
question of law, cognizable by this court.55cralawlawlibrary

Petitioners, therefore, properly filed, a petition for review under Rule 45.

II

Respondent Balmores' action in

the trial court is not a derivative suit

A derivative suit is an action filed by stockholders to enforce a corporate action.56 It is an exception to

the general rule that the corporation's power to sue57 is exercised only by the board of directors or
trustees.58cralawlawlibrary

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or
officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be
sued and are in control of the corporation.59 It is allowed when the "directors [or officers] are guilty of
breach of . . . trust, [and] not of mere error of judgment."60   In derivative suits, the real party in interest
is the corporation, and the suing stockholder is a mere nominal party.61 Thus, this court
noted:chanRoblesvirtualLawlibrary

The Court has recognized that a stockholder's right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. In effect, the suit is an action for
specific performance of an obligation, owed by the corporation to the stockholders, to assist its rights of
action when the corporation has been put in default by the wrongful refusal of the directors or
management to adopt suitable measures for its protection.62chanrobleslaw

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules)
provides the five (5) requisites63 for filing derivative suits:chanRoblesvirtualLawlibrary

SECTION 1. Derivative action. - A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:chanRoblesvirtualLawlibrary

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred
and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first
paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member
must be "in the name of [the] corporation or association. ..." This requirement has already been settled
in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al v. Solas, et al, 64 this court said that "[a]mong the
basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and
on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other shareholders similarly situated who
wish to join [him]."65 This principle on derivative suits has been repeated in, among other cases, Tarn
Wing Tak v. Hon. Makasiar and De Guia 66 and in Chua v. Court of Appeals,67 which was cited in Hi-Yield
Realty, Incorporated v. Court of Appeals.68cralawlawlibrary

Moreover, it is important that the corporation be made a party to the case.69cralawlawlibrary

This court explained in Asset Privatization Trust v. Court of Appeals 70 why it is a condition sine qua
non that the corporation be impleaded as party in derivative suits. Thus:chanRoblesvirtualLawlibrary

Not only is the corporation an indispensible party, but it is also the present rule that it must be served
with process. The reason given is that the judgment must be made binding upon the corporation in
order that the corporation may get the benefit of the suit and may not bring a subsequent suit against
the same defendants for the same cause of action. In other words the corporation must be joined as
party because it is its cause of action that is being litigated and because judgment must be a res
judicata against it.71chanrobleslaw

In the same case, this court enumerated the reasons for disallowing a direct individual suit.

The reasons given for not allowing direct individual suit are:chanRoblesvirtualLawlibrary

(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of. these are in the corporation itself for the benefit
of the stockholders." In other words, to allow shareholders to sue separately would conflict with
the separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the
case of Evangelista v. Santos, that 'the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the distribution among them of part
of the corporate assets before the dissolution of the corporation and the liquidation of its debts
and liabilities, something which cannot be legally done in view of Section 16 of the Corporation
Law. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the protection of
all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act.72

While it is true that the basis for allowing stockholders to file derivative suits on behalf of corporations is
based on equity, the above legal requisites for its filing must necessarily be complied with for its
institution.73cralawlawlibrary

Respondent Balmores' action in the trial court failed to satisfy all the requisites of a derivative suit.

Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though
he tried to communicate with PPC's directors about the checks in Villamor's possession before he filed
an action with the trial court, respondent Balmores was not able to show that this comprised -all the
remedies available under the articles of incorporation, bylaws, laws, or rules governing PPC.

An allegation that appraisal rights were not available for the acts complained of is another requisite for
filing derivative suits under Rule 8, Section 1(3) of the Interim Rules.

Section 81 of the Corporation Code provides the instances of appraisal right:chanRoblesvirtualLawlibrary

SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shah1 have the right to dissent
and demand payment of the fair value of his shares in the following instances:
 1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholders or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and

3. In case of merger or consolidation.

Section 82 of the Corporation Code provides that the stockholder may exercise the right if he or she
voted against the proposed corporate action and if he made a written demand for payment on the
corporation within thirty (30) days after the date of voting.

Respondent Balmores complained about the alleged inaction of PPC's directors in his letter informing
them that Villamor should be made to deliver to PPC and account for MC Home Depot's checks or their
equivalent value. He alleged that these are devices or schemes amounting to fraud or misrepresentation
detrimental to the corporation's and the stockholders' interests. He also alleged that the directors'
inaction placed PPC's assets in imminent and/or actual dissipation, loss, wastage, and destruction.

Granting that (a) respondent Balmores' attempt to communicate with the other PPC directors already
comprised all the available remedies that he could have exhausted and (b) the corporation was under
full- control of petitioners that exhaustion of remedies became impossible or futile,74 respondent
Balmores failed to allege that appraisal rights were not available for the acts complained of here.

Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on
behalf of the corporation.

The non-derivative character of respondent Balmores' action may also be gleaned from his allegations in
the trial court complaint. In the complaint, he described the nature of his action as an action under Rule
1, Section l(a)(l) of the Interim Rules, and not an action under Rule 1, Section l(a)(4) of the Interim Rules,
which refers to derivative suits. Thus, respondent Balmores said:chanRoblesvirtualLawlibrary

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-
corporate Controversies, involving devices or schemes employed by, or acts of, the defendants as board
of directors, business associates and officers of Pasig Printing Corporation (PPC), amounting to fraud or
misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of
PPC.75 (Emphasis supplied)

Rule 1, Section 1 (a)(1) of the Interim Rules refers to acts of the board, associates, and officers,
amounting to fraud or misrepresentation, which may be detrimental to the interest of the stockholders.
This is different from a derivative suit.

While devices and schemes of the board of directors, business associates,-or officers amounting to fraud
under Rule 1, Section l(a)(l) of the Interim Rules are causes of a derivative suit, it is not always the case
that derivative suits are limited to such causes or that they are necessarily derivative suits. Hence, they
are separately enumerated in Rule 1, Section 1 (a) of the Interim Rules:chanRoblesvirtualLawlibrary

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

(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. (Emphasis supplied)

Stockholder/s' suits based on fraudulent or wrongful acts of directors, associates, or officers may also be
individual suits or class suits.

Individual suits are filed when the cause of action belongs to the individual stockholder personally, and
not to the stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of
dividends to a stockholder.76 If the cause of action belongs to a group of stockholders, such as when the
rights violated belong to preferred stockholders, a class or representative suit may be filed to protect
the stockholders in the group.77cralawlawlibrary

In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner of
describing the nature of his action:chanRoblesvirtualLawlibrary

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate
Controversies, involving devices or schemes employed by, or acts of, the defendants as board of
directors, business associates and officers of Pasig Printing Corporation (PPC), amounting to fraud or
misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of
PPC.78 (Emphasis supplied)

His intent was also explicit from his prayer:chanRoblesvirtualLawlibrary

WHEREFORE, plaintiff respectfully prays that the Honorable Court -

2. After notice and due proceedings -

Declare that the acts of defendant Directors in allowing defendant VILLAMOR to retain custody of the
MC Home checks and encash them upon maturity, as well as their refusal or failure to take any action
against defendant VILLAMOR to make him account and deliver the MC Home checks and/or their
proceeds to Pasig Printing Corporation are devices, schemes or acts amounting to fraud that are
detrimental to plaintiff's interest as a stockholder of PPC;79 (Emphasis supplied)

Respondent Balmores did not bring the action for the benefit of the corporation. Instead, he was
alleging that the acts of PPC's directors, specifically the waiver of rights in favor of Villamor's law firm
and their failure to take back the MC Home Depot checks from Villamor, were detrimental to
his individual interest as a stockholder. In filing an action, therefore, his intention was to vindicate his
individual interest and not PPC's or a group of stockholders'.

The essence of a derivative suit is that it must be filed on behalf of the corporation. This is because the
cause of action belongs, primarily, to the corporation. The stockholder who sues on behalf of a
corporation is merely a nominal party.

Respondent Balmores' intent to file an individual suit removes it from the coverage of derivative suits.

III

Respondent Balmores has no

cause of action that would entitle
him to the reliefs sought

Corporations have a personality that is separate and distinct from their stockholders and directors. A
wrong to the corporation does not necessarily create an individual cause of action. "A cause of action is
the act or omission by which a party violates the right of another."80 A cause of action must pertain to
complainant if he or she is to be entitled to the reliefs sought.

Thus, in Cua v. Tan,81 this court emphasized:chanRoblesvirtualLawlibrary

. . . where the acts complained of constitute a wrong to the corporation itself, the cause of action
belongs to the corporation and not to the individual stockholder or member. Although in most every
case of wrong to the corporation, each stockholder is necessarily affected because the value of his
interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of
action since the corporation is a person distinct and separate from him, and can and should itself sue the
wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be
multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, there is the
difficulty of determining the amount of damages that should be paid to each individual
stockholder.82chanrobleslaw

In this case, respondent Balmores did not allege any cause of action that is personal to him. His
allegations are limited to the facts that PPC's directors waived their rights to rental income in favor of
Villamor's law firm without consideration and that they failed to take action when Villamor refused to
turn over the amounts to PPC. These are wrongs that pertain to PPC. Therefore, the cause of action
belongs to PPC — not to respondent Balmores or any stockholders as individuals.

For this reason, respondent Balmores is not entitled to the reliefs sought in the complaint. Only the
corporation, or arguably the stockholders as a group, is entitled to these reliefs, which should have been
sought in a proper derivative suit filed on behalf of the corporation.

PPC will not be bound by a decision granting the application for the appointment of a receiver or
management committee. Since it was not impleaded in the complaint, the courts did not acquire
jurisdiction over it. On this matter, it is an indispensable party, without which, no final determination
can be had.

Hence, it is not only respondent Balmores' failure to implead PPC that is fatal to his action, as petitioners
point out. It is the fact that he alleged no cause of action that pertains personally to him that disqualifies
him from the reliefs he sought in his complaint.

On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores' petition
for certiorari , reversing the trial court's decision, and issuing a new order placing PPC under receivership
and creating an interim management committee.

IV

Appointment of a management
committee was not proper

Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still erred in
placing PPC under receivership and in creating and appointing a management committee.

A corporation may be placed under receivership, or management committees may be created to

preserve properties involved in a suit and to protect the rights of the parties under the control and
supervision of the court.83 Management committees and receivers are appointed when the corporation
is in imminent danger of "(1) [dissipation, loss, wastage or destruction of assets or other properties; and
(2) [p]aralysation of its business operations that may be prejudicial to' the interest of the minority
stockholders, parties-litigants, or the general public."84cralawlawlibrary

Applicants for the appointment of a receiver or management committee need to establish the
confluence of these two requisites. This is because appointed receivers and management committees
will immediately take over the management of the corporation and will have the management powers
specified in law.85 This may have a negative effect on the operations and affairs of the corporation with
third parties,86 as persons who are more familiar with its operations are necessarily dislodged from their
positions in favor of appointees who are strangers to the corporation's operations and affairs.

Thus, in Sy Chim v. Sy Sly Ho & Sons, Inc.,87 this court said:chanRoblesvirtualLawlibrary

. . . the creation and appointment of a management committee and a receiver is an extraordinary and
drastic remedy to be exercised with care and caution; and only when the requirements under the
Interim Rules are shown. It is a drastic course for the benefit of the minority stockholders, the parties-
litigants or the general public are allowed only under pressing circumstances and, when there is
inadequacy, ineffectual or exhaustion of legal or other remedies . . . The power of the court to continue
a business of a corporation . . . must be exercised with the greatest care and caution. There should be a
full consideration of all the attendant facts, including the interest of all the parties
concerned.88chanrobleslaw

PPC waived its rights, without any consideration in favor of Villamor. The checks were already in
Villamor's possession. Some of the checks may have already been encashed. This court takes judicial
notice that the goodwill money of PI 8,000,000.00 and the rental payments of P4,500,000.00 every
month are not meager amounts only to be waived without any consideration. It is, therefore, enough to
constitute loss or dissipation of assets under the Interim Rules.

Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of PPC's
business operations. Apparently, PPC was- earning substantial amounts from its other sub-lessees.
Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one of the
requisites for appointment of a receiver or management committee.

The Court of Appeals had no

jurisdiction to appoint the receiver
or management committee

The Court of Appeals has no power to appoint a receiver or management committee. The Regional Trial
Court has original and exclusive jurisdiction89 to hear and decide intra-corporate
controversies,90 including incidents of such controversies.91 These incidents include applications for the
appointment of receivers or management committees.

"The receiver and members of the management committee . . . are considered officers of the court and
shall be under its control and supervision."92 They are required to report to the court on the status of
the corporation within sixty (60) days from their appointment and every three (3) months
after.93cralawlawlibrary

When respondent Balmores filed his petition for certiorari with the Court of Appeals, there was still a
pending action in the trial court. No less than the Court of Appeals stated that it allowed respondent
Balmores' petition under Rule 65 because the order or resolution in question was an interlocutory one.
This means that jurisdiction over the main case was still lodged with the trial court.

The court making the appointment controls and supervises the appointed receiver or management
committee. Thus, the Court of Appeals' appointment of a management committee would result in an
absurd scenario wherein while the main case is still pending before the trial court, the receiver or
management committee reports' to the Court of Appeals.

WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March 2, 2006 and
its resolution dated May 29, 2006 are SET ASIDE.

SO ORDERED.

G.R. No. 174938               October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,

vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO
G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a

contract entered into by the corporation they represent if there are allegations of bad faith or malice in
their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5, 2006
resolution. The Court of Appeals affirmed the trial court's decision holding that petitioners, as director,
should submit themselves as parties tothe arbitration proceedings between BF Corporation and Shangri-
La Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-Laand
the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo
Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos.1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into
agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel
parking structure along EDSA.2

Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements.3 However, by October 1991, Shangri-La started defaulting in payment.4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the
buildings using its own funds and credit despite Shangri-La’s default.5 According to BF Corporation,
ShangriLa misrepresented that it had funds to pay for its obligations with BF Corporation, and the delay
in payment was simply a matter of delayed processing of BF Corporation’s progress billing statements.6

BF Corporation eventually completed the construction of the buildings.7 Shangri-La allegedly took

possession of the buildings while still owing BF Corporation an outstanding balance.8

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to
it.9 It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs.
Therefore, they should be held jointly and severally liable with Shangri-La for its obligations as well as for
the damages that BF Corporation incurred as a result of Shangri-La’s default.10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin
C. Ramos filed a motion to suspend the proceedings in view of BF Corporation’s failure to submit its
dispute to arbitration, in accordance with the arbitration clauseprovided in its contract, quoted in the
motion as follows:11

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the Owner or the Project
Manager on his behalf and the Contractor, either during the progress or after the completion or
abandonment of the Works as to the construction of this Contract or as to any matter or thing of
whatsoever nature arising there under or inconnection therewith (including any matter or thing left by
this Contract to the discretion of the Project Manager or the withholding by the Project Manager of any
certificate to which the Contractor may claim to be entitled or the measurement and valuation
mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities of the parties under clauses
25, 26, 32 or 33 of these Conditions), the owner and the Contractor hereby agree to exert all efforts to
settle their differences or dispute amicably. Failing these efforts then such dispute or difference shall be
referred to arbitration in accordance with the rules and procedures of the Philippine Arbitration Law.

x x x           x x x          x x x

(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the Arbitrators
shall be a condition precedent to any right of legal action that either party may have against the
other. . . .12 (Underscoring in the original)

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend proceedings.14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory

counter claim against BF Corporation and crossclaim against Shangri-La.15 They alleged that they had
resigned as members of Shangri-La’s board of directors as of July 15, 1991.16

After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its
November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III, and
Benjamin Ramos filed a petition for certiorari with the Court of Appeals.17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the submission of
the dispute to arbitration.18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on certiorari with
this court.19 On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that the
dispute be submitted for arbitration.20

Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation and
Shangri-La failed to agree as to the law that should govern the arbitration proceedings.21 On October 27,
1998, the trial court issued the order directing the parties to conduct the proceedings in accordance
with Republic Act No. 876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both seeking
to clarify the term, "parties," and whether Shangri-La’s directors should be included in the arbitration
proceedings and served with separate demands for arbitration.23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be
excluded from the arbitration proceedings for being non-parties to Shangri-La’s and BF Corporation’s
agreement.24

On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon all
defendants in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s directors were
interested parties who "must also be served with a demand for arbitration to give them the opportunity
to ventilate their side of the controversy, safeguard their interest and fend off their respective
positions."26 Petitioners’ motion for reconsideration ofthis order was denied by the trial court on January
19, 2005.27

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of discretion in
the issuance of orders compelling them to submit to arbitration proceedings despite being third parties
to the contract between Shangri-La and BF Corporation.28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for certiorari. The
Court of Appeals ruled that ShangriLa’s directors were necessary parties in the arbitration
proceedings.30 According to the Court of Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in representation
of the party to the contract pursuant to Art. 31 of the Corporation Code, and that as directors of the
defendant corporation, [they], in accordance with Art. 1217 of the Civil Code, stand to be benefited or
injured by the result of the arbitration proceedings, hence, being necessary parties, they must be joined
in order to have complete adjudication of the controversy. Consequently, if [they were] excluded as
parties in the arbitration proceedings and an arbitral award is rendered, holding [Shangri-La] and its
board of directors jointly and solidarily liable to private respondent BF Corporation, a problem will arise,
i.e., whether petitioners will be bound bysuch arbitral award, and this will prevent complete
determination of the issues and resolution of the controversy.31

The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . . would
be contrary to the policy against multiplicity of suits."32

The dispositive portion of the Court of Appeals’ decision reads:

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January 19, 2005 of
public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED.33

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006 resolution.34

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of Appeals
decision and the October 5, 2006 Court of Appeals resolution.35

The issue in this case is whether petitioners should be made parties to the arbitration proceedings,
pursuant to the arbitration clause provided in the contract between BF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or obligations.36 The
corporation is a separate being, and nothing justifies BF Corporation’s allegation that they are solidarily
liable with Shangri-La.37 Neither did they bind themselves personally nor did they undertake to shoulder
Shangri-La’s obligations should it fail in its obligations.38 BF Corporation also failed to establish fraud or
bad faith on their part.39

Petitioners also argue that they are third parties to the contract between BF Corporation and Shangri-
La.40 Provisions including arbitration stipulations should bind only the parties.41 Based on our arbitration
laws, parties who are strangers to an agreement cannot be compelled to arbitrate.42

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in
resolving their disputes.43 Compelling them to submit to arbitration is against this purpose and may be
tantamount to stipulating for the parties.44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III, Alfredo
C.Ramos and Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that Shangri-
La’sdirectors, being non-parties to the contract, should not be made personally liable for Shangri-La’s
acts.46 Since the contract was executed only by BF Corporation and Shangri-La, only they should be
affected by the contract’s stipulation.47 BF Corporation also failed to specifically allege the unlawful acts
of the directors that should make them solidarily liable with Shangri-La for its obligations.48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should
undergo arbitration "clearly contemplated the inclusion of the directors of the corporation[.]"49 BF
Corporation also argued that while petitioners were not parties to the agreement, they were still
impleaded under Section 31 of the Corporation Code.50 Section 31 makes directors solidarily liable for
fraud, gross negligence, and bad faith.51 Petitioners are not really third parties to the agreement because
they are being sued as Shangri-La’s representatives, under Section 31 of the Corporation Code.52

BF Corporation further argued that because petitioners were impleaded for their solidary liability, they
are necessary parties to the arbitration proceedings.53 The full resolution of all disputes in the arbitration
proceedings should also be done in the interest of justice.54

In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral Tribunal
had already promulgated its decision on July 31, 2007.55 The Arbitral Tribunal denied BF Corporation’s
claims against them.56 Petitioners stated that "[they] were included by the Arbitral Tribunal in the
proceedings conducted . . . notwithstanding [their] continuing objection thereto. . . ."57 They also stated
that "[their] unwilling participation in the arbitration case was done ex abundante ad cautela, as
manifested therein on several occasions."58 Petitioners informed the court that they already manifested
with the trial court that "any action taken on [the Arbitral Tribunal’s decision] should be without
prejudice to the resolution of [this] case."59

Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners and
Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments that they
should not be held liable for Shangri-La’s default and made parties to the arbitration proceedings
because only BF Corporation and Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability under
Section 31 of the Corporation Code. Shangri-La added that their exclusion from the arbitration
proceedings will result in multiplicity of suits, which "is not favored in this jurisdiction."60 It pointed out
that the case had already been mooted by the termination of the arbitration proceedings, which
petitioners actively participated in.61 Moreover, BF Corporation assailed only the correctness of the
Arbitral Tribunal’s award and not the part absolving Shangri-La’s directors from liability.62

BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required

memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims were
already dismissed with finality, and the claims against them were likewise dismissed with finality, they
no longer have any interest orpersonality in the arbitration case. Thus, there is no longer any need to
resolve the present Petition, which mainly questions the inclusion of petitioners in the arbitration
proceedings."64 The court’s decision in this case will no longer have any effect on the issue of petitioners’
inclusion in the arbitration proceedings.65

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF
Corporation, have rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues so that principles may
be established for the guidance of the bench, bar, and the public. In De la Camara v. Hon. Enage,66 this
court disregarded the fact that petitioner in that case already escaped from prison and ruled on the
issue of excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted, still,
as set forth at the opening of this opinion, the fact that this case is moot and academic should not
preclude this Tribunal from setting forth in language clear and unmistakable, the obligation of fidelity on
the part of lower court judges to the unequivocal command of the Constitution that excessive bail shall
not be required.67

This principle was repeated in subsequent cases when this court deemed it proper to clarify important
matters for guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in accordance
with Shangri-Laand BF Corporation’s agreement, in order to determine if the distinction between
Shangri-La’s personality and their personalities should be disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid litigation
and settle disputes amicably and more expeditiously by themselves and through their choice of
arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved as early as
1949. It was later institutionalized by the approval of Republic Act No. 876,70 which expressly authorized,
made valid, enforceable, and irrevocable parties’ decision to submit their controversies, including
incidental issues, to arbitration. This court recognized this policy in Eastboard Navigation, Ltd. v. Ysmael
and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement, defendant raises the
issue that, even if it be granted that it agreed to submit its dispute with plaintiff to arbitration, said
agreement is void and without effect for it amounts to removing said dispute from the jurisdiction of the
courts in which the parties are domiciled or where the dispute occurred. It is true that there are
authorities which hold that "a clause in a contract providing that all matters in dispute between the
parties shall be referred to arbitrators and to them alone, is contrary to public policy and cannot oust
the courts of jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however,
there are authorities which favor "the more intelligent view that arbitration, as an inexpensive, speedy
and amicable method of settling disputes, and as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without contravening sound public policy or
settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view when it reproduced in
the new Civil Code the provisions of the old Code on Arbitration. And only recently it approved Republic
Act No. 876 expressly authorizing arbitration of future disputes.72 (Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are
liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol Industrial
Construction Groups, Inc.,73 this court said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with
mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside from unclogging
judicial dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. It
is thus regarded as the "wave of the future" in international civil and commercial disputes. Brushing
aside a contractual agreement calling for arbitration between the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods,
courts should liberally construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any doubt
should be resolved in favor of arbitration.74 (Emphasis supplied)

A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations that
would render effective an arbitration clause was later expressed in Republic Act No. 9285:75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote party
autonomy in the resolution of disputes or the freedom of the party to make their own arrangements to
resolve their disputes. Towards this end, the State shall encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an important means to achieve speedy and impartial justice and
declog court dockets. As such, the State shall provide means for the use of ADR as an efficient tool and
an alternative procedure for the resolution of appropriate cases. Likewise, the State shall enlist active
private sector participation in the settlement of disputes through ADR. This Act shall be without
prejudice to the adoption by the Supreme Court of any ADR system, such as mediation, conciliation,
arbitration, or any combination thereof as a means of achieving speedy and efficient means of resolving
cases pending before all courts in the Philippines which shall be governed by such rules as the Supreme
Court may approve from time to time.

....
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to the policy
of the law in favor of arbitration.Where action is commenced by or against multiple parties, one or more
of whomare parties who are bound by the arbitration agreement although the civil action may continue
as to those who are not bound by such arbitration agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for purposes
ofavoiding litigation and expediting resolution of the dispute, that interpretation shall be adopted.
Petitioners’ main argument arises from the separate personality given to juridical persons vis-à-vis their
directors, officers, stockholders, and agents. Since they did not sign the arbitration agreement in any
capacity, they cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in accordance
with the arbitration agreement. Moreover, they had already resigned as directors of Shangri-Laat the
time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and distinct
from Shangri-La.

A corporation is an artificial entity created by fiction of law.76 This means that while it is not a person,
naturally, the law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is
an individual with a personality that is distinct and separate from other persons including its
stockholders, officers, directors, representatives,77 and other juridical entities. The law vests in
corporations rights,powers, and attributes as if they were natural persons with physical existence and
capabilities to act on their own.78 For instance, they have the power to sue and enter into transactions or
contracts. Section 36 of the Corporation Code enumerates some of a corporation’s powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has the
power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate ofincorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall
give donations in aid of any political party or candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and

11. To exercise such other powers asmay be essential or necessary to carry out its purpose or purposes
as stated in its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers
through itsdirectors, officers, or agents, who are all natural persons. A corporation cannot sue or enter
into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation through its

representatives is not consent of the representative, personally. Its obligations, incurred through official
acts of its representatives, are its own. A stockholder, director, or representative does not become a
party to a contract just because a corporation executed a contract through that stockholder, director or
representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by
the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of
the corporation.

Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their disputes.
This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation79 that an arbitration
clause shall not apply to persons who were neither parties to the contract nor assignees of previous
parties, thus:

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on

arbitration, binds the parties thereto, as well as their assigns and heirs. But only they.80 (Citations
omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:

The provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is
part of that contract and is itself a contract. As a rule, contracts are respected as the law between the
contracting parties and produce effect as between them, their assigns and heirs. Clearly, only parties to
the Agreement . . . are bound by the Agreement and its arbitration clause as they are the only
signatories thereto.82 (Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co., Inc.83 and
Stanfilco Employees v. DOLE Philippines, Inc., et al.84

As a general rule, therefore, a corporation’s representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate in arbitration proceedings made
pursuant to an agreement entered into by the corporation. He or she is generally not considered a party
to that agreement.
However, there are instances when the distinction between personalities of directors, officers,and
representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate
fiction.

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues."85 It is also warranted in 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."86

When corporate veil is pierced, the corporation and persons who are normally treated as distinct from
the corporation are treated as one person, such that when the corporation is adjudged liable, these
persons, too, become liable as if they were the corporation.

Among the persons who may be treatedas the corporation itself under certain circumstances are its
directors and officers. Section 31 of the Corporation Code provides the instances when directors,
trustees, or officers may become liable for corporate acts:

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 inhim 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. (n)

Based on the above provision, a director, trustee, or officer of a corporation may be made solidarily
liable with it for all damages suffered by the corporation, its stockholders or members, and other
persons in any of the following cases:

a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate
act;

b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as
director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto";87

b) "When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action."89

When there are allegations of bad faith or malice against corporate directors or representatives, it
becomes the duty of courts or tribunals to determine if these persons and the corporation should be
treated as one. Without a trial, courts and tribunals have no basis for determining whether the veil of
corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge. Thus, the
courts or tribunals must first determine whether circumstances exist towarrant the courts or tribunals to
disregard the distinction between the corporation and the persons representing it. The determination of
these circumstances must be made by one tribunal or court in a proceeding participated in by all parties
involved, including current representatives of the corporation, and those persons whose personalities
are impliedly the sameas the corporation. This is because when the court or tribunal finds that
circumstances exist warranting the piercing of the corporate veil, the corporate representatives are
treated as the corporation itself and should be held liable for corporate acts. The corporation’s distinct
personality is disregarded, and the corporation is seen as a mere aggregation of persons undertaking a
business under the collective name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging malice
orbad faith on their part in directing the affairs of the corporation, complainants are effectively alleging
that the directors and the corporation are not acting as separate entities. They are alleging that the acts
or omissions by the corporation that violated their rights are also the directors’ acts or omissions.90 They
are alleging that contracts executed by the corporation are contracts executed by the directors.
Complainants effectively pray that the corporate veilbe pierced because the cause of action between
the corporation and the directors is the same.

In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action is
prohibited. Institution of more than one suit for the same cause of action constitutes splitting the cause
of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:

Section 3. One suit for a single cause of action. — A party may not institute more than one suit for a
single cause of action. (3a)

Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on the basis of
the same cause of action, the filing of one or a judgment upon the merits in any one is available as a
ground for the dismissal of the others. (4a)

It is because the personalities of petitioners and the corporation may later be found to be indistinct that
we rule that petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration proceedings, we are
not overturning Heirs of Augusto Salas wherein this court affirmed the basic arbitration principle that
only parties to an arbitration agreement may be compelled to submit to arbitration. In that case, this
court recognizedthat persons other than the main party may be compelled to submit to arbitration, e.g.,
assignees and heirs. Assignees and heirs may be considered parties to an arbitration agreement entered
into by their assignor because the assignor’s rights and obligations are transferred to them upon
assignment. In other words, the assignor’s rights and obligations become their own rights and
obligations. In the same way, the corporation’s obligations are treated as the representative’s
obligations when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this court affirmed
its policy against multiplicity of suits and unnecessary delay. This court said that "to split the proceeding
into arbitration for some parties and trial for other parties would "result in multiplicity of suits,
duplicitous procedure and unnecessary delay."91 This court also intimated that the interest of justice
would be best observed if it adjudicated rights in a single proceeding.92 While the facts of that case
prompted this court to direct the trial court to proceed to determine the issues of thatcase, it did not
prohibit courts from allowing the case to proceed to arbitration, when circumstances warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the
incidental issue of whether piercing of the corporate veil is warranted, should be determined in a single
proceeding. Such finding would determine if the corporation is merely an aggregation of persons whose
liabilities must be treated as one with the corporation.

However, when the courts disregard the corporation’s distinct and separate personality from its
directors or officers, the courts do not say that the corporation, in all instances and for all purposes, is
the same as its directors, stockholders, officers, and agents. It does not result in an absolute confusion of
personalities of the corporation and the persons composing or representing it. Courts merely discount
the distinction and treat them as one, in relation to a specific act, in order to extend the terms of the
contract and the liabilities for all damages to erring corporate officials who participated in the
corporation’s illegal acts. This is done so that the legal fiction cannot be used to perpetrate illegalities
and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the corporate
veil, parties who are normally treated as distinct individuals should be made to participate in the
arbitration proceedings in order to determine ifsuch distinction should indeed be disregarded and, if so,
to determine the extent of their liabilities.

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the
existence of circumstances that render petitioners and the other directors solidarily liable. It ruled that
petitioners and Shangri-La’s other directors were not liable for the contractual obligations of Shangri-La
to BF Corporation. The Arbitral Tribunal’s decision was made with the participation of petitioners, albeit
with their continuing objection. In view of our discussion above, we rule that petitioners are bound by
such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and resolution of
October 5, 2006 are AFFIRMED.

SO ORDERED.

G.R. No. 204944-45               December 3, 2014

FUJI TELEVISION NETWORK, INC., Petitioner,

vs.
ARLENE S. ESPIRITU, Respondent.

DECISION

LEONEN, J.:
It is the burden of the employer to prove that a person whose services it pays for is an independent
contractor rather than a regular employee with or without a fixed term. That a person has a disease
does not per se entitle the employer to terminate his or her services. Termination is the last resort. At
the very least, a competent public health authority must certify that the disease cannot be cured within
six ( 6) months, even with appropriate treatment.

We decide this petition for review1 on certiorari filed by Fuji Television Network, Inc., seeking the
reversal of the Court of Appeals’ Decision2 dated June 25, 2012, affirming with modification the
decision3 of the National Labor Relations Commission.

In 2005, Arlene S. Espiritu ("Arlene") was engaged by Fuji Television Network, Inc. ("Fuji") asa news
correspondent/producer4 "tasked to report Philippine news to Fuji through its Manila Bureau field
office."5 Arlene’s employment contract initially provided for a term of one (1) year but was successively
renewed on a yearly basis with salary adjustment upon every renewal.6 Sometime in January 2009,
Arlenewas diagnosed with lung cancer.7 She informed Fuji about her condition. In turn, the Chief of
News Agency of Fuji, Yoshiki Aoki, informed Arlene "that the company will have a problem renewing her
contract"8 since it would be difficult for her to perform her job.9 She "insisted that she was still fit to
work as certified by her attending physician."10

After several verbal and written communications,11 Arlene and Fuji signed a non-renewal contract on
May 5, 2009 where it was stipulated that her contract would no longer be renewed after its expiration
on May 31, 2009. The contract also provided that the parties release each other from liabilities and
responsibilities under the employment contract.12

In consideration of the non-renewal contract, Arlene "acknowledged receipt of the total amount of
US$18,050.00 representing her monthly salary from March 2009 to May 2009, year-end bonus, mid-year
bonus, and separation pay."13 However, Arlene affixed her signature on the nonrenewal contract with
the initials "U.P." for "under protest."14

On May 6, 2009, the day after Arlene signed the non-renewal contract, she filed a complaint for illegal
dismissal and attorney’s fees with the National Capital Region Arbitration Branch of the National Labor
Relations Commission. She alleged that she was forced to sign the nonrenewal contract when Fuji came
to know of her illness and that Fuji withheld her salaries and other benefits for March and April 2009
when she refused to sign.15

Arlene claimed that she was left with no other recourse but to sign the non-renewal contract, and it was
only upon signing that she was given her salaries and bonuses, in addition to separation pay equivalent
to four (4) years.16

In the decision17 dated September 10, 2009, Labor Arbiter Corazon C. Borbolla dismissed Arlene’s
complaint.18 Citing Sonza v. ABS-CBN19 and applying the four-fold test, the Labor Arbiter held that Arlene
was not Fuji’s employee but an independent contractor.20

Arlene appealed before the National Labor Relations Commission. In its decision dated March 5, 2010,
the National Labor Relations Commission reversed the Labor Arbiter’s decision.21 It held that Arlene was
a regular employee with respect to the activities for which she was employed since she continuously
rendered services that were deemednecessary and desirable to Fuji’s business.22 The National Labor
Relations Commission ordered Fuji to pay Arlene backwages, computed from the date of her illegal
dismissal.23 The dispositive portion of the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered GRANTING the instant appeal. The
Decision of the Labor Arbiter dated 19 September 2009 is hereby REVERSED and SET ASIDE, and a new
one is issued ordering respondents-appellees to pay complainant-appellant backwages computed from
the date of her illegal dismissal until finality of this Decision.

SO ORDERED.24

Arlene and Fuji filed separat emotions for reconsideration.25 Both motions were denied by the National
Labor Relations Commission for lack of merit in the resolution dated April 26, 2010.26 From the decision
of the National Labor Relations Commission, both parties filed separate petitions for certiorari27 before
the Court of Appeals. The Court of Appeals consolidated the petitions and considered the following
issues for resolution:

1) Whether or not Espirituis a regular employee or a fixed-term contractual employee;

2) Whether or not Espiritu was illegally dismissed; and

3) Whether or not Espirituis entitled to damages and attorney’s fees.28

In the assailed decision, the Court of Appeals affirmed the National Labor Relations Commission with the
modification that Fuji immediately reinstate Arlene to her position as News Producer without loss of
seniority rights, and pay her backwages, 13th-month pay, mid-year and year-end bonuses, sick leave and
vacation leave with pay until reinstated, moral damages, exemplary damages, attorney’sfees, and legal
interest of 12% per annum of the total monetary awards.29 The Court of Appeals ruled that:

WHEREFORE, for lack of merit, the petition of Fuji Television Network, Inc. and Yoshiki Aoki is DENIED
and the petition of Arlene S. Espiritu is GRANTED. Accordingly, the Decision dated March 5, 2010 of the
National Labor Relations Commission, 6th Division in NLRC NCR Case No. 05-06811-09 and its
subsequent Resolution dated April 26, 2010 are hereby AFFIRMED with MODIFICATIONS, as follows:

Fuji Television, Inc. is hereby ORDERED to immediately REINSTATE Arlene S. Espiritu to her position as
News Producer without loss of seniority rights and privileges and to pay her the following:

1. Backwages at the rate of $1,900.00 per month computed from May 5, 2009 (the date of dismissal),
until reinstated;

2. 13th Month Pay at the rate of $1,900.00 per annum from the date of dismissal, until reinstated;

3. One and a half (1 1/2) months pay or $2,850.00 as midyear bonus per year from the date of dismissal,
until reinstated;

4. One and a half (1 1/2) months pay or $2,850.00 as year-end bonus per year from the date of
dismissal, until reinstated;

5. Sick leave of 30 days with pay or $1,900.00 per year from the date of dismissal, until reinstated; and

6. Vacation leave with pay equivalent to 14 days or $1,425.00 per annum from date of dismissal, until
reinstated.
7. The amount of ₱100,000.00 as moral damages;

8. The amount of ₱50,000.00 as exemplary damages;

9. Attorney’s fees equivalent to 10% of the total monetary awards herein stated; and

10. Legal interest of twelve percent (12%) per annum of the total monetary awards computed from May
5, 2009, until their full satisfaction.

The Labor Arbiter is hereby DIRECTED to make another recomputation of the above monetary awards
consistent with the above directives.

SO ORDERED.30

In arriving at the decision, the Court of Appeals held that Arlene was a regular employee because she
was engaged to perform work that was necessary or desirable in the business of Fuji,31 and the
successive renewals of her fixed-term contract resulted in regular employment.32

According to the Court of Appeals, Sonzadoes not apply in order to establish that Arlene was an
independent contractor because she was not contracted on account of any peculiar ability, special
talent, or skill.33 The fact that everything used by Arlene in her work was owned by Fuji negated the idea
of job contracting.34

The Court of Appeals also held that Arlene was illegally dismissed because Fuji failed to comply with the
requirements of substantive and procedural due process necessary for her dismissal since she was a
regular employee.35

The Court of Appeals found that Arlene did not sign the non-renewal contract voluntarily and that the
contract was a mere subterfuge by Fuji to secure its position that it was her choice not to renew her
contract. She was left with no choice since Fuji was decided on severing her employment.36

Fuji filed a motion for reconsideration that was denied in the resolution37 dated December 7, 2012 for
failure to raise new matters.38

Aggrieved, Fuji filed this petition for review and argued that the Court of Appeals erred in affirming with
modification the National Labor Relations Commission’s decision, holding that Arlene was a regular
employee and that she was illegally dismissed. Fuji also questioned the award of monetary claims,
benefits, and damages.39

Fuji points out that Arlene was hired as a stringer, and it informed her that she would remain one.40 She
was hired as an independent contractor as defined in Sonza.41 Fuji had no control over her work.42 The
employment contracts were executed and renewed annually upon Arlene’s insistence to which Fuji
relented because she had skills that distinguished her from ordinary employees.43 Arlene and Fuji dealt
on equal terms when they negotiated and entered into the employment contracts.44 There was no illegal
dismissal because she freely agreed not to renew her fixed-term contract as evidenced by her e-mail
correspondences with Yoshiki Aoki.45 In fact, the signing of the non-renewal contract was not necessary
to terminate her employment since "such employment terminated upon expiration of her
contract."46 Finally, Fuji had dealt with Arlene in good faith, thus, she should not have been awarded
damages.47
Fuji alleges that it did not need a permanent reporter since the news reported by Arlene could easily be
secured from other entities or from the internet.48 Fuji "never controlled the manner by which she
performed her functions."49 It was Arlene who insisted that Fuji execute yearly fixed-term contracts so
that she could negotiate for annual increases in her pay.50

Fuji points out that Arlene reported for work for only five (5) days in February 2009, three (3) days in
March 2009, and one (1) day in April 2009.51 Despite the provision in her employment contract that sick
leaves in excess of 30 days shall not be paid, Fuji paid Arlene her entire salary for the months of March,
April, and May; four(4) months of separation pay; and a bonus for two and a half months for a total of
US$18,050.00.52 Despite having received the amount of US$18,050.00, Arlene still filed a case for illegal
dismissal.53

Fuji further argues that the circumstances would show that Arlene was not illegally dismissed. The
decision tonot renew her contract was mutually agreed upon by the parties as indicated in Arlene’s e-
mail54 dated March 11, 2009 where she consented to the non-renewal of her contract but refused to
sign anything.55 Aoki informed Arlene in an e-mail56 dated March 12, 2009 that she did not need to sign a
resignation letter and that Fuji would pay Arlene’s salary and bonus until May 2009 as well as separation
pay.57

Arlene sent an e-mail dated March 18, 2009 with her version of the non-renewal agreement that she
agreed to sign this time.58 This attached version contained a provision that Fuji shall re-hire her if she
was still interested to work for Fuji.59 For Fuji, Arlene’s e-mail showed that she had the power to
bargain.60

Fuji then posits that the Court of Appeals erred when it held that the elements of an employer-
employee relationship are present, particularly that of control;61 that Arlene’s separation from
employment upon the expiration of her contract constitutes illegal dismissal;62 that Arlene is entitled to
reinstatement;63 and that Fuji is liable to Arlene for damages and attorney’s fees.64

This petition for review on certiorari under Rule 45 was filed on February 8, 2013.65 On February 27,
2013, Arlene filed a manifestation66 stating that this court may not take jurisdiction over the case since
Fuji failed to authorize Corazon E. Acerden to sign the verification.67 Fuji filed a comment on the
manifestation68 on March 9, 2013.

Based on the arguments of the parties, there are procedural and substantive issues for resolution:

I. Whether the petition for review should be dismissed as Corazon E. Acerden, the signatory of the
verification and certification of non forum shopping of the petition, had no authority to sign the
verification and certification on behalf of Fuji;

II. Whether the Court of Appeals correctly determined that no grave abuse of discretion was committed
by the National Labor Relations Commission when it ruled that Arlene was a regular employee, not an
independent contractor, and that she was illegally dismissed; and

III. Whether the Court of Appeals properly modified the National Labor Relations Commission’s decision
by awarding reinstatement, damages, and attorney’s fees.

The petition should be dismissed.

I

Validity of the verification and certification against forum shopping

In its comment on Arlene’s manifestation, Fuji alleges that Corazon was authorized to sign the
verification and certification of non-forum shopping because Mr. Shuji Yano was empowered under the
secretary’s certificate to delegate his authority to sign the necessary pleadings, including the verification
and certification against forum shopping.69

On the other hand, Arlene points outthat the authority given to Mr. Shuji Yano and Mr. Jin Eto in the
secretary’s certificate is only for the petition for certiorari before the Court of Appeals.70 Fuji did not
attach any board resolution authorizing Corazon orany other person tofile a petition for review on
certiorari with this court.71 Shuji Yano and Jin Eto could not re-delegate the power thatwas delegated to
them.72 In addition, the special power of attorney executed by Shuji Yano in favor of Corazon indicated
that she was empowered to sign on behalf of Shuji Yano, and not on behalf of Fuji.73

The Rules of Court requires the

submission of verification and
certification against forum shopping

Rule 7, Section 4 of the 1997 Rules of Civil Procedure provides the requirement of verification, while
Section 5 of the same rule provides the requirement of certification against forum shopping. These
sections state:

SEC. 4. Ver if ica tio n. — Except when otherwise specifically required by law or rule, pleadings need not
be under oath, verified or accompanied by affidavit.

A pleading is verified by an affidavit that the affiant has read the pleading and that the allegations
therein are true and correct of his knowledge and belief.

A pleading required to be verifiedwhich containsa verification based on "information and belief," or

upon "knowledge, information and belief," or lacks a proper verification, shall be treated as an unsigned
pleading.

SEC. 5. Certification against forum shopping.— The plaintiff or principal party shall certify under oath in
the complaint orother initiatory pleading asserting a claim for relief or in a sworn certification annexed
thereto and simultaneously filed therewith: (a) that he has not theretofore commenced any action or
filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of
his knowledge, no such other action or claim is pending therein; (b) if there is such other pending action
or claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that
the same or similar action or claim has been filed or is pending, he shall report that fact within five (5)
days therefrom to the court wherein his aforesaid complaint or initiatory pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by mere amendment of the
complaint or other initiatory pleading but shall be cause for the dismissal of the case without prejudice,
unless otherwise provided, upon motion and after hearing. The submission of a false certification or
non-compliance with any of the undertakings therein shall constitute indirect contempt ofcourt, without
prejudice to the corresponding administrative and criminalactions. If the acts of the party or his counsel
clearly constitute willful and deliberate forum shopping, the same shall be ground for summary dismissal
with prejudice and shall constitute direct contempt, as well as a cause for administrative sanctions.

Section 4(e) of Rule 4574 requires that petitions for review should "contain a sworn certification against
forum shopping as provided in the last paragraph of section 2, Rule 42." Section 5 of the same rule
provides that failure to comply with any requirement in Section 4 is sufficient ground to dismiss the
petition.

Effects of non-compliance

Uy v. Landbank75 discussed the effect of non-compliance with regard to verification and stated that:

[t]he requirement regarding verification of a pleading is formal, not jurisdictional. Such requirement is
simply a condition affecting the form of pleading, the non-compliance of which does not necessarily
render the pleading fatally defective. Verification is simply intended to secure an assurance that the
allegations in the pleading are true and correct and not the product of the imagination or a matter of
speculation, and that the pleading is filed in good faith. The court may order the correction of the
pleading if the verification is lacking or act on the pleading although it is not verified, if the attending
circumstances are such that strict compliance with the rules may be dispensed with inorder that the
ends of justice may thereby be served.76 (Citations omitted)

Shipside Incorporated v. Court of Appeals77 cited the discussion in Uy and differentiated its effect from
non-compliance with the requirement of certification against forum shopping:

On the other hand, the lack of certification against forum shopping is generally not curable by the
submission thereof after the filing of the petition. Section 5, Rule 45 of the 1997 Rules of Civil Procedure
provides that the failure of the petitioner tosubmit the required documents that should accompany the
petition, including the certification against forum shopping, shall be sufficient ground for the dismissal
thereof. The same rule applies to certifications against forum shopping signed by a person on behalf of a
corporation which are unaccompanied by proof that said signatory is authorized to file a petition on
behalf of the corporation.78 (Emphasis supplied) Effects of substantial compliance with the requirement
of verification and certification against forum shopping

Although the general rule is that failure to attach a verification and certification against forum shopping
isa ground for dismissal, there are cases where this court allowed substantial compliance.

In Loyola v. Court of Appeals,79 petitioner Alan Loyola submitted the required certification one day after
filing his electoral protest.80 This court considered the subsequent filing as substantial compliance since
the purpose of filing the certification is to curtail forum shopping.81

In LDP Marketing, Inc. v. Monter,82 Ma. Lourdes Dela Peña signed the verification and certification
against forum shopping but failed to attach the board resolution indicating her authority to sign.83 In a
motion for reconsideration, LDP Marketing attached the secretary’s certificate quoting the board
resolution that authorized Dela Peña.84 Citing Shipside, this court deemed the belated submission as
substantial compliance since LDP Marketing complied with the requirement; what it failed to do was to
attach proof of Dela Peña’s authority to sign.85 Havtor Management Phils., Inc. v. National Labor
Relations Commission86 and General Milling Corporation v. National Labor Relations
Commission87 involved petitions that were dismissed for failure to attach any document showing that
the signatory on the verification and certification against forum-shopping was authorized.88 In both
cases, the secretary’s certificate was attached to the motion for reconsideration.89 This court considered
the subsequent submission of proof indicating authority to sign as substantial compliance.90 Altres v.
Empleo91 summarized the rules on verification and certification against forum shopping in this manner:

For the guidance of the bench and bar, the Court restates in capsule form the jurisprudential
pronouncements . . . respecting non-compliance with the requirement on, or submission of defective,
verification and certification against forum shopping:

1) A distinction must be made between non-compliance with the requirement on or submission of

defective verification, and noncompliance with the requirement on or submission of defective
certification against forum shopping.

2) As to verification, non-compliance therewith or a defect therein does not necessarily render the
pleading fatally defective. The court may order its submission or correction or act on the pleading if the
attending circumstances are such that strict compliance with the Rule may be dispensed with in order
that the ends of justice may be served thereby.

3) Verification is deemed substantially complied with when one who has ample knowledge to swear to
the truth of the allegations in the complaint or petition signs the verification, and when matters alleged
in the petition have been made in good faith or are true and correct.

4) As to certification against forum shopping, non-compliance therewith or a defect therein, unlike in

verification, is generally not curable by its subsequent submission or correction thereof, unless there is a
need to relax the Rule on the ground of "substantial compliance" or presence of "special circumstances
or compelling reasons."

5) The certification against forum shopping must be signed by all the plaintiffs or petitioners in a case;
otherwise, those who did not sign will be dropped as parties to the case. Under reasonable or justifiable
circumstances, however, as when all the plaintiffs or petitioners share a common interest and invoke a
common cause of action or defense, the signature of only one of them inthe certification against forum
shopping substantially complies with the Rule.

6) Finally, the certification against forum shopping must be executed by the party-pleader, not by his
counsel. If, however, for reasonable or justifiable reasons, the party-pleader is unable to sign, he must
execute a Special Power of Attorney designating his counsel of record to sign on his behalf.92

There was substantial compliance

by Fuji Television Network, Inc.

Being a corporation, Fuji exercises its power to sue and be sued through its board of directors or duly
authorized officers and agents. Thus, the physical act of signing the verification and certification against
forum shopping can only be done by natural persons duly authorized either by the corporate by-laws or
a board resolution.93

In its petition for review on certiorari, Fuji attached Hideaki Ota’s secretary’s certificate,94 authorizing
Shuji Yano and Jin Eto to represent and sign for and on behalf of Fuji.95 The secretary’s certificate was
duly authenticated96 by Sulpicio Confiado, Consul-General of the Philippines in Japan. Likewise attached
to the petition is the special power of attorney executed by Shuji Yano, authorizing Corazon to sign on
his behalf.97 The verification and certification against forum shopping was signed by Corazon.98

Arlene filed the manifestation dated February 27, 2013, arguing that the petition for review should be
dismissed because Corazon was not duly authorized to sign the verification and certification against
forum shopping.

Fuji filed a comment on Arlene’s manifestation, stating that Corazon was properly authorized to sign. On
the basis of the secretary’s certificate, Shuji Yano was empowered to delegate his authority.

Quoting the board resolution dated May 13, 2010, the secretary's certificate states:

(a) The Corporation shall file a Petition for Certiorari with the Court of Appeals, against Philippines’
National Labor Relations Commission ("NLRC") and Arlene S. Espiritu, pertaining to NLRC-NCR Case No.
LAC 00-002697-09, RAB No. 05-06811-00 and entitled "Arlene S. Espiritu v. Fuji Television Network,
Inc./Yoshiki Aoki", and participate in any other subsequent proceeding that may necessarily arise
therefrom, including but not limited to the filing of appeals in the appropriate venue;

(b) Mr. Shuji Yano and Mr. Jin Etobe authorized, as they are hereby authorized, to verify and execute the
certification against nonforum shopping which may be necessary or required to be attached to any
pleading to [sic] submitted to the Court of Appeals; and the authority to so verify and certify for the
Corporation in favor of the said persons shall subsist and remain effective until the termination of the
said case;

....

(d) Mr. Shuji Yano and Mr. Jin Etobe authorized, as they are hereby authorized, to represent and appear
on behalf the [sic] Corporation in all stages of the [sic] this case and in any other proceeding that may
necessarily arise thereform [sic], and to act in the Corporation’s name, place and stead to determine,
propose, agree, decide, do, and perform any and all of the following:

1. The possibility of amicable settlement or of submission to alternative mode of dispute resolution;

2. The simplification of the issue;

3. The necessity or desirability of amendments to the pleadings;

4. The possibility of obtaining stipulation or admission of facts and documents; and

5. Such other matters as may aid in the prompt disposition of the action.99 (Emphasis in the original;
Italics omitted)

Shuji Yano executed a special power of attorney appointing Ms. Ma. Corazon E. Acerden and Mr. Moises
A. Rollera as his attorneys-in-fact.100 The special power of attorney states:

That I, SHUJI YANO, of legal age, Japanese national, with office address at 2-4-8 Daiba, Minato-Ku,
Tokyo, 137-8088 Japan, and being the representative of Fuji TV, INc., [sic] (evidenced by the attached
Secretary’s Certificate) one of the respondents in NLRC-NCR Case No. 05-06811-00 entitled "Arlene S.
Espiritu v. Fuji Television Network, Inc./Yoshiki Aoki", and subsequently docketed before the Court of
Appeals asC.A. G.R. S.P. No. 114867 (Consolidated with SP No. 114889) do hereby make, constitute and
appoint Ms. Ma. Corazon E. Acerden and Mr. Moises A. Rolleraas my true and lawful attorneys-infact for
me and my name, place and stead to act and represent me in the above-mentioned case, with special
power to make admission/s and stipulations and/or to make and submit as well as to accept and
approve compromise proposals upon such terms and conditions and under such covenants as my
attorney-in-fact may deem fit, and to engage the services of Villa Judan and Cruz Law Officesas the legal
counsel to represent the Company in the Supreme Court;

The said Attorneys-in-Fact are hereby further authorized to make, sign, execute and deliver such papers
ordocuments as may be necessary in furtherance of the power thus granted, particularly to sign and
execute the verification and certification of non-forum shopping needed to be filed.101 (Emphasis in the
original)

In its comment102 on Arlene’s manifestation, Fuji argues that Shuji Yano could further delegate his
authority because the board resolution empowered him to "act in the Corporation’s name, place and
stead to determine, propose, agree, decided [sic], do and perform any and all of the following: . . . such
other matters as may aid in the prompt disposition of the action."103 To clarify, Fuji attached a
verification and certification against forum shopping, but Arlene questions Corazon’s authority to sign.
Arlene argues that the secretary’s certificate empowered Shuji Yano to file a petition for certiorari
before the Court of Appeals, and not a petition for review before this court, and that since Shuji Yano’s
authority was delegated to him, he could not further delegate such power. Moreover, Corazon was
representing Shuji Yano in his personal capacity, and not in his capacity as representative of Fuji.

A review of the board resolution quoted in the secretary’s certificate shows that Fuji shall "file a Petition
for Certiorari with the Court of Appeals"104 and "participate in any other subsequent proceeding that
may necessarily arise therefrom, including but not limited to the filing of appeals in the appropriate
venue,"105 and that Shuji Yano and Jin Eto are authorized to represent Fuji "in any other proceeding that
may necessarily arise thereform [sic]."106 As pointed out by Fuji, Shuji Yano and Jin Eto were also
authorized to "act in the Corporation’s name, place and stead to determine, propose, agree, decide, do,
and perform anyand all of the following: . . . 5. Such other matters as may aid in the prompt disposition
of the action."107

Considering that the subsequent proceeding that may arise from the petition for certiorari with the
Court of Appeals is the filing of a petition for review with this court, Fuji substantially complied with the
procedural requirement.

On the issue of whether Shuji Yano validly delegated his authority to Corazon, Article 1892 of the Civil
Code of the Philippines states:

ART. 1892. The agent may appoint a substitute if the principal has not prohibited him from doing so; but
he shall be responsible for the acts of the substitute:

(1) When he was not given the power to appoint one;

(2) When he was given such power, but without designating the person, and the person appointed was
notoriously incompetent or insolvent. All acts of the substitute appointed against the prohibition of the
principal shall be void.

The secretary’s certificate does not state that Shuji Yano is prohibited from appointing a substitute. In
fact, heis empowered to do acts that will aid in the resolution of this case.
This court has recognized that there are instances when officials or employees of a corporation can sign
the verification and certification against forum shopping without a board resolution. In Cagayan Valley
Drug Corporation v. CIR,108 it was held that:

In sum, we have held that the following officials or employees of the company can sign the verification
and certification without need of a board resolution: (1) the Chairperson of the Board of Directors, (2)
the President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel
Officer, and (5) an Employment Specialist in a labor case.

While the above cases109 do not provide a complete listing of authorized signatories to the verification
and certification required by the rules, the determination of the sufficiency of the authority was done on
a case to case basis. The rationale applied in the foregoing cases is to justify the authority of corporate
officers or representatives of the corporation to sign the verification or certificate against forum
shopping, being ‘in a position to verify the truthfulness and correctness of the allegations in the
petition.’110

Corazon’s affidavit111 states that she is the "office manager and resident interpreter of the Manila
Bureau of Fuji Television Network, Inc."112 and that she has "held the position for the last twenty-three
years."113

As the office manager for 23 years,Corazon can be considered as having knowledge of all matters in
Fuji’s Manila Bureau Office and is in a position to verify "the truthfulness and the correctness of the
allegations in the Petition."114

Thus, Fuji substantially complied with the requirements of verification and certification against forum
shopping.

Before resolving the substantive issues in this case, this court will discuss the procedural parameters of a
Rule 45 petition for review in labor cases.

II

Procedural parameters of petitions for review in labor cases

Article 223 of the Labor Code115 does not provide any mode of appeal for decisions of the National Labor
Relations Commission. It merely states that "[t]he decision of the Commission shall be final and
executory after ten (10) calendar days from receipt thereof by the parties." Being final, it is no longer
appealable. However, the finality of the National Labor Relations Commission’s decisions does not mean
that there is no more recourse for the parties.

In St. Martin Funeral Home v. National Labor Relations Commission,116 this court cited several
cases117 and rejected the notion that this court had no jurisdiction to review decisions of the National
Labor Relations Commission. It stated that this court had the power to review the acts of the National
Labor Relations Commission to see if it kept within its jurisdiction in deciding cases and alsoas a form of
check and balance.118 This court then clarified that judicial review of National Labor Relations
Commission decisions shall be by way of a petition for certiorari under Rule 65. Citing the doctrine of
hierarchy of courts, it further ruled that such petitions shall be filed before the Court of Appeals. From
the Court of Appeals, an aggrieved party may file a petition for review on certiorari under Rule 45.
A petition for certiorari under Rule 65 is an original action where the issue is limited to grave abuse of
discretion. As an original action, it cannot be considered as a continuation of the proceedings of the
labor tribunals.

On the other hand, a petition for review on certiorari under Rule 45 is a mode of appeal where the issue
is limited to questions of law. In labor cases, a Rule 45 petition is limited toreviewing whether the Court
of Appeals correctly determined the presence or absence of grave abuse of discretion and deciding
other jurisdictional errors of the National Labor Relations Commission.119

In Odango v. National Labor Relations Commission,120 this court explained that a petition for certiorari is
an extraordinary remedy that is "available only and restrictively in truly exceptional cases"121 and that its
sole office "is the correction of errors of jurisdiction including commission of grave abuse of discretion
amounting to lack or excess of jurisdiction."122 A petition for certiorari does not include a review of
findings of fact since the findings of the National Labor Relations Commission are accorded finality.123 In
cases where the aggrieved party assails the National Labor Relations Commission’s findings, he or she
must be able to show that the Commission "acted capriciously and whimsically or in total disregard of
evidence material to the controversy."124

When a decision of the Court of Appeals under a Rule 65 petition is brought to this court by way of a
petition for review under Rule 45, only questions of law may be decided upon. As held in Meralco
Industrial v. National Labor Relations Commission:125

This Court is not a trier of facts. Well-settled is the rule that the jurisdiction of this Court ina petition for
review on certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only errors of
law, not of fact, unless the factual findings complained of are completely devoid of support from the
evidence on record, or the assailed judgment is based on a gross misapprehension of facts. Besides,
factual findings of quasi-judicial agencies like the NLRC, when affirmed by the Court of Appeals, are
conclusive upon the parties and binding on this Court.126

Career Philippines v. Serna,127 citing Montoya v. Transmed,128 is instructive on the parameters of judicial

review under Rule 45:

As a rule, only questions of law may be raised in a Rule 45 petition. In one case, we discussed the
particular parameters of a Rule 45 appeal from the CA’s Rule 65 decision on a labor case, as follows:

In a Rule 45 review, we consider the correctness of the assailed CA decision, in contrast with the review
for jurisdictional error that we undertake under Rule 65. Furthermore, Rule 45 limits us to the review of
questions of law raised against the assailed CA decision. In ruling for legal correctness, we have to view
the CA decision in the same context that the petition for certiorari it ruled upon was presented to it; we
have to examine the CA decision from the prism of whether it correctly determined the presence or
absence of grave abuse of discretion in the NLRC decision before it, not on the basis of whether the
NLRC decision on the merits of the case was correct. In other words, we have to be keenly aware that
the CA undertook a Rule 65 review, not a review on appeal, of the NLRC decision challenged before
it.129 (Emphasis in the original)

Justice Brion’s dissenting opinion in Abott Laboratories, PhiIippines v. Aicaraz130 discussed that in

petitions for review under Rule 45, "the Court simply determines whether the legal correctness of the
CA’s finding that the NLRC ruling . . . had basis in fact and in Iaw."131 In this kind of petition, the proper
question to be raised is, "Did the CA correctly determine whether the NLRC committed grave abuse of
discretion in ruling on the case?"132

Justice Brion’s dissenting opinion also laid down the following guidelines:

If the NLRC ruling has basis in the evidence and the applicable law and jurisprudence, then no grave
abuse of discretion exists and the CA should so declare and, accordingly, dismiss the petition. If grave
abuse of discretion exists, then the CA must grant the petition and nullify the NLRC ruling, entering at
the same time the ruling that isjustified under the evidence and the governing law, rules and
jurisprudence. In our Rule 45 review, this Court must denythe petition if it finds that the CA correctly
acted.133 (Emphasis in the original)

These parameters shall be used in resolving the substantive issues in this petition.

III

Determination of employment status; burden of proof

In this case, there is no question thatArlene rendered services to Fuji. However, Fuji alleges that Arlene
was an independent contractor, while Arlene alleges that she was a regular employee. To resolve this
issue, we ascertain whether an employer-employee relationship existed between Fuji and Arlene.

This court has often used the four-fold test to determine the existence of an employer-employee
relationship. Under the four-fold test, the "control test" is the most important.134 As to how the
elements in the four-fold test are proven, this court has discussed that:

[t]here is no hard and fast rule designed to establish the aforesaid elements. Any competent and
relevant evidence to prove the relationship may be admitted. Identification cards, cash vouchers, social
security registration, appointment letters or employment contracts, payrolls, organization charts, and
personnel lists, serve as evidence of employee status.135

If the facts of this case vis-à-vis the four-fold test show that an employer-employee relationship existed,
we then determine the status of Arlene’s employment, i.e., whether she was a regular employee.
Relative to this, we shall analyze Arlene’s fixed-term contract and determine whether it supports her
argument that she was a regular employee, or the argument of Fuji that she was an independent
contractor. We shall scrutinize whether the nature of Arlene’s work was necessary and desirable to
Fuji’s business or whether Fuji only needed the output of her work. If the circumstances show that
Arlene’s work was necessary and desirable to Fuji, then she is presumed to be a regular employee. The
burden of proving that she was an independent contractor lies with Fuji.

In labor cases, the quantum of proof required is substantial evidence.136 "Substantial evidence" has been
defined as "such amount of relevant evidence which a reasonable mind might accept as adequate to
justify a conclusion."137

If Arlene was a regular employee, we then determine whether she was illegally dismissed. In complaints
for illegal dismissal, the burden of proof is on the employee to prove the fact of dismissal.138 Once the
employee establishes the fact of dismissal, supported by substantial evidence, the burden of proof shifts
tothe employer to show that there was a just or authorized cause for the dismissal and that due process
was observed.139
IV

Whether the Court of Appeals correctly affirmed the National Labor

Relations Commission’s finding that Arlene was a regular employee

Fuji alleges that Arlene was anindependent contractor, citing Sonza v. ABS-CBN and relying on the
following facts: (1) she was hired because of her skills; (2) her salary was US$1,900.00, which is higher
than the normal rate; (3) she had the power to bargain with her employer; and (4) her contract was for a
fixed term. According to Fuji, the Court of Appeals erred when it ruled that Arlene was forcedto sign the
non-renewal agreement, considering that she sent an email with another version of the non-renewal
agreement.140 Further, she is not entitled tomoral damages and attorney’s fees because she acted in bad
faith when she filed a labor complaint against Fuji after receiving US$18,050.00 representing her salary
and other benefits.141 Arlene argues that she was a regular employee because Fuji had control and
supervision over her work. The news events that she covered were all based on the instructions of
Fuji.142 She maintains that the successive renewal of her employment contracts for four (4) years
indicates that her work was necessary and desirable.143 In addition, Fuji’s payment of separation pay
equivalent to one (1) month’s pay per year of service indicates that she was a regular employee.144 To
further support her argument that she was not an independent contractor, she states that Fuji owns the
laptop computer and mini-camera that she used for work.145 Arlene also argues that Sonza is not
applicable because she was a plain reporter for Fuji, unlike Jay Sonza who was a news anchor, talk show
host, and who enjoyed a celebrity status.146 On her illness, Arlene points outthat it was not a ground for
her dismissal because her attending physician certified that she was fit to work.147

Arlene admits that she signed the non-renewal agreement with quitclaim, not because she agreed to
itsterms, but because she was not in a position to reject the non-renewal agreement. Further, she badly
needed the salary withheld for her sustenance and medication.148 She posits that her acceptance of
separation pay does not bar filing of a complaint for illegal dismissal.149

Article 280 of the Labor Code provides that:

Art. 280. Regular and casual employment.The provisions of written agreement to the contrary
notwithstanding and regardless of the oral agreement of the parties, an employment shall be deemed to
be regular where the employee has been engaged to perform activities which are usually necessary or
desirable in the usual business or trade of the employer, except where the employment has been fixed
for a specific project or undertaking the completion or termination of which has been determined at the
time of the engagement of the employee or where the work or services to be performed is seasonal in
nature and the employment is for the duration of the season.

An employment shall be deemed to be casual if it is not covered by the preceding paragraph; Provided,
That, any employee who has rendered at least one year of service, whether such service is continuous or
broken, shall be considered a regular employee with respect to the activity in which heis employed and
his employment shall continue while such activity exist.

This provision classifies employees into regular, project, seasonal, and casual. It further classifies regular
employees into two kinds: (1) those "engaged to perform activities which are usually necessary or
desirable in the usual business or trade of the employer"; and (2) casual employees who have "rendered
at least one year of service, whether such service is continuous or broken."
Another classification of employees, i.e., employees with fixed-term contracts, was recognized in Brent
School, Inc. v. Zamora150 where this court discussed that:

Logically, the decisive determinant in the term employment should not be the activities that the
employee is called upon to perform, but the day certain agreed upon by the parties for the
commencement and termination of their employment relationship, a day certainbeing understood to be
"that which must necessarily come, although it may not be known when."151 (Emphasis in the original)

This court further discussed that there are employment contracts where "a fixed term is an essential and
natural appurtenance"152 such as overseas employment contracts and officers in educational
institutions.153

Distinctions among fixed-term

employees, independent contractors,
and regular employees

GMA Network, Inc. v. Pabriga154 expounded the doctrine on fixed term contracts laid down in Brentin
the following manner:

Cognizant of the possibility of abuse in the utilization of fixed term employment contracts, we
emphasized in Brentthat where from the circumstances it is apparent that the periods have been
imposed to preclude acquisition of tenurial security by the employee, they should be struck down as
contrary to public policy or morals. We thus laid down indications or criteria under which "term
employment" cannot be said to be in circumvention of the law on security of tenure, namely:

1) The fixed period of employment was knowingly and voluntarily agreed upon by the parties without
any force, duress, or improper pressure being brought to bear upon the employee and absent any other
circumstances vitiating his consent; or

2) It satisfactorily appears that the employer and the employee dealt with each other on more or less
equal terms with no moral dominance exercised by the former or the latter.

These indications, which must be read together, make the Brent doctrine applicable only in a few special
cases wherein the employer and employee are on more or less in equal footing in entering into the
contract. The reason for this is evident: whena prospective employee, on account of special skills or
market forces, is in a position to make demands upon the prospective employer, such prospective
employee needs less protection than the ordinary worker. Lesser limitations on the parties’ freedom of
contract are thus required for the protection of the employee.155 (Citations omitted)

For as long as the guidelines laid down in Brentare satisfied, this court will recognize the validity of the
fixed-term contract.

In Labayog v. M.Y. San Biscuits, Inc.,156 this court upheld the fixedterm employment of petitioners
because from the time they were hired, they were informed that their engagement was for a specific
period. This court stated that:

[s]imply put, petitioners were notregular employees. While their employment as mixers, packers and
machine operators was necessary and desirable in the usual business ofrespondent company, they were
employed temporarily only, during periods when there was heightened demand for production.
Consequently, there could have been no illegal dismissal when their services were terminated on
expiration of their contracts. There was even no need for notice of termination because they knew
exactly when their contracts would end. Contracts of employment for a fixed period terminate on their
own at the end of such period.

Contracts of employment for a fixed period are not unlawful. What is objectionable is the practice of
some scrupulous employers who try to circumvent the law protecting workers from the capricious
termination of employment.157 (Citation omitted)

Caparoso v. Court of Appeals158 upheld the validity of the fixed-term contract of employment. Caparoso
and Quindipan were hired as delivery men for three (3) months. At the end of the third month, they
were hired on a monthly basis. In total, they were hired for five (5) months. They filed a complaint for
illegal dismissal.159 This court ruled that there was no evidence indicating that they were pressured into
signing the fixed-term contracts. There was likewise no proof that their employer was engaged in hiring
workers for five (5) months onlyto prevent regularization. In the absence of these facts, the fixed-term
contracts were upheld as valid.160 On the other hand, an independent contractor is defined as:

. . . one who carries on a distinct and independent business and undertakes to perform the job, work, or
service on its own account and under one’s own responsibility according to one’s own manner and
method, free from the control and direction of the principal in all matters connected with the
performance of the work except as to the results thereof.161

In view of the "distinct and independent business" of independent contractors, no employer-employee

relationship exists between independent contractors and their principals. Independent contractors are
recognized under Article 106 of the Labor Code:

Art. 106. Contractor or subcontractor. Whenever an employer enters into a contract with another
person for the performance of the former’s work, the employees of the contractor and of the latter’s
subcontractor, if any, shall be paid in accordance with the provisions of this Code.

....

The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the
contracting-out of labor to protect the rights of workers established under this Code. In so prohibiting or
restricting, he may make appropriate distinctions between labor-only contracting and job contracting as
well as differentiations within these types of contracting and determine who among the parties involved
shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of
any provision of this Code.

There is "labor-only" contracting where the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment, machineries, work premises, among
others, and the workers recruited and placed by such person are performing activities which are directly
related to the principal business of such employer. In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be responsible to the workers in the same
manner and extent as if the latterwere directly employed by him.

In Department Order No. 18-A, Seriesof 2011, of the Department of Labor and Employment, a
contractor is defined as having:
Section 3. . . .

....

(c) . . . an arrangement whereby a principal agrees to put out or farm out with a contractor the
performance or completion of a specific job, work or service within a definite or predetermined period,
regardless of whether such job, work or service is to be performed or completed within oroutside the
premises of the principal.

This department order also states that there is a trilateral relationship in legitimate job contracting and
subcontracting arrangements among the principal, contractor, and employees of the contractor. There is
no employer-employee relationship between the contractor and principal who engages the contractor’s
services, but there is an employer-employee relationship between the contractor and workers hired to
accomplish the work for the principal.162

Jurisprudence has recognized another kind of independent contractor: individuals with unique skills and
talents that set them apart from ordinary employees. There is no trilateral relationship in this case
because the independent contractor himself or herself performs the work for the principal. In other
words, the relationship is bilateral.

In Orozco v. Court of Appeals,163 Wilhelmina Orozco was a columnist for the Philippine Daily Inquirer.
This court ruled that she was an independent contractor because of her "talent, skill, experience, and
her unique viewpoint as a feminist advocate."164 In addition, the Philippine Daily Inquirer did not have
the power of control over Orozco, and she worked at her own pleasure.165

Semblante v. Court of Appeals166 involved a masiador167 and a sentenciador.168 This court ruled that

"petitioners performed their functions as masiadorand sentenciador free from the direction and control
of respondents"169 and that the masiador and sentenciador "relied mainly on their ‘expertise that is
characteristic of the cockfight gambling.’"170 Hence, no employer-employee relationship existed.

Bernarte v. Philippine Basketball Association171 involved a basketball referee. This court ruled that "a
referee is an independent contractor, whose special skills and independent judgment are required
specifically for such position and cannot possibly be controlled by the hiring party."172

In these cases, the workers were found to be independent contractors because of their unique skills and
talents and the lack of control over the means and methods in the performance of their work.

In other words, there are different kinds of independent contractors: those engaged in legitimate job
contracting and those who have unique skills and talents that set them apart from ordinary employees.

Since no employer-employee relationship exists between independent contractors and their principals,
their contracts are governed by the Civil Code provisions on contracts and other applicable laws.173

A contract is defined as "a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service."174 Parties are free to stipulate on
terms and conditions in contracts as long as these "are not contrary to law, morals, good customs, public
order, or public policy."175 This presupposes that the parties to a contract are on equal footing. Theycan
bargain on terms and conditions until they are able to reach an agreement.
On the other hand, contracts of employment are different and have a higher level of regulation because
they are impressed with public interest. Article XIII, Section 3 of the 1987 Constitution provides full
protection to labor:

ARTICLE XIII. SOCIAL JUSTICE AND HUMAN RIGHTS

....

LABOR

Section 3. The State shall afford full protection to labor, local and overseas, organized and unorganized,
and promote full employment and equality of employment opportunities for all.

It shall guarantee the rights of all workers to self-organization, collective bargaining and negotiations,
and peaceful concerted activities, including the right to strike in accordance with law. They shall be
entitled to security of tenure, humane conditions of work, and a living wage. They shall also participate
in policy and decision-making processes affecting their rights and benefits as may be provided by law.

The State shall promote the principle of shared responsibility between workers and employers and the
preferential use of voluntary modes in settling disputes, including conciliation, and shall enforce their
mutual compliance therewith to foster industrial peace.

The State shall regulate the relations between workers and employers, recognizing the right of labor to
its just share in the fruits of production and the right of enterprises to reasonable returns on
investments, and to expansion and growth.

Apart from the constitutional guarantee of protection to labor, Article 1700 of the Civil Code states:

ART. 1700. The relations between capital and labor are not merely contractual. They are so impressed
with public interest that labor contracts must yield to the common good. Therefore, such contracts are
subject to the special laws on labor unions, collective bargaining, strikes and lockouts, closed shop,
wages, working conditions, hours of labor and similar subjects.

In contracts of employment, the employer and the employee are not on equal footing. Thus, it is subject
to regulatory review by the labor tribunals and courts of law. The law serves to equalize the unequal.
The labor force is a special class that is constitutionally protected because of the inequality between
capital and labor.176 This presupposes that the labor force is weak. However, the level of protection to
labor should vary from case to case; otherwise, the state might appear to be too paternalistic in
affording protection to labor. As stated in GMA Network, Inc. v. Pabriga, the ruling in Brent applies in
cases where it appears that the employer and employee are on equal footing.177 This recognizes the fact
that not all workers are weak. To reiterate the discussion in GMA Network v. Pabriga:

The reason for this is evident: when a prospective employee, on account of special skills or market
forces, is in a position to make demands upon the prospective employer, such prospective employee
needs less protection than the ordinary worker. Lesser limitations on the parties’ freedom of contract
are thus required for the protection of the employee.178

The level of protection to labor mustbe determined on the basis of the nature of the work, qualifications
of the employee, and other relevant circumstances.
For example, a prospective employee with a bachelor’s degree cannot be said to be on equal footing
witha grocery bagger with a high school diploma. Employees who qualify for jobs requiring special
qualifications such as "[having] a Master’s degree" or "[having] passed the licensure exam" are different
from employees who qualify for jobs that require "[being a] high school graduate; withpleasing
personality." In these situations, it is clear that those with special qualifications can bargain with the
employer on equal footing. Thus, the level of protection afforded to these employees should be
different.

Fuji’s argument that Arlene was an independent contractor under a fixed-term contract is contradictory.
Employees under fixed-term contracts cannot be independent contractors because in fixed-term
contracts, an employer-employee relationship exists. The test in this kind of contract is not the necessity
and desirability of the employee’s activities, "but the day certain agreed upon by the parties for the
commencement and termination of the employment relationship."179 For regular employees, the
necessity and desirability of their work in the usual course of the employer’s business are the
determining factors. On the other hand, independent contractors do not have employer-employee
relationships with their principals. Hence, before the status of employment can be determined, the
existence of an employer-employee relationship must be established.

The four-fold test180 can be used in determining whether an employeremployee relationship exists. The
elements of the four-fold test are the following: (1) the selection and engagement of the employee; (2)
the payment of wages; (3) the power of dismissal; and (4) the power of control, which is the most
important element.181

The "power of control" was explained by this court in Corporal, Sr. v. National Labor Relations
Commission:182

The power to control refers to the existence of the power and not necessarily to the actual exercise
thereof, nor is it essential for the employer to actually supervise the performance of duties of the
employee. It is enough that the employer has the right to wield that power.183 (Citation omitted)

Orozco v. Court of Appeals further elucidated the meaning of "power of control" and stated the
following:

Logically, the line should be drawn between rules that merely serve as guidelines towards the
achievement of the mutually desired result without dictating the means or methods to be employed in
attaining it, and those that control or fix the methodology and bind or restrict the party hired to the use
of such means. The first, which aim only to promote the result, create no employer-employee
relationship unlike the second, which address both the result and the means used to achieve it. . . .
184
 (Citation omitted)

In Locsin, et al. v. Philippine Long Distance Telephone Company,185 the "power of control" was defined as
"[the] right to control not only the end to be achieved but also the means to be used in reaching such
end."186

Here, the Court of Appeals applied Sonza v. ABS-CBN and Dumpit Murillo v. Court of Appeals187 in
determining whether Arlene was an independent contractor or a regular employee.
In deciding Sonza and Dumpit-Murillo, this court used the four-fold test. Both cases involved
newscasters and anchors. However, Sonza was held to be an independent contractor, while Dumpit-
Murillo was held to be a regular employee.

Comparison of the Sonza and

Dumpit-Murillo cases using
the four-fold test

Sonza was engaged by ABS-CBN in view of his "unique skills, talent and celebrity status not possessed by
ordinary employees."188 His work was for radio and television programs.189 On the other hand, Dumpit-
Murillo was hired by ABC as a newscaster and co-anchor.190 Sonza’s talent fee amounted to ₱317,000.00
per month, which this court found to be a substantial amount that indicatedhe was an independent
contractor rather than a regular employee.191 Meanwhile, Dumpit-Murillo’s monthly salary was
₱28,000.00, a very low amount compared to what Sonza received.192

Sonza was unable to prove that ABS-CBN could terminate his services apart from breach of contract.
There was no indication that he could be terminated based on just or authorized causes under the Labor
Code. In addition, ABS-CBN continued to pay his talent fee under their agreement, even though his
programs were no longer broadcasted.193 Dumpit-Murillo was found to have beenillegally dismissed by
her employer when they did not renew her contract on her fourth year with ABC.194

In Sonza, this court ruled that ABS-CBN did not control how Sonza delivered his lines, how he appeared
on television, or how he sounded on radio.195 All that Sonza needed was his talent.196 Further, "ABS-CBN
could not terminate or discipline SONZA even if the means and methods of performance of his work . . .
did not meet ABS-CBN’s approval."197 In Dumpit-Murillo, the duties and responsibilities enumerated in
her contract was a clear indication that ABC had control over her work.198

Application of the four-fold test

The Court of Appeals did not err when it relied on the ruling in Dumpit-Murillo and affirmed the ruling of
the National Labor Relations Commission finding that Arlene was a regular employee. Arlene was hired
by Fuji as a news producer, but there was no showing that she was hired because of unique skills that
would distinguish her from ordinary employees. Neither was there any showing that she had a celebrity
status. Her monthly salary amounting to US$1,900.00 appears tobe a substantial sum, especially if
compared to her salary whenshe was still connected with GMA.199 Indeed, wages may indicate whether
oneis an independent contractor. Wages may also indicate that an employee is able to bargain with the
employer for better pay. However, wages should not be the conclusive factor in determining whether
one is an employee or an independent contractor.

Fuji had the power to dismiss Arlene, as provided for in paragraph 5 of her professional employment
contract.200 Her contract also indicated that Fuji had control over her work because she was required to
work for eight (8) hours from Monday to Friday, although on flexible time.201 Sonza was not required to
work for eight (8) hours, while Dumpit-Murillo had to be in ABC to do both on-air and off-air tasks.

On the power to control, Arlene alleged that Fuji gave her instructions on what to report.202 Even the
mode of transportation in carrying out her functions was controlled by Fuji. Paragraph 6 of her contract
states:
6. During the travel to carry out work, if there is change of place or change of place of work, the train,
bus, or public transport shall be used for the trip. If the Employee uses the private car during the work
and there is an accident the Employer shall not be responsible for the damage, which may be caused to
the Employee.203

Thus, the Court of Appeals did not err when it upheld the findings of the National Labor Relations
Commission that Arlene was not an independent contractor.

Having established that an employer-employee relationship existed between Fuji and Arlene, the next
questions for resolution are the following: Did the Court of Appeals correctly affirm the National Labor
Relations Commission that Arlene had become a regular employee? Was the nature of Arlene’s work
necessary and desirable for Fuji’s usual course of business?

Arlene was a regular employee

with a fixed-term contract

The test for determining regular employment is whether there is a reasonable connection between the
employee’s activities and the usual business of the employer. Article 280 provides that the nature of
work must be "necessary or desirable in the usual business or trade of the employer" as the test for
determining regular employment. As stated in ABS-CBN Broadcasting Corporation v. Nazareno:204

In determining whether an employment should be considered regular or non-regular, the applicable test
is the reasonable connection between the particular activity performed by the employee in relation to
the usual business or trade of the employer. The standard, supplied by the law itself, is whether the
work undertaken is necessary or desirable in the usual business or trade of the employer, a fact that can
be assessed by looking into the nature of the services rendered and its relation to the general scheme
under which the business or trade is pursued in the usual course. It is distinguished from a specific
undertaking that is divorced from the normal activities required incarrying on the particular business or
trade.205

However, there may be a situation where an employee’s work is necessary but is not always desirable
inthe usual course of business of the employer. In this situation, there is no regular employment.

In San Miguel Corporation v. National Labor Relations Commission,206 Francisco de Guzman was hired to
repair furnaces at San Miguel Corporation’s Manila glass plant. He had a separate contract for every
furnace that he repaired. He filed a complaint for illegal dismissal three (3) years after the end of his last
contract.207 In ruling that de Guzman did not attain the status of a regular employee, this court
explained:

Note that the plant where private respondent was employed for only seven months is engaged in the
manufacture of glass, an integral component of the packaging and manufacturing business of petitioner.
The process of manufacturing glass requires a furnace, which has a limited operating life. Petitioner
resorted to hiring project or fixed term employees in having said furnaces repaired since said activity is
not regularly performed. Said furnaces are to be repaired or overhauled only in case of need and after
being used continuously for a varying period of five (5) to ten (10) years. In 1990, one of the furnaces of
petitioner required repair and upgrading. This was an undertaking distinct and separate from
petitioner's business of manufacturing glass. For this purpose, petitioner must hire workers to undertake
the said repair and upgrading. . . .
....

Clearly, private respondent was hired for a specific project that was not within the regular business of
the corporation. For petitioner is not engaged in the business of repairing furnaces. Although the activity
was necessary to enable petitioner to continue manufacturing glass, the necessity therefor arose only
when a particular furnace reached the end of its life or operating cycle. Or, as in the second undertaking,
when a particular furnace required an emergency repair. In other words, the undertakings where private
respondent was hired primarily as helper/bricklayer have specified goals and purposes which are
fulfilled once the designated work was completed. Moreover, such undertakings were also identifiably
separate and distinct from the usual, ordinary or regular business operations of petitioner, which is glass
manufacturing. These undertakings, the duration and scope of which had been determined and made
known to private respondent at the time of his employment, clearly indicated the nature of his
employment as a project employee.208

Fuji is engaged in the business of broadcasting,209 including news programming.210 It is based in

Japan211 and has overseas offices to cover international news.212

Based on the record, Fuji’s Manila Bureau Office is a small unit213 and has a few employees.214 As such,
Arlene had to do all activities related to news gathering. Although Fuji insists that Arlene was a stringer,
it alleges that her designation was "News Talent/Reporter/Producer."215

A news producer "plans and supervises newscast . . . [and] work[s] with reporters in the field planning
and gathering information. . . ."216 Arlene’s tasks included "[m]onitoring and [g]etting [n]ews [s]tories,
[r]eporting interviewing subjects in front of a video camera,"217 "the timely submission of news and
current events reports pertaining to the Philippines[,] and traveling [sic] to [Fuji’s] regional office in
Thailand."218 She also had to report for work in Fuji’s office in Manila from Mondays to Fridays, eight (8)
hours per day.219 She had no equipment and had to use the facilities of Fuji to accomplish her tasks.

The Court of Appeals affirmed the finding of the National Labor Relations Commission that the
successive renewals of Arlene’s contract indicated the necessity and desirability of her work in the usual
course of Fuji’s business. Because of this, Arlene had become a regular employee with the right to
security of tenure.220 The Court of Appeals ruled that:

Here, Espiritu was engaged by Fuji as a stinger [sic] or news producer for its Manila Bureau. She was
hired for the primary purpose of news gathering and reporting to the television network’s headquarters.
Espiritu was not contracted on account of any peculiar ability or special talent and skill that she may
possess which the network desires to make use of. Parenthetically, ifit were true that Espiritu is an
independent contractor, as claimed by Fuji, the factthat everything that she uses to perform her job is
owned by the company including the laptop computer and mini camera discounts the idea of job
contracting.221

Moreover, the Court of Appeals explained that Fuji’s argument that no employer-employee relationship
existed in view of the fixed-term contract does not persuade because fixed-term contracts of
employment are strictly construed.222 Further, the pieces of equipment Arlene used were all owned by
Fuji, showing that she was a regular employee and not an independent contractor.223

The Court of Appeals likewise cited Dumpit-Murillo, which involved fixed-term contracts that were
successively renewed for four (4) years.224 This court held that "[t]his repeated engagement under
contract of hire is indicative of the necessity and desirability of the petitioner’s work in private
respondent ABC’s business."225

With regard to Fuji’s argument that Arlene’s contract was for a fixed term, the Court of Appeals cited
Philips Semiconductors, Inc. v. Fadriquela226 and held that where an employee’s contract "had been
continuously extended or renewed to the same position, with the same duties and remained in the
employ without any interruption,"227 then such employee is a regular employee. The continuous renewal
is a scheme to prevent regularization. On this basis, the Court of Appeals ruled in favor of Arlene.

As stated in Price, et al. v. Innodata Corp., et al.:228

The employment status of a person is defined and prescribed by law and not by what the parties say it
should be. Equally important to consider is that a contract of employment is impressed with public
interest such that labor contracts must yield to the common good. Thus, provisions of applicable
statutes are deemed written into the contract, and the parties are not at liberty to insulate themselves
and their relationships from the impact of labor laws and regulations by simply contracting with each
other.229 (Citations omitted)

Arlene’s contract indicating a fixed term did not automatically mean that she could never be a regular
employee. This is precisely what Article 280 seeks to avoid. The ruling in Brent remains as the exception
rather than the general rule.

Further, an employee can be a regular employee with a fixed-term contract. The law does not preclude
the possibility that a regular employee may opt to have a fixed-term contract for valid reasons. This was
recognized in Brent: For as long as it was the employee who requested, or bargained, that the contract
have a "definite date of termination," or that the fixed-term contract be freely entered into by the
employer and the employee, then the validity of the fixed-term contract will be upheld.230

Whether the Court of Appeals correctly affirmed

the National Labor Relations Commission’s finding of illegal dismissal

Fuji argues that the Court of Appeals erred when it held that Arlene was illegally dismissed, in view of
the non-renewal contract voluntarily executed by the parties. Fuji also argues that Arlene’s contract
merely expired; hence, she was not illegally dismissed.231

Arlene alleges that she had no choice but to sign the non-renewal contract because Fuji withheldher
salary and benefits.

With regard to this issue, the Court of Appeals held:

We cannot subscribe to Fuji’s assertion that Espiritu’s contract merely expired and that she voluntarily
agreed not to renew the same. Even a cursory perusal of the subject Non-Renewal Contract readily
shows that the same was signed by Espiritu under protest. What is apparent is that the Non-Renewal
Contract was crafted merely as a subterfuge to secure Fuji’s position that it was Espiritu’s choice not to
renew her contract.232
As a regular employee, Arlene was entitled to security of tenure and could be dismissed only for just or
authorized causes and after the observance of due process.

The right to security of tenureis guaranteed under Article XIII, Section 3 of the 1987 Constitution:
ARTICLE XIII. SOCIAL JUSTICE AND HUMAN RIGHTS

....

LABOR

....

It shall guarantee the rights of all workers to self-organization, collective bargaining and negotiations,
and peaceful concerted activities, including the right to strike in accordance with law. They shall be
entitled to security of tenure, humane conditions of work, and a living wage. They shall also participate
in policy and decision-making processes affecting their rights and benefits as may be provided by law.

Article 279 of the Labor Code also provides for the right to security of tenure and states the following:

Art. 279. Security of tenure.In cases of regular employment, the employer shall not terminate the
services of an employee except for a just cause of when authorized by this Title. An employee who is
unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other
privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary
equivalent computed from the time his compensation was withheld from him up to the time of his
actual reinstatement.

Thus, on the right to security of tenure, no employee shall be dismissed, unless there are just
orauthorized causes and only after compliance with procedural and substantive due process is
conducted.

Even probationary employees are entitled to the right to security of tenure. This was explained in
Philippine Daily Inquirer, Inc. v. Magtibay, Jr.:233

Within the limited legal six-month probationary period, probationary employees are still entitled to
security of tenure. It is expressly provided in the afore-quoted Article 281 that a probationary employee
may be terminated only on two grounds: (a) for just cause, or (b) when he fails to qualify as a regular
employee in accordance with reasonable standards made known by the employer to the employee at
the time of his engagement.234 (Citation omitted)

The expiration of Arlene’s contract does not negate the finding of illegal dismissal by Fuji. The manner by
which Fuji informed Arlene that her contract would no longer be renewed is tantamount to constructive
dismissal. To make matters worse, Arlene was asked to sign a letter of resignation prepared by
Fuji.235 The existence of a fixed-term contract should not mean that there can be no illegal dismissal. Due
process must still be observed in the pre-termination of fixed-term contracts of employment.

In addition, the Court of Appeals and the National Labor Relations Commission found that Arlene was
dismissed because of her health condition. In the non-renewal agreement executed by Fuji and Arlene,
it is stated that:
WHEREAS, the SECOND PARTY is undergoing chemotherapy which prevents her from continuing to
effectively perform her functions under the said Contract such as the timely submission of news and
current events reports pertaining to the Philippines and travelling [sic] to the FIRST PARTY’s regional
office in Thailand.236 (Emphasis supplied)

Disease as a ground for termination is recognized under Article 284 of the Labor Code:

Art. 284. Disease as ground for termination. An employer may terminate the services of an employee
who has been found to be suffering from any disease and whose continued employment is prohibited by
law or is prejudicial to his health as well as to the health of his co-employees: Provided, That he is paid
separation pay equivalent to at least one (1) month salary or to one-half (1/2) month salary for every
year of service, whichever is greater, a fraction of at least six (6) months being considered as one (1)
whole year.

Book VI, Rule 1, Section 8 of the Omnibus Rules Implementing the Labor Code provides:

Sec. 8. Disease as a ground for dismissal.– Where the employee suffers from a disease and his continued
employment is prohibited by law or prejudicial to his healthor to the health of his coemployees, the
employer shall not terminate his employment unless there is a certification by a competent public
health authority that the disease is of such nature or at such a stage that it cannot be cured within a
period of six (6) months even with proper medical treatment. If the disease or ailment can be cured
within the period, the employer shall not terminate the employee but shall ask the employee to take a
leave. The employer shall reinstate such employee to his former position immediately upon the
restoration of his normal health.

For dismissal under Article 284 to bevalid, two requirements must be complied with: (1) the employee’s
disease cannot be cured within six (6) months and his "continued employment is prohibited by law or
prejudicial to his health as well as to the health of his co-employees"; and (2) certification issued by a
competent public health authority that even with proper medical treatment, the disease cannot be
cured within six (6) months.237 The burden of proving compliance with these requisites is on the
employer.238 Noncompliance leads to the conclusion that the dismissal was illegal.239

There is no evidence showing that Arlene was accorded due process. After informing her employer of
her lung cancer, she was not given the chance to present medical certificates. Fuji immediately
concluded that Arlene could no longer perform her duties because of chemotherapy. It did not ask her
how her condition would affect her work. Neither did it suggest for her to take a leave, even though she
was entitled to sick leaves. Worse, it did not present any certificate from a competent public health
authority. What Fuji did was to inform her thather contract would no longer be renewed, and when she
did not agree, her salary was withheld. Thus, the Court of Appeals correctly upheld the finding of the
National Labor Relations Commission that for failure of Fuji to comply with due process, Arlene was
illegally dismissed.240

VI

Whether the Court of Appeals properly modified

the National Labor Relations Commission’s decision
when it awarded reinstatement, damages, and attorney’s fees
The National Labor Relations Commission awarded separation pay in lieu of reinstatement, on the
ground that the filing of the complaint for illegal dismissal may have seriously strained relations
between the parties. Backwages were also awarded, to be computed from date of dismissal until the
finality of the National Labor Relations Commission’s decision. However, only backwages were included
in the dispositive portion because the National Labor Relations Commission recognized that Arlene had
received separation pay in the amount of US$7,600.00. The Court of Appeals affirmed the National
Labor Relations Commission’s decision but modified it by awarding moral and exemplary damages and
attorney’s fees, and all other benefits Arlene was entitled to under her contract with Fuji. The Court of
Appeals also ordered reinstatement, reasoning that the grounds when separation pay was awarded in
lieu of reinstatement were not proven.241

Article 279 of the Labor Code provides:

Art. 279. Security of tenure. In cases of regular employment, the employer shall not terminate the
services of an employee except for a just cause or when authorized by this Title. An employee who is
unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other
privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary
equivalent computed from the time his compensation was withheld from him up to the time of his
actual reinstatement. (Emphasis supplied)

The Court of Appeals’ modification of the National Labor Relations Commission’s decision was proper
because the law itself provides that illegally dismissed employees are entitled to reinstatement,
backwages including allowances, and all other benefits.

On reinstatement, the National Labor Relations Commission ordered payment of separation pay in lieu
of reinstatement, reasoning "that the filing of the instant suit may have seriously abraded the
relationship of the parties so as to render reinstatement impractical."242 The Court of Appeals reversed
this and ordered reinstatement on the ground that separation pay in lieu of reinstatement is allowed
only in several instances such as (1) when the employer has ceased operations; (2) when the employee’s
position is no longer available; (3) strained relations; and (4) a substantial period has lapsed from date of
filing to date of finality.243

On this matter, Quijano v. Mercury Drug Corp.244 is instructive:

Well-entrenched is the rule that an illegally dismissed employee is entitled to reinstatement as a matter
of right. . . .

To protect labor’s security of tenure, we emphasize that the doctrine of "strained relations" should be
strictly applied so as not to deprive an illegally dismissed employee of his right to reinstatement. Every
labor dispute almost always results in "strained relations" and the phrase cannot be given an
overarching interpretation, otherwise, an unjustly dismissed employee can never be
reinstated.245 (Citations omitted)

The Court of Appeals reasoned that strained relations are a question of fact that must be supported by
evidence.246 No evidence was presented by Fuji to prove that reinstatement was no longer feasible. Fuji
did not allege that it ceased operations or that Arlene’s position was no longer available. Nothing in the
records shows that Arlene’s reinstatement would cause an atmosphere of antagonism in the workplace.
Arlene filed her complaint in 2009. Five (5) years are not yet a substantial period247 to bar reinstatement.
On the award of damages, Fuji argues that Arlene is notentitled to the award of damages and attorney’s
fees because the non-renewal agreement contained a quitclaim, which Arlene signed. Quitclaims in
labor cases do not bar illegally dismissed employees from filing labor complaints and money claim. As
explained by Arlene, she signed the non-renewal agreement out of necessity. In Land and Housing
Development Corporation v. Esquillo,248 this court explained: We have heretofore explained that the
reason why quitclaims are commonly frowned upon as contrary to public policy, and why they are held
to be ineffective to bar claims for the full measure of the workers’ legal rights, is the fact that the
employer and the employee obviously do not stand on the same footing. The employer drove the
employee to the wall. The latter must have to get holdof money. Because, out of a job, he had to face
the harsh necessities of life. He thus found himself in no position to resist money proffered. His, then, is
a case of adherence, not of choice.249

With regard to the Court of Appeals’ award of moral and exemplary damages and attorney’s fees, this
court has recognized in several cases that moral damages are awarded "when the dismissal is attended
by bad faith or fraud or constitutes an act oppressive to labor, or is done in a manner contrary to good
morals, good customs or public policy."250 On the other hand, exemplary damages may be awarded
when the dismissal was effected "in a wanton, oppressive or malevolent manner."251

The Court of Appeals and National Labor Relations Commission found that after Arlene had informed
Fuji of her cancer, she was informed that there would be problems in renewing her contract on account
of her condition. This information caused Arlene mental anguish, serious anxiety, and wounded feelings
that can be gleaned from the tenor of her email dated March 11, 2009. A portion of her email reads:

I WAS SO SURPRISED . . . that at a time when I am at my lowest, being sick and very weak, you suddenly
came to deliver to me the NEWS that you will no longer renew my contract.1awp++i1 I knew this will
come but I never thought that you will be so ‘heartless’ and insensitive to deliver that news just a month
after I informed you that I am sick. I was asking for patience and understanding and your response was
not to RENEW my contract.252

Apart from Arlene’s illegal dismissal, the manner of her dismissal was effected in an oppressive
approach withher salary and other benefits being withheld until May 5, 2009, when she had no other
choice but to sign the non-renewal contract. Thus, there was legal basis for the Court of Appeals to
modify the National Labor Relations Commission’s decision.

However, Arlene receivedher salary for May 2009.253 Considering that the date of her illegal dismissal
was May 5, 2009,254 this amount may be subtracted from the total monetary award. With regard to the
award of attorney’s fees, Article 111 of the Labor Code states that "[i]n cases of unlawful withholding of
wages, the culpable party may be assessed attorney’s fees equivalent to ten percent of the amount of
wages recovered." Likewise, this court has recognized that "in actions for recovery of wages or where an
employee was forced to litigate and, thus, incur expenses to protect his rights and interest, the award of
attorney’s fees is legallyand morally justifiable."255 Due to her illegal dismissal, Arlene was forced to
litigate.

In the dispositive portion of its decision, the Court of Appeals awarded legal interest at the rate of 12%
per annum.256 In view of this court’s ruling in Nacar v. Gallery Frames,257 the legal interest shall be reducd
to a rate of 6% per annum from July 1, 2013 until full satisfaction.
WHEREFORE, the petition is DENIED. The assailed Court of Appeals decision dated June 25, 2012 is
AFFIRMED with the modification that backwages shall be computed from June 2009. Legal interest shall
be computed at the rate of 6% per annum of the total monetary award from date of finality of this
decision until full satisfaction.

SO ORDERED.

SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. SUBIC BAY GOLF AND COUNTRY CLUB, INC.
AND UNIVERSAL INTERNATIONAL GROUP DEVELOPMENT CORPORATION, Respondents.

DECISION

LEONEN, J.:

Intra-corporate controversies, previously under the Securities and Exchange Commission's jurisdiction,
are now under the jurisdiction of Regional Trial Courts designated as commercial courts. However, the
transfer of jurisdiction to the trial courts does not oust the Securities and Exchange Commission of its
jurisdiction to determine if administrative rules and regulations were violated.

In this Petition for Review1 on Certiorari under Rule 45 of the Rules of Court, petitioner Securities and
Exchange Commission prays for the reversal of the Court of Appeals' July 31, 2007 Decision.2 The Court
of Appeals declared void the Securities and Exchange Commission's February 10, 2004 Decision affirming
its Corporation Finance Department's Order3 to refund payments for Subic Bay Golf and Country Club,
Inc.'s shares of stock.4cralawrednad

Subic Bay Golf Course, also known as Binictican Valley Golf Course, was operated by Subic Bay
Metropolitan Authority (SBMA) under the Bases Conversion Development Authority (BCDA).5 Universal
International Group of Taiwan (UIG), a Taiwanese corporation, was chosen to implement the plan to
privatize the golf course.6cralawrednad

On May 25, 1995, SBMA and UIG entered into a Lease and Development Agreement. Under the
agreement, SBMA agreed to lease the golf course to UIG for 50 years, renewable for another 25
years.7 UIG agreed to "develop, manage and maintain the golf course and other related facilities within
the complex[.]"8 Later, Universal International Group Development Corporation (UIGDC) succeeded to
the interests of UIG on the golf course development.9cralawrednad

On April 1, 1996, UIGDC executed a Deed of Assignment in favor of Subic Bay Golf and Country Club, Inc.
(SBGCCI). Under the Deed of Assignment, UIGDC assigned all its rights and interests in the golf course's
development, operations, and marketing to SBGCCI.10cralawrednad

On April 25, 1996, SBGCCI and UIGDC entered into a Development Agreement.11 UIGDC agreed to
"finance, construct and develop the [golf course], for and in consideration of the payment by [SBGCCI] of
its 1,530 (SBGCCI) shares of stock."12cralawrednad

Upon SBGCCI's application, the Securities and Exchange Commission issued an Order for the Registration
of 3,000 no par value shares of SBGCCI on July 8, 1996. SBGCCI was issued a Certificate of Permit to Offer
Securities for Sale to the Public of its 1,530 no par value proprietary shares on August 9, 1996. The
shares were sold at P425,000.00 per share. SBGCCI would use the proceeds of the sale of securities to
pay UIGDC for the development of the golf course.13cralawrednad

In the letter14 dated November 4, 2002 addressed to Atty. Justina Callangan, Director of Securities and
Exchange Commission's Corporation Finance Department, complainants Regina Filart (Filart) and
Margarita Villareal (Villareal) informed the Securities and Exchange Commission that they had been
asking UIGDC for the refund of their payment for their SBGCCI shares. UIGDC did not act on their
requests.15 They alleged that they purchased the shares in 1996 based on the promise of SBGCCI and
UIGDC to deliver the following:cralawlawlibrary

a. an 18 hole golf course that would meet the highest USGA and PGA standards.

b. A 9 hole executive course which would be completely illuminated to allow members to play
after dark

c. A swimming pool and tennis courts

d. Golf Villas and Residential Condominium-Hotel

e. Driving range of 30 berths provided with a roof and illuminated to afford nighttime driving.

f. Club facilities with a restaurant which will offer French, Filipino and Chinese cuisine and 7 well-
furnished VIP rooms which are equipped with the latest toilet and bath facilities and are
available for private meetings and conferences.16

However, these promises were not delivered.17cralawrednad

Villareal and Filart also claimed that despite SBGCCI's and UIGDC's failure to deliver the promised
amenities, they started to charge them monthly dues. They also never received any billing statement
from them until they were sent a demand notice to pay the alleged back dues of P39,000.00 within five
(5) days. They were threatened that their shares amounting to P740,000.00 and paid off in December
1996 would be auctioned off if their alleged back dues would not be paid.18 Villareal and Filart prayed for
relief from the "terrible situation [they found themselves] in."19 They also prayed that their letter be
accepted "as a formal complaint against Universal International Group Development Corporation for
breach of promise/contract with its investors who put in hard-earned money believing that they would
deliver what their brochures promised to deliver."20cralawrednad

In their Comment,21 SBGCCI and UIGDC averred that they had already substantially complied with their
commitment to provide the members a world-class golf and country club.22 The construction of the golf
course substantially met international standards.23 Other proposed project developments such as the
construction of villas and residential condominium-hotels were not included in the rights purchased with
member shares.24 They also denied that they failed to send monthly billing statements to Filart and
Villareal.25cralawredcralawrednad

SBGCCI and UIGDC also stressed that SBMA, under its Contract of Lease, was the one duty-bound to
complete the golf course and amenities. It would be in breach of contract if it failed to complete the golf
course and the amenities. Insofar as SBGCCI's commitments were concerned, it was able to fully comply
with its obligations.26cralawrednad

In January 2003, the Securities and Exchange Commission's Corporation Finance Department conducted
an ocular inspection of the project. Based on the Memorandum Report prepared by Julius H. Baltazar,
Specialist I, SBGCCI and UIGDC failed to comply substantially with their commitment to complete the
project.27 According to the Report:cralawlawlibrary

Completion
Project Description based on Work Findings per ocular inspection as of
date/cost per
Program January 3, 2003
Prospectus

Reconstruction/rehabilitation of the 18- The 18-hole golf course is already

hole golf course. This includes the existing and playable. It was observed
construction of the following:    Before November that the grass in some parts of the 18-
1996 hole course is dry and withered
P301,600[,]000.
1. greens
The road/cart paths are fully concrete
2. fairways
and passable, bridges, drainage and
3. road/cart paths
irrigation systems are in place.
4. bridges
5. drainage & irrigation system    
6. driving range
There is a driving range with roof and 7
7. tee houses
berths and one (1) tee house in hole #
After November 3.
Construction of additional 9-hole course.
1996 P156,000,000
The construction of the additional 9-
hole course has not yet started.

Construction/renovation of Clubhouse Before November The clubhouse has a dining area,

with the following facilities: 1996 P192,400,000 function room, 6 VIP rooms, sport
    shop, one (1) restaurant and men &
ladies locker rooms. It has no sauna
1. dining areas
and massage rooms.
2. function rooms
3. indoor and outdoor tennis courts
Beside the clubhouse is a swimming
4. 25-meter swimming pool
pool with no water and one (1) tennis
5. gyms
court, [sic] that are both poorly
6. saunas and massage room
maintained.
7. sport shops
There is [sic] none.28
Condominiums, Residential Villas, 250-
bedroom hotel and a conference center
   

In the July 1, 2003 Order, the Securities and Exchange Commission's Corporation Finance Department
gave due course to Villareal and Filart's letter-complaint:29
WHEREFORE, upon consideration of the foregoing, the complaint of REGINA S. FILART and MARGARITA
G. VILLAREAL is hereby given DUE COURSE.

Respondents SUBIC BAY GOLF AND COUNTRY CLUB, INC. and UNIVERSAL INTERNATIONAL GROUP
DEVELOPMENT CORPORATION, are hereby ordered to refund to REGINA S. FILART and MARGARITA G.
VILLAREAL, within ten (10) days from receipt of this Order, the total purchase price of their shares of
stock issued by Subic Bay Golf and Country Club, Inc., in the amount of P740,000.00 each, or a total of
P1,480,000.00.

SUBIC BAY GOLF and COUNTRY CLUB, INC. is likewise hereby ordered to amend its Prospectus, reflecting
therein the actual status of the facilities of the club, and to comply with the requirements of SRC Rule
14.

Furthermore, due to its failure to comply with its undertakings in its Registration Statement and
Prospectus, tantamount to misrepresentation, and in violation of the provisions of the Securities
Regulation Code, and its implementing rules and regulation, the Certificate of Registration and Permit to
Sell Securities to the Public issued to respondent Subic Bay Golf and Country Club, Inc., are hereby
SUSPENDED until the aforementioned misrepresentations are rectified and the requirements of this
Order are complied with. The Commission shall make a determination, within thirty (30) days, whether
or not such registration should be revoked.

And, pursuant to Section 54 of the Code, respondent corporations, SUBIC BAY GOLF AND COUNTRY
CLUB, INC. and UNIVERSAL INTERNATIONAL GROUP DEVELOPMENT CORPORATION, are hereby fined
the amount of P100,000.00.

SO ORDERED.30 (Emphasis in the original)

The Corporation Finance Department found that Filart and Villareal invested in the golf course because
of SBGCCI and UIGDC's representation that a 27-hole, world-class golf course would be developed.31 It
also found that SBGCCI and UIGDC failed to comply with their commitments and representations as
stated in their prospectus.32cralawrednad

The Corporation Finance Department ordered the return of the purchase price of shares pursuant to
Rule 1433 of the Implementing Rules and Regulations of Republic Act No. 8799 or the Securities
Regulation Code. It explained that the non-completion of the golf course constituted a material
amendment in the prospectus. The prospectus had become misleading, tending to work a fraud. This
gave the purchasers the right to a refund of their contributions.34cralawrednad

SBGCCI and UIGDC filed a Petition for Review35 of the Corporation Finance Department's Order before
the Securities and Exchange Commission. SBGCCI and UIGDC assailed the Corporation Finance
Department's and the Securities and Exchange Commission's authority to order a refund of investments.
They also assailed its jurisdiction over the case, which according to SBGCCI and UIGDC involved an intra-
corporate dispute. They argued that the Corporation Finance Department's Order was issued without
due process.36cralawrednad
On February 10, 2004, the Securities and Exchange Commission rendered the Decision37 affirming the
July 1, 2003 Order of the Corporation Finance Department:cralawlawlibrary

WHEREFORE, in view of the foregoing, the PETITION is hereby DENIED. The July 1, 2003 ORDER of the
Corporate Finance Department is hereby AFFIRMED.

SO ORDERED.38

The Securities and Exchange Commission ruled that the Corporation Finance Department's proceedings
were administrative in nature. It was only conducted to determine if SBGCCI and UIGDC violated the
Securities and Exchange Commission's rules and regulations. While Villareal and Filart's letter-complaint
alleged intra-corporate matters, it also alleged matters pertaining to SBGCCI and UIGDC's compliance
with the prospectus and registration statements. The Securities and Exchange Commission has the
authority to investigate possible acts of abuse of franchise and violations of its rules and regulations. It
also has the power to impose appropriate administrative sanctions. The Corporation Finance
Department only exercised these powers.39cralawrednad

The Corporation Finance Department, tasked to oversee securities registration, has the implied power to
suspend or revoke registration upon showing of violations of the Securities and Exchange Commission's
rules and regulations. Based on Section 4.6 of the Securities Regulation Code, the Securities and
Exchange Commission has the power to delegate some of its functions to any of its
departments.40cralawrednad

On SBGCCI and UIGDC's allegation that they were not given due process, the Securities and Exchange
Commission ruled that suspension of permit to sell securities does not require a full-blown hearing. In
any case, SBGCCI and UIGDC were served notice and given an opportunity to present their case. They
were even able to file their Comment on the letter-complaint on January 6, 2003.41cralawrednad

The Securities and Exchange Commission added that the Corporation Finance Department's directive to
return the purchasers' investments was in accordance with the rules. Rule 14 of the Securities
Regulation Code allows purchasers to renounce their securities.42cralawrednad

SBGCCI and UIGDC filed a Motion for Reconsideration of the February 10, 2004 Securities and Exchange
Commission Decision, but this was denied in the Order43 dated April 6, 2004.44cralawrednad

SBGCCI and UIGDC filed a Petition for Review45 of the Securities and Exchange Commission's February
10, 2004 Decision before the Court of Appeals.46 They argued that the letter-complaint filed by Villareal
and Filart involved an intra-corporate dispute that was under the jurisdiction of the Regional Trial Court
and not the Securities and Exchange Commission.47 They also argued that the Securities Regulation Code
does not grant the Securities and Exchange Commission the power to order the refund of payment for
shares of stock.48cralawrednad

On July 31, 2007, the Court of Appeals declared void the February 10, 2004 Decision of the Securities
and Exchange Commission insofar as it ordered the refund of the purchase price of Filart's and Villareal's
investments.49 Thus:cralawlawlibrary
WHEREFORE, the February 10, 2004 Decision of the Securities and Exchange Commission in CFD-AA-
Case No. 08-03-36, affirming the July 1, 2003 Order of the Corporate Finance Department, insofar as it
ordered the refund of the purchase price of the shares of stock of petitioner SBGCCI, is hereby declared
NULL and VOID for lack of jurisdiction.

SO ORDERED.50

The Court of Appeals found that the case involved an intra-corporate controversy. The Securities and
Exchange Commission acted in excess of its jurisdiction when it ordered UIGDC and SBGCCI to refund
Villareal and Filart the amount they paid for SBGCCI shares of stock. The authority to exercise powers
necessary to carry out the objectives of the Securities and Exchange Commission does not include the
authority to refund investments. This power has been transferred to the Regional Trial Court. The
Securities and Exchange Commission should have limited its exercise of power to issuing an order
imposing a fine, to amend the prospectus, and to suspend the Certificate of Registration and Permit to
Sell Securities to the Public.51cralawrednad

Hence, this petition was filed.

The Securities and Exchange Commission argues that Villareal and Filart's letter-complaint of November
4, 2002 did not only raise matters involving intra-corporate relations. Their letter-complaint also stated
serious violations of the Securities Regulation Code, which may require the Securities and Exchange
Commission's intervention.52 The Commission did not adjudicate private rights or awarded damages.53 It
only determined whether SBGCCI and UIGDC committed misrepresentations,54 in violation of the
Securities Regulation Code and its implementing rules.55cralawrednad

The Securities and Exchange Commission contends that its Order to return the stock purchasers'
contributions is in accordance with Rule 14, Section 1(c)56 of the Implementing Ru|es and Regulations of
the Securities Regulation Code.57 This provision is within the Securities and Exchange Commission's rule-
making power under Section 14358 of the Corporation Code and Section 5(g) and (n)59 of the Securities
Regulation Code.60 Section l(c) is necessary to implement the Securities Regulation Code's mandate "to
protect the investing public from unscrupulous corporations taking advantage of every
situation[.]"61cralawrednad

The Securities and Exchange Commission points out that Villareal and Filart had been demanding from
SBGCCI and UIGDC the return of their investments. Its Corporation Finance Department already directed
SBGCCI and UIGDC to amend their prospectus and registration statements to comply with the Securities
Regulation Code. However, SBGCCI and UIGDC failed to comply.62cralawrednad

In their Comment,63 SBGDCC and UIGDC insist that the case involved an intra-corporate dispute over
which only the Regional Trial Court has jurisdiction.64 The Securities and Exchange Commission has no
authority to order the return of payments made by Villareal and Filart.65 Even assuming that the
Securities and Exchange Commission has jurisdiction over intra-corporate cases, there should first be a
disagreement over prospectus amendments before paid contributions can be refunded.66cralawrednad

We determine which between the Securities and Exchange Commission and the Regional Trial Court has
jurisdiction over this case. We also determine whether the Securities and Exchange Commission has the
authority to order the return of purchase price of securities upon finding that there were fraudulent
representations in the prospectus.

We rule for SBGCCI and UIGDC.

Under Presidential Decree No. 902-A,67 the Securities and Exchange Commission has jurisdiction over
acts amounting to fraud and misrepresentation by a corporation's board of directors, business
associates, and officers. It also provides that it has jurisdiction over intra-corporate disputes.
Thus:cralawlawlibrary

WHEREAS, in line with the government's policy of encouraging investments, both domestic and foreign,
and more active public participation in the affairs of private corporations and enterprises through which
desirable activities may be pursued for the promotion of economic development; and, to promote a
wider and more meaningful equitable distribution of wealth, there is a need for an agency of the
government to be invested with ample powers to protect such investment and the public;

....

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

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.

However, jurisdiction over intra-corporate disputes and all other cases enumerated in Section 5 of
Presidential Decree No. 902-A had already been transferred to designated Regional Trial Courts. Section
5.2 of Republic Act No. 8799 provides:cralawlawlibrary

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 fully disposed.
Hence, actions pertaining to intra-corporate disputes should be filed directly before designated Regional
Trial Courts. Intra-corporate disputes brought before other courts or tribunals are dismissible for lack of
jurisdiction.68cralawrednad

For a dispute to be "intra-corporate," it must satisfy the relationship and nature of controversy
tests.69cralawrednad

The relationship test requires that the dispute be between a corporation/partnership/association  and
the public; a corporation/partnership/association and the state regarding the entity's franchise, permit,
or license to operate; a corporation/partnership/association and its stockholders, partners, members, or
officers; and among stockholders, partners, or associates of the entity.70cralawrednad

The nature of the controversy test requires that the action involves the enforcement of corporate rights
and obligations.

Courts and tribunals must consider both the parties' relationship and the nature of the controversy to
determine whether they should assume jurisdiction over a case. In Medical Plaza Makati Condominium
Corporation v. Cullen:71

[T]he 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. In other
words, jurisdiction should be determined by considering both the relationship of the parties as well as
the nature of the question involved.72 (Citations omitted)

This case is an intra-corporate dispute, over which the Regional Trial Court has jurisdiction. It involves a
dispute between the corporation, SBGCCI, and its shareholders, Villareal and Filart.

This case also involves corporate rights and obligations. The nature of the action — whether it involves
corporate rights and obligations — is determined by the allegations and reliefs in the
complaint.73cralawrednad

Villareal and Filart's right to a refund of the value of their shares was based on SBGCCI and UIGDC's
alleged failure to abide by their representations in their prospectus. Specifically, Villareal and Filart
alleged in their letter-complaint that the world-class golf course that was promised to them when they
purchased shares did not materialize. This is an intra-corporate matter that is under the designated
Regional Trial Court's jurisdiction. It involves the determination of a shareholder's rights under the
Corporation Code or other intra-corporate rules when the corporation or association fails to fulfill its
obligations.

However, even though the Complaint filed before the Securities and Exchange Commission contains
allegations that are intra-corporate in nature, it does not necessarily oust the Securities and Exchange
Commission of its regulatory and administrative jurisdiction to determine and act if there were
administrative violations committed.

The Securities and Exchange Commission is organized in line with the policy of encouraging and
protecting investments.74 It also administers the Securities Regulation Code,75 which was enacted to
"promote the development of the capital market, protect investors, ensure full and fair disclosure about
securities, [and] minimize if not totally eliminate insider trading and other fraudulent or manipulative
devices and practices which create distortions in the free market."76 Pursuant to these policies, the
Securities and Exchange Commission is given regulatory powers77 and "absolute jurisdiction, supervision
and control over all corporations, partnerships' or associations. . . ."78cralawrednad

In relation to securities, the Securities and Exchange Commission's regulatory power pertains to the
approval and rejection, and suspension or revocation, of applications for registration of securities79 for,
among others, violations of the law, fraud, and misrepresentations. Thus:cralawlawlibrary

SEC. 13. Rejection and Revocation of Registration of Securities. - 13.1. The Commission may reject a
registration statement and refuse registration of the security thereunder, or revoke the effectivity of a
registration statement and the registration of the security thereunder after due notice and hearing by
issuing an order to such effect, setting forth its findings in respect thereto, if it finds that:

a. The issuer:

i. Has been judicially declared insolvent;

ii. Has violated any of the provisions of this Code, the rules promulgated pursuant thereto,
or any order of the Commission of which the issuer has notice in connection with the
offering for which a registration statement has been filed;

iii. Has been engaged or is about to engage in fraudulent transactions;

iv. Has made any false or misleading representation of material facts in any prospectus
concerning the issuer or its securities;

v. Has failed to comply with any requirement that the Commission may impose as a
condition for registration of the security for which the registration statement has been
filed; or

b. The registration statement is on its face incomplete or inaccurate in any material respect or
includes any untrue statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; or

c. The issuer, any officer, director or controlling person of the issuer, or person performing similar
functions, or any underwriter has been convicted, by a competent judicial or administrative
body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or
is enjoined or restrained by the Commission or other competent judicial or administrative body
for violations of securities, commodities, and other related laws.
....

13.4. If the Commission deems it necessary, it may issue an order suspending the offer and sale of the
securities pending any investigation. The order shall state the grounds for taking such action, but such
order of suspension although binding upon the persons notified thereof, shall be deemed confidential,
and shall not be published. Upon the issuance of the suspension order, no further offer or sale of such
security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall
be void.

....

SEC. 15. Suspension of Registration. - 15.1. If, at any time, the information contained in the registration
statement filed is or has become misleading, incorrect, inadequate or incomplete in any material
respect, or the sale or offering for sale of the security registered thereunder may work or tend to work a
fraud, the Commission may require from the issuer such further information as may In its judgment be
necessary to enable the Commission to ascertain whether the registration of such security should be
revoked on any ground specified in this Code. The Commission may also suspend the right to sell and
offer for sale such security pending further investigation, by entering an order specifying the grounds for
such action, and by notifying the issuer, underwriter, dealer or broker known as participating in such
offering.80

To ensure compliance with the law and the rules, the Securities and Exchange Commission is also given
the power to impose fines and penalties. It may also investigate motu proprio whether corporations
comply with the Corporation Code, Securities Regulation Code, and rules implemented by the Securities
and Exchange Commission.chanrobleslaw

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:ChanRoblesvirtualLawlibrary

..
.
d. Regulate, investigate or supervise the activities of persons to ensure compliance;
..  
.
f. Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant
thereto;
..
.
i. Issue cease and desist orders to prevent fraud or injury to the investing public;
..
.
m.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; and
n. Exercise 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.81
The Securities and Exchange Commission's approval of securities registrations signals to the public that
the securities are valid. It provides the public with basis for relying on the representations of
corporations that issue securities or financial instruments.

Any fraud or misrepresentation in the issuance of securities injures the public. The Securities and
Exchange Commission's power to suspend or revoke registrations and to impose fines and other
penalties provides the public with a certain level of assurance that the securities contain representations
that are true, and that misrepresentations if later found, would be detrimental to the erring corporation.
It creates risks to corporations that issue securities and adds cost to errors, misrepresentations, and
violations related to the issuance of those securities. This protects the public who will rely on
representations of corporations and partnerships regarding financial instruments that they issue. The
Securities and Exchange Commission's regulatory power over securities-related activities is tied to the
government's duty to protect the investing public from illegal and fraudulent instruments.

Thus, when Villareal and Filart alleged in their letter-complaint that SBGCCI and UIGDC committed
misrepresentations in the sale of their shares, nothing prevented the Securities and Exchange
Commission from taking cognizance of it to determine if SBGCCI and UIGDC committed administrative
violations and were liable under the Securities Regulation Code. The Securities and Exchange
Commission may investigate activities of corporations under its jurisdiction to ensure compliance with
the law.

However, the Securities and Exchange Commission's regulatory power does not include the authority to
order the refund of the purchase price of Villareal's and Filart's shares in the golf club. The issue of
refund is intra-corporate or civil in nature. Similar to issues such as the existence or inexistence of
appraisal rights, pre-emptive rights, and the right to inspect books and corporate records, the issue of
refund is an intra-corporate dispute that requires the court to determine and adjudicate the parties'
rights based on law or contract. Injuries, rights, and obligations involved in intra-corporate disputes are
specific to the parties involved. They do not affect the Securities and Exchange Commission or the public
directly.

The Securities and Exchange Commission argues that the power to order a refund is in accordance with
the implementing rules of the Securities Regulation Code. Despite orders from the Securities and
Exchange Commission to amend their prospectus, SBGCCI and UIGDC failed to comply. Thus, Villareal
and Filart were entitled to the refund of the purchase price of their shares. They cite Section 14 of the
Implementing Rules and Regulations of the Securities Regulation Code:ChanRoblesvirtualLawlibrary
SRC Rule 14 - Amendments to the Registration Statement

1. If a prospectus filed with the Commission under the Code becomes incomplete or inaccurate in any
material respect or if the issuer wants to change any material information therein, the issuer shall:
a. file an amendment to the registration statement with the Commission explaining all proposed
changes which shall be reviewed by the Commission in accordance with Section 14 of the Code;
..
..
c. where material amendments have been made to the prospectus after the effective date
thereof, purchasers may, within thirty (30) days from the date of such notification, renounce their
purchase of securities, whereupon the issuer, or any person acting on behalf of the issuer in
connection with the distribution of said securities, shall, within ten (10) days from receipt of
notification of such election, return the contributions paid by such purchasers without making any
deductions. Purchasers who decide not to renounce their purchase of securities shall be subject to the
terms of the amended offering. (Emphasis supplied)

Based on these provisions, Villareal and Filart may be entitled to a refund of the purchase price of their
shares. Provisions giving shareholders rights, however, are not to be interpreted as sources of authority
or jurisdiction when there is none. The provisions in the law or in the rules giving Villareal and Filart the
right to be refunded the value of their shares are not equivalent to authority for the Securities and
Exchange Commission to issue an order for the refund. Such order may not come from the Securities
and Exchange Commission.

Neither the provisions of the implementing rules nor the provisions of the Securities Regulation
Code,82 the law being implemented, give the Securities and Exchange Commission the power to order a
refund. The Securities and Exchange Commission's power when violations of the Securities Regulation
Code are found is limited to issuing regulatory orders such as suspending or revoking registration
statements, providing for the terms and conditions for registration, and imposing fines and penalties.

The implementing rules cannot be interpreted to give the Securities and Exchange Commission the
power that is more than what is provided under the Securities Regulation Code. Implementing rules are
limited by the laws they implement. The rules cannot be used to amend, expand, or modify the law
being implemented. The law shall prevail in case of inconsistency between the law and the rules.

In United BF Homeowner's Association v. BF Homes, Inc.:83

As early as 1970, in the case of Teoxon vs. Members of the Board of Administrators (PVA), we ruled that
the power to promulgate rules in the implementation of a statute is necessarily limited to what is
provided for in the legislative enactment. Its terms must be followed for an administrative agency
cannot amend an Act of Congress. "The rule-making power must be confined to details for regulating
the mode or proceedings to carry into effect the law as it has been enacted, and it cannot be extended
to amend or expand the statutory requirements or to embrace matters not covered by the statute." If a
discrepancy occurs between the basic law and an implementing rule or regulation, it is the former that
prevails.

....

. . . The rule-making power of a public administrative body is a delegated legislative power, which it may
not use either to abridge the authority given it by Congress or the Constitution or to enlarge its power
beyond the scope intended. Constitutional and statutory provisions control what rules and regulations
may be promulgated by such a body, as well as with respect to what fields are subject to regulation by it.
It may not make rules and regulations which are inconsistent with the provisions of the Constitution or a
statute, particularly the statute it is administering or which created it, or which are in derogation of, or
defeat, the purpose of a statute.

Moreover, where the legislature has delegated to an executive or administrative officers and boards
authority to promulgate rules to carry out an express legislative purpose, the rules of administrative
officers and boards, which have the effect of extending, or which conflict with the authority-granting
statute, do not represent a valid exercise of the rule-nrnking power but constitute an attempt by an
administrative body to legislate. "A statutory grant of powers should not be extended by implication
beyond what may be necessary for their just and reasonable execution." It is axiomatic that a rule or
regulation must bear upon, and be consistent with, the provisions of the enabling statute if such rule or
regulation is to be valid.84 (Citations omitted)

Hence, the issue of refund should be litigated in the appropriate Regional Trial Court. This issue is both
intra-corporate and civil in nature, which is under the jurisdiction of the designated Regional Trial
Courts.

WHEREFORE, the Court of Appeals Decision dated July 31, 2007 is AFFIRMED.

SO ORDERED.

G.R. No. 215568, August 03, 2015

RICHARD N. RIVERA, Petitioner, v. GENESIS TRANSPORT SERVICE, INC. AND RIZA A.

MOISES, Respondents.

DECISION

LEONEN, J.:

This resolves a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure
praying that the July 8, 2014 Decision1 and the November 20, 2014 Resolution2 of the Court of Appeals
Fifth Division in CA-G.R. SP No. 130801 be reversed and set aside, and that new judgment be entered
finding petitioner Richard N. Rivera to have been illegally dismissed and awarding to him his monetary
claims.

The assailed July 8, 2014 Decision of the Court of Appeals dismissed the Petition for Certiorari under
Rule 65 of the 1997 Rules of Civil Procedure filed by Richard N. Rivera (Rivera) and affirmed the February
28, 20133 and April 30, 20134 Resolutions of the National Labor Relations Commission Second Division.
These Resolutions sustained the ruling of Labor Arbiter Gaudencio P. Demaisip, Jr. who, in his June 26,
2012 Decision,5 dismissed Rivera's Complaint6 for illegal dismissal.

The assailed November 20, 2014 Resolution of the Court of Appeals denied Rivera's Motion for
Reconsideration.

Rivera was employed by respondent Genesis Transport Service, Inc. (Genesis) beginning June 2002 as a
bus conductor, assigned to the Cubao-Baler, Aurora route. As part of the requisites for his employment,
he was required to post a cash bond of P6,000.00. Respondent Riza A. Moises is Genesis' President and
General Manager.7

In his Position Paper before the Labor Arbiter, Rivera acknowledged that he was dismissed by Genesis on
account of a discrepancy in the amount he declared on bus ticket receipts. He alleged that on June 10,
2010, he received a Memorandum8 giving him twenty-four (24) hours to explain why he should not be
sanctioned for reporting and remitting the amount of P198.00 instead of the admittedly correct amount
of P394.00 worth of bus ticket receipts. He responded that it was an honest mistake, which he was
unable to correct "because the bus encountered mechanical problems."9

The discrepancy between the reported and remitted amount as against the correct amount was detailed
in the "Irregularity Report" prepared by Genesis' Inspector, Arnel Villaseran (Villaseran).10

According to Villaseran, on May 25, 2010, he conducted a "man to man" inspection on the tickets held
by the passengers on board Bus No. 8286 who had transferred from Bus No. 1820 in San Fernando,
Pampanga. (Bus No. 1820 broke down.) In the course of his inspection, he noticed that Ticket No.
723374 VA had a written corrected amount of P394.00. However, the amount marked by perforations
made on the ticket, which was the amount originally indicated by the bus conductor, was only P198.00.
Upon inquiring with the passenger holding the ticket, Villaseran found out that the passenger paid
P500.00 to Rivera, who gave her change in the amount of P106.00.11

Subsequently, Villaseran conducted verification works with the Ticket Section of Genesis' Cubao Main
Office. Per his inquiries, the duplicate ticket surrendered by Rivera to Genesis indicated only the
unconnected amount of P198.00. It was also found that Rivera remitted only P198.00.12

On July 20, 2010, Genesis served on Rivera a written notice13 informing him that a hearing of his case
was set on July 23, 2010. Despite his explanations, Rivera's services were terminated through a written
notice dated July 30, 2010.14 Contending that this termination was arbitrary and not based on just
causes for terminating employment, he filed the Complaint15 for illegal dismissal, which is subject of this
Petition.16

For their defense, Genesis and Riza A. Moises claimed that Rivera's misdeclaration of the amount in the
bus ticket receipts and failure to remit the correct amount clearly violated Genesis' policies and
amounted to serious misconduct, fraud, and willful breach of trust; thereby justifying his dismissal.17
In a Decision18 dated June 26, 2012, Labor Arbiter Gaudencio P. Demaisip gave credence to respondents'
appreciation of the gravity of Rivera's acts of misdeclaring the amount of bus ticket receipts and failing
to remit the correct amount. Thus, he dismissed Rivera's Complaint.

In a Resolution19 dated February 28, 2013, the National Labor Relations Commission Second Division
affirmed the Decision of Labor Arbiter Demaisip. In a Resolution20 dated April 30, 2013, the National
Labor Relations Commission denied Rivera's Motion for Reconsideration.

Thereafter, Rivera filed a Rule 65 Petition before the Court of Appeals. In the assailed July 8, 2014
Decision,21 the Court of Appeals Fifth Division sustained the rulings of Labor Arbiter Demaisip and the
National Labor Relations Commission. In the assailed November 20, 2014 Resolution,22 the Court of
Appeals denied Rivera's Motion for Reconsideration.

Hence, this Petition was filed.

For resolution is the issue of whether petitioner Richard N. Rivera's employment was terminated for just
cause by respondent Genesis Transport, Inc.

As Riza A. Moises, Genesis' President and General Manager, has been impleaded, this court must also
rule on her personal liability, should the termination of petitioner's employment be found
invalid.chanrobleslaw

Our laws on labor, foremost of which is the Labor Code, are pieces of social legislation. They have been
adopted pursuant to the constitutional recognition of "labor as a primary social economic force"23 and to
the constitutional mandates for the state to "protect the rights of workers and promote their
welfare"24 and for Congress to "give highest priority to the enactment of measures that protect and
enhance the right of all the people to human dignity, [and] reduce social, economic, and political
inequalities."25cralawred

They are means for effecting social justice, i.e., the "humanization of laws and the equalization of social
and economic forces by the State so that justice in the rational and objectively secular conception may
at least be approximated."26

Article XIII, Section 3 of the 1987 Constitution guarantees the right of workers to security of tenure.
"One's employment, profession, trade or calling is a 'property right,'"27 of which a worker may be
deprived only upon compliance with due process requirements:chanRoblesvirtualLawlibrary

It is the policy of the state to assure the right of workers to "security of tenure" (Article XIII, Sec. 3 of the
New Constitution, Section 9, Article II of the 1973 Constitution). The guarantee is an act of social justice.
When a person has no property, his job may possibly be his only possession or means of livelihood.
Therefore, he should be protected against any arbitrary deprivation of his job. Article 280 of the Labor
Code has construed security of tenure as meaning that "the employer shall not terminate the services of
an employee except for a just cause or when authorized by" the code. Dismissal is not justified for being
arbitrary where the workers were denied due process and a clear denial of due process, or
constitutional right must be safeguarded against at all times.28 (Citations
omitted)ChanRoblesVirtualawlibrary

Conformably, liberal construction of Labor Code provisions in favor of workers is stipulated by Article 4
of the Labor Code:chanRoblesvirtualLawlibrary

Art. 4. Construction in favor of labor. All doubts in the implementation and interpretation of the
provisions of this Code, including its implementing rules and regulations, shall be resolved in favor of
labor.ChanRoblesVirtualawlibrary

This case is quintessentially paradigmatic of the need for the law to be applied in order to ensure social
justice. The resolution of this case should be guided by the constitutional command for courts to take a
preferential view in favor of labor in ambitious cases.

This case revolves around an alleged discrepancy between the amounts indicated on a single ticket. For
the paltry sum of P196.00 that petitioner failed to remit in his sole documented instance of apparent
misconduct, petitioner's employment was terminated. He was deprived of his means of
subsistence.chanrobleslaw

II

Misconduct and breach of trust are just causes for terminating employment only when attended by such
gravity as would leave the employer no other viable recourse but to cut off an employee's livelihood.

The Labor Code recognizes serious misconduct, willful breach of trust or loss of confidence, and other
analogous causes as just causes for termination of employment:chanRoblesvirtualLawlibrary

Article 282. Termination by employer. An employer may terminate an employment for any of the
following just causes:

(a) Serious misconduct or willful disobedience by the employee of the lawful orders of his employer or
representative in connection with his work;
(b) Gross and habitual neglect by the employee of his duties;
(c) Fraud or willful breach by the employee of the trust reposed in him by his employer or duly
authorized representative;
(d) Commission of a crime or offense by the employee against the person of his employer or any
immediate member of his family or his duly authorized representative; and
(e) Other causes analogous to the foregoing.
Serious misconduct as a just cause for termination was discussed in Yabut v. Manila Electric Co.:29

Misconduct is defined as the "transgression of some established and definite rule of action, a forbidden
act, a dereliction of duty, willful in character, and implies wrongful intent and not mere error in
judgment." For serious misconduct to justify dismissal, the following requisites must be present: (a) it
must be serious; (b) it must relate to the performance of the employee's duties; and (c) it must show
that the employee has become unfit to continue working for the employer.30 (Emphasis supplied, citation
omitted)ChanRoblesVirtualawlibrary

Thus, it is not enough for an employee to be found to have engaged in improper or wrongful conduct. To
justify termination of employment, misconduct must be so severe as to make it evident that no other
penalty but the termination of the employee's livelihood is viable.

In Philippine Plaza Holdings v. Episcope,31 we discussed the requisites for valid dismissal on account of
willful breach of trust:chanRoblesvirtualLawlibrary

Among the just causes for termination is the employer's loss of trust and confidence in its employee.
Article 296 (c) (formerly Article 282 [c]) of the Labor Code provides that an employer may terminate the
services of an employee for fraud or willful breach of the trust reposed in him. But in order for the said
cause to be properly invoked, certain requirements must be complied with[,] namely[:] (1) the employee
concerned must be holding a position of trust and confidence and (2) there must be an act that would
justify the loss of trust and confidence.32ChanRoblesVirtualawlibrary

Relating to the first requisite, Philippine Plaza Holdings clarified that two (2) classes of employees are
considered to hold positions of trust:chanRoblesvirtualLawlibrary

It is noteworthy to mention that there are two classes of positions of trust: on the one hand, there are
managerial employees whose primary duty consists of the management of the establishment in which
they are employed or of a department or a subdivision thereof, and to other officers or members of the
managerial staff; on the other hand, there are fiduciary rank-and-file employees, such as cashiers,
auditors, property custodians, or those who, in the normal exercise of their functions, regularly handle
significant amounts of money or property. These employees, though rank-and-file, are routinely charged
with the care and custody of the employer's money or property, and are thus classified as occupying
positions of trust and confidence.33 (Emphasis supplied)ChanRoblesVirtualawlibrary

The position an employee holds is not the sole criterion. More important than this formalistic
requirement is that loss of trust and confidence must be justified. As with misconduct as basis for
terminating employment, breach of trust demands that a degree of severity attend the employee's
breach of trust. In China City Restaurant Corporation v. National Labor Relations Commission,34 this court
emphasized the need for caution:chanRoblesvirtualLawlibrary

For loss of trust and confidence to be a valid ground for the dismissal of employees, it must be
substantial and not arbitrary, whimsical, capricious or concocted.

Irregularities or malpractices should not be allowed to escape the scrutiny of this Court. Solicitude for
the protection of the rights of the working class [is] of prime importance. Although this is not [al license
to disregard the rights of management, still the Court must be wary of the ploys of management to get
rid of employees it considers as undesirable.35 (Emphasis supplied)ChanRoblesVirtualawlibrary

ChanRoblesVirtualawlibrary

III
The social justice suppositions underlying labor laws require that the statutory grounds justifying
termination of employment should not be read to justify the view that bus conductors should, in all
cases, be free from any kind of error. Not every improper act should be taken to justify the termination
of employment.

Concededly, bus conductors handle money. To this extent, their work may be analogous to that of
tellers, cashiers, and other similarly situated rank-and-file employees who occupy positions of trust and
confidence. However, even granting that the first requisite for termination of employment on account of
willful breach of trust has been satisfied, we find it improper to sustain the validity of the termination of
petitioner's employment.

We take judicial notice of bus conductors' everyday work. Bus conductors receive, exchange, and keep
money paid by passengers by way of transportation fare. They keep track of payments and make
computations down to the last centavo, literally on their feet while a bus is in transit.

Regardless of whether a bus is driving through awkward spaces—through steep inclines, rugged roads,
or sharp turns—or of whether a bus is packed with standing passengers, the lonesome task of keeping
track of the passengers' payments falls upon a bus conductor.

Thus, while they do handle money, their circumstances are not at all the same as those of regular
cashiers. They have to think quickly, literally on their feet. Regular cashiers, on the other hand, have the
time and comfort to deliberately and carefully examine the transactions of their employer.

However, handling passengers' fare payments is not their sole function. Bus conductors assist drivers as
they maneuver buses through tight spaces while they are in transit, depart, or park. They often act as
dispatchers in bus stops and other such places, assist passengers as they embark and alight, and
sometimes even help passengers load and unload goods and cargo. They manage the available space in
a bus and ensure that no space is wasted as the bus accommodates more passengers. Along with
drivers, bus conductors commit to memory the destination of each passenger so that they can anticipate
their stops.

There are several ways to manifest the severity that suffices to qualify petitioner's alleged misconduct or
breach of trust as so grave that terminating his employment is warranted. It may be through the nature
of the act itself: spanning an entire spectrum between, on one end, an overlooked error, made entirely
in good faith; and, on another end, outright larceny. It may be through the sheer amount mishandled. It
may be through frequency of acts. It may be through other attendant circumstances, such as attempts
to destroy or conceal records and other evidence, or evidence of a motive to undermine the business of
an employer.

We fail to appreciate any of these in this case.

To reiterate, what is involved is a paltry amount of P196.00. All that has been proven is the existence of
a discrepancy. No proof has been adduced of ill-motive or even of gross negligence. From all indications,
petitioner stood charged with a lone, isolated instance of apparent wrongdoing.

The records are bereft of evidence showing a pattern of discrepancies chargeable against petitioner.
Seen in the context of his many years of service to his employer and in the absence of clear proof
showing otherwise, the presumption should be that he has performed his functions faithfully and
regularly. It can be assumed that he has issued the correct tickets and given accurate amounts of change
to the hundreds or even thousands of passengers that he encountered throughout his tenure. It is more
reasonable to assume that—except for a single error costing a loss of only P196.00—the company would
have earned the correct expected margins per passenger, per trip, and per bus that it allowed to travel.

Absent any other supporting evidence, the error in a single ticket issued by petitioner can hardly be used
to justify the inference that he has committed serious misconduct or has acted in a manner that runs
afoul of his employer's trust. More so, petitioner cannot be taken to have engaged in a series of acts
evincing a pattern or a design to defraud his employer. Terminating his employment on these
unfounded reasons is manifestly unjust.

To infer from a single error that petitioner committed serious misconduct or besmirched his employer's
trust is grave abuse of discretion. It is an inference that is arbitrary and capricious. It is contrary to the
high regard for labor and social justice enshrined in our Constitution and our labor laws.

The Court of Appeals committed an error of law correctible by a petition for review under Rule 45. It
erred when it held that the National Labor Relations did not commit grave abuse of discretion when the
latter did not engage in the requisite scrutiny to review the inference and its bases.chanrobleslaw

IV

As his employment was illegally and unjustly terminated, petitioner is entitled to full backwages and
benefits from the time of his termination until the finality of this Decision. He is likewise entitled to
separation pay in the amount of one (1) month's salary for every year of service until the finality of this
Decision, with a fraction of a year of at least six (6) months being counted as one (1) whole year.

As he was compelled to litigate in order to seek relief for the illegal and unjust termination of his
employment, petitioner is likewise entitled to attorney's fees in the amount of 10% of the total
monetary award.36

"Moral damages are awarded in termination cases where the employee's dismissal was attended by bad
faith, malice or fraud, or where it constitutes an act oppressive to labor, or where it was done in a
manner contrary to morals, good customs or public policy."37 Also, to provide an "example or correction
for the public good,"38 exemplary damages may be awarded.

However, we find no need to award these damages in favor of petitioner. While the termination of his
employment was invalid, we nevertheless do not find respondent Genesis to have acted with such a
degree of malice as to act out of a design to oppress petitioner. It remains that a discrepancy and
shortage chargeable to petitioner was uncovered, although this discrepancy and shortage does not
justify a penalty as grave as termination of employment.chanrobleslaw

Respondent Riza A. Moises may not be held personally liable for the illegal termination of petitioner's
employment.

As we explained in Saudi Arabian Airlines v. Rebesencio:39

A corporation has a personality separate and distinct from those of the persons composing it. Thus, as a
rule, corporate directors and officers are not liable for the illegal termination of a corporation's
employees. It is only when they acted in bad faith or with malice that they become solidarity liable with
the corporation.

In Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical, this court
clarified that "[b]ad faith does not connote bad judgment or negligence; it imports a dishonest purpose
or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some
motive or interest or ill will; it partakes of the nature of fraud."40ChanRoblesVirtualawlibrary

Petitioner has not produced proof to show that respondent Riza A. Moises acted in bad faith or with
malice as regards the termination of his employment. Thus, she did not incur any personal liability.

WHEREFORE, the Petition for Review on Certiorari is PARTIALLY GRANTED. The assailed Decision dated
July 8, 2014 and the assailed Resolution dated November 20, 2014 of the Court of Appeals Fifth Division
in CA-G.R. SP No. 130801, which dismissed the Petition for Certiorari filed by petitioner Richard N. Rivera
and affirmed the February 28, 2013 and April 30, 2013 Resolutions of the National Labor Relations
Commission Second Division, as well as the June 26, 2012 Decision of Labor Arbiter Gaudencio P.
Demaisip, Jr., are REVERSED and SET ASIDE. Accordingly, respondent Genesis Transport Service, Inc. is
ordered to pay petitioner:

(1) Full backwages and other benefits computed from July 30, 2010, when petitioner's employment
was illegally terminated, until the finality of this Decision;
(2) Separation pay computed from June 2002, when petitioner commenced employment, until the
finality of this Decision, at the rate of one (1) month's salary for every year of service, with a
fraction of a year of at least six (6) months being counted as one (1) whole year; and
(3) Attorney's fees equivalent to ten percent (10%) of the total award.

The case is REMANDED to the Labor Arbiter to make a detailed computation of the amounts due to
petitioner, which respondents should pay without delay.

The case is DISMISSED with respect to respondent Riza A. Moises.

SO ORDERED.
G.R. No. 194964-65, January 11, 2016

UNIVERSITY OF MINDANAO, INC., Petitioner, v. BANGKO SENTRAL PILIPINAS, ET AL., Respondents.

DECISION

LEONEN, J.:

Acts of an officer that arc not authorized by the board of directors/trustees do not bind the corporation
unless the corporation ratifies the acts or holds the officer out as a person with authority to transact on
its behalf.

This is a Petition for Review on Certiorari1 of the Court of Appeals' December 17, 2009 Decision2 and
December 20, 2010 Resolution.3 The Court of Appeals reversed the Cagayan De Oro City trial court's and
the Iligan City trial court's Decisions to nullify mortgage contracts involving University of Mindanao's
properties.4

University of Mindanao is an educational institution. For the year 1982, its Board of Trustees was
chaired by Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao's Assistant
Treasurer.5

Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift banks:
(1) First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and Loan Association, Inc.
(DSLAI). Guillermo B. Torres chaired both thrift banks. He acted as FISLAI's President, while his wife,
Dolores P. Torres, acted as DSLAI's President and FISLAI's Treasurer.6

Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas issued a P1.9 million standby emergency
credit to FISLAI. The release of standby emergency credit was evidenced by three (3) promissory notes
dated February 8, 1982, April 7, 1982, and May 4, 1982 in the amounts of P500,000.00, P600,000.00,
and P800,000.00, respectively. All these promissory notes were signed by Guillermo B. Torres, and were
co-signed by either his wife, Dolores P. Torres, or FISLAI's Special Assistant to the President, Edmundo G.
Ramos, Jr.7

On May 25, 1982, University of Mindanao's Vice President for Finance, Saturnino Petalcorin, executed a
deed of real estate mortgage over University of Mindanao's property in Cagayan de Oro City (covered by
Transfer Certificate of Title No. T-14345) in favor of Bangko Sentral ng Pilipinas.8 "The mortgage served
as security for FISLAI's PI.9 Million loan[.]"9 It was allegedly executed on University of Mindanao's
behalf.10

As proof of his authority to execute a real estate mortgage for University of Mindanao, Saturnino
Petalcorin showed a Secretary's Certificate signed on April 13, 1982 by University of Mindanao's
Corporate Secretary, Aurora de Leon.11 The Secretary's Certificate stated:chanRoblesvirtualLawlibrary

That at the regular meeting' of the Board of Trustees of the aforesaid corporation [University of
Mindanao] duly convened on March 30, 1982, at which a quorum was present, the following resolution
was unanimously adopted:chanRoblesvirtualLawlibrary
"Resolved that the University of Mindanao, Inc. be and is hereby authorized, to mortgage real estate
properties with the Central Bank of the Philippines to serve as security for the credit facility of First Iligan
Savings and Loan Association, hereby authorizing the President and/or Vice-president for Finance,
Saturnino R. Petalcorin of the University of Mindanao,- Inc. to sign, execute and deliver the covering
mortgage document or any other documents which may be proper[l]y required."12

cralawlawlibrary

The Secretary's Certificate was supported by an excerpt from the minutes of the January 19, 1982
alleged meeting of University of Mindanao's Board of Trustees. The excerpt was certified by Aurora de
Leon on March 13, 1982 to be a true copy of University of Mindanao's records on file.13 The excerpt
reads:chanRoblesvirtualLawlibrary

3 - Other Matters:

(a) Cagayan de Oro and Iligan properties:

Resolution No. 82-1-8

Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to represent
the University of Mindanao to transact, transfer, convey, lease, mortgage, or otherwise hypothecate any
or all of the following properties situated at Cagayan de Oro and Iligan City and authorizing further Mr.
Petalcorin to sign any or all documents relative thereto:chanRoblesvirtualLawlibrary

1. A parcel of land situated at Cagayan de Oro City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE No. T-14345 of the Registry of Deeds of Cagayan de Oro City;

2. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO..T-15696 (a.t.) of the Registry of Deeds of Iligan City; and

3. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds of Iligan City.14

cralawlawlibrary

The mortgage deed executed by Saturnino Petalcorin in favor of Bangko Sentral ng Pilipinas was
annotated on the certificate of title of the Cagayan de Oro City property (Transfer Certificate of Title No.
14345) on June 25, 1982. Aurora de Leon's'certification was also annotated on the Cagayan de Oro City
property's certificate of title (Transfer Certificate of Title No. 14345).15

On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional loan of P620,700.00.
Guillermo B. Torres and Edmundo Ramos executed a promissory note on October 21, 1982 to cover that
amount.16
On November 5, 1982, Saturnino Petalcorin executed another deed of real estate mortgage, allegedly on
behalf of University of Mindanao, over its two properties in Iligan City. This mortgage served as
additional security for FISLAI's loans. The two Iligan City properties were covered by Transfer Certificates
of Title Nos, T-15696 and T-15697.17

On January 17, 1983, Bangko Sentral ng Pilipinas' mortgage lien over the Iligan City properties and
Aurora de Leon's certification were annotated on Transfer Certificates of Title Nos. T-15696 and T-
15697.18 On January 18, 1983, Bangko Sentral ng Pilipinas' mortgage lien over the Iligan City properties
was also annotated on the tax declarations covering the Iligan City properties.19

Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on May 27, 1983 and on August
20, 1984 in the amounts of P1,633,900.00 and P6,489,000.00, respectively.20

On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a Memorandum of
Agreement intended to rehabilitate the thrift banks, which had been suffering from their depositors'
heavy withdrawals. Among the terms of the agreement was the merger of FISLAI and DSLAI, with DSLAI
as the surviving corporation. DSLAI later became known as Mindanao Savings and Loan Association, Inc.
(MSLAI).21

Guillermo B. Torres died on March 2, 1989.22

MSLAI failed to recover from its losses and was liquidated on May 24, 1991.23

On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao, informing it that
the bank would foreclose its properties if MSLAI's total outstanding obligation of P12,534,907.73
remained unpaid.24

In its reply to Bangko Sentral ng Pilipinas' June 18, 1999 letter, University of Mindanao, through its Vice
President for Accounting, Gloria E. Detoya, denied that University of Mindanao's properties were
mortgaged. It also denied having received any loan proceeds from Bangko Sentral ng
Pilipinas.25cralawred

On July 16, 1999, University of Mindanao filed two Complaints for nullification and cancellation of
mortgage. One Complaint was filed before the Regional Trial Court of Cagayan de Oro City, and the
other Complaint was filed before the Regional Trial Court of Iligan City.26

University of Mindanao alleged in its Complaints that it did not obtain any loan from Bangko Sentral ng
Pilipinas. It also did not receive any loan proceeds from the bank.27

University of Mindanao also alleged that Aurora de Leon's certification was anomalous. It never
authorized Saturnino Petalcorin to execute real estate mortgage contracts involving its properties to
secure FISLAI's debts. It never ratified the execution of the mortgage contracts. Moreover, as an
educational institution, it cannot mortgage its properties to secure another person's debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de Oro City rendered a Decision in favor of
University of Mindanao,29 thus:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and against
defendants:chanRoblesvirtualLawlibrary

1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of BANGKO SENTRAL
NG PILIPINAS involving Lot 421-A located in Cagayan de Oro City with an area of 482 square meters
covered by TCT No. T-14345 as annuled [sic];

2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry No. 9951 and Entry No. 9952
annotated at the back of said TCT No. T-14345, Registry of Deeds of Cagayan de Oro City;

Prayer for attorney's fee [sic] is hereby denied there being no proof that in demanding payment of the
emergency loan, defendant BANGKO SENTRAL NG PILIPINAS was motivated by evident bad faith,

SO ORDERED.30 (Citation omitted)cralawlawlibrary

The Regional Trial Court of Cagayan de Oro City found that there was no board resolution giving
Saturnino Petalcorin authority to execute mortgage contracts on behalf of University of Mindanao. The
Cagayan de Oro City trial court gave weight to Aurora de Leon's testimony that University ofMindanao's
Board of Trustees did not issue a board resolution that would support the Secretary's Certificate she
issued. She testified that she signed the Secretary's Certificate only upon Guillermo B. Torres' orders.31

Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on University
ofMindanao's behalf. He merely executed the contract because of Guillermo B. Torres' request.32

Bangko Sentral ng Pilipinas' witness Daciano Pagui, Jr. also admitted that there was no board resolution
giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of University of
Mindanao.33

The Regional Trial Court of Cagayan de Oro City ruled that Saturnino Petalcorin was not authorized to
execute mortgage contracts for University of Mindanao. Hence, the mortgage of University
ofMindanao's Cagayan de Oro City property was unenforceable. Saturnino Petalcorin's unauthorized
acts should be annulled.34

Similarly, the Regional Trial Court of Iligan City rendered a Decision on December 7, 2001 in favor of
University of Mindanao.35 The dispositive portion of the Decision reads:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendants, as follows:chanRoblesvirtualLawlibrary

1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage dated November 5, 1982 for
being unenforceable or void contract;
2. Ordering the Office of the Register of Deeds of Iligan City to cancel the entries on TCT No. T-15696 and
TCT No. T- 15697 with respect to the aforesaid Deed of Real Estate Mortgage dated November 5, 1982
and all other entries related thereto;

3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owner's duplicate copies of TCT No.
T-15696 and TCT No. 15697 to the plaintiff;

4. Nullifying the subject [foreclosure [proceedings and the [a]uction [s]ale conducted by defendant Atty.
Gerardo Paguio, Jr. on October 8, 1999 including all the acts subsequent thereto and ordering the
Register of Deeds of Iligan City not to register any Certificate of Sale pursuant to the said auction sale
nor make any transfer of the corresponding titles, and if already registered and transferred, to cancel all
the said entries in TCT No. T-15696 and TCT No. T-15697 and/or cancel the corresponding new TCTs in
the name of defendant Bangko Sentral ng Pilipinas;

5. Making the Preliminary Injunction per Order of this Court dated October 13, 2000 permanent.

No pronouncement as to costs.36 (Citation omitted)cralawlawlibrary

The Iligan City trial court found that the Secretary's Certificate issued by Aurora de Leon was
fictitious37 and irregular for being unnumbered.38 It also did not specify the identity, description, or
location of the mortgaged properties.39

The Iligan City trial court gave credence to Aurora de Leon's testimony that the University of Mindanao's
Board of Trustees did not take up the documents in its meetings. Saturnino Petalcorin corroborated her
testimony.40

The Iligan City trial court ruled that the lack of a board resolution authorizing Saturnino Petalcorin to
execute documents of mortgage on behalf of University of Mindanao made the real estate mortgage
contract unenforceable under Article 140341 of the Civil Code.42 The mortgage contract and the
subsequent acts of foreclosure and auction sale were void because the mortgage contract was executed
without University of Mindanao' s authority.43

The Iligan City trial court also ruled that the annotations on the titles of University of Mindanao's
properties do not operate as notice to the University because annotations only bind third parties and
not owners.44 Further, Bangko Sentral ng Pilipinas' right to foreclose the University of Mindanao's
properties had already prescribed.45

Bangko Sentral ng Pilipinas separately appealed the Decisions of both the Cagayan de Oro City and the
Iligan City trial courts.46

After consolidating both cases, the Court of Appeals issued a Decision on December 17, 2009 in favor of
Bangko Sentral ng Pilipinas, thus:chanRoblesvirtualLawlibrary
FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial Court of
Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7 December 2001 of the
Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and SET ASIDE. The
Complaints in both cases before the trial courts are DISMISSED. The Writ of Preliminary Injunction issued
by the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 is LIFTED and SET ASIDE.

SO ORDERED.47cralawlawlibrary

The Court of Appeals ruled that "[although BSP failed to prove that the UM Board of Trustees actually
passed a Board Resolution authorizing Petalcorin to mortgage the subject real properties,"48 Aurora de
Leon's Secretary's Certificate "clothed Petalcorin with apparent and ostensible authority to execute the
mortgage deed on its behalf[.]"49 Bangko Sentral ng Pilipinas merely relied in good faith on the
Secretary's Certificate.50 University of Mindanao is estopped from denying Saturnino Petalcorin's
authority.51

Moreover, the Secretary's Certificate was notarized. This meant that it enjoyed the presumption of
regularity as to the truth of its statements and authenticity of the signatures.52 Thus, "BSP cannot be
faulted for relying on the [Secretary's Certificate.]"53

The Court of Appeals also ruled that since University of Mindanao's officers, Guillermo B. Torres and his
wife, Dolores P. Torres, signed the promissory notes, University of Mindanao was presumed to have
knowledge of the transaction.54 Knowledge of an officer in relation to matters within the scope of his or
her authority is notice to the corporation.55

The annotations on University of Mindanao's certificates of title also operate as constructive notice to it
that its properties were mortgaged.56 Its failure to disown the mortgages for more than a decade was
implied ratification.57

The Court of Appeals also ruled that Bangko Sentral ng Pilipinas' action for foreclosure had not yet
prescribed because the due date extensions that Bangko Sentral ng Pilipinas granted to FISLAI extended
the due date of payment to five (5) years from February 8, 1985.58 The bank's demand letter to Dolores
P. Torres on June 18, 1999 also interrupted the prescriptive period.59

University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for Reconsideration60 and
Motion for Partial Reconsideration respectively of the Court of Appeals' Decision. On December 20,
2010, the Court of Appeals issued a Resolution, thus:chanRoblesvirtualLawlibrary

Acting on the foregoing incidents, the Court RESOLVES to:chanRoblesvirtualLawlibrary

1. GRANT the appellant's twin motions for extension of time to file comment/opposition

and NOTE the Comment . on the appellee's Motion for Reconsideration it subsequently filed on
June 23, 2010;
 2. GRANT the appellee's three (3) motions for extension of time to file comment/opposition
and NOTE the Comment on the appellant's Motion for Partial Reconsideration it filed on July 26,
2010;

3. NOTE the appellant's "Motion for Leave to File Attached Reply Dated August 11, 2010" filed on
August 13, 2010 and DENY the attached "Reply to Comment Dated July 26, 2010";

4. DENY the appellee's Motion for Reconsideration as it does' not offer any arguments sufficiently
meritorious to warrant modification or reversal of the Court's 17 December 2009 Decision. The
Court finds that there is no compelling reason to reconsider its ruling; and

5. GRANT the appellant's Motion for Partial Reconsideration, as the Court finds it meritorious,
considering that it ruled in its Decision that "BSP can still foreclose on the UM's real property in
Cagayan de Oro City covered by TCT No. T- 14345." It then follows that the injunctive writ issued
by the RTC of Cagayan de Oro City, Branch 24 must be lifted. The Court's 17 December 2009
Decision is accordingly MODIFIED and AMENDED to read as follows:chanRoblesvirtualLawlibrary

"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial Court of
Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7 December 2001 of the
Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and SET ASIDE. The
Complaints in both cases before the trial courts are DISMISSED. The Writs of Preliminary Injunction
issued by the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 and in the Regional Trial
Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 are LIFTED and SET ASIDE."

SO ORDERED.61 (Citation omitted)

cralawlawlibrary

Hence, University of Mindanao filed this Petition for Review. The issues for resolution
are:chanRoblesvirtualLawlibrary

First, whether respondent Bangko Sentral ng Pilipinas' action to foreclose the mortgaged properties had
already prescribed; and

Second, whether petitioner University of Mindanao is bound by the real estate mortgage contracts
executed by Saturnino Petalcorin.

We grant the Petition.

Petitioner argues that respondent's action to foreclose its mortgaged properties had already prescribed.
Petitioner is mistaken.

Prescription is the mode of acquiring or losing rights through the lapse of time.62 Its purpose is "to
protect the diligent and vigilant, not those who sleep on their rights."63

The prescriptive period for actions on mortgages is ten (10) years from the day they may be
brought.64 Actions on mortgages may be brought not upon the execution of the mortgage contract but
upon default in payment of the obligation secured by the mortgage.65

A debtor is considered in default when he or she fails to pay the obligation on due date and, subject to
exceptions, after demands for payment were made by the creditor. Article 1169 of the Civil Code
provides:chanRoblesvirtualLawlibrary

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may
exist:chanRoblesvirtualLawlibrary

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.cralawlawlibrary

Article 1193 of the Civil'Code provides that an obligation is demandable only upon due date. It
provides:chanRoblesvirtualLawlibrary

ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only
when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.

A day certain is understood to be that which must necessarily come, although it may not be known
when.

If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall
be regulated by the rules of the preceding Section.cralawlawlibrary
In other words, as a general rule, a person defaults and prescriptive period for action runs when (1) the
obligation becomes due and demandable; and (2) demand for payment has been made.

The prescriptive period neither runs from the date of the execution of a contract nor does the
prescriptive period necessarily run on the date when the loan becomes due and
demandable.66 Prescriptive period runs from the date of demand,67 subject to certain exceptions.

In other words, ten (10) .years may lapse from the date of the execution of contract, without barring a
cause of action on the mortgage when there is a gap between the period of execution of the contract
and the due date or between the due date and the demand date in cases when demand is necessary.68

The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The maturity dates
of FISLAI's loans were repeatedly extended until the loans became due and demandable only in 1990.
Respondent informed petitioner of its decision to foreclose its properties and demanded payment in
1999.

The running of the prescriptive period of respondent's action on the mortgages did not start when it
executed the mortgage contracts with Saturnino Petalcorin in 1982.

The prescriptive period for filing an action may run either (1) from 1990 when the loan became due, if
the obligation was covered by the exceptions under Article 1169 of the Civil Code; (2) or from 1999
when respondent demanded payment, if the obligation was not covered by the exceptions under Article
1169 of the Civil Code.

In either case, respondent's Complaint with cause of action based on the mortgage contract was filed
well within the prescriptive period.

Given the termination of all traces of FISLAI's existence,70 demand may have been rendered unnecessary
under Article 1169(3)71 of the Civil Code. Granting that this is the case,.respondent would have had ten
(10) years from due date in 1990 or until 2000 to institute an action on the mortgage contract.

However, under Article 115572 of the Civil Code, prescription of actions may be interrupted by (1) the
filing of a court action; (2) a written extrajudicial demand; and (3) the written acknowledgment of the
debt by the debtor.

Therefore, the running of the prescriptive period was interrupted when respondent sent its demand
letter to petitioner on June 18, 1999. This eventually led to petitioner's filing of its annulment of
mortgage complaints before the Regional Trial Courts of Iligan City and Cagayan De Oro City on July 16,
1999.

Assuming that demand was necessary, respondent's action was within the ten (10)-year prescriptive
period. Respondent demanded payment of the loans in 1999 and filed an action in the same year.

II
Petitioner argues that the execution of the mortgage contract was ultra vires. As an educational
institution, it may not secure the loans of third persons.73 Securing loans of third persons is not among
the purposes for which petitioner was established.74

Petitioner, is correct.

Corporations are artificial entities granted legal personalities upon their creation by their incorporators
in accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing
with corporations cannot assume that corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly defined by the law and their articles of
incorporation.75

A corporation may exercise its powers only within those definitions. Corporate acts that are outside
those express definitions under the law or articles of incorporation or those "committed outside the
object for which a corporation is created"76 are ultra vires.

The only exception to this, rule is when acts are necessary and incidental to carry out a corporation's
purposes, and to the exercise of powers conferred by the Corporation Code and under a corporation's
articles of incorporation.77 This exception is specifically included in the general powers of a corporation
under Section 36 of the Corporation Code:chanRoblesvirtualLawlibrary

SEC. 36. Corporate powers and capacity.—Every corporation incorporated under this Code has the
power and capacity:chanRoblesvirtualLawlibrary

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a
non stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;
 9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation. (Emphasis supplied)

cralawlawlibrary

Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test to determine if a corporate act is
in accordance with its purposes:chanRoblesvirtualLawlibrary

It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose
expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done
for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those
ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter
powers. The test to be applied is whether the act in question is in direct and immediate furtherance of
the corporation's business, fairly incident to the express powers and reasonably necessary to their
exercise. If so, the corporation has the power to do it; otherwise, not.79 (Emphasis
supplied)cralawlawlibrary

As an educational institution, petitioner serves:chanRoblesvirtualLawlibrary

a. To establish, conduct and operate a college or colleges, and/or university;

b. To acquire properties,, real and/or personal, in connection with the establishment and
operation of such college or colleges;

c. To do and perform the various and sundry acts and things permitted by the laws of the
Philippines unto corporations like classes and kinds;

d. To engage in agricultural, industrial, and/or commercial pursuits in line with educational

program of the corporation and to acquire all properties, real and personal [,] necessary for the
purposes[;]

e. To establish, operate, and/or acquire broadcasting and television stations also in line with the
educational program of the corporation and for such other purposes as the Board of Trustees
may determine from time to time;

f. To undertake housing projects of faculty members and employees, and to acquire real estates
for this purpose;
 g. To establish, conduct and operate and/or invest in educational foundations; [As amended on
December 15, 1965][;]

h. To establish, conduct and operate housing and dental schools, medical facilities and other
related undertakings;

i. To invest in other corporations. [As amended on December 9, 1998]. [Amended Articles of

Incorporation of the University of Mindanao, Inc. - the Petitioner].80

cralawlawlibrary

Petitioner does not have the power to mortgage its properties in order to secure loans of other persons.
As an educational institution, it is limited to developing human capital thrpugh formal instruction. It is
not a corporation engaged in the business of securing loans of others.

Hiring professors, instructors, and personnel; acquiring equipment and real estate; establishing housing
facilities for personnel and students; hiring a concessionaire; and other activities that can be directly
connected to the operations and conduct of the education business may constitute the necessary and
incidental acts of an educational institution.

Securing FISLAI's loans by mortgaging petitioner's properties does not appear to have even the remotest
connection to the operations of petitioner as an educational institution. Securing loans is not an adjunct
of the educational institution's conduct of business.81 It does not appear that securing third-party loans
was necessary to maintain petitioner's business of providing instruction to individuals.

This court upheld the validity of corporate acts when those acts were shown to be clearly within the
corporation's powers or were connected to the corporation's purposes.

In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the donation given to the
children of a deceased person who contributed to the growth of the corporation.83 This court found that
this donation was within the broad scope of powers and purposes of the corporation to "aid in any other
manner any person . . . in which any interest is held by this corporation or in the affairs or prosperity of
which this corporation has a lawful interest."84

In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this court declared valid a rule by
Twin Towers Condominium denying delinquent members the right to use condominium facilities. This
court ruled that the condominium's power to promulgate rules on the use of facilities and to enforce
provisions of the Master Deed was clear in the Condominium Act, Master Deed, and By-laws of the
condominium.87 Moreover, the promulgation of such rule was "reasonably necessary" to attain the
purposes of the condominium project.88

This court has, in effect, created a presumption that corporate acts are valid if, on their face, the acts
were within the corporation's powers or purposes. This presumption was explained as early as in 1915
in Coleman v. Hotel De France,89 where this court ruled that contracts entered into by corporations in
the exercise of their incidental powers are not ultra vires.90

Coleman involved a hotel's cancellation of an employment contract it executed with a gymnast. One of
the hotel's contentions was the supposed ultra vires nature of the contract.- It was executed outside its
express and implied powers under the articles of incorporation.91

In ruling in favor of the contract's validity, this court considered the incidental powers of the hotel to
include the execution of employment contracts with entertainers for the purpose of providing its guests
entertainment and increasing patronage.92

This court ruled that a contract executed by a corporation shall be presumed valid if on its face its
execution was not beyond the powers of the corporation to do.93 Thus:chanRoblesvirtualLawlibrary

When a contract is not on its face necessarily beyond the scope of the power of the corporation by
which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations
are presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal
wrong.94cralawlawlibrary

However, this should not be interpreted to mean that such presumption applies to all cases, even when
the act in question is on its face beyond the corporation's power to do or when the evidence contradicts
the presumption.

Presumptions are "inference[s] as to the existence of a fact not actually known, arising from its usual
connection with another which is known, or a conjecture based on past experience as to what course
human affairs ordinarily take."95 Presumptions embody values and revealed behavioral expectations
under a given set of circumstances.

Presumptions may be conclusive96 or disputable.97

Conclusive presumptions are presumptions that may not be overturned by evidence, however strong
the evidence is.98 They are made conclusive not because there is an established uniformity in behavior
whenever identified circumstances arise. They are conclusive because they are declared as such under
the law or the rules. Rule 131, Section 2 of the Rules of Court identifies two (2) conclusive
presumptions:chanRoblesvirtualLawlibrary

SEC. 2. Conclusive presumptions.— The following are instances of conclusive

presumptions:chanRoblesvirtualLawlibrary

(a)  Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising
out of such declaration, act or omission, be permitted to falsify it;
(b) The tenant is not permitted to deny the title of his landlord at the time of the commencement of the
relation of landlord and tenant between them.cralawlawlibrary

On the other hand, disputable, presumptions are presumptions that may be overcome by contrary
evidence.99 They are disputable in recognition of the variability of human behavior. Presumptions are
not always true. They may be wrong under certain circumstances, and courts are expected to apply
them, keeping in mind the nuances of every experience that may render the expectations wrong.

Thus, the application of disputable presumptions on a given circumstance must be based on the
existence of certain facts on which they are meant to operate. "[Presumptions are not allegations, nor
do they supply their absence[.]"100 Presumptions are conclusions. They do not apply when there are no
facts or allegations to support them.

If the facts exist to set in motion the operation of a disputable presumption, courts may accept the
presumption. However, contrary evidence may be presented to rebut the presumption.

Courts cannot disregard contrary evidence offered to rebut disputable presumptions. Disputable
presumptions apply only in the absence of contrary evidence or explanations. This court explained
in Philippine Agila Satellite Inc. v. Usec. Trinidad-Lichauco: 101chanroblesvirtuallawlibrary

We do not doubt the existence of the presumptions of "good faith" or "regular performance of official
duty," yet these presumptions are disputable and may be contradicted and overcome by other
evidence. Many civil actions are oriented towards overcoming any number of these presumptions, and a
cause of action can certainly be geared towards such effect.  The very purpose of trial is to allow a party
to present evidence to overcome the disputable presumptions involved. Otherwise, if trial is deemed
irrelevant or unnecessary, owing to the perceived indisputability of the presumptions, the judicial
exercise would be relegated to a mere ascertainment of what presumptions apply in a given case,
nothing more. Consequently, the entire Rules of Court is rendered as excess verbiage, save perhaps for
the provisions laying down the legal presumptions.

If this reasoning of the Court of Appeals were ever adopted as a jurisprudential rule, no public officer
could ever be sued for acts executed beyond their official functions or authority, or for tortious conduct
or behavior, since such acts would "enjoy the presumption of good faith and in the regular performance
of official duty." Indeed, few civil actions of any nature would ever reach the trial stage, if a case can be
adjudicated by a mere determination from the complaint or answer as to which legal presumptions are
applicable. For-example, the presumption that a person is innocent of a wrong is a disputable
presumption on the same level as that of the regular performance of official duty. A civil complaint for
damages necessarily alleges that the defendant committed a wrongful act or omission that would serve
as basis for the award of damages. With the rationale of the Court of Appeals, such complaint can be
dismissed upon a motion to dismiss solely on the ground that the presumption is that a person is
innocent of a wrong.102 (Emphasis supplied, citations omitted)cralawlawlibrary
In this case, the presumption that the execution of mortgage contracts was within petitioner's corporate
powers does not apply. Securing third-party loans is not connected to petitioner's purposes as an
educational institution.

III

Respondent argues that petitioner's act of mortgaging its properties to guarantee FISLAI's loans was
consistent with petitioner's business interests, since petitioner was presumably a FISLAI shareholder
whose officers and shareholders interlock with FISLAI. Respondent points out that petitioner and its key
officers held substantial shares in MSLAI when DSLAI and FISLAI merged. Therefore, it was safe to
assume that when the mortgages were executed in 1982, petitioner held substantial shares in FISLAI.103

Parties dealing with corporations cannot simply assume that their transaction is within the corporate
powers. The acts of a corporation are still limited by its powers and purposes as provided in the law and
its articles of incorporation.

Acquiring shares in another corporation is not a means to create new powers for the acquiring
corporation. Being a shareholder of another corporation does not automatically change the nature and
purpose of a corporation's business. Appropriate amendments must be made either to the law or the
articles of incorporation before a corporation can validly exercise powers outside those provided in law
or the articles of incorporation. In other words, without an amendment, what is ultra vires before a
corporation acquires shares in other corporations is still ultra vires after such acquisition.

Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI, securing loans
of third persons is still beyond petitioner's power to do. It is still inconsistent with its purposes under the
law104 and its articles of incorporation.105

In attempting to show petitioner's interest in securing FISLAI's loans by adverting to their interlocking,
directors and shareholders, respondent disregards petitioner's separate personality from its officers,
shareholders, and other juridical persons.

The separate personality of corporations means that they are "vest[ed] [with] rights, powers, and
attributes [of their own] as if they were natural persons[.]"106 Their assets and liabilities are their own
and not their officers', shareholders', or another corporation's. In the same vein, the assets and liabilities
of their officers and shareholders are not the corporations'. Obligations incurred by corporations are not
obligations of their officers and shareholders. Obligations of officers and shareholders are not
obligations of corporations.107 In other words, corporate interests are separate from the personal
interests of the natural persons that comprise corporations.

Corporations are given separate personalities to allow natural persons to balance the risks of business as
they accumulate capital. They are, however, given limited competence as a means to protect the public
from fraudulent acts that may be committed using the separate juridical personality given to
corporations.
Petitioner's key officers, as shareholders of FISLAI, may have an interest in ensuring the viability of FISLAI
by obtaining a loan from respondent and securing it by whatever means. However, having interlocking
officers and stockholders with FISLAI does not mean that petitioner, as an educational institution, is or
must necessarily be interested in the affairs of FISLAI.

Since petitioner is an entity distinct and separate not only from its own officers and shareholders but
also from FISLAI, its interests as an educational institution may not be consistent with FISLAI's.

Petitioner and FISLAI have different constituencies. Petitioner's constituents comprise persons who have
committed to developing skills and acquiring knowledge in their chosen fields by availing the formal
instruction provided by petitioner. On the other hand, FISLAI is a thrift bank, which constituencies
comprise investors.

While petitioner and FISLAI exist ultimately to benefit their stockholders, their constituencies affect the
means by which they can maintain their existence. Their interests are congruent with sustaining their
constituents' needs because their existence depends on that. Petitioner can exist only if it continues to
provide for the kind and quality of instruction that is needed by its constituents. Its operations and
existence are placed at risk when resources are used on activities that are not geared toward the
attainment of its purpose. Petitioner has no business in securing FISLAI, DSLAI, or MSLAI's loans. This
activity is not compatible with its business of providing quality instruction to its constituents.

Indeed, there are instances when we disregard the separate corporate personalities of the corporation
and its stockholders, directors, or officers. This is called piercing of the corporate veil.

Corporate veil is pierced when the separate personality of the corporation is being used to perpetrate
fraud, illegalities, and injustices.108 In Lanuza, Jr. v. BF Corporation:109chanroblesvirtuallawlibrary

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues." It is also warranted in 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."110cralawlawlibrary

These instances have not been shown in this case. There is no evidence pointing to the possibility that
petitioner used its separate personality to defraud third persons or commit illegal acts. Neither is there
evidence to show that petitioner was merely a farce of a corporation. What has been shown instead was
that petitioner, too, had been victimized by fraudulent and unauthorized acts of its own officers and
directors.

In this case, instead of guarding against fraud, we perpetuate fraud if we accept respondent's
contentions.
IV

Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on its behalf.
There was no board resolution to that effect. Thus, the mortgages executed by Saturnino Petalcorin
were unenforceable.111

The mortgage contracts executed in favor of respondent do not bind petitioner. They were executed
without authority from petitioner.

Petitioner must exercise its.powers and conduct its business through its Board of Trustees. Section 23 of
the Corporation Code provides:chanRoblesvirtualLawlibrary

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.cralawlawlibrary

Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any manner
without action from its Board of Trustees. The Board of Trustees must act as a body in order to exercise
corporate powers. Individual trustees are not clothed with corporate powers just by being a trustee.
Hence, the individual trustee cannot bind the corporation by himself or herself.

The corporation may, however, delegate through a board resolution its corporate powers or functions
to a representative, subject to limitations under the law and the corporation's articles of
incorporation.112

The relationship between a corporation and its representatives is governed by the general principles of
agency.113 Article 1317 of the Civil Code provides that there must be authority from the principal before
anyone can act in his or her name:chanRoblesvirtualLawlibrary

ART. 1317. No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.cralawlawlibrary

Hence, without delegation by the board of directors or trustees, acts of a person—including those of the
corporation's directors, trustees, shareholders, or officers—executed on behalf of the corporation are
generally not binding on the corporation.114

Contracts entered into in another's name without authority or valid legal representation are generally
unenforceable. The Civil Code provides:chanRoblesvirtualLawlibrary
ART. 1317. . . .

A contract entered into in the name of another by one who has no authority or legal representation, or
who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been executed, before it is revoked by the other contracting party.
....

ART. 1403. The following contracts are unenforceable, unless they are
ratified:chanRoblesvirtualLawlibrary

(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers[.]cralawlawlibrary

The unenforceable status of contracts entered into by an unauthorized person on behalf of another is
based on the basic principle that contracts must be consented to by both parties.115 There is no contract
without meeting of the minds as to the subject matter and cause of the obligations created under the
contract.116

Consent of a person cannot be presumed from representations of another, especially if obligations will
be incurred as a result. Thus, authority is required to make actions made on his or her behalf binding on
a person. Contracts entered into by persons without authority from the corporation shall generally be
considered ultra vires and unenforceable117 against the corporation.

Two trial courts118 found that the Secretary's Certificate and the board resolution were either non-
existent or fictitious. The trial courts based their findings on the testimony of the Corporate Secretary,
Aurora de Leon herself. She signed the Secretary's Certificate and the excerpt of the minutes of the
alleged board meeting purporting to authorize Saturnino Petalcorin to mortgage petitioner's properties.
There was no board meeting to that effect. Guillermo B. Torres ordered the issuance of the Secretary's
Certificate. Aurora de Leon's testimony was corroborated by Saturnino Petalcorin.

Even the Court of Appeals, which reversed the trial courts' decisions, recognized that "BSP failed to
prove that the UM Board of Trustees actually passed a Board Resolution authorizing Petalcorin to
mortgage the subject real properties[.]"119

Well-entrenched is the rule that this court, not being a trier of facts, is bound by the findings of fact of
the trial courts and the Court of Appeals when such findings are supported by evidence on
record.120 Hence, not having the proper board resolution to authorize Saturnino Petalcorin to execute
the mortgage contracts for petitioner, the contracts he executed are unenforceable against petitioner.
They cannot bind petitioner.

However, personal liabilities may be incurred by directors who assented to such unauthorized act121 and
by the person who contracted in excess of the limits of his or her authority without the corporation's
knowledge.122
V

Unauthorized acts that are merely beyond the powers of the corporation under its articles of
incorporation are not void ab initio.

In Pirovano, et al, this court explained that corporate acts may be ultra vires but not void.123 Corporate
acts may be capable of ratification:124chanroblesvirtuallawlibrary

[A] distinction should be made between corporate acts or contracts which are illegal and those which
are merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or
public order, or contravene some rules of public policy or public duty, and are, like similar transactions
between individuals, void. They cannot serve as basis of a court action, nor acquire validity by
performance, ratification, or estoppel. Mere ultra vires acts, on the other hand, or those which are not
illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the stockholders.125cralawlawlibrary

Thus, even though a person did not give another person authority to act on his or her behalf, the action
may be enforced against him or her if it is shown that he or she ratified it or allowed the other person to
act as if he or she had full authority to do so. The Civil Code provides:chanRoblesvirtualLawlibrary

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.

ART. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the
agent if the former allowed the latter to act as though he had full powers. (Emphasis
supplied)cralawlawlibrary

Ratification is a voluntary and deliberate confirmation or adoption of a previous unauthorized act.

It.converts the unauthorized act of an agent into an act of the principal.127 It cures the lack of consent at
the time of the execution of the contract entered into by the representative, making the contract valid
and enforceable.128 It is, in essence, consent belatedly given through express or implied acts that are
deemed a confirmation or waiver of the right to impugn the unauthorized act.129 Ratification has the
effect of placing the principal in a position as if he or she signed the original contract. In Board of
Liquidators v. Heirs ofM. Kalaw, et al.:130chanroblesvirtuallawlibrary

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized
act or contract by its officers or others relates back to the time of the act or contract ratified, and is
equivalent to original authority;" and that "[t]he corporation and the other party to the transaction are
in precisely the same position as if the act or contract had been authorized at the time." The language of
one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more nor
less than the making of an original contract. The theory of corporate ratification is predicated on the
right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior
authority."131 (Citations omitted)cralawlawlibrary

Implied ratification may take the form of silence, acquiescence, acts consistent with approval of the act,,
or acceptance or retention of benefits.132 However, silence, acquiescence, retention of benefits, and acts
that may be interpreted as approval of the act do not by themselves constitute implied ratification. For
an act to constitute an implied ratification, there must be no acceptable explanation for the act-other
than that there is an intention to adopt the act as his or her own.133 "[It] cannot be inferred from acts
that a principal has a right to do independently of the unauthorized act of the agent."134

No act by petitioner can be interpreted as anything close to ratification. It was not shown that it issued a
resolution ratifying the execution of the mortgage contracts. It was not shown that it received proceeds
of the loans secured by the mortgage contracts. There was also no showing that it received any
consideration for the execution of the mortgage contracts. It even appears that petitioner was unaware
of the mortgage contracts until respondent notified it of its desire to foreclose the mortgaged
properties.

Ratification must be knowingly and voluntarily done.135 Petitioner's lack of knowledge about the
mortgage executed in its name precludes an interpretation that there was any ratification on its part.

Respondent further argues that petitioner is presumed to have knowledge of its transactions with
respondent because its officers, the Spouses Guillermo and Dolores Torres, participated in obtaining the
loan.136

Indeed, a corporation, being a person created by mere fiction of law, can act only through natural
persons such as its directors, officers, agents, and representatives. Hence, the general rule is that
knowledge of an officer is considered knowledge of the corporation.

However, even though the Spouses Guillermo and Dolores Torres were officers of both the thrift banks
and petitioner, their knowledge of the mortgage contracts cannot be considered as knowledge of the
corporation.

The rule that knowledge of an officer is considered knowledge of the corporation applies only when the
officer is acting within the authority given to him or her by the corporation. In  Francisco v. Government
Service Insurance System:137chanroblesvirtuallawlibrary

Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his
employment, and in relation to matters within the scope of his authority, is notice to the corporation,
whether he communicates such knowledge or not.138cralawlawlibrary
The public should be able to rely on and be protected from the representations of a corporate
representative acting within the scope of his or her authority. This is why an authorized officer's
knowledge is considered knowledge of corporation. However, just as the public should be able to rely on
and be protected from corporate representations, corporations should also be able to expect that they
will not be bound by unauthorized actions made on their account.

Thus, knowledge should be actually communicated to the corporation through its authorized
representatives. A corporation cannot be expected to act or not act on a knowledge that had not been
communicated to it through an authorized representative. There can be no implied ratification without
actual communication. Knowledge of the existence of contract must be brought to the corporation's
representative who has authority to ratify it. Further, "the circumstances must be shown from which
such knowledge may be presumed."139

The Spouses Guillermo and Dolores Torres' knowledge cannot be interpreted as knowledge of
petitioner. Their knowledge was not obtained as petitioner's representatives. It was not shown that they
were acting for and within the authority given by petitioner when they acquired knowledge of the loan
transactions and the mortgages. The knowledge was obtained in the interest of and as representatives
of the thrift banks.

VI

Respondent argues that Satnrnino Petalcorin was clothed with the authority to transact on behalf of
petitioner, based on the board resolution dated March 30, 1982 and Aurora de Leon's notarized
Secretary's Certificate.140 According to respondent, petitioner is bound by the mortgage contracts
executed by Saturnino Petalcorin.141

This court has recognized presumed or apparent authority or capacity to bind corporate representatives
in instances when the corporation, through its silence or other acts of recognition, allowed others to
believe that persons, through their usual exercise of corporate powers, were conferred with authority to
deal on the corporation's behalf.142

The doctrine of apparent authority does not go into the question of the corporation's competence or
power to do a particular act. It involves the question of whether the officer has the power or is clothed
with the appearance of having the power to act for the corporation. A finding that there is apparent
authority is not the same as a finding that the corporate act in question is within the corporation's
limited powers.

The rule on apparent authority is based on the principle of estoppel. The Civil Code
provides:chanRoblesvirtualLawlibrary

ART. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.
....

ART, 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing that another person is acting on his behalf
without authority.

Agency may be oral, unless the law requires a specific form.cralawlawlibrary

A corporation is estopped by its silence and acts of recognition because we recognize that there is
information asymmetry between third persons who have little to no information as to what happens
during corporate meetings, and the corporate officers, directors, and representatives who are insiders to
corporate affairs.143

In  People's Air car go and Warehousing Co. Inc. v. Court of Appeals,144 this court held that the contract
entered into by the corporation's officer without a board resolution was binding upon the corporation
because it previously allowed the officer to contract on its behalf despite the lack of board resolution.145

In Francisco, this court ruled that Francisco's proposal for redemption of property was accepted by and
binding upon the Government Service Insurance System. This court did not appreciate the Government
Service Insurance System's defense that since it was the Board Secretary and not the General Manager
who sent Francisco the acceptance telegram, it could not be made binding upon the Government
Service Insurance System. It did not authorize the Board Secretary to sign for the General Manager. This
court appreciated the Government Service Insurance System's failure to disown the telegram sent by
the Board Secretary and its silence while it accepted all payments made by Francisco for the redemption
of property.146

There can be no apparent authority and the corporation cannot be estopped from denying the binding
affect of an act when there is no evidence pointing to similar acts and other circumstances that can be
interpreted as the corporation holding out a representative as having authority to contract on its behalf.
In Advance Paper Corporation v. Arma Traders Corporation,147 this court had the occasion to
say:chanRoblesvirtualLawlibrary

The doctrine of apparent authority does not apply if the principal did not commit any acts or conduct
which a third party knew and relied upon in good faith as a result of the exercise of reasonable
prudence. Moreover, the agent's acts or conduct must have produced a change of position to the third
party's detriment. (Citation omitted)cralawlawlibrary

Saturnino Petalcorin's authority to transact on behalf of petitioner cannot be presumed based on a

Secretary's Certificate and excerpt from the minutes of the alleged board meeting that were found to
have been simulated. These documents cannot be considered as the corporate acts that held out
Saturnino Petalcorin as petitioner's authorized representative for mortgage transactions. They were not
supported by an actual board meeting.149
VII

Respondent argues that it may rely on the Secretary's Certificate issued by Aurora de Leon because it
was notarized.

The Secretary's Certificate was void whether or not it was notarized.

Notarization creates a presumption of regularity and authenticity on the document. This presumption
may be rebutted by "strong, complete and conclusive proof"150 to the contrary. While notarial
acknowledgment "attaches full faith and credit to the document concerned[,]"151 it does not give the
document its validity or binding effect. When there is evidence showing that the document is invalid, the
presumption of regularity or authenticity is not applicable.

In Basilio v. Court of Appeals152 this court was convinced that the purported signatory on a deed of sale
was not as represented, despite testimony from the notary public that the signatory appeared before
him and signed the instrument.153 Apart from finding that there was forgery,154 this court
noted:chanRoblesvirtualLawlibrary

The notary public, Atty. Ruben Silvestre, testified that he was the one who notarized the document and
that Dionisio Z. Basilio appeared personally before him and signed the. instrument himself. However, he
admitted that he did not know Dionisio Z. Basilio personally to ascertain if the person who signed the
document was actually Dionisio Z. Basilio himself, or another person who stood in his place. He could
not even recall whether the document had been executed in his office or not.

Thus, considering the testimonies of various witnesses and a comparison of the signature in question
with admittedly genuine signatures, the Court is convinced that Dionisio Z. Basilio did not execute the
questioned deed of sale. Although the questioned deed of sale was a public document having in its favor
the presumption of regularity, such presumption was adequately refuted by competent witnesses
showing its forgery and the Court's own visual analysis of the document. (Emphasis supplied, citations
omitted)cralawlawlibrary

In Suntay v. Court of Appeals,156 this court held that a notarized deed of sale was void because it was a
mere sham.157 It was not intended to have any effect between the parties.158 This court
said:chanRoblesvirtualLawlibrary

[I]t is not the intention nor the function of the notary public to validate and make binding' an instrument
never, in the first place, intended to have any binding legal effect upon the parties
thereto.159cralawlawlibrary

Since the notarized Secretary's Certificate was found to have been issued without a supporting board
resolution, it produced no effect. It is not binding upon petitioner. It should not have been relied on by
respondent especially given its status as a bank.

VIII

The banking institution is "impressed with public interest"160 such that the public's faith is "of paramount
importance."161 Thus, banks are required to exercise the highest degree of diligence in their
transactions.162 In China Banking Corporation v. Lagon,163 this court found that the bank was not a
mortgagee in good faith for its failure to question the due execution of a Special Power of Attorney that
was presented to it in relation to a mortgage contract.164 This court said:chanRoblesvirtualLawlibrary

Though petitioner is not expected to conduct an exhaustive investigation on the history of the
mortgagor's title, it cannot be excused from the duty of exercising the due diligence required of a
banking institution. Banks are expected to exercise more care and prudence than private individuals in
their dealings, even those that involve registered lands, for their business is affected with public
interest.165 (Citations omitted) cralawlawlibrary

For its failure to exercise the degree of diligence required of banks, respondent cannot claim good faith
in the execution of the mortgage contracts with Saturnino Petalcorin. Respondent's witness, Daciano
Paguio, Jr., testified that there was no board resolution authorizing Saturnino Petalcorin to act on behalf
of petitioner.166 Respondent did not inquire further as to Saturnino Petalcorin's authority.

Banks cannot rely on assumptions. This will be contrary to the high standard of diligence required of
them.

VI

According to respondent, the annotations of respondent's mortgage interests on the certificates of titles
of petitioner's properties operated as constructive notice to petitioner of the existence of such
interests.167 Hence, petitioners are now estopped from claiming that they did not know about the
mortgage.

Annotations of adverse claims on certificates of title to properties operate as constructive notice only to
third parties—not to the court or the registered owner. In Sajonas v. Court of
Appeals:168chanroblesvirtuallawlibrary

[Annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of
real property where the registration of such interest or right is not otherwise provided for by the Land
Registration Act or Act 496 (now [Presidential Decree No.] 1529 or the Property Registration Decree),
and serves a warning to third parties dealing with said property that someone is claiming an interest on
the same or a better right than that of the registered owner thereof. 169 (Emphasis
supplied)cralawlawlibrary

Annotations are merely claims of interest or claims of the legal nature and incidents of relationship
between the person whose name appears on the document and the person who caused the annotation.
It does not say anything about the validity of the claim or convert a defective claim or document into a
valid one.170 These claims may be proved or disproved during trial.

Thus, annotations are not conclusive upon courts or upon owners who may not have reason to doubt
the security of their claim as their properties' title holders.

WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December 17, 2009
is REVERSED and SET ASIDE. The Regional Trial Courts' Decisions of November 23, 2001 and December
7, 2001 are REINSTATED.

SO ORDERED.

GR. No. 174909

MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO and RAUL A. MUYCO, Petitioners,

vs.
ROGELIO M. FLORETE, IMELDA C. FLORETE, DIAMEL CORPORATION, ROGELIO C. FLORETE JR., and
MARGARET RUTH C. FLORETE, Respondents.

x-----------------------x

G.R. No. 177275

ROGELIO M. FLORETE SR., Petitioner,

vs.
MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO AND RAUL A. MUYCO, Respondents.

DECISION

LEONEN, J.:

A stockholder may suffer from a wrong done to or involving a corporation, but this does not vest in the
aggrieved stockholder a sweeping license to sue in his or her own capacity. The determination of the
stockholder’s appropriate remedy—whether it is an individual suit, a class suit, or a derivative suit—
hinges on the object of the wrong done. When the object of the wrong done is the corporation itself or
"the whole body of its stock and property without any severance or distribution among individual
holders,"1 it is a derivative suit, not an individual suit or class/representative suit, that a
stockholder must  resort to.

This resolves consolidated cases involving a Complaint for Declaration of Nullity of Issuances, Transfers
and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior Subscriptions and Increases
thereto with Damages.2 The Complaint did not implead as parties the concerned corporation, some of
the transferees, transferors and other parties involved in the assailed transactions. The
Petition3 docketed as G.R. No. 174909 assails the Court of Appeals Decision affirming the dismissal of the
Complaint and sustaining the award of ₱25,000,000.00 as moral damages and ₱5,000,000.00 as
exemplary damages in favor of Rogelio Florete, Sr. The Petition4 docketed as G.R. No. 177275 assails the
Court of Appeals Decision that disallowed the immediate execution of the same award of damages.

Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4) children: Marcelino
Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma. Elena), Rogelio Florete, Sr. (Rogelio, Sr.), and
Teresita Menchavez (Teresita), now deceased.5

People’s Broadcasting Service, Inc. (People’s Broadcasting) is a private corporation authorized to

operate, own, maintain, install, and construct radio and television stations in the Philippines.6 In its
incorporation on March 8, 1966,7 it had an authorized capital stock of ₱250,000.00 divided into 2,500
shares at ₱100.00 par value per share.8 Twenty-five percent (25%) of the corporation’s authorized
capital stock were then subscribed to as follows:

Stockholder Number of Shares

Marcelino Florete, Sr. (Marcelino, Sr.) 250 shares

Salome Florete (Salome) 100 shares

Ricardo Berlin (Berlin) 50 shares

Pacifico Sudario (Sudario) 50 shares

Atty. Santiago Divinagracia (Divinagracia), now deceased9 50 shares10

On November 17, 1967, Berlin and Sudario resigned from their positions as General Manager and
Station Supervisor, respectively.11 Berlin and Sudario each transferred 20 shares to Raul Muyco and
Estrella Mirasol.12

Salome died on November 22, 1980.13 Marcelino, Sr. suffered a stroke on July 12, 1982, which left him
paralyzed and bedridden until his death on October 3, 1990.14 After Marcelino, Sr.’s stroke, their son,
Rogelio, Sr. started managing the affairs of People’s Broadcasting.15

In October 1993, People’s Broadcasting sought the services of the accounting and auditing firm Sycip
Gorres Velayo and Co. in order to determine the ownership of equity in the corporation.16 On November
2, 1994, Sycip Gorres Velayo and Co. submitted a report detailing the movements of the corporation’s
shares from November 23, 1967 to December 8, 1989.17 The relevant portion of this report reads:

B. PEOPLE’S BROADCASTING SERVICE, INC. (PBS)

The movements in the capital stock accounts (by beneficial stockholders) are as follows:

1âwphi1
 Transfe
Transfe
r of
Transfe r of
Additional Shares
Shareholding r of Shares Shareholding
Beneficial Subscriptio of Increase
s Nov. 27, Shares of Stock s Oct. 31,
Stockholder n Sept. 1, Stock (F)
1967 (A) of Stock June 5, 1993
1982 (B) March
(D) 1987
1, 1983
(E)
(C)

Marcelino M. 560 - 750 (680) - 62,344.19 62,974.19

Florete, Sr.

Salome M. 30 (30) - - -    
Florete

Rogelio M. 20 5 1110 370 (5) 149,624.7 151,124.75

Florete 5

Ma. Elena F. 20 5 - - (25) 2,493.68 2,493.68

Muyco

Teresita F. - 5 - 20 (25) 2,493.69 2,493.69

Menchavez

Marcelino M. - 5 - 20 (20) 2,493.44 2,493.44

Florete, Jr.

Santiago C. 20 - - 270 75 29,925.25 30,290.25

Divinagracia

Newsound 610 - (610)        

1
Broadcasting
8

Consolidated - 1,250 (1,250)        

Broadcasting

Total 1,260 1,250       249,375.0 251,875.00

0

(A) The People’s Broadcasting Service, Inc. was incorporated in 1965 with an authorized capital stock of
P250,000 divided into 2,500 shares at P100 par value. As of November 23, 1967, the total subscribed
shares of stock was [sic] 1,260. The 610 shares issued in the name of [Newsounds Broadcasting Network,
Inc.] was [sic] authorized by the Board of Directors in payment for the obligation of the Corporation to
[Newsounds Broadcasting Network, Inc.].

....

(B) On August 5, 1982, the Board of Directors passed Resolution No. 4 which authorized Atty.
Divinagracia to negotiate the purchase of two stations of Consolidated Broadcasting System, Inc. (CBS),
DYMF and DXMF in Cebu and Davao, respectively. In consideration thereof, [People’s Broadcasting
Service, Inc.] shall issue 1,250 shares of stock in favor of [Consolidated Broadcasting System, Inc.]. In
pursuance thereof, on September 1, 1982, the Corporation issued the remaining 1,240 shares of
unissued capital stock to [Consolidated Broadcasting System, Inc.]. To complete the consideration of
1,250 shares, it was explained that [Salome] transferred her 10 shares to [Consolidated Broadcasting
System, Inc.] and distributed her remaining 20 shares to her children, at 5 shares each.

(C) On March 1, 1983, all the 610 shares of [Newsounds Broadcasting Network, Inc.] were transferred to
[Rogelio, Sr.]. We were not able to determine the person who endorsed the certificate in [sic] behalf [of]
[Newsounds Broadcasting Network, Inc.] as the certificate was not found on file. On the same day, the
entire investment of [Consolidated Broadcasting System, Inc.] were transferred to [Marcelino, Sr.] and
[Rogelio, Sr.] at the proportion of 750 shares and 500 shares, respectively. The cancelled certificates of
[Consolidated Broadcasting System, Inc.] were endorsed by [Rogelio, Sr.] in [sic] its behalf.

(D) On February 28 and August 1, 1983, [Marcelino, Sr.] transferred 680 shares from his block to the
following:

Transferee No. of Shares Date of Transfer

     

Rogelio M. Florete [Sr.] 370 February 28, 1983

Santiago C. Divinagracia 270 August 1, 1983

Marcelino M. Florete, Jr. 20 August 1, 1983

Teresita F. Menchavez 20 August 1, 1983

Total 680  

(E) On June 3, 1987, the Corporation effected the transfer of 75 shares to [Divinagracia] by virtue of the
deeds of sale executed by the transferors concerned in his favor.

(F) On December 8, 1989, the [Securities and Exchange Commission] approved the application of the
Corporation to increase the authorized capital stock to ₱100,000,000.00 divided into 1,000,000 shares at
₱100 par value. Of the increase, 249,375 shares were subscribed for ₱24,937,500 and ₱6,234,375
thereof was paid-up. The subscribers to the increase were as indicated in the foregoing.
There were no other transactions affecting the interest of the beneficial stockholders up to October 31,
1993 except transfers to and from designated nominees[.]19

Even as it tracked the movements of shares, Sycip Gorres Velayo and Co. declined to give a categorical
statement on equity ownership as People’s Broadcasting’s corporate records were incomplete.20 The
report contained the following disclaimer on the findings regarding the corporation’s capital structure:

Because the procedures included certain assumptions  as represented by the corporate secretaries

mentioned in Attachment I and we have not verified the documents supporting some of the transactions,
we do not express an opinion on the capital stock accounts of the respective companies [including
People’s Broadcasting] as at October 31, 1993.21 (Emphasis supplied)

On February 1, 1997, the Board of Directors of People’s Broadcasting approved Sycip Gorres Velayo and
Co.’s report.22

In the meantime, Rogelio, Sr. transferred a portion of his shareholdings to the members of his
immediate family, namely: Imelda Florete, Rogelio Florete, Jr., and Margaret Ruth Florete, as well as to
Diamel Corporation, a corporation owned by Rogelio, Sr.’s family.23

As of April 27, 2002, the stockholders of record of People’s Broadcasting were the following:24

Stockholder No. of Shares

1. Diamel Corporation 30,000.00

2. Rogelio Florete [Sr.] 153,881.53

3. Marcelino Florete, Jr. 18,240.99

4. Ma. Elena Muyco 18,227.23

5. Santiago Divinagracia 30,289.25

6. Imelda Florete 1,000.00

7. Rogelio Florete, Jr. 100.00

8. Margaret Ruth Florete 100.00

9. Raul Muyco 10.00

10. Manuel Villa, Jr. 10.00

11. Gregorio Rubias 1.00

 12. Cyril Regaldao 1.00

13. Jose Mari Treñas 1.00

14. Enrico Jacomille 1.00

15. Joseph Vincent Go 1.00

16. Jerry Treñas 1.00

17. Efrain Treñas 10.00

On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group) filed before the
Regional Trial Court a Complaint25 for Declaration of Nullity of Issuances, Transfers and Sale of Shares in
People’s Broadcasting Service, Inc. and All Posterior Subscriptions and Increases thereto with
Damages26 against Diamel Corporation, Rogelio, Sr., Imelda Florete, Margaret Florete, and Rogelio
Florete, Jr. (Rogelio, Sr. Group).

On July 25, 2003, the Rogelio, Sr. Group filed their Answer with compulsory counterclaim.27

On August 2, 2005, the Regional Trial Court issued a Decision (which it called a "Placitum") dismissing
the Marcelino, Jr. Group’s Complaint. It ruled that the Marcelino, Jr. Group did not have a cause of
action against the Rogelio, Sr. Group and that the former is estopped from questioning the assailed
movement of shares of People’s Broadcasting. It also ruled that indispensible parties were not joined in
their Complaint.

According to the trial court, the indispensable parties would include:

[Marcelino, Sr.] and/or his estate and/or his heirs, [Salome] and/or her estate and/or her heirs,
[Divinagracia] and/or his estate and/or his successors-in-interest, [Teresita] and/or her estate and/or her
own successors-in-interest, the other [People’s Broadcasting Service, Inc.] stockholders who may be
actually beneficial owners and not purely nominees, all the so called nominal stockholders. . . [and] the
various [People’s Broadcasting Service, Inc.] Corporate Secretaries[.]"28

The Regional Trial Court granted Rogelio, Sr.’s compulsory counterclaim for moral and exemplary
damages amounting to ₱25,000,000.00 and ₱5,000,000.00, respectively, reasoning that Rogelio, Sr.
suffered from the besmirching of his personal and commercial reputation.29

The dispositive portion of the Regional Trial Court Decision reads:

WHEREFORE, premises duly considered, the instant "Complaint" of the plaintiffs is hereby DISMISSED for
lack of merit.

The "Counterclaim" of defendant Rogelio Florete Sr. is hereby given DUE COURSE but only insofar as the
claims for moral and exemplary damages are concerned. Consequently, the plaintiffs herein are hereby
ordered to pay, jointly and severally, defendant Rogelio Florete Sr., the following sums, to wit:

1. TWENTY FIVE MILLION PESOS (P25,000,000.00) as and for MORAL DAMAGES; and,
2. FIVE MILLION PESOS (P5,000,000.00) as and for EXEMPLARY DAMAGES.

The "Counterclaim(s)" of the other defendants and the prayer for the recovery of attorney’s fees and
litigation expenses of defendant Rogelio Florete, Sr. are hereby DISMISSED likewise for lack of merit.

SO ORDERED.30

On August 15, 2005, Rogelio, Sr. filed a Motion for the immediate execution of the award of moral and
exemplary damages pursuant to Rule I, Section 431 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies.32

On September 8, 2005, the Marcelino, Jr. Group filed before the Court of Appeals a Petition for
Review33 with a prayer for the issuance of a temporary restraining order and/or writ of preliminary
injunction to deter the immediate execution of the trial court Decision awarding damages to Rogelio,
Sr.34 The Court of Appeals issued a temporary restraining order and, subsequently, a writ of preliminary
injunction.35

In its Decision36 dated March 29, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Petition
and affirmed the trial court Decision.37 It also lifted the temporary restraining order and writ of
preliminary injunction.38

The Court of Appeals ruled that the Marcelino, Jr. Group did not have a cause of action against those
whom they have impleaded as defendants. It also noted that the principal obligors in or perpetrators of
the assailed transactions were persons other than those in the Rogelio, Sr. Group who have not been
impleaded as parties. Thus, the Court of Appeals emphasized that the following parties were
indispensable to the case: People’s Broadcasting; Marcelino, Sr.; Consolidated Broadcasting System, Inc.;
Salome; Divinagracia; Teresita; and "other stockholders of [People’s Broadcasting] to whom the shares
were transferred or the nominees of the stockholders."39

The Court of Appeals further emphasized that the estates of Marcelino, Sr. and Salome had long been
settled, with those in the Marcelino, Jr. Group participating (in their capacity as heirs). As the Marcelino,
Jr. Group failed to act to protect their supposed interests in shares originally accruing to Marcelino, Sr.
and Salome, the group is estopped from questioning the distribution of Marcelino, Sr.’s and Salome’s
assets.40 Furthering the conclusion that the Marcelino, Jr. Group was bound by estoppel, the Court of
Appeals noted that the Marcelino, Jr. Group was well aware of the matters stated in the report
furnished by Sycip Gorres Velayo and Co. but failed to act on any supposed error in the report. Instead,
the Marcelino, Jr. Group waited ten (10) years before filing their Complaint. In the interim, they even
participated in the affairs of People’s Broadcasting, voting their shares and electing members of the
Board of Directors.41

On April 26, 2006, the Marcelino, Jr. Group filed a Motion for Reconsideration dated April 24, 2006.42

Pending resolution of the Marcelino, Jr. Group’s Motion for Reconsideration, Rogelio, Sr. filed before the
Regional Trial Court a Motion to resolve his earlier motion for the immediate execution of the awards of
moral and exemplary damages, which was filed on August 15, 2005.43 The Regional Trial Court granted
the Motion in its Order dated May 18, 2006.44 On May 23, 2006, a Writ of Execution was issued to
enforce the award of moral and exemplary damages.45
The Marcelino, Jr. Group filed a Petition for Certiorari46 before the Court of Appeals questioning the
Regional Trial Court Order to immediately execute its Decision.47 On June 13, 2006, the Court of Appeals
issued a temporary restraining order and, subsequently, a writ of preliminary injunction.48 The Court of
Appeals reversed the trial court Order of immediate execution in the Decision promulgated on
November 28, 2006.49 It also annulled the writ of execution issued pursuant to the Order of immediate
execution. Rogelio, Sr. filed a Motion for Reconsideration,50 but it was denied on February 23, 2007.51

On September 15, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Motion for
Reconsideration dated April 24, 2006.52

Hence, on November 17, 2006, the Marcelino, Jr. Group filed the Petition53 docketed as G.R. No. 174909.

Since the Court of Appeals Decision disallowed the immediate execution of the Regional Trial Court
Decision, Rogelio, Sr. filed on May 7, 2007 the Petition54 docketed as G.R. No. 177275.

On March 16, 2009, this court ordered the consolidation of the Petitions docketed as G.R. No. 174909
and G.R. No. 177275.

For resolution are the following issues:

First, whether it was proper for the Regional Trial Court to dismiss the Complaint filed by the Marcelino,
Jr. Group;

Second, assuming that it was error for the Regional Trial Court to dismiss the Complaint and that the
case may be decided on the merits, whether the transfers of shares assailed by the Marcelino, Jr. Group
should be nullified; and

Lastly, whether the Regional Trial Court’s award of moral and exemplary damages in favor of Rogelio, Sr.
may be executed at this juncture of the proceedings.

The Marcelino, Jr. Group insists that they have sufficiently established causes of action accruing to them
and against the Rogelio, Sr. Group.55 They add that they have impleaded all indispensable parties.56 Thus,
they claim that it was an error for the Regional Trial Court to dismiss their Complaint. They assert that a
resolution of the case on the merits must ensue.

The Marcelino, Jr. Group seeks to nullify the following transactions on the shares of stock of People’s
Broadcasting, as noted in the report of Sycip Gorres Velayo and Co.:

(a) Issuance of 1,240 shares to Consolidated Broadcasting System, Inc. on September 1, 1982,

(b) Transfer of 10 shares from Salome to Consolidated Broadcasting System, Inc. on September 1, 1982,

(c) Issuance of 610 shares to Newsounds Broadcasting Network, Inc. on November 17, 1967,

(d) Transfer of 610 shares from Newsounds Broadcasting Network, Inc. to Rogelio, Sr. on March 1, 1983,

(e) Transfer of 750 shares from Consolidated Broadcasting System, Inc. to Marcelino, Sr. on March 1,
1983,

(f) Transfer of 500 shares from Consolidated Broadcasting System, Inc. to Rogelio, Sr.,
(g) Transfer of 680 shares from Marcelino, Sr. to the following: 370 shares to Rogelio, Sr., 270 shares to
Divinagracia, 20 shares to Marcelino, Jr., and 20 shares to Teresita, and

(h) Increase in the authorized capital stock to ₱100,000,000.00 divided into 1,000,000 shares with a par
value of ₱100.00 per share on December 8, 1989, and the resulting subscriptions.57

For the issuance of 1,250 shares to Consolidated Broadcasting System, Inc., the Marcelino, Jr. Group
argues that Board Resolution No. 4 dated August 5, 1982, the basis for the issuance of the 1,250 shares
in favor of Consolidated Broadcasting System, Inc., was a forgery: it was simulated, unauthorized, and
issued without a quorum as required under Section 25 of the Corporation Code.58 They add that Salome,
who allegedly transferred her 10 shares to complete the 1,250 share transfer, was already dead at the
time of the alleged transfer on September 1, 1982.59 The Marcelino, Jr. Group claims that no member of
the Board attended the meeting referred to in Board Resolution No. 4.60 They further allege that the
signature of Marcelino, Sr. in Board Resolution No. 4 is a forgery.61 They argue that Marcelino, Sr. could
not have attended the meeting on August 5, 1982 because from July 12, 1982 to August 26, 1982,62 he
was confined in Gov. B. Lopez Memorial Hospital for quadriparesis and motor aphasia.63 They also
supplied the trial court with specimen signatures of Marcelino, Sr. to prove that the signature appearing
on Board Resolution No. 4 was forged.64

The Marcelino, Jr. Group alleges that from the time Marcelino, Sr. suffered a stroke on July 12, 1982
until his death on October 3, 1990, he was no longer capable of giving consent because of his
quadriparesis and motor aphasia.65 As they emphasized, "[q]uadriparesis means weakness of the upper
and lower extremities with spasticity and tremors. Motor aphasia means that the patient could not
communicate, unable to talk, nor responds [sic] to question or simple commands."66 Thus, they conclude
that all of the issuances of shares in favor of Marcelino, Sr. and all of the transfers of shares to and from
Marcelino, Sr. from July 12, 1982 are void for lack of consent.

With respect to the issuance of 610 shares to Newsounds Broadcasting Network, Inc. and the
subsequent transfer of 610 shares to Rogelio, Sr., the Marcelino, Jr. Group argues that there is no deed
of conveyance to support the transfer and that the stock certificates representing the 610 shares are
missing. They conclude that because of the absence of the stock certificates, there is no valid delivery
and endorsement as required by Section 63 of the Corporation Code.67 Hence, the transfer is invalid.

Regarding the increase in the authorized capital stock of People’s Broadcasting, the Marcelino, Jr. Group
argues that the increase was procured by fraud because it was made "by the new Board of Directors
who were elected by stockholders who were transferees of the illegal, fraudulent and anomalous
transfers, and therefore have no power and authority to procure such increase."68 They also pray that
the subscriptions to the increase be nullified.69

After a declaration that the issuances and transfers are void, the Marcelino, Jr. Group prays that the
capital structure of People’s Broadcasting System be corrected to reflect the following:70

Beneficial Stockholder No. of Shares %

Marcelino Florete, Sr. 660 81.48

 Salome Florete 100 12.35

Santiago Divinagracia 50 6.17

Total 810 100.00

The Marcelino, Jr. Group further claims that the award of moral and exemplary damages is
erroneous.71 They add that the amounts of ₱25,000,000.00 as moral damages and ₱5,000,000.00 as
exemplary damages are excessive.72

The Rogelio, Sr. Group seeks the denial of the Petition filed by the Marcelino, Jr. Group, claiming that it
raises factual questions that may not be taken cognizance of in a petition for review on certiorari under
Rule 45.73

They further argue that the Marcelino, Jr. Group has no cause of action against them.74 They insist that
indispensable parties have not been impleaded75 and that the Marcelino Jr. Group’s claims should have
been raised during the settlement of the estates of deceased Spouses Marcelino, Sr. and Salome
Florete.76 They also argue that the Marcelino, Jr. Group is already estopped from questioning Sycip
Gorres Velayo and Co.’s report because they allowed 10 years to lapse before questioning the
truthfulness of the report. They add that the Marcelino, Jr. Group’s members have been voting their
shares since 1963 without making any reservation.77

In G.R. No. 177275, Rogelio, Sr. argues that the Court of Appeals erred in disallowing the immediate
execution of the Regional Trial Court Decision. He argues that the Petition filed by the Marcelino, Jr.
Group before the Court of Appeals should not have been accepted because Rule 65 petitions require
that there no longer be any appeal nor any plain, speedy, and adequate remedy in the ordinary course
of law.78 He alleges that when the Petition was filed by the Marcelino, Jr. Group, there was still a
pending appeal before the Court of Appeals to resolve the main case.79 Rogelio, Sr. adds that the filing of
a new petition despite the pendency of the main case is a violation of the rule against forum shopping.80

The sufficiency of the Marcelino, Jr. Group’s plea for relief, through their Complaint for Declaration of
Nullity of Issuances, Transfers and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior
Subscriptions and Increases thereto with Damages,81 hinges on a characterization of the suit or action
they initiated. This characterization requires a determination of the cause of action through which the
Marcelino, Jr. Group came to court for relief. It will, thus, clarify the parties who must be included in
their action and the procedural and substantive requirements they must satisfy if their action is to
prosper.

A stockholder suing on account of wrongful or fraudulent corporate actions (undertaken through

directors, associates, officers, or other persons) may sue in any of three (3) capacities: as an individual;
as part of a group or specific class of stockholders; or as a representative of the corporation.

Villamor v. Umale82 distinguished individual suits from class or representative suits:

Individual suits are filed when the cause of action belongs to the individual stockholder personally, and
not to the stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of
dividends to a stockholder. If the cause of action belongs to a group of stockholders, such as when the
rights violated belong to preferred stockholders, a class or representative suit may be filed to protect
the stockholders in the group.83

Villamor  further explained that a derivative suit "is an action filed by stockholders to enforce a
corporate action."84 A derivative suit, therefore, concerns "a wrong to the corporation itself."85 The real
party in interest is the corporation, not the stockholders filing the suit. The stockholders are technically
nominal parties but are nonetheless the active persons who pursue the action for and on behalf of the
corporation.

Remedies through derivative suits are not expressly provided for in our statutes—more specifically, in
the Corporation Code and the Securities Regulation Code—but they are "impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties."86 They are intended to afford reliefs to stockholders
in instances where those responsible for running the affairs of a corporation would not otherwise act:

However, in cases of mismanagement where the wrongful acts are committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the former are
vested by law with the right to decide whether or not the corporation should sue, and they will never be
willing to sue themselves. The corporation would thus be helpless to seek remedy. Because of the
frequent occurrence of such a situation, the common law gradually recognized the right of a stockholder
to sue on behalf of a corporation in what eventually became known as a "derivative suit." It has been
proven to be an effective remedy of the minority against the abuses of management. Thus, an individual
stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to
sue or are the ones to be sued or hold the control of the corporation. In such actions, the suing
stockholder is regarded as the nominal party, with the corporation as the party in interest.87

The distinction between individual and class/representative suits on one hand and derivative suits on
the other is crucial. These are not discretionary alternatives. The fact that stockholders suffer from a
wrong done to or involving a corporation does not vest in them a sweeping license to sue in their own
capacity. The recognition of derivative suits as a vehicle for redress distinct from individual and
representative suits is an acknowledgment that certain wrongs may be addressed only through acts
brought for the corporation:

Although in most every case of wrong to the corporation, each stockholder is necessarily affected
because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him
an individual cause of action since the corporation is a person distinct and separate from him, and can
and should itself sue the wrongdoer.88

In Asset Privatization Trust v. Court of Appeals,89 the reasons for disallowing a direct individual suit were
further explained:

The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit of the
stockholders." In other words, to allow shareholders to sue separately would conflict with the separate
corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case
of Evangelista v. Santos, that ‘the stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of Section 16 of the Corporation Law. . .";

(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all
concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act.90

The avenues for relief are, thus, mutually exclusive. The determination of the appropriate remedy hinges
on the object of the wrong done. When the object is a specific stockholder or a definite class of
stockholders, an individual suit or class/representative suit must  be resorted to. When the object of the
wrong done is the corporation itself or "the whole body of its stock and property without any severance
or distribution among individual holders,"91 it is a derivative suit that a stockholder must  resort to.
In Cua, Jr. v. Tan:92

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz.:

As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the benefit of
the corporation and its whole body of shareholders when injury is caused to the corporation that may
not otherwise be redressed because of failure of the corporation to act. Thus, ‘the action is derivative,
i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole
body of its stock and property without any severance or distribution among individual holders, or it seeks
to recover assets for the corporation or to prevent the dissipation of its assets.’" In contrast, "a direct
action [is one] filed by the shareholder individually (or on behalf of a class of shareholders to which he
or she belongs) for injury to his or her interest as a shareholder. . . . [T]he two actions are mutually
exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) or the
corporation (derivative action)."

Thus, in Nelson v. Anderson, the minority shareholder alleged that the other shareholder of the
corporation negligently managed the business, resulting in its total failure. The appellate court
concluded that the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the
complaint is injury to the whole body of its stockholders, it was for the corporation to institute and
maintain a remedial action. A derivative action would have been appropriate if its responsible officials
had refused or failed to act." The court went on to note that the damages shown at trial were the loss of
corporate profits. Since "[s]hareholders own neither the property nor the earnings of the corporation,"
any damages that the plaintiff alleged that resulted from such loss of corporate profits "were incidental
to the injury to the corporation."93 (Emphasis supplied, citations omitted)

Villamor  recalls the requisites for filing derivative suits:

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules)
provides the five (5) requisites for filing derivative suits:

SECTION 1. Derivative action.—A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred
and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust
all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first
paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member
must be "in the name of [the] corporation or association. . . ." This requirement has already been settled
in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that "[a]mong the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on
behalf of the corporation must allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other shareholders similarly situated who
wish to join [him]." . . .

Moreover, it is important that the corporation be made a party to the case.94 (Citations omitted)

II

The greater number of cases that sustained stockholders’ recourse to derivative suits involved corporate
acts amounting to mismanagement by either the corporation’s directors or officers in relations to third
persons. Several cases serve as examples.

Hi-Yield Realty v. Court of Appeals95 affirmed the Regional Trial Court’s and Court of Appeals’
characterization of a Petition for Annulment of Real Estate Mortgage and Foreclosure Sale96 as a
derivative suit. The Petition was initiated by private respondent Roberto H. Torres, a stockholder, on
behalf of the corporation Honorio Torres & Sons, Inc. Petitioner Hi-Yield Realty, Inc. was among the
defendants to the Petition, along with the related parties, Leonora, Ma. Theresa, Glenn, and Stephanie,
all surnamed Torres, as well as the Registers of Deeds of Marikina and of Quezon City. Against Hi-Yield
Realty, Inc.’s claims, this court sustained the respondent’s position that the Petition was "primarily a
derivative suit to redress the alleged unauthorized acts of its corporate officers and major stockholders
in connection with the lands."97

Cua, Jr.  considered two corporate acts to be valid objects of a derivative suit. The first was a resolution
of the Board of Directors of the corporation Philippine Racing Club, Inc. to acquire up to 100% of the
common shares of another corporation, JTH Davies Holdings, Inc., as well as to appoint Santiago Cua, Jr.
"to act as attorney-in-fact and proxy who could vote all the shares of [Philippine Racing Club, Inc.] in [JTH
Davies Holdings, Inc.], as well as nominate, appoint, and vote into office directors and/or officers during
regular and special stockholders meetings of [JTH Davies Holdings, Inc.]."98 The second was another
resolution of Philippine Racing Club, Inc.’s Board of Directors "approving the property-for-shares
exchange between P[hilippine] R[acing] C[lub], I[nc]. and [JTH Davies Holdings, Inc.]."99

In Cua, Jr.,  the derivative suit grounded on the first was dismissed by this court for being moot and
academic.100 The suit grounded on the second was similarly dismissed for failure to comply with one of
the requisites for instituting a derivative suit. The plaintiffs "made no mention at all of appraisal rights,
which could or could not have been available to them[,]" thereby violating Rule 8, Section 1 of the
Interim Rules of Procedure for Intra-Corporate Controversies.101

As with Hi-Yield Realty  and Cua, Go v. Distinction Properties Development and Construction,

Inc.102 concerned a corporate action taken in relation to a third person.

Petitioners Philip L. Go, Pacifico Q. Lim and Andrew Q. Lim filed before the Housing and Land Use
Regulatory Board a Complaint, which they claimed was one for specific performance intended to compel
the developer of Phoenix Heights Condominium, Distinction Properties Development and Construction,
Inc. (Distinction Properties), to fulfill its contractual obligations. The Complaint was filed in the wake of
an agreement entered into by Distinction Properties with the condominium corporation Phoenix Heights
Condominium Corporation (PHCC). PHCC "approved a settlement offer from [Distinction Properties] for
the set-off of the latter’s association dues arrears with the assignment [from Distinction Properties] of
title over [two saleable commercial units/spaces originally held by Distinction Properties] and their
conversion into common areas."103

This court clarified that the true purpose of the petitioners’ action was not to compel Distinction
Properties to fulfill its contractual obligations. Instead, "petitioners [we]re actually seeking to nullify and
invalidate the duly constituted acts of PHCC - the April 29, 2005 Agreement entered into by PHCC with
DPDCI and its Board Resolution which authorized the acceptance of the proposed offsetting/settlement
of DPDCI’s indebtedness and approval of the conversion of certain units from saleable to common
areas." This court thereby concluded that "the cause of action rightfully pertains to PHCC [and that]
[p]etitioners cannot exercise the same except through a derivative suit."104

The prevalence of derivative suits arising from corporate actions taken in relation to third persons is to
be expected. After all, it is easier to perceive the wrong done to a corporation when third persons
unduly gain an advantage. However, this does not mean that derivative suits cannot arise with respect
to conflicts among a corporation’s directors, officers, and stockholders.

Ching and Wellington v. Subic Bay Golf and Country Club 105 sustained the Regional Trial Court’s and Court
of Appeals’ characterization of the Complaint filed by stockholders against officers of the corporation as
a derivative suit. Nestor Ching and Andrew Wellington filed a Complaint in their own names and in their
right as individual stockholders assailing an amendment introduced into Subic Bay Golf and Country
Club’s articles of incorporation, which supposedly "takes away the right of the shareholders to
participate in the pro-rata distribution of the assets of the corporation after its dissolution."106 They
anchored their action on Section 5(a) of Presidential Decree No. 902-A.107 They claimed that this
statutory provision "allows any stockholder to file a complaint against the Board of Directors for
employing devices or schemes amounting to fraud and misrepresentation which is detrimental to the
interest of the public and/or the stockholders."108

This court did not sustain Nestor Ching’s and Andrew Wellington’s claim of a right to sue in their own
capacity. Concluding that the petitioners’ action was a derivative suit, this court explained:

The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and
Board of Directors of the corporation, the appointment of a receiver, and the prayer for damages in the
amount of the decrease in the value of the shares of stock, clearly show that the Complaint was filed to
curb the alleged mismanagement of [Subic Bay Gold and Country Club]. The causes of action pleaded by
petitioners do not accrue to a single shareholder or a class of shareholders but to the corporation
itself.109 (Emphasis supplied)

We are mindful that in 1979, in Gamboa v. Victoriano,110 this court characterized an action to nullify the
sale of 823 unissued shares on the ground of violating the plaintiffs’ pre-emptive rights and in violation
of the voting requirement for the Board of Directors as not  a derivative suit. This court characterized the
action as one in which "the plaintiffs are alleging and vindicating their own individual interests or
prejudice, and not that of the corporation."111

This pronouncement cannot be considered as a binding precedent for holding actions of the sort filed by
the plaintiffs therein to not be derivative suit. This point in Gamboa  was mere obiter dictum. The main
issue in Gamboa  was the validity of the trial court’s denial of the Motion to Dismiss filed by four of the
seven defendants after the plaintiffs entered into a compromise agreement with the three other
defendants. The resolution of this issue was contingent on the determination of whether the
compromise amounted to the plaintiff’s waiver and estoppel for having conceded the validity of the
sale. Besides, this court itself acknowledged that the statement it made characterizing the action
brought by the plaintiffs was premature. Immediately after saying that "the plaintiffs are alleging and
vindicating their own individual interests or prejudice, and not that of the corporation[,]"112 this court
stated: "At any rate, it is yet too early in the proceedings since the issues have not been joined."113

III

In this case, the Marcelino, Jr. Group anchored their Complaint on violations of and liabilities arising
from the Corporation Code, specifically: Section 23114 (on corporate decision-making being vested in the
board of directors), Section 25115 (quorum requirement for the transaction of corporate business),
Sections 39116 and 102117 (both on stockholders’ pre-emptive rights), Section 62118 (stipulating the
consideration for which stocks must be issued), Section 63119 (stipulating that no transfer of shares "shall
be valid, except as between the parties, until the transfer is recorded in the books of the corporation"),
and Section 65120 (on liabilities of directors and officers "to the corporation  and its creditors" for the
issuance of watered stocks) in relation to provisions in People’s Broadcasting’s Articles of Incorporation
and By-Laws as regards conditions for issuances of and subscription to shares. The Marcelino, Jr. Group
ultimately prays that People’s Broadcasting’s entire capital structure be reconfigured to reflect a status
quo ante.121

As with Ching and Wellington, the actions being assailed by the Marcelino, Jr. Group pertain to parties
that are not extraneous to People’s Broadcasting. They assail and seek to nullify acts taken by various
iterations of People’s Broadcasting’s Board of Directors. All these acts and incidents concern the capital
structure of People’s Broadcasting. These acts reconfigured, through redistribution and enlargement,
the structure of People’s Broadcasting’s equity ownership. These acts also admitted into People’s
Broadcasting new equity holders such as Consolidated Broadcasting System, Inc. and Newsounds
Broadcasting Network, Inc.

As Ching and Wellington  exemplifies, the action should be a proper derivative suit even if the assailed
acts do not pertain to a corporation’s transactions with third persons. Cua, Jr.  established that the
pivotal consideration is whether the wrong done as well as the cause of action arising from it accrues to
the corporation itself or to the whole body of its stockholders. Ching and Wellington  states that if "[t]he
causes of action pleaded . . . do not accrue to a single shareholder or a class of shareholders but to the
corporation itself,"122 the action should be deemed a derivative suit. Also, in Go, an action "seeking to
nullify and invalidate the duly constituted acts [of a corporation]" entails a cause of action that
"rightfully pertains to [the corporation itself and which stockholders] cannot exercise . . . except through
a derivative suit."123

These are the same conditions in this case. What the Marcelino, Jr. Group asks is the complete reversal
of a number of corporate acts undertaken by People’ Broadcasting’s different boards of directors. These
boards supposedly engaged in outright fraud or, at the very least, acted in such a manner that amounts
to wanton mismanagement of People’s Broadcasting’s affairs. The ultimate effect of the remedy they
seek is the reconfiguration of People’s Broadcasting’s capital structure.

The remedies that the Marcelino, Jr. Group seeks are for People’s Broadcasting itself to avail. Ordinarily,
these reliefs may be unavailing because objecting stockholders such as those in the Marcelino, Jr. Group
do not hold the controlling interest in People’s Broadcasting. This is precisely the situation that the rule
permitting derivative suits contemplates: minority shareholders having no other recourse "whenever
the directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or are
the ones to be sued and are in control of the corporation."124

The Marcelino, Jr. Group points to violations of specific provisions of the Corporation Code that
supposedly attest to how their rights as stockholders have been besmirched. However, this is not
enough to sustain a claim that the Marcelino, Jr. Group initiated a valid individual or class suit. To
reiterate, whether stockholders suffer from a wrong done to or involving a corporation does not readily
vest in them a sweeping license to sue in their own capacity.

The specific provisions adverted to by the Marcelino, Jr. Group signify alleged wrongdoing committed
against the corporation itself and not uniquely to those stockholders who now comprise the Marcelino,
Jr. Group. A violation of Sections 23 and 25 of the Corporation Code—on how decision-making is vested
in the board of directors and on the board’s quorum requirement—implies that a decision was wrongly
made for the entire corporation, not just with respect to a handful of stockholders. Section 65
specifically mentions that a director’s or officer’s liability for the issuance of watered stocks in violation
of Section 62 is solidary "to the corporation  and its creditors," not to any specific stockholder. Transfers
of shares made in violation of the registration requirement in Section 63 are invalid and, thus, enable
the corporation to impugn the transfer. Notably, those in the Marcelino, Jr. Group have not shown any
specific interest in, or unique entitlement or right to, the shares supposedly transferred in violation of
Section 63.

Also, the damage inflicted upon People’s Broadcasting’s individual stockholders, if any, was
indiscriminate. It was not unique to those in the Marcelino, Jr. Group. It pertained to "the whole body of
[People’s Broadcasting’s] stock."125 Accordingly, it was upon People’s Broadcasting itself that the causes
of action now claimed by the Marcelino Jr. Group accrued. While stockholders in the Marcelino, Jr.
Group were permitted to seek relief, they should have done so not in their unique capacity as individuals
or as a group of stockholders but in place of the corporation itself through a derivative suit. As they,
instead, sought relief in their individual capacity, they did so bereft of a cause of action. Likewise, they
did so without even the slightest averment that the requisites for the filing of a derivative suit, as spelled
out in Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies, have been
satisfied. Since the Complaint lacked a cause of action and failed to comply with the requirements of the
Marcelino, Jr. Group’s vehicle for relief, it was only proper for the Complaint to have been dismissed.

IV

Erroneously pursuing a derivative suit as a class suit not only meant that the Marcelino, Jr. Group lacked
a cause of action; it also meant that they failed to implead an indispensable party.

In derivative suits, the corporation concerned must be impleaded as a party. As explained in Asset
Privatization Trust:

Not only is the corporation an indispensible party, but it is also the present rule that it must be served
with process. The reason given is that the judgment must be made binding upon the corporation in
order that the corporation may get the benefit of the suit and may not bring a subsequent suit against
the same defendants for the same cause of action. In other words the corporation must be joined as
party because it is its cause of action that is being litigated and because judgment must be a res
ajudicata [sic] against it.126

We have already discussed Go  where this court concluded that an action brought by three individual
stockholders was, in truth, a derivative suit. There, this court further explained that a case cannot
prosper when the proper party is not impleaded:

As it is clear that the acts being assailed are those of PHHC, this case cannot prosper for failure to
implead the proper party, PHCC.

An indispensable party is defined as one who has such an interest in the controversy or subject matter
that a final adjudication cannot be made, in his absence, without injuring or affecting that interest. In
the recent case of Nagkakaisang Lakas ng Manggagawa sa Keihin (NLMK-OLALIA-KMU) v. Keihin
Philippines Corporation, the Court had the occasion to state that:

Under Section 7, Rule 3 of the Rules of Court, "parties in interest without whom no final determination
can be had of an action shall be joined as plaintiffs or defendants." If there is a failure to implead an
indispensable party, any judgment rendered would have no effectiveness. It is "precisely ‘when an
indispensable party is not before the court (that) an action should be dismissed.’ The absence of an
indispensable party renders all subsequent actions of the court null and void for want of authority to
act, not only as to the absent parties but even to those present." The purpose of the rules on joinder of
indispensable parties is a complete determination of all issues not only between the parties themselves,
but also as regards other persons who may be affected by the judgment. A decision valid on its face
cannot attain real finality where there is want of indispensable parties.

Similarly, in the case of Plasabas v. Court of Appeals, the Court held that a final decree would necessarily
affect the rights of indispensable parties so that the Court could not proceed without their presence. In
support thereof, the Court in Plasabas  cited the following authorities, thus:

The general rule with reference to the making of parties in a civil action requires the joinder of all
indispensable parties under any and all conditions, their presence being a sine qua non of the exercise of
judicial power. For this reason, our Supreme Court has held that when it appears of record that there
are other persons interested in the subject matter of the litigation, who are not made parties to the
action, it is the duty of the court to suspend the trial until such parties are made either plaintiffs or
defendants. x x x Where the petition failed to join as party defendant the person interested in sustaining
the proceeding in the court, the same should be dismissed. x x x When an indispensable party is not
before the court, the action should be dismissed.

Parties in interest without whom no final determination can be had of an action shall be joined either as
plaintiffs or defendants. The burden of procuring the presence of all indispensable parties is on the
plaintiff. The evident purpose of the rule is to prevent the multiplicity of suits by requiring the person
arresting a right against the defendant to include with him, either as co-plaintiffs or as co-defendants, all
persons standing in the same position, so that the whole matter in dispute may be determined once and
for all in one litigation.

From all indications, PHCC is an indispensable party and should have been impleaded, either as a
plaintiff or as a defendant, in the complaint filed before the HLURB as it would be directly and adversely
affected by any determination therein. To belabor the point, the causes of action, or the acts
complained of, were the acts of PHCC as a corporate body[.]127 (Citations omitted)

There are two consequences of a finding on appeal that indispensable parties have not been joined.
First, all subsequent actions of the lower courts are null and void for lack of jurisdiction.128 Second, the
case should be remanded to the trial court for the inclusion of indispensable parties. It is only upon the
plaintiff’s refusal to comply with an order to join indispensable parties that the case may be dismissed.129

All subsequent actions of lower courts are void as to both the absent and present parties.130 To reiterate,
the inclusion of an indispensable party is a jurisdictional  requirement:

While the failure to implead an indispensable party is not per se a ground for the dismissal of an action,
considering that said party may still be added by order of the court, on motion of the party or on its own
initiative at any stage of the action and/or such times as are just, it remains essential — as it is
jurisdictional  — that any indispensable party be impleaded in the proceedings before the court renders
judgment. This is because the absence of such indispensable party renders all subsequent actions of the
court null and void for want of authority to act, not only as to the absent parties but even as to those
present.131 (Emphasis supplied, citation omitted)
In Metropolitan Bank and Trust Co. v. Alejo 132 and Arcelona v. Court of Appeals,133 this court clarified that
the courts must first acquire jurisdiction over the person  of an indispensable party. Any decision
rendered by a court without first obtaining the required jurisdiction over indispensable parties is null
and void for want of jurisdiction: "the presence of indispensable parties is necessary to vest the court
with jurisdiction, which is ‘the authority to hear and determine a cause, the right to act in a case.’"134

In Divinagracia v. Parilla,135 Macawadib v. Philippine National Police Directorate for Personnel and

Records Management,136 People v. Go,137 and Valdez-Tallorin v. Heirs of Tarona,138 among others, this
court annulled judgments rendered by lower courts in the absence of indispensible parties.

The second consequence is unavailing in this case. While "[n]either misjoinder nor non-joinder of parties
is ground for dismissal of an action"139 and is, thus, not fatal to the Marcelino, Jr. Group’s action, we
have shown that they lack a cause of action. This warrants the dismissal of their Complaint.

The first consequence, however, is crucial. It determines the validity of the Regional Trial Court’s award
of damages to Rogelio, Sr.

Since the Regional Trial Court did not have jurisdiction, the decision awarding damages in favor of
Rogelio, Sr. is void.1âwphi1

Apart from this, there is no basis in jurisprudence for awarding moral and exemplary damages in cases
where individual suits that were erroneously filed were dismissed. In the analogous cases that we
previously discussed—Hi-Yield Realty, Cua, Jr., Go, and Ching and Wellington—the dismissal alone of the
erroneously filed complaints sufficed. This court never saw the need to award moral and exemplary
damages. This is in keeping with the Civil Code provisions that stipulate when the award of such
damages is proper. We find no reason to conclude that the Marcelino, Jr. Group acted in so malevolent,
oppressive, or reckless a manner that moral and exemplary damages must be awarded in such huge
amounts as the Regional Trial Court did.

From the conclusion that the Decision awarding damages is void and unwarranted, it necessarily follows
that the Order of the Regional Trial Court to immediately execute its Decision is likewise null and void.
In Arcelona, the Decision sought to be annulled was already being executed. However, this court found
that the assailed Decision was promulgated without indispensable parties being impleaded. Hence, the
Decision was ruled to have been made without jurisdiction. This court nullified the judgment and
declared:

A void judgment for want of jurisdiction is no judgment at all. 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 effect. Hence, it can never become final and  any writ of execution based on it is void: x x x it may
be said to be a lawless thing which can be treated as an outlaw and slain at sight, or ignored wherever
and whenever it exhibits its head.140 (Emphasis supplied)

Accordingly, the subsequent Order of the Decision’s immediate execution is also void for lack of
jurisdiction. Contrary to Rogelio Sr.’s claim in its Petition, execution cannot ensue. For this reason, the
Petition docketed as G.R. No. 177275 must be denied.

WHEREFORE, the Petition docketed as G.R. No. 174909 is PARTLY GRANTED and the Petition docketed
as G.R. No. 177275 is DENIED.
The Complaint filed by Marcelino M. Florete, Jr., Maria Elena F. Muyco, and Raul A. Muyco for
Declaration of Nullity of Issuances, Transfers and Sale of Shares in People's Broadcasting Service, Inc.
and All Posterior Subscriptions and Increases thereto with Damages is dismissed as the complainants
have no cause of action. The award of P25,000,000.00 as moral damages and PS,000,000.00 as
exemplary damages in favor of Rogelio Florete, Sr. is deleted. The Regional Trial Court Order dated May
18, 2006 ordering the immediate execution of its Decision dated August 2, 2005 is set aside.

SO ORDERED.

G.R. No. 190187, September 28, 2016

THE PHILIPPINE GEOTHERMAL, INC. EMPLOYEES UNION, Petitioner, v. UNOCAL PHILIPPINES, INC.

(NOW KNOWN AS CHEVRON GEOTHERMAL PHILIPPINES HOLDINGS, INC.), Respondent.

DECISION

LEONEN, J.:

The merger of a corporation with another does not operate to dismiss the employees of the corporation
absorbed by the surviving corporation. This is in keeping with the nature and effects of a merger as
provided under law and the constitutional policy protecting the rights of labor. The employment of the
absorbed employees subsists. Necessarily, these absorbed employees are not entitled to separation pay
on account of such merger in the absence of any other ground for its award.

This resolves a Petition for Review on Certiorari1 filed by Philippine Geothermal, Inc. Employees Union
(Union) assailing the Decision2 dated July 23, 2009 and the Resolution3 dated November 9, 2009 of the
Court of Appeals Eighth Division in Unocal Philippines, Inc. (now known as Chevron Geothermal
Philippines Holdings, inc.) v. The Philippine Geothermal, Inc. Employees Union. The assailed Decision
granted Unocal Philippines, Inc.'s (Unocal Philippines) appeal and reversed the Secretary of Labor's
award of separation benefits to the Union. The award was granted on the premise that the merger of
Unocal Philippines' parent corporation with another corporation impliedly terminated the employment
of the Union's members. The assailed Resolution denied the Union's Motion for Reconsideration.

Philippine Geothermal, Inc. Employees Union is a legitimate labor union that stands as the bargaining
agent of the rank-and-file employees of Unocal Philippines.4chanrobleslaw

Unocal Philippines, formerly known as Philippine Geothermal, Inc., is a foreign corporation incorporated
under the laws of the State of California, United States of America, licensed to do business in the
Philippines for the "exploration and development of geothermal resources as alternative sources of
energy."5 It is a wholly owned subsidiary of Union Oil Company of California (Unocal California),6 which,
in turn, is a wholly owned subsidiary of Union Oil Corporation (Unocal Corporation).7 Unocal Philippines
operates two (2) geothermal steam fields in Tiwi, Albay and Makiling, Banahaw, Laguna, owned by the
National Power Corporation.8chanrobleslaw

On April 4, 2005, Unocal Corporation executed an Agreement and Plan of Merger (Merger Agreement)
with Chevron Texaco Corporation (Chevron) and Blue Merger Sub, Inc. (Blue Merger).9 Blue Merger is a
wholly owned subsidiary of Chevron.10 Under the Merger Agreement, Unocal Corporation merged with
Blue Merger, and Blue Merger became the surviving corporation.11 Chevron then became the parent
corporation of the merged corporations:12 After the merger, Blue Merger, as the surviving corporation,
changed its name to Unocal Corporation.13chanrobleslaw

On January 31, 2006, Unocal Philippines executed a Collective Bargaining Agreement with the
Union.14chanrobleslaw

However, on October 20, 2006, the Union wrote Unocal Philippines asking for the separation benefits
provided for under the Collective Bargaining Agreement. According to the Union, the Merger Agreement
of Unocal Corporation, Blue Merger, and Chevron resulted in the closure and cessation of operations of
Unocal Philippines and the implied dismissal of its employees.15chanrobleslaw

Unocal Philippines refused the Union's request and asserted that the employee-members were not
terminated and that the merger did not result in its closure or the cessation of its
operations.16chanrobleslaw

As Unocal Philippines and the Union were unable to agree, they decided to submit the matter to the
Department of Labor and Employment's Administrative Intervention for Dispute Avoidance
Program.17 However, they were unable to arrive at "a mutually acceptable agreement."18chanrobleslaw

On November 24, 2006, the Union claimed that Unocal Philippines was guilty of unfair labor practice and
filed a Notice of Strike.19 Later, the Union withdrew its Notice of Strike.20chanrobleslaw

On February 5, 2007, the parties agreed to submit their dispute for voluntary arbitration before the
Department of Labor and Employment, with the Secretary of Labor and Employment as Voluntary
Arbitrator.21 The case, entitled In Re: Labor Dispute at Philippines, Inc./Chevron, was docketed as OS-VA-
2007-04.22chanrobleslaw

After the parties submitted their respective position papers, the Secretary of Labor rendered the
Decision23 on January 15, 2008 ruling that the Union's members were impliedly terminated from
employment as a result of the Merger Agreement. The Secretary of Labor found that the merger
resulted in new contracts and a new employer for the Union's members. The new contracts allegedly
required the employees' consent; otherwise, there was no employment contract to speak of.24 Thus, the
Secretary of Labor awarded the Union separation pay under the Collective Bargaining
Agreement.25cralawred The dispositive portion of the Decision reads:ChanRoblesVirtualawlibrary

WHEREFORE, this Office rules that Unocal and Chevron merged into one corporate entity and the
employees were impliedly terminated from employment. Accordingly, they are entitled to the
separation benefits provided under ARTICLE XII, SECTION 2 and ANNEX "B" of the collective bargaining
[agreement] between UNOCAL PHILIPPINES, INC. and the PHILIPPINE GEOTHERMAL, INC. EMPLOYEES
UNION.

Pursuant to Section 7, Rule XIX of Department Order No. 40-03, series of 2003, this Decision shall be
final and executory after ten (10) calendar days from receipt hereof and it shall not be subject of a
motion for reconsideration.
SO ORDERED.26 (Emphasis in the original)

Unocal Philippines filed before the Court of Appeals a Petition for Review27 questioning the Secretary of
Labor's Decision. Unocal Philippines claimed that the Union was not entitled to separation benefits given
that Unocal Philippines was not a party to the merger,28 that it never closed nor ceased its business, and
that it did not terminate its employees after the merger.29 It asserted that its operations continued in
the same manner, and with the same manpower complement.30 Likewise, the employees kept their
tenure intact and experienced no changes in their salaries and benefits.31chanrobleslaw

In the Decision32 dated July 23, 2009, the Court of Appeals granted the appeal of Unocal Philippines and
reversed the Decision of the Secretary of Labor.33 It held that Unocal Philippines has a separate and
distinct juridical personality from its parent company, Unocal Corporation, which was the party that
entered into the Merger Agreement.34 The Court of Appeals ruled that Unocal Philippines remained
undissolved and its employees were unaffected by the merger.35 It found that this was evidenced by the
Union's assumption of its role as the duly recognized bargaining representative of all rank-and-file
employees a few months after the merger.36chanrobleslaw

Moreover, the Court of Appeals found that although Unocal Corporation became a part of Chevron,
Unocal Philippines still remained as a wholly owned subsidiary of Unocal California after the merger.37 It
ruled that in any case, the Collective Bargaining Agreement only provided for the payment of separation
pay if a reduction in workforce results from redundancy, retrenchment or installation of labor-saving
devices, or closure and cessation of operations, all of which did not occur in this case.38chanrobleslaw

The Court of Appeals also pointed out that the Union's members merely wanted to discontinue their
employment with Unocal Philippines, but there was nothing in the Labor Code nor in the parties'
Collective Bargaining Agreement that would sanction the payment of separation pay to those who no
longer wanted to work for Unocal Philippines as a result of the merger.39 The dispositive portion of the
Decision reads:ChanRoblesVirtualawlibrary

WHEREFORE, premises considered, the Decision dated 15 January 2008, of the Department of Labor and
Employment (DOLE) in OS-VA-2007-04 is hereby REVERSED and SET ASIDE.

SO ORDERED.40 (Emphasis in the original)

On November 9, 2009, the Court of Appeals denied the Union's Motion for
Reconsideration.41chanrobleslaw

Hence, this Petition42 was filed.

Petitioner Philippine Geothermal, Inc. Employees Union claims that respondent Unocal Philippines, Inc.
changed its theory of the case when, in the proceedings before the Secretary of Labor, it claimed that it
entered into a merger and not a sale, but later, in its appeal before the Court of Appeals, argued that it
was not a party to the merger.43 Petitioner asserts that the Court of Appeals erred in allowing
respondent to change its theory of the case on appeal and in deciding the case on the basis of this
changed theory.44chanrobleslaw
Petitioner further claims that the Court of Appeals erred in reversing the Decision of the Secretary of
Labor, who properly ruled that petitioner's members are entitled to separation pay.45 It claims that the
merger resulted in (a) "the severance of the juridical tie that existed between the employees and its
original employer, Unocal Corporation,"46 and (b) the implied termination of the employment of the
Union's members, who had the right to waive their continued employment with the absorbing
corporation.47 Petitioner insists that the the "cessation of operations" contemplated in the Collective
Bargaining Agreement and the Memorandum of Agreement must be liberally interpreted to include
mergers,48 and that doubts must be resolved in favor of labor.49chanrobleslaw

In the Resolution50 dated January 27, 2010, this Court directed respondent to comment on the Petition.

Respondent filed its Comment51 on March 26, 2010. It argues that it did not change its theory on appeal.
It insists that it has been consistent in arguing before the Secretary of Labor and the Court of Appeals
that it was never a party to the merger between Unocal Corporation and Blue Merger as it has always
stated that it was Unocal Corporation who entered into the Merger Agreement.52 Respondent argues
that even assuming that it did change its theory on appeal, it may do so as an exception to the rule since
"a party may change [its] legal theory when its factual bases would not require the presentation of
further evidence by the adverse party in order to meet the issue raised in the new theory."53 It posits
that the alleged new theory would still be based on the evidence presented before the Secretary of
Labor, hence, petitioner was.not placed at a disadvantage.54chanrobleslaw

Respondent further argues that in any case, petitioner's members still did not lose their employment as
to warrant the award of separation pay.55 The Memorandum of Agreement, the Collective Bargaining
Agreement, and the contemporaenous acts of the parties show that respondent shall pay separation
pay only in case the employees actually lose their jobs due to redundancy, retrenchment or installation
of labor-saving devices, or closure and cessation of operation.56 As these circumstances did not occur,
respondent cannot grant petitioner's members separation pay.

Petitioner filed its Reply57 on July 6, 2010. It insists that respondent never claimed before the Secretary
of Labor that it was not covered by the merger.58 It maintains that respondent only insisted on this
argument when it obtained the unfavorable decision from the Secretary of Labor.59 Moreover, the
Secretary of Labor was correct in ruling that, indeed, there was a cessation of operations of respondent
when it merged with Chevron.60chanrobleslaw

We resolve the following issues:

chanRoblesvirtualLawlibraryFirst, whether respondent changed the theory of its case on appeal;

Second, whether the Merger Agreement executed by Unocal Corporation, Blue Merger, and Chevron
resulted in the termination of the employment of petitioner's members; and cralawlawlibrary

Lastly, whether petitioner's members are entitled to separation benefits.

As regards the first issue, we rule that respondent did, indeed, change the theory of its case on appeal.

In its Petition before the Court of Appeals, respondent asserted that it was not a party to the merger as
it was a subsidiary of Unocal California and, thus, had a separate and distinct personality from Unocal
Corporation.

However, the following statement can be found in respondent's Position Paper in the proceedings
before the Secretary of Labor:ChanRoblesVirtualawlibrary

3. . . . Following the merger, Blue Merger Sub Inc. which as above stated is a wholly owned subsidiary of
Chevron Corporation changed its name to Unocal Corporation retaining Unocal Philippines, Inc. as its
Philippine Branch to continue to operate the aforenamed geothermal plants as, in fact[.]61 (Emphasis
supplied)

Respondent alleges that it is a branch of Unocal Coiporation. Claiming that it is a branch is inconsistent
with its allegation (on appeal) that it is a subsidiary of another corporation. A branch and a subsidiary
differ in its corporate existence: a branch is not a legally independent unit, while a subsidiary has a
separate and distinct personality from its parent corporation.

In Philippine Deposit Insurance Corp. v. Citibank:62

The Court begins by examining the manner by which a foreign corporation can establish its presence in
the Philippines. It may choose to incorporate its own subsidiary as a domestic corporation, in which case
such subsidiary would have its own separate and independent legal personality to conduct business in
the country. In the alternative, it may create a branch in the Philippines, which would not be a legally
independent unit, and simply obtain a license to do business in the Philippines.63 (Emphasis supplied,
citations omitted)

Respondent likewise made the following assertions in its Position Paper in the proceedings before the
Secretary of Labor:ChanRoblesVirtualawlibrary

Based on the facts of this case, the Honorable Secretary of Labor would certainly appreciate that the
business transaction entered into by respondent employer was in law and in fact, a merger. Hence, there
is no basis to the union's claim.

....

. . . In the present case, it is clear that the surviving corporation, i.e. Unocal Philippines Inc. has continued
the business and operations of the absorbed corporation in an unchanged manner, and using the same
employees with their tenure intact and under the same terms and conditions of
employment.64 (Emphasis supplied)

These statements reveal that not only did respondent fail to assert that it was not a party to the Merger
Agreement, but it also referred to itself as the party who entered into the transaction and became the
surviving corporation in the merger. Thus, the claim that respondent is not a party to the merger is a
new allegation raised for the first time on appeal before the Court of Appeals.
Raising a factual question for the first time on appeal is not allowed. In Tan v. Commission on Elections:65

The aforementioned issue is now raised only for the first time on appeal before this Court. Settled is the
rule that issues not raised in the proceedings below (COMELEC en banc) cannot be raised for the first
time on appeal. Fairness and due process dictate that evidence and issues not presented below cannot
be taken up for the first time on appeal.

Thus, in Matugas v. Commission on Elections, we reiterated this rule, saying:ChanRoblesVirtualawlibrary

The rule in appellate procedure is that a factual question may not be raised for the first time on appeal,
and documents forming no part of the proofs before the appellate court will not be considered in
disposing of the issues of" an action. This is true whether the decision elevated for review originated
from a regular court or an administrative agency or quasi-judicial body, and whether it was rendered in
a civil case, a special proceeding, or a criminal case. Piecemeal presentation of evidence is simply not in
accord with orderly justice.

Moreover, in Vda. De Gualberto v. Go, we also held:ChanRoblesVirtualawlibrary

In Labor Congress of the Philippines v. NLRC, we have made it clear that "to allow fresh issues on appeal
is violative of the rudiments of fair play, justice and due process." Likewise, in Orosa v. Court of Appeals,
the Court disallowed it because "it would be offensive to the basic rule of fair play, justice and due
process if it considered [the] issue[s] raised for the first time on appeal." We cannot take an opposite
stance in the present case.66 (Citations omitted)

Respondent did state that Unocal Corporation was the party to the Merger Agreement with Blue Merger
and Chevron. Nonetheless, it did not use this allegation to argue that it had a separate and distinct
personality from Unocal Corporation and is, thus, not a party to the Merger Agreement. Respondent
only raised this argument in its appeal before the Court of Appeals.

Respondent's contention that it falls within the exception to the rule likewise does not lie. Respondent
cites Quasha Ancheta Pena and Nolasco Law Office v. LCN Construction Corp. 67 and claims that it falls
within the exception since it did not present any additional evidence on the
matter:ChanRoblesVirtualawlibrary

In the interest of justice and within the sound discretion of the appellate court, a party may change his
legal theory on appeal, only when the factual bases thereof would not require presentation of any
further evidence by the adverse party in order to enable it to properly meet the issue raised in the new
theory.68chanroblesvirtuallawlibrary

However, this paragraph states that it is the adverse party that should no longer be required to present
additional evidence to contest the new claim, and not the party presenting the new theory on appeal.
Thus, it does not matter that respondent no longer presented additional evidence to support its new
claim. The petitioner, as the adverse party, should not have to present further evidence on the matter
before the new issue may be considered. However, the issue of whether respondent is a party to the
Merger Agreement may be proven otherwise by petitioner, through the presentation of evidence that
respondent is merely a branch and not a subsidiary of Unocal Corporation. Thus, respondent's new
allegation does not fall under the exception to the rule.

Petitioner was denied the opportunity to present evidence to disprove respondent's new claim.
Therefore, the Court of Appeals erred in taking into consideration this argument.

As to the remaining issues, we rule in favor of respondent and dismiss the Petition.

Both the Secretary of Labor and the Court of Appeals found that what was entered into by Unocal
Corporation, Blue Merger, and Chevron is a merger. The primary issue is what the effects of this merger
on respondent's employees are.

We find that, whether or not respondent is a party to the Merger Agreement, there is no implied
dismissal of its employees as a consequence of the merger.

A merger is a consolidation of two or more corporations, which results in one or more corporations
being absorbed into one surviving corporation.69 The separate existence of the absorbed corporation
ceases, and the surviving corporation "retains its identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and obligations of the absorbed corporation(s)."70chanrobleslaw

If respondent is a subsidiary of Unocal California, which, in turn, is a subsidiary of Unocal Corporation,

then the merger of Unocal Corporation with Blue Merger and Chevron does not affect respondent or
any of its employees. Respondent has a separate and distinct personality from its parent corporation.

Nonetheless, if respondent is indeed a party to the merger, the merger still does not result in the
dismissal of its employees.

The effects of a merger are provided under Section 80 of the Corporation

Code:ChanRoblesVirtualawlibrary

SEC. 80. Effects of merger or consolidation. — The merger or consolidation, as provided in the preceding
sections shall have the following effects:

chanRoblesvirtualLawlibrary

1. The constituent corporations shall become a single corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;

2. The separate existence of the constituent corporations shall cease, except that of the surviving or the
consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including subscriptions to shares and other
choses in action, and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be taken and deemed to be transferred to and vested in such surviving or consolidated
corporation without further act or deed; and

5. The surviving or the consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any claim, action or
proceeding pending by or against any of such constituent corporations may be prosecuted by or against
the surviving or consolidated corporation, as the case may be. Neither the rights of creditors nor any lien
upon the property of any of such constituent corporations shall be impaired by such merger or
consolidation. (Emphasis supplied)

Although this provision does not explicitly state the merger's effect on the employees of the absorbed
corporation, Bank of the Philippine Islands v. BPI Employees Union-Davao Chapter-Federation of Unions
in BPI Unibank71 has ruled that the surviving corporation automatically assumes the employment
contracts of the absorbed corporation, such that the absorbed corporation's employees become part of
the manpower complement of the surviving corporation, thus:ChanRoblesVirtualawlibrary

Taking a second look on this point, we have come to agree with Justice Brion's view that it is more in
keeping with the dictates of social justice and the State policy of according full protection to labor to
deem employment contracts as automatically assumed by the surviving corporation in a merger, even in
the absence of an express stipulation in the articles of merger or the merger plan. In his dissenting
opinion, Justice Brion reasoned that:ChanRoblesVirtualawlibrary

To my mind, due consideration of Section 80 of the Corporation Code, the constitutionally declared
policies on work, labor and employment, and the specific FEBTC-BPI situation —  i.e., a merger with
complete "body and soul" transfer of all that FEBTC embodied and possessed and where both
participating banks were willing (albeit by deed, not by their written agreement) to provide for the
affected human resources by recognizing continuity of employment — should point this Court to a
declaration that in a complete merger situation where there is total takeover by one corporation over
another and there is silence in the merger agreement on what the fate of the human resource
complement shall be, the latter should not be left in legal limbo and should be properly provided for, by
compelling the surviving entity to absorb these employees. This is what Section 80 of the Corporation
Code commands, as the surviving corporation has the legal obligation to assume all the obligations and
liabilities of the merged constituent corporation.

Not to be forgotten is that the affected employees managed, operated and worked on the transferred
assets and properties as their means of livelihood; they constituted a basic component of their
corporation during its existence. In a merger and consolidation situation, they cannot be treated without
consideration of the applicable constitutional declarations and directives, or, worse, be simply
disregarded. If they are so treated, it is up to this Court to read and interpret the law so that they are
treated in accordance with the legal requirements of mergers and consolidation, read in light of the
social justice, economic and social provisions of our Constitution. Hence, there is a need for the surviving
corporation to take responsibility for the affected employees and to absorb them into its workforce
where no appropriate provision for the merged corporation's human resources component is made in
the Merger Plan.72 (Emphasis supplied, citations omitted)

The rationale for this ruling is anchored on the nature and effects of a merger as provided under Section
80 of the Corporation Code, as well as the policies on work and labor enshrined in the
Constitution.73chanrobleslaw

To reiterate, Section 80 of the Corporation Code provides that the surviving corporation shall possess all
the rights, privileges, properties, and receivables due of the absorbed corporation. Moreover, all
interests of, belonging to, or due to the absorbed corporation "shall be taken and deemed to be
transferred to and vested in such surviving or consolidated corporation without further act or
deed."74 The surviving corporation likewise acquires all the liabilities and obligations of the absorbed
corporation as if it had itself incurred these liabilities or obligations.75chanrobleslaw

This acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily includes
the rights and obligations of the absorbed corporation under its employment contracts. Consequently,
the surviving corporation becomes bound by the employment contracts entered into by the absorbed
corporation. These employment contracts are not terminated. They subsist unless their termination is
allowed by law.

This interpretation is consistent with the consitutional provisions and policies on work and labor, which
provides:ChanRoblesVirtualawlibrary

ARTICLE II

....

State Policies

....

SECTION 18. The State affirms labor as a primary social economic force. It shall protect the rights of
workers and promote their welfare.

....

ARTICLE XIII

....

Labor

SECTION 3. The State shall afford full protection to labor, local and overseas, organized and unorganized,
and promote full employment and equality of employment opportunities for all.
It shall guarantee the rights of all workers to self-organization, collective bargaining and negotiations,
and peaceful concerted activities, including the right to strike in accordance with law. They shall be
entitled to security of tenure, humane conditions of work, and a living wage. They shall also participate
in policy and decision-making processes affecting their rights and benefits as may be provided by law.

The State shall promote the principle of shared responsibility between workers and employers and the
preferential use of voluntary modes in settling disputes, including conciliation, and shall enforce their
mutual compliance therewith to foster industrial peace.

The State shall regulate the relations between workers and employers, recognizing the right of labor to
its just share in the fruits of production and the right of enterprises to reasonable returns on
investments, and to expansion and growth.

These constitutional provisions ensure that workers' rights are protected as they are imbued with public
interest. They likewise prevent an interpretation of any law, rule, or agreement, which may violate
worker's rights acquired during their employment.

Associate Justice Arturo D. Brion's Dissenting Opinion in Bank of the Philippine Islands v. BPI Employees
Union-Davao Chapter-Federation of Unions in BPI Unibank 76 was similarly premised on the constitutional
protection afforded to labor and the public interest carried by employment
contracts:ChanRoblesVirtualawlibrary

An employment contract or contract of service essentially has value because it embodies work — the
means of adding value to basic raw materials and the processes for producing goods, materials and
services that become the lifeblood of corporations and, ultimately, of the nation. Viewed from this
perspective, the employment contract or contract of service is not an ordinary agreement that can be
viewed in strictly contractual sense. It embodies work and production and carries with it a very
significant element of public interest; thus, the Constitution, no less, accords full recognition and
protection to workers and their contribution to production.

....

These constitutional statements and directives, aside from telling us to consider work, labor and
employment beyond purely contractual terms, also provide us directions on how our considerations
should be made, i.e., with an eye on the interests they represent — the individual, the corporate, and
more importantly, the national.77chanroblesvirtuallawlibrary

Associate Justice Brion likewise discussed the nature of a merger agreement vis-a-vis the employment
contracts:ChanRoblesVirtualawlibrary

This recognition is not to objectify the workers as assets and liabilities, but to recognize — using the
spirit of the law and constitutional standards — their necessary involvement and need to be provided
for in a merger situation. Neither does this step, directly impacting on the employees' individual
employment contracts, detract from the in personam character of these contracts. For in a merger
situation, no change of employer is involved; the change is in the internal personality of the
employer rather than through the introduction of a new employer which would have novated the
contract. This conclusion proceeds from the nature of a merger as a corporate development regulated
by law and the merger's implementation through the parties' merger agreement.

....

In the BPI-FEBTC situation, these employment contracts are part of the obligations that the merging
parties have to account and make provisions for under the Constitution and the Corporation Code; in
the absence of any clear agreement, these employment contracts subsist, subject to the right of the
employees to reject them as they cannot be compelled to render service but can only be made to
answer in damages if the rejection constitutes a breach. In other words, in mergers and consolidations,
these contracts should be held to be continuing, unless rejected by the employees themselves or declared
by the merging parties to be subject to the authorized causes for termination of employment under
Sections 282 and 283 of the Labor Code. In this sense, the merging parties' control and business decision
on how employees shall be affected, in the same manner that the affected employees' decision on
whether to abide by the merger or to opt out, remain unsullied. 78 (Emphasis in the original)

Senior Associate Justice Antonio T. Carpio's Dissenting Opinion79 likewise discusses the constitutional
and legal right to security of tenure as basis for ruling that the employment contracts of the absorbed
corporation subsist in case of a merger:ChanRoblesVirtualawlibrary

Upon merger, BPI, as the surviving entity, absorbs FEBTC and continues the combined business of the
two banks. BPI assumes the legal personality of FEBTC, and automatically acquires FEBTC s rights,
privileges and powers, as well as its liabilities and obligations.

....

Among the obligations and liabilities of FEBTC is to continue the employment of FEBTC employees.
These employees have already acquired certain employment status, tenure, salary and benefits. They
are regular employees of FEBTC. Since after the merger, BPI has continued the business of FEBTC,
FEBTC's obligation to these employees is assumed by BPI, and BPI becomes duty-bound to continue the
employment of these FEBTC employees.

Under Article 279 of the Labor Code, regular employees acquire security of tenure, and hence, may not
be terminated by the employer except upon legal grounds. . . . Without any of these legal grounds, the
employer cannot validly terminate the employment of regular employees; otherwise, the employees'
right to security of tenure would be violated.

The merger of two corporations does not authorize the surviving corporation to terminate the
employees of the absorbed corporation in the absence of just or authorized causes as provided in
Articles 282 and 283 of the Labor Code. . . . Once an employee becomes permanent, he is protected by
the security of tenure clause in the Constitution, and he can be terminated only for just or authorized
causes as provided by law.80chanroblesvirtuallawlibrary

These theories were dissents to the Decision in Bank of the Philippine Islands. However, in the
Resolution resolving the Motion for Reconsideration in that case, this Court found it necessary to
interpret Section 80 of the Corporation Code and the constitutional provisions on labor as to strengthen
the "judicial protection of the right to security of tenure of employees affected by a merger and [avoid]
confusion regarding the status of various-benefits."81 Thus, this Court ruled that the surviving
corporation automatically assumes the employment contracts of the absorbed corporation. The
absorbed corporation's employees are not impliedly dismissed, but become part of the manpower
complement of the surviving corporation.82chanrobleslaw

The merger of Unocal Corporation with Blue Merger and Chevron does not result in an implied
termination of the employment of petitioner's members. Assuming respondent is a party to the merger,
its employment contracts are deemed to subsist and continue by "the combined operation of the
Corporation Code and the Labor Code under the backdrop of the labor and social justice provisions of
the Constitution."83chanrobleslaw

Petitioner insists that this is contrary to its freedom to contract, considering its members did not enter
into employment contracts with the surviving corporation. However, petitioner is not precluded from
leaving the surviving corporation. Although the absorbed employees are retained as employees of the
merged corporation, the employer retains the right to terminate their employment for a just or
authorized cause. Likewise, the employees are not precluded from severing their employment through
resignation or retirement. The freedom to contract and the prohibition against involuntary servitude is
still, thus, preserved in this sense.84 This is the manner by which the consent of the employees is
considered by the law.

Hence, assuming respondent is a party to the merger, the merger still does not operate to effect a
termination of the employment of respondent's employees. Should they be unhappy with the surviving
corporation, the employees may retire or resign from employment.

Given these considerations, we rule that petitioner is not entitled to the separation benefits it claims
from respondent.

Separation benefits are not granted to petitioner by law in case of voluntary resignation,85 or by any
contract it entered into with respondent.

The Collective Bargaining Agreement86 between petitioner and respondent

provides:ChanRoblesVirtualawlibrary

Article XII

RESPONSIBILITIES OF THE PARTIES AND INDUSTRIAL PEACE

....

Section 2. ADDITIONAL RESPONSIBILITIES

....
In the event of closure, cessation of operations, retrenchment, redundancy or installation of labor saving
devices, the COMPANY will pay just and fair compensation for those who will be separated from the
COMPANY. The separation benefit is covered under a MEMORANDUM OF AGREEMENT as agreed upon
by both parties and shall serve as a part of this agreement (Annex B).87chanroblesvirtuallawlibrary

Likewise, the Memorandum of Agreement88 dated November 1, 2005 betweeen petitioner and

respondent states:ChanRoblesVirtualawlibrary

WITHESSETH: That

WHEREAS, the COMPANY and the UNION recognize the possibility that UNOCAL PHILIPPINES, INC. may
undergo at its discretion reduction in workforce as a result of redundancy, retrenchment or installation
of labor saving devices, or closure and cessation of operations.

WHEREAS, the COMPANY and the UNION agree that should any of the above-cited conditions occur that
may directly affect the tenure of existing employees, the rights of the employees should be respected
and that the COMPANY will pay just and fair compensation for those who will be separated from the
COMPANY;

In view of the foregoing and in consideration of industrial peace and this covenant, the parties hereby
agree as follows:

chanRoblesvirtualLawlibrary. . . .

2. The COMPANY will provide the following separation benefits for all regular and probationary
employees in the event that they lose their jobs as a result of the conditions cited above;  

a. Separation Pay: 2.5 months multiplied by the current monthly base pay plus monthly equivalent
of the 13th month and 14th month pay multiplied by the number of years service.89

Merger is not one of the circumstances where the employees may claim separation pay. The only
instances where separation pay may be awarded to petitioner are: (a) reduction in workforce as a result
of redundancy; (b) retrenchment or installation of labor-saving devices; or (c) closure and cessation of
operations.

Redundancy has been defined by this Court as follows:ChanRoblesVirtualawlibrary

[W]e believe that redundancy, for purposes of our Labor Code, exists where the services of an employee
are in excess of what is reasonably demanded by the actual requirements of the enterprise. Succinctly
put, a position is redundant where it is superfluous, and superfluity of a position or positions may be the
outcome of a number of factors, such as overhiring of workers, decreased volume of business, or
dropping of a particular product line or service activity previously manufactured or undertaken by the
enterprise. The employer has no legal obligation to keep in its payroll more employees than are
necessary for the operation of its business.90 (Citations omitted)
Retrenchment, on the other hand, is the reduction of personnel to save on costs on salaries and wages
due to a considerable decline in the volume of business.91chanrobleslaw

Cessation and closure of business contemplates the stopping of business operations of the employer
whether on the employer's prerogative or on account of severe business losses.92chanrobleslaw

None of these instances are present here. The terms do not provide that a merger is one of the
instances where petitioner may claim separation benefits for its members. Neither can these
circumstances be interpreted as to contemplate a merger with another corporation. In any case, if title
parties intended that petitioner ought to be granted separation pay in case of a merger, it should have
been explicitly provided for in the contract. Absent this express intention, petitioner cannot claim
separation pay.

On the contention that petitioner must be awarded the separation pay in the interest of social justice,
this Court has held that this award is granted only under the following exceptional cases: (1) the
dismissal of the employee was not for serious misconduct; and (2) it did not reflect on the moral
character of the employee.93chanrobleslaw

In this case, there is no dismissal of the employees on account of the merger. Petitioner does not deny
that respondent actually continued its normal course of operations after the merger, and that its
members, as employees, resumed their work with their tenure, salaries, wages, and other benefits
intact. Petitioner was even able to execute with respondent, after the merger, the Collective Bargaining
Agreement from which it anchors its claims.

Given these circumstances, petitioner is not entitled to separation pay. Although the policy of the state
is to rule in favor of labor in light of the social justice provisions under the Constitution, this Court
cannot unduly trample upon the rights of management, which are likewise entitled to respect in the
interest of fair play.

WHEREFORE, the Decision dated July 23, 2009 and the Resolution dated November 9, 2009 of the Court
of Appeals in CA-G.R. SP No. 102184 are AFFIRMED. The Petition for Review is DENIED considering that
no reversible error was committed by the Court of Appeals.

SO ORDERED.chanRoblesvirtualLawlibrary

G.R. No. 172948, October 05, 2016

PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION, Petitioner, v. PABLITO O. LIM,

MANUEL A. AGCAOILI, AND CONSUELO M. PADILLA, Respondents.

DECISION

LEONEN, J.:

An action for injunction filed by a corporation generally does not lie to prevent the enforcement by a
stockholder of his or her right to inspection.1
Philippine Associated Smelting and Refining Corporation filed a Petition for Review on Certiorari2 to
assail the Court of Appeals Decision3 dated January 243 2006 and Resolution4 dated May 18, 2006, The
Court of Appeals lifted and cancelled the writ of preliminary injunction issued by the Regional Trial
Court,5 which enjoined respondents Pablito O. Lim (Lim), Manuel A. Agcaoili (Agcaoili), and Consuelo M.
Padilla (Padilla), or their representatives, from gaining access to the records of Philippine Associated
Smelting and Refining Corporation.: The records were then classified as either confidential or inexistent
until further orders from the court.6

As summarized by the Court of Appeals, the facts are as follows:chanRoblesvirtualLawlibrary

Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a corporation duly
organized and existing under the laws of the Philippines and is engaged in copper smelting and refining.

On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively referred to as
petitioners) were former senior officers and presently shareholders of PASAR holding 500 shares each.

An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction and/or
Temporary Restraining Order, dated February 4, 2004 was filed by PASAR seeking to restrain petitioners
from demanding inspection of its confidential and inexistent records.

On February 23, 2004, petitioners moved for the dismissal of the petition on the following grounds: 1)
the petition states no cause of action; 2) the petition should be dismissed on account of litis
pendentia; 3) the petition is a nuisance or harassment suit; and 4) the petition should be dismissed on
account of improper venue.

On April 14, 2004, the RTC issued an Order granting PASAR's prayer for a writ of preliminary injunction.
The RTC held that the right to inspect book should not be denied to the stockholders, however, the
same may be restricted. The right to inspect should be limited to the ordinary records as identified and
classified by PASAR. Thus, pending the determination of which records are confidential or inexistent, the
petitioners should be enjoined from inspecting the books. The dispositive portion of said Order
states:chanRoblesvirtualLawlibrary

"WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim, Manuel
A. Agcaoili and Consuelo N. Padilla or their representatives from gaining access to records of Philippine
Associated Smelting and Refining Corporation which are presently classified as either confidential or
inexistent, until further orders from this Court.

Petitioner is required to execute a bond in the amount of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) in favor of herein respondents to answer for all damages which the latter may sustain by
reason of the injunction should this Court, finally decide that petitioner is not entitled thereto.

SO ORDERED."

chanrobleslaw
On May 26, 2004, petitioners filed a Motion for Dissolution of the Writ of Preliminary Injunction on the
ground that the petition is insufficient. Petitioners claim that the enforcement of the right to inspect
book should be on the stockholders and not on PASAR. Petitioners further claim that no irreparable
injury is caused to PASAR which justifies the issuance of the writ of preliminary injunction.

On January 10, 2005, the RTC issued the assailed Order, denying the Motion to Dismiss filed by
petitioners on the ground that it is a prohibited pleading under Section 8, Rule 1 of the Interim Rules on
Intra-Corporate Controversies  under the Securities Regulation Code (RA 8799). The Motion for
Dissolution of the Writ of Preliminary Injunction was likewise denied on the ground that the writ does
not completely result in unjust denial of petitioners' right to inspect the books of the corporation. The
RTC further stated that if no preliminary injunction is issued, petitioners may, before final judgment, do
the act which PASAR is seeking the Court to restrain which will make ineffectual the final judgment that
it may afterward render.7 (Emphasis in the original)

chanrobleslaw
Aggrieved, Lim, Agcaoili, and Padilla filed before the Court of Appeals a Petition for
Certiorari8 questioning the propriety of the writ of preliminary injunction. The Court of Appeals held that
there was no basis to issue an injunctive writ, thus:chanRoblesvirtualLawlibrary

We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary
injunction is uncalled for. The petition is a pre-emptive action unjustly intended to impede and restrain
the stockholders' rights. If a stockholder demands the inspection of corporate books, the corporation
could refuse to heed to such demand. When the corporation, through its officers, denies the
stockholders of such right, the latter could then go to court and enforce their rights. It is then that the
corporation could set up its defenses and the reasons for the denial of such right. Thus, the proper
remedy available for the enforcement of the right of inspection is undoubtedly the writ of mandamus to
be filed by the stockholders and not a petition for injunction filed by the corporation.

The Order of the RTC shows that indeed there is no basis for the issuance not only of the temporary but
also of the permanent injunctive writ. The Order dated April 14, 2004
states:chanRoblesvirtualLawlibrary

"In the present case, PASAR failed to present sufficient evidence to show that respondents' (petitioners')
demand to inspect the corporate records was not made in good faith nor for a lawful purpose. . . .
PASAR is reminded that it is its burden to prove that respondents' action in seeking examination of the
corporate records was moved by unlawful or ill-motivated designs which could appropriately call for a
judicial protection against the exercise of such right[.]"9

chanrobleslaw
Hence, Philippine Associated Smelting and Refining Corporation filed this Petition praying that this Court
render judgment:chanRoblesvirtualLawlibrary

(a) reversing and setting aside the Decision dated 24 January 2006 and Resolution dated 18 May 2006
rendered by the Court of Appeals;ChanRoblesVirtualawlibrary

(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April 2004, and
consequently ordering respondents to desist from further harassing, vexing, or annoying petitioner with
threats of filing criminal complaints against its President, Bruce Anderson, and other appropriate parties,
as embodied in the letters dated 25 and 27 February 2006 and 31 March
2006;ChanRoblesVirtualawlibrary

(c) reinstating the main action for injunction and ordering the RTC to continue hearing SEC Case No. 04-
33;ChanRoblesVirtualawlibrary

(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be issued
by this Honorable Court to urgently restrain respondents from further committing acts which are bases
for the application of the writ of preliminary injunction.10

chanrobleslaw
In the Resolution11 dated July 19, 2006, this Court denied petitioner's prayer for the issuance of a
temporary restraining order and required respondents Lim, Agcaoili, and Padilla to comment on the
Petition.

Respondents filed their Comment12 on October 16, 2006 through counsel Cayetano Sebastian Ata Dado
& Cruz. On October 20, 2006, they filed a second Comment13 through counsel Siguion Reyna Montecillo
& Ongsiako. Petitioner filed a Motion for Leave to Admit Attached Reply,14 together with its Reply,15 on
December 12, 2006.

In the Resolution16 dated January 24, 2007, this Court noted respondents' separate Comments and
petitioner's Reply. The parties were also directed to submit their respective memoranda within 30 days
from notice.17 Respondents filed their Memorandum18 on March 26, 2007, and petitioner filed its
Memorandum19 on April 2, 2007.

Petitioner argues that the right of a stockholder to inspect corporate books and records is limited in that
any demand must be made in good faith or for a legitimate purpose.20 Respondents, however, have no
legitimate purpose in this case.21 If respondents gain access to petitioner's confidential records,
petitioner's trade secrets and other confidential information will be used by its former officers to give
undue commercial advantage to third parties.22 Petitioner insists that to hold that objections to the right
of inspection can only be raised in an action for mandamus brought by the stockholder, would leave a
corporation helpless and without an adequate legal remedy.23 To leave the corporation helpless negates
the doctrine that where there is a right, there is a remedy for its violation.24

Petitioner argues that it has the right to protect itself against all forms of embarrassment or harassment
against its officers, including the filing of criminal cases against them.25 Moreover, respondents' request
for inspection of confidential corporate records and documents violates and breaches petitioner's right
to peaceful and continuous possession of its confidential records and documents.26

Petitioner further argues that respondents' Motion for Dissolution before the Court of Appeals did not
comply with Rule 58, Section 6 of the Rules of Court. Therefore, the Motion should not have been
granted.27 Likewise, respondents' Motion to Dismiss is a prohibited pleading under Rule 1, Section 8 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies28 and should not have been
granted.29 In any case, the Court of Appeals should have remanded the case to the trial court for further
disposition.30
We are asked to resolve whether injunction properly lies to prevent respondents from invoking their
right to inspect.

We deny the Petition.

The Petition asks this Court to enjoin acts beyond what was enjoined by the Regional Trial Court in its
April 14, 2004 Order.31 The Regional Trial Court Order did not specify the particular acts it enjoined
respondents from doing:chanRoblesvirtualLawlibrary

The question as to what records should be deemed confidential and inexistent, however, cannot be
passed upon at this time, since neither were admissions made nor sufficient evidence presented to
categorically determine which corporate records are to be considered confidential and inexistent. In the
meantime, then, and in order to prevent grave and irreparable injury on the part of PASAR should
otherwise be allowed [sic], respondents' right to inspect is limited to the ordinary records as identified
and classified by PASAR. Subsequent hearings shall be set to determine which among the corporate
records demanded to be inspected by the respondents are indeed confidential or inexistent, and to
further determine whether or not the issuance of a writ of final injunction is in order.

WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim, Manuel A.
Agcaoili and Consuelo N. Padilla or their representatives from gaining access to records of Philippine
Associated Smelting & Refining Corporation which are presently classified as either confidential or
inexistent, until further orders from this Court.32 (Emphasis supplied)

chanrobleslaw
What precisely is contemplated by the phrase "gaming access to records" is not clear.

Taking advantage of this ambiguity, petitioner prays that the injunction be reinstated and that this Court
enjoin respondents from "harassing, vexing, or annoying petitioner with threats of filing criminal
complaints" and from "further committing acts which are bases for the application of the writ of
preliminary injunction":chanRoblesvirtualLawlibrary

(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April 2004, and
consequently ordering respondents to desist from further harassing, vexing, or annoying petitioner with
threats of filing criminal complaints against its President, Bruce Anderson, and other appropriate parties,
as embodied in the letters dated 25 and 27 February 2006 and 31 March
2006;ChanRoblesVirtualawlibrary

.....

(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be issued
by this Honorable Court to urgently restrain respondents from further committing acts which are bases
for the application of the writ of preliminary injunction.33
chanrobleslaw
Petitioner claims that respondents are materially and substantially invading its right to protect itself by
demanding to inspect petitioner's purportedly confidential records. Respondents wrote petitioner and
demanded to inspect its corporate books and records.34 They reiterated this demand in a subsequent
letter.35

On at least two (2) occasions, respondents went to petitioner's office to again demand that they be
allowed to inspect.36 On one of these occasions, respondents brought members of the press, caused
work disruption, and harassed petitioner's representatives who met with them.37 When asked the
purpose of the inspection of certain records not ordinarily inspected by stockholders, respondents
answered they wished to ensure that petitioner's business transactions were "above board" and
"entered into for the best interest of the company."38

During negotiations on the terms of confidentiality agreements to be executed before respondents are
allowed to inspect certain confidential records, respondents wrote petitioner stating that they would
proceed to inspect the corporate books and records. They warned petitioner that should petitioner fail
to allow inspection, they would initiate legal proceedings against it.39 They refused to accept the final
terms and conditions of the confidentiality agreement and wrote another letter, reiterating their
demand to inspect confidential records.40

After petitioner filed before the Regional Trial Court of Pasig City a Petition for Declaratory
Relief41 seeking a declaration of the rights and duties of the parties in relation to the inspection of the
records, respondent Lim filed a criminal Complaint42 against some of petitioner's officers for infringing
on their right to inspect petitioner's corporate books and records.43 As a result, a criminal case was filed
against Javier Herrero, petitioner's Former President, and Jocelyn Sanchez-Salazar, its Former Corporate
Secretary.44 Respondents caused news reports to be published on the arrest warrants issued in relation
to these Informations.45

Respondents wrote another letter dated January 30, 2004 demanding again that they be allowed to
inspect, among others, the confidential records.46 On March 31, 2006, respondents wrote another letter
threatening to file criminal charges if they were not allowed to inspect the confidential records. They
stated that they wanted to ensure that petitioner complied with environmental laws in the operations of
its plant in Leyte.47

On April 7, 2006, petitioner advised respondents that it would furnish them with records kept by the
Department of Environment and Natural Resources. These records supposedly showed that all
environmental laws were complied with.48 On June 28, 2006 and July 4, 2006, respondents Lim and
Padilla wrote to demand that they be allowed to inspect the audited financial statements for 2004 and
2005; the interim statements for the end of May 2006; and more detailed records on finance,
production, marketing, and purchasing.49

In September 2006, after a stockholders' meeting, respondents again demanded access to certain
information and documents.50 In a letter dated September 8, 2006, respondents again asked about
balance sheet accounts, advances to suppliers, trade and other receivables, inventory, investments,
current assets, trade and other payables, related party transactions, cost of goods manufactured and
sold, selling and administrative expenses, other operating expenses, metal hedging, and staff costs,
among others.51

For an action for injunction to prosper, the applicant must show the existence of a right, as well as the
actual or threatened violation of this right.52

Specifically, for a writ of preliminary injunction to be issued, Rule 58 of the Rules of Court
provides:chanRoblesvirtualLawlibrary

RULE 58
PRELIMINARY INJUNCTION

....

SEC. 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when
it is established:chanRoblesvirtualLawlibrary

(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;ChanRoblesVirtualawlibrary

(b) That the commission, continuance or non- performance of the act 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.

chanrobleslaw
In Duvaz Corp. v. Export and Industry Bank:53chanroblesvirtuallawlibrary

Anent the first issue, the requisites for preliminary injunctive relief are: (a) the invasion of the right
sought to be protected is material and substantial; (b) the right of the plaintiff is clear and unmistakable;
and (c) there is an urgent and paramount necessity for the writ to prevent serious damage. As such, a
writ of preliminary injunction may be issued only upon clear showing of an actual existing right to be
protected during the pendency of the principal action. The twin requirements of a valid injunction are
the existence of a right and its actual or threatened violation. Thus, to be entitled to an injunctive writ,
the right to be protected and the violation against that right must be shown.

In  Almeida v. Court of Appeals, the Court stressed how important it is for the applicant for an injunctive
writ to establish his right thereto by competent evidence:chanRoblesvirtualLawlibrary

Thus, the petitioner, as plaintiff, was burdened to adduce testimonial and/or documentary evidence to
establish her right to the injunctive writs. It must be stressed that injunction is not designed to protect
contingent or future rights, and, as such, the possibility of irreparable damage without proof of actual
existing right is no ground for an injunction. A clear and positive right especially calling for judicial
protection must be established. Injunction is not a remedy to protect or enforce contingent, abstract, or
future rights; it will not issue to protect a right not in esse and which may never arise, or to restrain an
action which did not give rise to a cause of action. There must be an existence of an actual right. Hence,
where the plaintiffs right or title is doubtful or disputed, injunction is not proper.

....

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. The possibility of
irreparable damage without proof of an. actual existing right would not justify injunctive relief in his
favor.

....

In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave abuse of
discretion. As the Court had the occasion to state in Olalia v. Hizon . . . :chanRoblesvirtualLawlibrary

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.54 (Emphasis supplied, citations
omitted)

chanrobleslaw
Thus, an injunction must fail where there is no clear showing of both an actual right to be protected and
its threatened violation, which calls for the issuance of an injunction.

The Corporation Code provides that a stockholder has the right to inspect the records of all business
transactions of the corporation and the minutes of any meeting at reasonable hours on business days.
The stockholder may demand in writing for a copy of excerpts from these records or minutes, at his or
her expense:chanRoblesvirtualLawlibrary

Title VIII
Corporate Books and Records

SECTION 74. Books to be Kept; Stock Transfer Agent.  — Every corporation shall, at its principal office,
keep and carefully preserve a record of all business transactions, and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail
the time and place of holding the meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and every act done or ordered done at
the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and
on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be
open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, in writing, for a copy of excerpts from said records or
minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of
this Code: Provided, That if such refusal is pursuant to a resolution or order of the Board of Directors or
Trustees, the liability under this section for such action shall be imposed upon the directors or trustees
who voted for such refusal: and Provided, further, That it shall be a  defense to any action under this
section  that the person demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.  (Emphasis supplied)

chanrobleslaw
The right to inspect under Section 74 of the Corporation Code is subject to certain limitations. However,
these limitations are expressly provided as defenses in actions filed under Section 74. Thus, this Court
has held that a corporation's objections to the right to inspect must be raised as a defense:

2) the person demanding to examine and copy excerpts from the corporation's records and minutes has
not improperly used any information secured through any previous examination of the records of such
corporation; and 3) the demand is made in good faith or for a legitimate purpose. The latter two
limitations, however, must be set up as a defense by the corporation if it is to merit judicial cognizance.
As such, and in the absence of evidence, the PCGG cannot unilaterally deny a stockholder from
exercising his statutory right of inspection based on an unsupported and naked assertion that private
respondent's motive is improper or merely for curiosity or on the ground that the stockholder is not in
friendly terms with the corporation's officers.55

chanrobleslaw
Gokongwei, Jr. v. Securities and Exchange Commission 56 stresses that "impropriety of purpose .  .  . must
be set up the [sic] corporation defensively":chanRoblesvirtualLawlibrary

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the
corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial
ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is
generally held by majority of the courts that where the right is granted by statute to the stockholder, it
is given to him as such and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In other words, the inspection has
to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character
and not inimical to the interest of the corporation. In  Grey v. Insular Lumber, this Court held that "the
right to examine the books of the corporation must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes." The weight of judicial
opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court
to inquire into and consider the stockholder's good faith and his purpose and motives hi seeking
inspection. Thus, it was held that "the right given by statute is not absolute and may be refused when
the information is not sought in good faith or is used to the detriment of the corporation." But the
"impropriety of purpose such as will defeat enforcement  must be set up the corporation defensively if
the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from
the stockholder the burden of showing propriety of purpose and place upon the corporation the burden
of showing impropriety of purpose or motive." It appears to be the "general rule that stockholders are
entitled to full information as to the management of the corporation and the manner of expenditure of
its funds, and to inspection to obtain such information, especially where it appears that the company is
being mismanaged or that it is being managed for the personal benefit of officers or directors or certain
of the stockholders to the exclusion of others."57 (Emphasis supplied, citations omitted)

chanrobleslaw
Terelay Investment and Development Corp. v. Yulo58 has held that although the corporation may deny a
stockholder's request to inspect corporate records, the corporation must show that the purpose of the
shareholder is improper by way of defense:chanRoblesvirtualLawlibrary

The right of the shareholder to inspect the books and records of the petitioner should not be made
subject to the condition of a showing of any particular dispute or of proving any mismanagement or
other occasion rendering an examination proper, but if the right is to be denied, the burden of proof is
upon the corporation to show that the purpose of the shareholder is improper,  by way of defense.
According to a recognized commentator:chanRoblesvirtualLawlibrary

By early English decisions it was formerly held that there must be something more than bare suspicion
of mismanagement or fraud. There must be some particular controversy or question in which the party
applying was interested, and inspection would be granted only so far as necessary for that particular
occasion. By the general rule in the United States, however, shareholders have a right to inspect the
books and papers of the corporation without first showing any particular dispute or proving any
mismanagement or other occasion rendering an examination proper. The privilege, however, is not
absolute and the corporation may show in defense that the applicant is acting from wrongful motives.

In Guthrie v. Harkness, there was involved the right of a shareholder hi a national bank to inspect its
books for the purpose of ascertaining whether the business affairs of the bank' had been conducted
according to law, and whether, as suspected, the bank was guilty of irregularities. The court said: "The
decisive weight of American authority recognizes the right of the shareholder, for proper purposes and
under reasonable regulations as to place and time, to inspect the books of the corporation of which he is
a member. . . . In issuing the writ of mandamus the court will exercise a sound discretion and grant the
right under proper safeguards to protect the interest of all concerned. The writ should not be granted
for speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be denied to
the stockholder who seeks the information for legitimate purposes."

Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the
financial condition of the company or the propriety of dividends; (2) the value of the shares of stock for
sale or investment; (3) whether there has been mismanagement; (4) in anticipation of shareholders'
meetings to obtain a mailing list of shareholders to solicit proxies or influence voting; (5) to obtain
information in aid of litigation with the corporation or its officers as to corporate transactions. Among
the improper purposes which may justify denial of the right of inspection are: (1) Obtaining of
information as to business secrets or to aid a competitor; (2) to secure business "prospects" or
investment or advertising lists; (3) to find technical defects in corporate transactions in order to bring
"strike suits" for purposes of blackmail or extortion.

In general, however, officers and directors have no legal authority to close the office doors against
shareholders for whom they are only agents, and withhold from them the right to inspect the books
which furnishes the most effective method of gaining information which the law has provided, on mere
doubt or suspicion as to the motives of the shareholder. While there is some conflict of authority, when
an inspection by a shareholder is contested, the burden is usually held to be upon the corporation to
establish a probability that the applicant is attempting to gain inspection for a purpose not connected
with his interests as a shareholder, or that his purpose is otherwise improper. The burden is not upon
the petitioner to show the propriety of his examination or that the refusal by the officers or directors
was wrongful, except under statutory provisions.59 (Citations omitted)

chanrobleslaw
Among the actions that may be filed is an action for specific performance, damages, petition for
mandamus, or for violation of Section 74, in relation to Section 144 of the Corporation Code, which
provides:chanRoblesvirtualLawlibrary

SECTION 144. Violations of the Code. — Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one
thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for
not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If
the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Securities and Exchange Commission: Provided,  That such
dissolution shall not preclude the institution of appropriate action against the director, trustee or officer
of the corporation responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code.

chanrobleslaw
In this case, petitioner invokes its right to raise the limitations provided under Section 74 of the
Corporation Code. However, petitioner provides scant legal basis to claim this right because it does not
raise the limitations as a matter of defense. As properly appreciated by the Court of
Appeals:chanRoblesvirtualLawlibrary
We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary
injunction is uncalled for. The petition is a pre-emptive action unjustly intended to impede and restrain
the stockholders' rights. If a stockholder demands the inspection of corporate books, the corporation
could refuse to heed to such demand. When the corporation, through its officers, denies the
stockholders of such right, the latter could then go to court and enforce their rights. It is then that the
corporation could set up its defenses and the reasons for the denial of such right. Thus, the proper
remedy available for the enforcement of the right of inspection is undoubtedly the writ of mandamus to
be filed by the stockholders and not a petition for injunction filed by the corporation.60

chanrobleslaw
Petitioner insists that the Court of Appeals erred in relying on Section 74 of the Corporation Code. It
claims that jurisprudence allows the corporation to prevent a stockholder from inspecting records
containing confidential information.61 Petitioner cites W.G Philpotts v. Philippine Manufacturing
Company:62chanroblesvirtuallawlibrary

In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable to
say that there are some things which a corporation may undoubtedly keep secret, notwithstanding the
right of inspection given by law to the stockholder; as, for instance, where a corporation engaged in the
business of manufacture, has acquired a formula or process, not generally known, which has proved of
utility to it in the manufacture of its products. It is not our intention to declare that the authorities of the
corporation, and more particularly the Board of Directors, might not adopt measures for the protection
of such process from publicity.63

chanrobleslaw
However, W.G Philpotts  cannot support petitioner's contention since it involved a petition for
mandamus where the stockholder prayed to be allowed to exercise its right to inspect, and the
respondent's objections were raised as a defense. Nothing in W.G. Philpotts grants a corporation a cause
of action to enjoin the exercise of the right of inspection by a stockholder.

The clear provision in Section 74 of the Corporation Code is sufficient authority to conclude that an
action for injunction and, consequently, a writ of preliminary injunction filed by a corporation is
generally unavailable to prevent stockholders from exercising their right to inspection. Specifically,
stockholders cannot be prevented from gaining access to the (a) records of all business transactions of
the corporation; and (b) minutes of any meeting of stockholders or the board of directors, including
their various committees and subcommittees.

The grant of legal personality to a corporation is conditioned on its compliance with certain obligations.
Among these are its fiduciary responsibilities to its stockholders. Providing stockholders with access to
information is a fundamental basis for their intelligent participation in the governance of the
corporation as a business organization that they partially own. The law is agnostic with respect to the
amount of shares required. Generally, each individual stockholder should be given reasonable access so
that he or she can assess or share his or her assessment of the management of the corporation with
other stockholders. The separate legal personality of a corporation is not so absolutely separate that it
divorces itself from its responsibility to its constituent owners.

The law takes into consideration the potential disparity in the financial legal resources between the
corporation and an ordinary stockholder. The phraseology of the text of the law provides that access to
the information mentioned in Section 74 of the Corporation Code is mandatory. The presumption is that
the corporation should provide access. If it has basis for denial, then the corporation shoulders the risks
of being sued and of successfully raising the proper defenses. The corporation cannot immediately
deploy its resources—part of which is owned by the requesting stockholder—to put the owner on the
defensive.

Specifically, corporations may raise their objections to the right of inspection through affirmative
defense in an ordinary civil action for specific performance or damages, or through a comment (if one is
required) in a petition for mandamus.64 The corporation or defendant or respondent still carries the
burden of proving (a) that the stockholder has improperly used information before; (b) lack of good
faith; or (c) lack of legitimate purpose.65

Good faith and a legitimate purpose are presumed. It is the duty of the corporation to allege and prove
with sufficient evidence the facts that give rise to a claim of bad faith as to the existence of an
illegitimate purpose.

The confidentiality of business transactions is not a magical incantation that will defeat the request of a
stockholder to inspect the records. Although it is true that the business is entitled to the protection of its
trade secrets and other intellectual property rights, facts must be pleaded to convince the court that a
specific stockholder's request for inspection, under certain conditions, would violate the corporation's
own legal right.

Furthermore, the discomfort caused to the management of a corporation when a request for inspection
is claimed is part of the regular matters that a business wanting to ensure good governance must
endure. The range between discomfort and vexation is a broad one, which may tend to be located in the
personalities of those involved.

Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the part of the
requesting stockholder. Courts must be convinced that the scope or manner of the request and the
conditions under which it was made are so frivolous that the huge cost to the business will, in equity, be
unfair to the other stockholders. There is no iota of evidence that this happened
here.chanroblesvirtuallawlibrary

II

The Court of Appeals did not commit an error of law in disregarding the procedure on dissolution of
injunctive writs. It lifted and cancelled the injunction via a petition for certiorari under Rule 65 of the
Rules of Court based on the grave abuse of discretion on the part of the Regional Trial Court in issuing
the writ of preliminary injunction.

Petitioner invokes Rule 58, Section 6 of the Rules of Court, which provides:chanRoblesvirtualLawlibrary
SEC. 6.  Grounds for Objection to, or for Motion of Dissolution of, Injunction or Restraining Order. — The
application for injunction or restraining order may be denied, upon a showing of its insufficiency. The
injunction or restraining order may also be denied, or, if granted, may be dissolved, on other grounds
upon affidavits of the party or person enjoined, which may be opposed by the applicant also by
affidavits. It may further be denied, or, if granted, may be dissolved, if it appears after hearing that
although the applicant is entitled to the injunction or restraining order, the issuance or continuance
thereof, as the case may be, would cause irreparable damage to the party or person enjoined while the
applicant can be fully compensated for such damages as he may suffer, and the former files a bond in an
amount fixed by the court conditioned that he will pay all damages which the applicant may suffer by
the denial or the dissolution of the injunction or restraining order. If it appears that the extent of the
preliminary injunction or restraining order granted is too great, it may be modified.

chanrobleslaw
Petitioner assails respondents' failure to submit any affidavit or counter-bond pertaining to irreparable
damage and compensation of damages that may be suffered if the injunction is dissolved.66

However, the injunction was lifted and cancelled via a petition for certiorari under Rule 65 of the Rules
of Court,67 not based on a motion for dissolution of the injunction. Thus, the Court of Appeals evaluated
the basis for the injunction granted by the Regional Trial Court rather than whether the injunction would
cause irreparable damage to respondents.

WHEREFORE, the Petition is DENIED.

SO ORDERED.ChanRoblesVirtualawlibrary

G.R. No. 193068, February 01, 2017

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v. STA. INES MELALE FOREST PRODUCTS

CORPORATION, RODOLFO CUENCA, MANUEL TINIO, CUENCA INVESTMENT CORPORATION AND
UNIVERSAL HOLDINGS CORPORATION, Respondents.

G.R. No. 193099, February 1, 2017

NATIONAL DEVELOPMENT CORPORATION, Petitioner, v. STA. INES MELALE FOREST PRODUCTS

CORPORATION, RODOLFO M. CUENCA, MANUEL I. TINIO, CUENCA INVESTMENT CORPORATION AND
UNIVERSAL HOLDINGS CORPORATION, Respondents.

DECISION

LEONEN, J.:

A condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfilment and a debtor
loses the right to make use of the period when a condition is violated, making the obligation
immediately demandable.1

This resolves the consolidated Petitions for Review filed by the Development Bank of the Philippines
(DBP)2 and the National Development Corporation (NEDC)3 assailing the Court of Appeals
Decision4 dated March 24, 2010 and Court of Appeals Resolution5 dated July 21, 2010, which affirmed
with modifications the Decision6 dated September 16, 2003 of Branch 137, Regional Trial Court of
Makati City.7

Sometime in 1977, National Galleon Shipping Corporation (Galleon), "formerly known as Galleon
Shipping Corporation, was organized to operate a liner service between the Philippines and its ... trading
partners."8 Galleon's major stockholders were respondents Sta. Ines Melale Forest Products Corporation
(Sta. Ines), Cuenca Investment Corporation (Cuenca Investment), Universal Holdings Corporation
(Universal Holdings), Galleon's President Rodolfo M. Cuenca (Cuenca), Manuel I. Tinio (Tinio), and the
Philippine National Construction Corporation (PNCC).9

Galleon experienced financial difficulties and had to take out several loans from different sources such
as foreign financial institutions, its shareholders (Sta. Ines, Cuenca Investment, Universal Holdings,
Cuenca, and Tinio), and other entities "with whom it had ongoing commercial relationships."10

DBP guaranteed Galleon's foreign loans.11 In return, Galleon and its stockholders Sta. Ines, Cuenca
Investment, Universal Holdings, Cuenca, and Tinio, executed a Deed of Undertaking12 on October 10,
1979 and obligated themselves to guarantee DBP's potential liabilities.13

To secure DBP's guarantee, Galleon undertook to secure a first mortgage on its five new vessels and two
second-hand vessels.14 However, despite the loans extended to it, "[Galleon's] financial condition did not
improve."15

Cuenca, as Galleon's president, wrote to the members of the Cabinet Standing Committee "for the
consideration of a policy decision to support a liner service."16 Cuenca also wrote then President
Ferdinand Marcos and asked for assistance.17

On July 21, 1981, President Marcos issued Letter of Instructions No. 115518 addressed to the NDC, DBP,
and the Maritime Industry Authority. Letter of Instructions No. 1155 reads:

TO : Development Bank of the Philippines

National Development Company
Maritime Industry Authority

DIRECTING A REHABILITATION PLAN FOR

GALLEON SHIPPING CORPORATION

WHEREAS, Galleon Shipping Corporation is presently in a distressed state in view of the unfavorable
developments in the liner shipping business;

WHEREAS, the exposure of the Philippine government financial institutions is substantial;

WHEREAS, it is a policy of government to provide a reliable liner service between the Philippines and its
major trading partners;

WHEREAS, it is a policy to have a Philippine national flag liner service to compete with other heavily
subsidized national shipping companies of other countries;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, do hereby direct the
following:

1. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation from its present
owners for the amount of P46.7 million which is the amount originally contributed by the
present shareholders, payable after five years with no interest cost.

2. NDC to immediately infuse P30 million into Galleon Shipping Corporation in lieu of its previously
approved subscription to Philippine National Lines. In addition, NDC is to provide additional
equity to Galleon as may be required.

3. DBP to advance for a period of three years from date hereof both the principal and the interest
on Galleon's obligations falling due and to convert such advances into 12% preferred shares in
Galleon Shipping Corporation.

4. DBP and NDC to negotiate a restructuring of loans extended by foreign creditors of Galleon.

5. MARINA to provide assistance to Galleon by mandating a rational liner shipping schedule

considering existing freight volume and to immediately negotiate a bilateral agreement with the
United States in accordance with UNCTAD resolutions.

These instructions are to take effect immediately.19

On August 10, 1981,20 pursuant to Letter of Instructions No. 1155, Galleon's stockholders, represented
by Cuenca, and NDC, through its then Chairman of the Board of Directors, Roberto V. Ongpin (Ongpin)
entered into a Memorandum of Agreement,21 where NDC and Galleon undertook to prepare and sign a
share purchase agreement covering 100% of Galleon's equity for P46,740,755.00.22 The purchase price
was to be paid after five years from the execution of the share purchase agreement.23 The share
purchase agreement also provided for the release of Sta. Ines, Cuenca, Tinio and Construction
Development Corporation of the Philippines from the personal counter-guarantees they issued in DBP's
favor under the Deed of Undertaking.24

The Memorandum of Agreement reads:

KNOW ALL MEN BY THESE PRESENTS:

This Memorandum of Agreement made and entered into this day of August, 1981, at Makati, Metro
Manila, Philippines, by and between the stockholders of Galleon Shipping Corporation listed in Annex A
hereof, represented herein by their duly authorized attorney-in-fact, Mr. Rodolfo M. Cuenca (hereinafter
called "Sellers") and National Development Company, represented herein by its Chairman of the Board,
Hon. Minister Roberto V. Ongpin (hereinafter called "Buyer").

WITNESSETH: That —

WHEREAS, Sellers and Buyer desire to implement immediately Letter of Instructions No. 1155, dated July
21, 1981, which directs that Buyer acquire 100% of the shareholdings of Galleon Shipping Corporation
("GSC") from Sellers who are the present owners.
WHEREAS, Sellers have consented to allow Buyer to assume actual control over the management and
operations of GSC prior to the execution of a formal share purchase agreement and the transfer of all
the shareholdings of Sellers to Buyer.

NOW, THEREFORE, the parties agree as follows:

1. Within seven (7) days after the signing hereof, Sellers shall take all steps necessary to cause five (5)
persons designated by Buyer to be elected directors of GSC, it being understood that Sellers shall retain
the remaining two (2) seats in the GSC board subject to the condition hereafter stated in clause 7(b).

2. The new board to be created pursuant to clause 1 above shall elect Antonio L. Carpio as Chairman and
Chief Executive Officer and Rodolfo M. Cuenca as President. All other officers will be nominated and
appointed by Buyer.

3. As soon as possible, but not more than 60 days after the signing hereof, the parties shall endeavor to
prepare and sign a share purchase agreement covering 100% of the shareholdings of Sellers in GSC to be
transferred to Buyer, i.e. 10,000,000 fully paid common shares of the par value of P1.00 per share and
subscription of an additional 100,000,000 common shares of the par value of P1.00 per share of which
P36,740,755.00 has been paid, but not yet issued.

4. Sellers hereby warrant that P46,740,755[.00] had been actually paid to Galleon Shipping Corporation,
which amount represents payment of Sellers for 46,740,755 common shares of said Corporation. This
warranty shall be verified by Buyer, the results of which will determine the final purchase price to be
paid to Sellers. The purchase price directed by LOI 1155 to be paid to Sellers shall be paid after five (5)
years from date of the share purchase agreement with no interest cost to buyer.

5. As security for the payment of the aforementioned purchase price, Buyer shall issue to each of the
GSC stockholders listed in Annex A a negotiable promissory note in the amount corresponding to the
respective paid-up capital in GSC of each of such stockholders and with maturity on the date of the fifth
annual anniversary of the share purchase agreement.

6. Notwithstanding the provisions of clauses 4 and 5 above, upon the signing of the share purchase
agreement, it is understood that Sellers shall deliver to Buyer all the stock certificates covering
10,000,000 common shares of GSC, and duly and validly endorsed for transfer, free from any and all
Hens and encumbrances whatsoever. It is likewise understood that Buyer shall at that time acquire all
the subscription rights to 100,000,000 common shares of which P36,740,755.00 has been paid by
Sellers, and shall assume the obligation to pay the unpaid portion of such subscription.

7. The stock purchase agreement to be prepared and signed by the parties within sixty (60) days from
date hereof shall contain, among other things:

(a) standard warranties of seller including, but not limited to, warranties pertaining to the accuracy
of financial and other statements of GSC; disclosure of liabilities; payment of all taxes, duties,
licenses and fees; non-encumbrance of corporate assets; valid contracts with third parties, etc.
including an indemnity clause covering any breach thereof.

(b) provisions that Buyer shall retain 2 representatives of Sellers in the board of GSC only for as long
as Sellers have not been paid, or have not negotiated or discounted any of the promissory notes
 referred to in clause 5 above.

(c) provisions whereby Construction Development Corporation of the Philippines, Sta. Ines Melale
Forest Products Corporation, Mr. Rodolfo M. Cuenca and Mr. Manuel I. Tinio shall be released
from counter-guarantees they have issued in favor of DBP and other financial institutions in
connection with GSC's various credit accommodations.

(d) provisions for arbitration as a means of settling disputes and differences of opinion regarding the
stock purchase agreement.

8. Sellers hereby make a special warranty that:chanRoblesvirtualLawlibrary

(a) any and all liabilities and obligations as disclosed in the financial statements of Galleon Shipping
Corporation are valid, regular, normal and incurred in the ordinary course of business of Galleon
Shipping Corporation, and Buyer will verify this warranty and conduct an audit of Galleon
Shipping Corporation as of March 31 and July 31, 1981; liabilities that do not fall under the above
definition are to be for the account of the Seller; and

(b) from July 31, 1981 to the date of the election of Buyers' representatives to the Board of GSC, GSC
has not and shall not enter into any contract and has not and shall not incur any liability except
what is normal and usual in the ordinary course of shipping business.

9. Valid and duly authorized liabilities of GSC which are the subject of a meritorious lawsuit, or
which have been arranged and guaranteed by Mr. Rodolfo M. Cuenca, may be considered by
Buyer for priority in the repayment of accounts, provided that, upon review, the Buyer shall
determine these to be legitimate and were validly incurred in the ordinary course of GSC's
principal business.

IN WITNESS HEREOF, the parties have signed this Memorandum of Agreement this day of August 1981,
in Makati, Metro Manila.

STOCKHOLDERS OF
GALLEON SHIPPING
CORPORATION

By:

(signed)
RODOLFO M. CUENCA

NATIONAL DEVELOPMENT COMPANY

By:

(signed)
ROBERTO V.
ONGPIN25

Acting as Galleon's guarantor, DBP paid off Galleon's debts to its foreign bank creditor and, on January
25, 1982, pursuant to the Deed of Undertaking, Galleon executed a mortgage contract26 over seven of its
vessels in favor of DBP.

NDC took over Galleon's operations "even prior to the signing of a share purchase
agreement."27 However, despite NDC's takeover, the share purchase agreement was never formally
executed.28

On February 10, 1982, or barely seven months from the issuance of Letter of Instructions No. 1155,
President Marcos issued Letter of Instructions No. 1195,29 which reads:

TO : Development Bank of the

Philippines
National Development Company

RE : Galleon Shipping Corporation

WHEREAS, NDC has assumed management of Galleon's operations pursuant to LOI No. 1155;

WHEREAS, the original terms under which Galleon acquired or leased the vessels were such that Galleon
would be unable to pay from its cash flows the resulting debt service burden;

WHEREAS, in such a situation the financial exposure of the Government will continue to increase and
therefore the appropriate steps must be taken to limit and protect the Government's exposure;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, do hereby direct the
following:

1) The DBP and the NDC shall take immediate steps, including foreclosure of Galleon vessels and
other assets, as may be deemed necessary to limit and protect the Government's exposure;

2) NDC shall discharge such maritime liens as it may deem necessary to allow the foreclosed vessels
to engage in the international shipping business;

3) Any provision of LOI No. 1155 inconsistent with this Letter of Instructions is hereby rescinded.

These instructions are to take effect immediately.30

On April 22, 1985, respondents Sta. Ines, Cuenca, Tinio, Cuenca Investment and Universal Holdings filed
a Complaint with Application for the Issuance of a Temporary Restraining Order or Writ of Preliminary
Injunction.31 The Complaint was amended several times to implead new parties and to include new
claims/counterclaims.32

In their Complaint, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings alleged that
NDC, "without paying a single centavo, took over the complete, total, and absolute ownership,
management, control, and operation of defendant [Galleon] and all its assets, even prior to the formality
of signing a share purchase agreement, which was held in abeyance because the defendant NDC was
verifying and confirming the amounts paid by plaintiffs to Galleon, and certain liabilities of Galleon to
plaintiffs[.]"33

Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings also alleged that NDC tried to delay
'the formal signing of the share purchase agreement in order to interrupt the running of the 5-year
period to pay ... the purchase of the shares in the amount of P46,740,755[.00] and the execution of the
negotiable promissory notes to secure payment[.]34

As for DBP, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings claimed that "DBP can
no longer go after [them] for any deficiency judgment [since] NDC had been subrogated [in their place]
as borrower[s], hence the Deed of Undertaking between [Sta. Ines, Cuenca Investment, Universal
Holdings, Cuenca, and Tinio and DBP] had been extinguished and novated[.]"35

Meanwhile, on December 8, 1986, Proclamation No. 50 created the Asset Privatization Trust.36 The Asset
Privatization Trust was tasked to "take title to and possession of, conserve, provisionally manage and
dispose of, assets which have been identified for privatization or disposition and transferred to the TI-
List for [that] purpose."37

Under Administrative Order No. 14 issued by then President Corazon C. Aquino, certain assets of DBP,
which included Galleon's loan accounts, "were identified for transfer to the National Government."38

On February 27, 1987, a Deed of Transfer was executed providing for the transfer of the Galleon loan
account from DBP to the National Government.39 The Asset Privatization Trust was "constituted as [the
National Government's] trustee over the transferred accounts and assets[.]"40

On September 16, 2003, the Regional Trial Court upheld the validity of Letter of Instructions No. 1155
and the Memorandum of Agreement executed by NDC and Galleon's stockholders, pursuant to Letter of
Instructions No. 1155.41

The Regional Trial Court also held that Letter of Instructions No. 1195 did not supersede or impliedly
repeal Letter of Instructions No. 1155, and assuming that it did impliedly repeal Letter of Instructions No.
1155, it would be void and unconstitutional for violating the non-impairment clause.42

As regards NDC's argument that Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings had
no basis to compel it to pay Galleon's shares of stocks because no share purchase agreement was
executed, the Regional Trial Court held that the NDC was in estoppel since it prevented the execution of
the share purchase agreement and had admitted to being Galleon's owner.43

The Regional Trial Court also ruled that Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal
Holdings' liability to DBP under the Deed of Undertaking had been extinguished due to novation, with
NDC replacing them and PNCC as debtors.44 The dispositive of the Regional Trial Court's Decision reads:

WHEREFORE, judgment is hereby rendered (1) ordering defendants National Development Corporation
and National Galleon Shipping Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest
Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, the amounts of P15,150,000.00 and US$2.3 million, representing the
amount of advances made by plaintiffs in behalf of defendant Galleon, plus legal interest at the rate of
6% per annum from the date of filing of this case on 22 April 1985 up to full payment;
(2) ordering defendants National Development Corporation and National Galleon Shipping Corporation,
jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca,
Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings Corporation, the amount of
P46,740,755.00, representing the price of the shares of stock of plaintiffs and defendant PNCC in
defendant Galleon, plus legal interest at the rate of 6% per annum from the date of filing of this case on
22 April 1985 up to full payment;

(3) ordering defendants National Development Corporation and National Galleon Shipping Corporation,
jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca,
Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings Corporation, attorney's fees
equivalent to 10% of the amount due; and costs of suit; and

(4) ordering defendants National Development Corporation, Development Bank of the Philippines and
National Galleon Shipping Corporation, jointly and severally, to pay each plaintiff and defendant
Philippine National Construction Corporation, P10,000.00 as moral damages; and P10,000.00 as
exemplary damages.

SO ORDERED.45

On February 23, 2003, the Regional Trial Court issued an Order46 partially reconsidering and modifying
the September 16, 2003 Decision by categorically declaring Sta. Ines, Cuenca, Tinio, Cuenca Investment,
and Universal Holdings free from liability under the mortgage contract with DBP and the deficiency claim
of DBP.47 The Regional Trial Court also deleted the award of US$2.3 million to Sta. Ines, Cuenca, Tinio,
Cuenca Investment, and Universal Holdings since they failed to Include the same in their fourth
amended complaint.48 The dispositive portion of the Regional Trial Court Order, as amended, reads:

WHEREFORE, judgment is hereby rendered (1) ordering defendants National Development Corporation
and National Galleon Shipping Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest
Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, the amount of P15,150,000.00 representing the amount of advances
made by plaintiffs in behalf of defendant NGSC, plus legal interest at the rate of 6% per annum from the
date of filing of this case on 22 April 1985 up to full payment;

(2) ordering defendants National Development Corporation and National Galleon Shipping Corporation,
jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca,
Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings Corporation, the amount of
P46,740,755.00, representing the price of the shares of stock of plaintiffs and defendant PNCC in
defendant NGSC, plus legal interest at the rate of 6% per annum from the date of filing of this case on 22
April 1985 up to full payment;

(3) ordering defendants National Development Corporation and National Galleon Shipping Corporation,
jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca,
Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings Corporation, attorney's fees
equivalent to 10% of the amount due; and costs of suit;

(4) ordering defendants National Development Corporation and National Galleon Shipping Corporation,
jointly and severally, to pay to each plaintiff and defendant Philippine National Construction
Corporation, P10,000.00 as moral damages; and P10,000.00 as exemplary damages; and
(5) declaring plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio,
Cuenca Investment Corporation and Universal Holdings Corporation and defendant Philippine National
Construction Corporation to be no longer liable to defendants National Development Corporation,
Development Bank of the Philippines and Asset Privatization Trust under the deed of undertaking,
pledge, mortgages, and other accessory contracts between the parties; and consequently, permanently
enjoining defendant DBP or APT from filing a deficiency claim against plaintiffs and defendant PNCC.

SO ORDERED.49

On March 9, 2004 and March 16, 2004, DBP and NDC filed their respective notices of appeal to the Court
of Appeals.50

In its assailed Decision dated March 24, 2010, the Court of Appeals upheld the Regional Trial Court's
findings that the Memorandum of Agreement between NDC and Cuenca (representing Sta. Ines, Cuenca,
Tinio, Cuenca Investment, and Universal Holdings) was a perfected contract, which bound the
parties,51 thus:

Although the Supreme Court ruled in the Poliand case that LOI No. 1155 is a mere administrative
issuance and, as such, cannot be a valid source of obligation, the defendant-appellant NDC cannot
escape its liabilities to the plaintiffs-appellees considering that the Memorandum of Agreement that it
executed with the plaintiffs-appellees created certain rights and obligations between the parties which
may be enforced by the parties against each other. The situation in the Poliand case is different because
Poliand was not a party to the Memorandum of Agreement.52

The Court of Appeals ruled that NDC is estopped from claiming that there was no agreement between it
and Cuenca since the agreement had already been partially executed after NDC took over the control
and management of Galleon.53

The Court of Appeals also rejected NDC's argument that it should not be held liable for the payment of
Galleon's shares.54 The Court of Appeals held that NDC "voluntarily prevented the execution of a share
purchase agreement when it reneged on its various obligations under the Memorandum of
Agreement."55

The Court of Appeals likewise affirmed the Regional Trial Court's ruling that novation took place when
NDC agreed to be substituted in place of Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal
Holdings in the counter-guarantees they issued in favor of DBP.56

The Court of Appeals ruled that DBP was privy to the Memorandum of Agreement between NDC and
Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings, since Ongpin was concurrently
Governor of DBP and chairman of the NDC Board at the time the Memorandum of Agreement was
signed.57

The Court of Appeals further held that DBF was no longer the real party-in-interest as the loan accounts
of Galleon were transferred to the Asset Privatization Trust.58

The fallo of the Court of Appeals Decision reads:

WHEREFORE, in view of the foregoing premises, the assailed Decision, as well as, assailed Order,
appealed from is hereby AFFIRMED with MODIFICATIONS such that, as modified, the dispositive portion
thereof shall now read as follows:

"WHEREFORE, judgment is hereby rendered (1) ordering defendants National Development Corporation
and National Galleon Shipping Corporation jointly and severally, to pay plaintiffs Sta. Ines Melale Forest
Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, the amount of P15,150,000.00 representing the amount of advances
made by plaintiffs in behalf of defendant NGSC, plus interest at the rate of twelve percent (12%) per
annum from the date of filing of this case on 22 April 1985 until instant Decision becomes final and
executory, thereafter the said amount shall earn an interest at the rate of twelve (12%) percent per
annum from such finality until its satisfaction;

(2) ordering the defendants National Development Corporation and National Galleon Shipping
[C]orporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation,
Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings
Corporation, the amount of P46,740,755.00, representing the price of the shares of stock of plaintiffs
and defendant PNCC in defendant NGSC, plus interest at the rate of twelve percent (12%) per annum
from the date of filing of this case on 22 April 1985 until instant Decision becomes final and executory,
thereafter the said amount shall earn an interest at the rate of twelve percent (12%) per annum from
such finality until its satisfaction;

(3) ordering the defendants National Development Corporation and National Galleon Shipping
Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo
M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings Corporation,
attorney's fees equivalent to 10% of the amount due; and costs of suit;

(4) ordering the defendants National Development Corporation and National Galleon Shipping
Corporation, jointly and severally, to pay to each plaintiffs and defendant Philippine National
Construction Corporation, P10,000.00 as moral damages; and P10,000.00 as exemplary damages; and

(5) declaring plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio,
Cuenca Investment Corporation and Universal Holdings Corporation and defendant Philippine National
Construction Corporation to be no longer liable to defendants National Development Corporation,
Development Bank of the Philippines and Asset Privatization Trust under the deed of undertaking,
pledge, mortgages, and other accessory contracts between the parties; and consequently, permanently
enjoining defendant DBP or APT from filing a deficiency claim against plaintiffs and defendant PNCC.

SO ORDERED.59 (Emphasis and underscoring in the original)

On September 16, 2010, NDC appealed the Court of Appeals Decision to this Court. In its Petition for
Review,60 NDC maintains that the Memorandum of Agreement does not bind it, since Ongpin was not
equipped with authority from the NDC Board to sign the Memorandum of Agreement on NDC's
behalf.61 NDC also denies that it took over the control and management of Galleon or that it "prevented
the execution of the [s]hare [p]urchase [a]greement[.]"62

NDC asserts that even assuming that the Memorandum of Agreement was binding, what was agreed
upon was that the parties shall execute a share purchase agreement within a certain period of
time.63 The Memorandum of Agreement was only a preliminary agreement between Cuenca and Ongpin
for NDC's "intended purchase of Galleon's equity[,] pursuant to [Letter of Instructions No.] 1155."64 The
Memorandum of Agreement cannot "be considered as the executing agreement or document for the
purchase of the shares."65

On September 13, 2010, DBP filed its Petition for Review66 before this Court. DBP insisted that novation
did not take place because: (a) there was no second binding contract designed to replace the Deed of
Undertaking; (b) it did not give its consent to the substitution of debtors under the Memorandum of
Agreement; and (c) there was no agreement that unequivocally declared novation by substitution of
debtors.67

The issues raised for the resolution of this Court are as follows:

a) Whether the Memorandum of Agreement obligates NDC to purchase Galleon's shares of stocks
and pay the advances made by respondents in Galleon's favor;68

b) Whether the Memorandum of Agreement novated the Deed of Undertaking executed between
DBP and respondents;69 and

c) Whether the computation of legal interest should be at the rate of 6% per annum, instead of the
12% per annum pegged by the Court of Appeals.70

When the "terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control."71

Bautista v. Court of Appeals72 instructs that where the language of a contract is plain and unambiguous,
the contract must be taken at its face value, thus:

The rule is that where the language of a contract is plain and unambiguous, its meaning should be
determined without reference to extrinsic facts or aids. The intention of the parties must be gathered
from that language, and from that language alone. Stated differently, where the language of a written
contract is clear and unambiguous, the contract must be taken to mean that which, on its face, it
purports to mean, unless some good reason can be assigned to show that the words used should be
understood in a different sense. Courts cannot make for the parties better or more equitable
agreements than they themselves have been satisfied to make, or rewrite contracts because they
operate harshly or inequitably as to one of the parties, or alter them for the benefit of one party and to
the detriment of the other, or by construction, relieve one of the parties from terms which he
voluntarily consented to, or impose on him those which he did not.73

It is not disputed that NDC and respondents Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal
Holdings executed a Memorandum of Agreement pursuant to the directives of Letter of Instructions No.
1155.

Under the Memorandum of Agreement, NDC, as the Buyer, undertook to:

a) implement Letter of Instructions No. 1155 and acquire 100% of Galleon's shareholdings;
b) assume actual control over Galleon's management and operations prior to the execution of a
formal share purchase agreement and prior to the transfer to NDC of Galleon's shareholdings;

c) designate five persons to sit in Galleon's Board of Directors;

d) pay Galleon's stockholders the share purchase price after five years from the date of the share
purchase agreement;

e) issue each Galleon stockholder a negotiable promissory note with maturity on the date of the
fifth annual anniversary of the share purchase agreement;

f) verify Galleon's special warranty on its liabilities and obligations by conducting an audit; and

g) consider for priority in the repayment of accounts, Galleon's valid and duly authorized liabilities
which are the subject of meritorious lawsuit or which have been arranged and guaranteed by
Cuenca.

While respondents, Galleon's stockholders, as the Sellers, undertook to:

a) implement Letter of Instructions No. 1155 by allowing NDC to purchase 100% of their
shareholdings;

b) consent for NDC to assume actual control over Galleon's management and operations prior to the
execution of a formal share purchase agreement and prior to the transfer to NDC of Galleon's
shareholdings;

c) elect NDC's designated five persons to Galleon's Board of Directors;

d) warrant that P46,740,755.00 had been actually paid to Galleon, representing payment of
46,740,755 common shares to Galleon;

e) deliver to NDC, upon signing of the share purchase agreement, 10,000,000 common shares of
Galleon, duly and validly endorsed for transfer, free from any and all liens and encumbrances
whatsoever; and

f) make special warranties under clause 8.

As parties to the Memorandum of Agreement, NDC and respondents jointly undertook to:

a) immediately implement Letter of Instructions No. 1155;

b) endeavor to prepare and sign a share purchase agreement covering 100% of Galleon's
 shareholdings not more than 60 days after the signing of the Memorandum of Agreement; and

c) incorporate the conditions listed down in clause 7 in the share purchase agreement.

The law is categorical that "various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly."74Fernandez v. Court of
Appeals75 further emphasizes that "[t]he important task in contract interpretation is always the
ascertainment of the intention of the contracting parties and that task is of course to be discharged by
looking to the words they used to project that intention in their contract, all the words not just a
particular word or two, and words in context  not words standing alone."76

The Court of Appeals found that the Memorandum of Agreement between NDC and Galleon was a
perfected contract for NDC to purchase 100% of Galleon's shareholdings. However, a careful reading of
the Memorandum of Agreement shows that what the parties agreed to was the execution of a share
purchase agreement to effect the transfer of 100% of Galleon's shareholdings to NDC, as seen in clause
3:

3. As soon as possible, but not more than 60 days after the signing hereof, the parties shall endeavor to
prepare and sign a share purchase agreement covering 100% of the shareholdings of Sellers in GSC to be
transferred to Buyer, i.e. 10,000,000 fully paid common shares of the par value of P1.00 per share and
subscription of an additional 100,000,000 common shares of the par value of P1.00 per share of which
P36,740,755.00 has been paid, but not yet issued.

The second paragraph of clause 4 likewise makes the execution of a share purchase agreement a
condition before the purchase price can be paid to respondents, since the payment of the purchase
price becomes due only after five years from the date of execution of the share purchase agreement:

4. Sellers hereby warrant that P46,740,755[.00] had been actually paid to Galleon Shipping Corporation,
which amount represents payment of Sellers for 46,740,755 common shares of said Corporation. This
warranty shall be verified by Buyer, the results of which will determine the final purchase price to be
paid to Sellers.

The purchase price directed by LOI 1155 to be paid to Sellers shall be paid after five (5) years from date
of the share purchase agreement with no interest cost to buyer.  (Emphasis supplied)

NDC asserts that the Memorandum of Agreement was only a preliminary agreement between Galleon,
represented by Cuenca, and NDC, represented by Ongpin, for the intended purchase of Galleon's equity
pursuant to Letter of Instructions No. 1155,77 thus:

It merely prescribed the manner, terms and conditions of said purchase. In fact, the [Memorandum of
Agreement] provided for a time frame for the execution of the share purchase agreement which is
within sixty (60) days from the signing thereof. By no means can it be considered as the executing
agreement or document for the purchase of the shares.78

NDC's assertion that the Memorandum of Agreement was merely a preliminary agreement that was
separate and distinct from the share purchase agreement, finds support in clause 7 of the Memorandum
of Agreement, which lists down the terms and conditions to be included in the share purchase
agreement as follows:
7. The stock purchase agreement to be prepared and signed by the parties within sixty (60) days from
date hereof shall contain, among other things:

(a) standard warranties of seller including, but not limited to, warranties pertaining to the accuracy
of financial and other statements of GSC; disclosure of liabilities; payment of all taxes, duties,
licenses and fees; non-encumbrance of corporate assets; valid contracts with third parties, etc.
including an indemnity clause covering any breach thereof.

(b) provisions that Buyer shall retain 2 representatives of Sellers in the board of GSC only for as long
as Sellers have not been paid, or have not negotiated or discounted any of the promissory notes
referred to in clause 5 above.

(c) provisions whereby Construction Development Corporation of the Philippines, Sta. Ines Melale
Forest Products Corporation, Mr. Rodolfo M. Cuenca and Mr. Manuel I. Tinio shall be released
from counter-guarantees they have issued in favor of DBP and other financial institutions in
connection with GSC's various credit accommodations.

(d) provisions for arbitration as a means of settling disputes and differences of opinion regarding the
stock purchase agreement.

Under clause 7 of the Memorandum of Agreement, NDC and respondents agreed to include in the still-
to-be-executed share purchase agreement, provisions on: (a) standard warranties, including warranties
on the accuracy of Galleon's financials, disclosure of liabilities, etc; (b) the retention of Galleon's
representatives in Galleon's board of directors prior to the payment of the share purchase price; (c) the
release of respondents from the counter-guarantees they made in favor of DBP and other financial
institutions in connection with Galleon's various credit accommodations; and (d) arbitration as a means
of settling disputes and differences of opinion regarding the stock purchase agreement.

Taking the provisions of the Memorandum of Agreement as a whole, it is clear that while there was an
intention to follow the directives of Letter of Instructions No. 1155, the transfer of shares from
respondents to NDC was to be effected only with the execution of the share purchase agreement, the
terms and conditions of which were laid out in the Memorandum of Agreement.

NDC and the respondents undertook to prepare and sign a share purchase agreement over 100% of
respondents' shares in Galleon not more than sixty days after the signing of the Memorandum of
Agreement:

3. As soon as possible, but not more than 60 days after the signing hereof, the parties shall endeavor to
prepare and sign a share purchase agreement covering 100% of the shareholdings of Sellers in GSC to be
transferred to Buyer, i.e. 10,000,000 fully paid common shares of the par value of P1.00 per share and
subscription of an additional 100,000,000 common shares of the par value of P1.00 per share of which
P36,740,755.00 has been paid, but not yet issued.

The execution of a share purchase agreement was a condition precedent to the transfer of Galleon's
shares to NDC. However, the Court of Appeals found that the NDC prevented its execution by
deliberately delaying its review of Galleon's financial accounts:
From the foregoing, it is evident that the period for the payment of the purchase price is entirely
dependent on the execution of a share purchase agreement by the parties. The evidence on record,
however, show that the defendant-appellant NDC itself voluntarily prevented the execution of a share
purchase agreement when it reneged on its various obligations under the Memorandum of Agreement.
The evidence on record show that the share purchase agreement was not formally executed because
then Minister Roberto Ongpin claimed that the accounts of defendant Galleon had to be reviewed and
cleared up before the share purchase agreement is signed. While defendant Galleon made its financial
records available to defendant-appellant NDC for their review, the latter never made any serious effort
to review the financial accounts of the defendant Galleon, hence, effectively preventing the execution of
the share purchase agreement. Consequently, the condition for the running of the period for the
payment of the purchase price of the shares of stocks in defendant Galleon by the defendant-appellant
NDC,  i.e., the execution of the Share Purchase Agreement, was deemed fulfilled as it was the defendant-
appellant NDC itself which prevented it from happening. Under Article 1186 of the Civil Code, a
"condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfilment." This applies in
the instant case.79 (Emphasis supplied)

The Regional Trial Court likewise found that respondent Cuenca, as Galleon's representative, initiated
moves for the preparation and execution of the share purchase agreement and NDC's takeover of
Galleon.80 Nonetheless, despite Cuenca's efforts, the share purchase agreement was never formally
executed:

Assuming that the share purchase agreement was a condition for the effectivity of the Memorandum of
Agreement (dated 10 August 1981), said condition is deemed fulfilled by virtue of Art. 1186 of the Civil
Code, which provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents
its fulfillment." Plaintiff Cuenca, as representative of the former shareholders of defendant Galleon, in
order to clear up the accounts preparatory to the execution of the share purchase agreement, created a
team to prepare a statement of defendant Galleon's outstanding accounts which statement of account
was intended to be included as part of the annexes of the said share purchase agreement. Another team
with representatives from both parties, that is, the former stockholders of defendant Galleon and
defendant NDC, had to be created for a smoother turnover. However, despite said efforts done by
plaintiff Cuenca the share purchase agreement was not formally executed.81 (Emphasis in the original)

NDC denies that it caused the delay in the execution of the share purchase agreement and argues that it
was Cuenca who caused the delay for insisting on the payment first of the advances made in Galleon's
favor before executing the share purchase agreement and relinquishing control over Galleon.82

NDC's bare denials cannot succeed in light of the preponderance of evidence submitted by respondents.

In his Affidavit83 dated June 17, 1999, Cuenca narrated the preparations the Galleon stockholders
undertook for the execution of the share purchase agreement with NDC:

What happened to the share purchase agreement referred to in the Memorandum of

168. Q :
Agreement dated August 1981 (Exhibit "J")?

  A : The share purchase agreement was never drawn up despite persistent attempts by
myself to see it prepared and executed. In fact, we continually negotiated with NDC and
 DBP throughout 1982 and 1983 on the matter.

169. Q : Why was it never executed?

Minister Ongpin kept claiming that the accounts had to be cleared up before any formal
  A :
agreement could be signed.

What steps, if any, did the parties take to clear up the accounts preparatory to the
170. Q :
signing of the share purchase agreement?

During the transition period, prior to the signing of the share purchase agreement, I
created a team to prepare a statement of Galleon's outstanding accounts which we
intended to include as part of the annexes of the share purchase agreement. Another
team with representatives from both parties, i.e., the former stockholders of Galleon
  A :
and NDC, had to be created for a smoother turn-over. In short, we did all that was
possible and required of us under the Memorandum of Agreement. We negotiated with
NDC in good faith for years but NDC kept stonewalling the execution of the share
purchase agreement.84 (Emphasis supplied)

On April 26, 1982, Antonio L. Carpio, NDC's General Manager,85 sent Ongpin a Memorandum,86 where
Carpio acknowledged reviewing Galleon's outstanding accounts submitted by Cuenca.87 This supports
Cuenca's statement that they submitted a statement of Galleon's outstanding accounts for NDC's
review, as per Ongpin's request, a fact not denied by NDC.

Upon receiving Galleon's outstanding accounts, NDC and Sta. Ines, Cuenca, Tinio, Cuenca Investment
and Universal Holdings should have initiated the execution of the share purchase agreement. However,
the share purchase agreement was never executed, through no fault of Galleon's stockholders.

In clause 4 of the Memorandum of Agreement, NDC as the buyer was to verify the warranty of the
Galleon shareholders that P46,740,755.00 was paid for Galleon's 46,740,755 common shares with par
value of P1.00 per share. The results of the verification would have determined the final purchase price
to be paid to the Galleon shareholders. Nonetheless, despite the verification still to be done, both
parties agreed to execute the share purchase agreement as soon as possible but not more than sixty
days from the signing of the Memorandum of Agreement.

We uphold the Court of Appeals' finding that the failure to execute the share purchase agreement was
brought about by NDC's delay in reviewing the financial accounts submitted by Galleon's stockholders.
The Memorandum of Agreement was executed on August 10, 1981, giving the parties no more than
sixty days or up to October 9, 1981, to prepare and sign the share purchase agreement. However, it was
only on April 26, 1982, or more than eight months after the Memorandum of Agreement was signed, did
NDC's General Director submit his recommendation on Galleon's outstanding account. Even then, there
was no clear intention to execute a share purchase agreement as compliance with the Memorandum of
Agreement. Article 1186 of the Civil Code is categorical that a "condition shall be deemed fulfilled when
the obligor voluntarily prevents its fulfilment." Considering NDC's delay, the execution of the share
purchase agreement should be considered fulfilled with NDC as the new owner of 100% of Galleon's
shares of stocks.
The due execution of the share purchase agreement is further bolstered by Article 1198(4) of the Civil
Code, which states that the debtor loses the right to make use of the period when a condition is
violated, making the obligation immediately demandable:

Article 1198. The debtor shall lose every right to make use of the period:

(1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or
security for the debt;

(2) When he does not furnish to the creditor the guaranties or securities which he has promised;

(3) When by his own acts he has impaired said guaranties or securities after their establishment, and
when through a fortuitous event they disappear, unless he immediately gives new ones equally
satisfactory;

(4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the
period;

(5) When the debtor attempts to abscond. (Emphasis supplied)

Well-settled is the rule that findings of fact made by a trial court and the Court of Appeals are accorded
the highest degree of respect by this Court, and, absent a clear disregard of the evidence before it that
can otherwise affect the results of the case, those findings should not be ignored.88

II

The Regional Trial Court found that the advances made by respondents in Galleon's behalf covered
legitimate expenses in the ordinary course of business,89 making NDC liable under clause 9 of the
Memorandum of Agreement, which states:

9. Valid and duly authorized liabilities of GSC which are the subject of a meritorious lawsuit, or which
have been arranged and guaranteed by Mr. Rodolfo M. Cuenca, may be considered by Buyer for priority
in the repayment of accounts, provided that, upon review, the Buyer shall determine these to be
legitimate and were validly incurred in the ordinary course of GSC's principal business.

NDC's liability for the advances made in Galleon's behalf was upheld by the Court of Appeals, which held
that the advances made were valid and authorized liabilities incurred by Galleon in the course of its
business, thus:

In the instant case, the advances being claimed by [respondents] are in the nature of guarantee fees in
consideration for the personal undertakings of the [respondents] to secure the potential liabilities of
defendant-appellant DBP in favor of defendant Galleon's foreign creditors, advances to cover payments
of interest, security and management fees arising out of a mortgage contract, charter line payments,
bare boat hire payments, fuel and ship franchise payments, salaries and wages and advertising
expenses[.]90

Ordinary and necessary business expenses are those that are "directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of a profession[.]"91

In Carpio's Memorandum to Ongpin dated April 26, 1982, he recommended that the guarantee fees
being claimed by Galleon's stockholders should not be paid. Carpio also questioned the P1,400,000.00
interest being charged by Sta. Ines from the ]P6,650,000.00 cash advances it made in Galleon's behalf.
Carpio likewise questioned the charge of P600,000.00 being claimed as Galleon's share for the
Construction Development Corporation of the Philippine’s basketball team with the Philippine
Basketball Association.92

We see no reason to disturb the findings of fact made by the trial court and the Court of Appeals
considering that the same are duly supported by substantial evidence.

III

Novation is a mode of extinguishing an obligation by "[c]hanging [its] object or principal conditions[,]

[substituting the person of the debtor [or] [s]ubrogating a third person in the rights of the
creditor."93 While novation, "which consists in substituting a new debtor in the place of the original one
may be made even without the knowledge or against the will of the latter, [it must be with] the consent
of the creditor."94

Testate Estate of Mota v. Serra95 instructs that for novation to have legal effect, the creditor must
expressly consent to the substitution of the new debtor:

It should be noted that in order to give novation its legal effect, the law requires that the creditor should
consent to the substitution of a new debtor. This consent must be given expressly for the reason that,
since novation extinguishes the personality of the first debtor who is to be substituted by new one, it
implies on the part of the creditor a waiver of the right that he had before the novation, which waiver
must be express under the principle that  renuntiatio non præsumitur, recognized by the law in declaring
that a waiver of right may not be performed unless the will to waive is indisputably shown by him who
holds the right.96 (Emphasis supplied)

The Court of Appeals erred when it ruled that DBP was privy to the Memorandum of Agreement since
Ongpin was concurrently Governor of DBP and chairman of NDC Board of Directors at the time the
Memorandum of Agreement was signed.97

The general rule is that, "[i]n the absence of an authority from the board of directors, no person, not
even the officers of the corporation, can validly bind the corporation."98 A corporation is a juridical
person, separate and distinct from its stockholders and members, having "powers, attributes and
properties expressly authorized by law or incident to its existence."99

Section 23100 of the Corporation Code provides that "the corporate powers of all corporations . . . shall
be exercised, all business conducted and all property of such corporations [shall] be controlled and held
by the board of directors[.]"

People's Aircargo and Warehousing Co. Inc. v. Court of Appeals 101 explains that under Section 23 of the
Corporation Code, the power and responsibility to bind a corporation can be delegated to its officers,
committees, or agents. Such delegated authority is derived from law, corporate bylaws, or authorization
from the board:

Under this provision, the power and the responsibility to decide whether the corporation should enter
into a contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However, just as a natural person may authorize
another to do certain acts for and on his behalf, the board of directors may validly delegate some of its
functions and powers to officers, committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of business,  viz.:

"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."102 (Emphasis supplied)

Aside from Ongpin being the concurrent head of DBP and NDC at the time the Memorandum of
Agreement was executed, there was no proof presented that Ongpin was duly authorized by the DBP to
give consent to the substitution by NDC as a co-guarantor of Galleon's debts. Ongpin is not DBP,
therefore, it is wrong to assume that DBP impliedly gave its consent to the substitution simply by virtue
of the personality of its Governor.

Novation is never presumed. The animus novandi, whether partial or total, "must appear by express
agreement of the parties, or by their acts which are too clear and unequivocal to be mistaken."103

There was no such  animus novandi in the case at bar between DBP and respondents, thus, respondents
have not been discharged as Galleon's co-guarantors under the Deed of Undertaking and they remain
liable to DBP.

IV

On the issue of attorney's fees and moral and exemplary damages awarded to Sta. Ines, Cuenca, Tinio,
Cuenca Investment, and Universal Holdings, the Court of Appeals upheld the findings of the Regional
Trial Court for being just, reasonable, and supported by the evidence on record.104

We see no reason to disturb the findings of the lower courts.

However, on the issue of compensatory interest as damages, where the Regional Trial Court imposed an
interest rate of six percent (6%) per annum on the advances made and the payment due for the shares
of stock,105 the Court of Appeals modified the Regional Trial Court's ruling insofar as the interest rate to
be imposed was concerned.106 The Court of Appeals ruled that the advances made by Sta. Ines, Cuenca,
Tinio, Cuenca Investment, and Universal Holdings and the payment due them for the Galleon shares of
stocks were loans or forbearances of money that should earn interest of 12% from the date the case was
filed.107 Furthermore, the Court of Appeals held that these amounts should likewise earn an additional
12% interest per annum from finality until its satisfaction.108

Estores v. Spouses Supangan109 defined forbearance as an arrangement other than a loan where a

person agrees to the temporary use of his money, goods, or credits subject to the fulfilment of certain
conditions.110

In this case, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings advanced money in
Galleon's favor and agreed to turn over management and control of Galleon to NDC even before
receiving payment for their shares of stocks. They were deprived of the use of their money in both cases
for the periods pending fulfillment of the agreed conditions. When those conditions were not met, they
became entitled not only to the return of their advances and payment of their shares of stocks, but also
to the compensation for the use of their money and property. The unwarranted withholding of the
money, which rightfully pertains to Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings,
amounts to forbearance of money.

Sunga-Chan v. Court of Appeals,111 citing Eastern Shipping Lines, Inc. v. Court of Appeals,112 reiterated the

rule on application of interest:

Eastern Shipping Lines, Inc.  synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans
or forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance
of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general," with the application of both rates reckoned "from
the time the complaint was filed until the [adjudged] amount is fully paid." In either instance, the
reckoning period for the commencement of the running of the legal interest shall be subject to the
condition "that the courts are vested with discretion, depending on the equities of each case, on the
award of interest."

Otherwise formulated, the norm to be followed in the future on the rates and application thereof is:

I. When an obligation, regardless of its source, is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:chanRoblesvirtualLawlibrary

1. When the obligation breached 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.

...

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.113 (Emphasis supplied, citations omitted)

On May 16, 2013, the Monetary Board of the Bangko Sentral ng Pilipinas issued Resolution No. 796,
which revised the interest rate to be imposed for the loan or forbearance of any money, goods, or
credits. This was implemented by Bangko Sentral ng Pilipinas Circular No. 799,114 Series of 2013, which
reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section
2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six
percent (6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are
hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

Nacar v. Gallery Frames, et al.115 then modified the guidelines laid down in  Eastern Shipping Lines  to
embody Bangko Sentral ng Pilipinas Circular No. 799, thus:

I. When an obligation, regardless of its source,  i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6%  per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.116

Applying these guidelines, the Court of Appeals' ruling must be modified to reflect the ruling in Nacar.
The award of the advances made by Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings
in Galleon's favor and payment for their shares of stocks in Galleon shall earn an interest rate of 12% per
annum from the date of filing of this case on April 22, 1985117 until June 30, 2013. After June 30, 2013,
these amounts shall earn interest at six percent (6%) per annum until the Decision becomes final and
executory. An interest of six percent (6%) per annum shall be imposed on such amounts from the finality
of the Decision until its satisfaction.

Finally, DBP's claims for damages are denied since it failed to support its claims of malicious prosecution
and a deliberate act of Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings to cause loss
or injury to DBP.

WHEREFORE, the March 24, 2010 Decision and July 21, 2010 Resolution of the Court of Appeals in CA-
G.R. CV No. 85385 are AFFIRMED with the following MODIFICATIONS:

(1) Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment
Corporation, Universal Holdings Corporation, and the Philippine National Construction Corporation are
declared LIABLE to the National Development Corporation, the Development Bank of the Philippines,
and the Asset Privatization Trust under the deed of undertaking, pledge, mortgages, and other accessory
contracts among the parties; and

(2) The award of the advances made by Sta. Ines Melale Forest Products Corporation, Rodolfo M.
Cuenca, Manuel L. Tinio, Cuenca Investment Corporation, and Universal Holdings Corporation in
Galleon's favour, as well as the award of the payment for their shares of stocks in Galleon, shall earn an
interest rate of 12% per annum from the date of the filing of this case on April 22, 1985 until June 30,
2013, after which, they shall earn interest at the rate of 6% per annum until the Decision becomes final
and executory.

These amounts shall earn interest at the rate of 6% per annum from the finality of this Decision until its
satisfaction.

SO ORDERED.

G.R. No. 184092, February 22, 2017

AQUILINA B. GRANADA, CARLOS B. BAUTISTA, AND FELIPE PANCHO, Petitioners, v. PEOPLE OF THE

PHILIPPINES, Respondent.

G.R. No. 186084

VENANCIO R. NAVA, Petitioner, v. THE HONORABLE JUSTICES MA. CRISTINA G. CORTEZ-ESTRADA,

ROLAND B. JURADO, AND TERESITA V. DIAZ-BALDOS, AS MEMBERS OF THE SANDIGANBAYAN'S
5TH DIVISION, AND THE PEOPLE OF THE PHILIPPINES, Respondents.
G.R. No. 186272

JESUSA DELA CRUZ, Petitioner, v. PEOPLE OF THE PHILIPPINES, Respondent.

G.R. No. 186488

AQUILINA B. GRANADA, Petitioner, v. PEOPLE OF THE PHILIPPINES, Respondent.

G.R. No. 186570

SUSANA B. CABAHUG, Petitioner, v. PEOPLE OF THE PHILIPPINES AND SANDIGANBAYAN, Respondents.

DECISION

LEONEN, J.:

The Commission on Audit is the guardian of public funds with the mandate to review and audit public
spending.1 The Court generally sustains the decisions of administrative authorities like the Commission
on Audit in recognition of the doctrine of separation of powers and their presumed knowledge and
expertise of the laws they have been tasked to uphold.2

This resolves the consolidated Petitions for Review on Certiorari and Petition for Certiorari, which assail
the Decision3 dated August 1, 2008 and the Resolution4 dated January 12, 2009 of the Sandiganbayan in
Criminal Case No. 23459, finding petitioners Venancio R. Nava (Nava), Susana B. Cabahug (Cabahug),
Aquilina B. Granada (Granada), Carlos Bautista (Bautista), Felipe Pancho (Pancho), and Jesusa Dela Cruz
(Dela Cruz) guilty of violation of Section 3(g) of Republic Act No. 3019, otherwise known as the Anti-Graft
and Corrupt Practices Act.5

On November 5, 1993, Teresita C. Lagmay (Lagmay), Eden Jane R. Intencion, and Mabini S. Reyes of the
Commission on Audit, Region XI, Davao City, submitted a Joint-Affidavit6 with an attached Special Audit
Report7 to the Commission on Audit Director, Region XI, Davao City.

The Special Audit Report disclosed that the various school forms and construction materials purchased
by the Department of Education, Culture and Sports, now Department of Education, Division Office of
Davao for the Elementary School Building Program were priced above the prevailing market prices,
leading to a loss of P613,755.36 due to overpricing.8 The auditors recommended the refund of the
excess amount, and the filing of a criminal or administrative action against the public officials who
participated in the transactions.9

On July 25, 1996, the Office of the Ombudsman, Mindanao, found that there was sufficient evidence to
indict several Department of Education, Culture and Sports officials for violating Section 3(g) and (e) of
Republic Act No. 3019.10 The dispositive of the Ombudsman Resolution11 reads:

WHEREFORE, finding sufficient evidence to hold that the offense of violation of Section 3 (g) and (e) of
RA 3019 and falsification have been committed and that the hereunder list of persons are probably
guilty thereof, let the following criminal Informations be filed with the following courts, namely:
A) Violation of Section 3 (g) of RA 3019 relative to the overpricing of school supplies and forms
with the Regional Trial Court of Davao City against:

1. Division Superintendent Luceria de Leon,

2. Bids and Awards Committee (BAC) Chairman Edilberto Madria,

3. Clerk and BAC Member Stephen Acosta,

4. Clerk III and BAC Member Timoteo Fulguerinas,

5. Fiscal Clerk II Lydia Cerdinia and

6. Supply Officer Felipe Pancho

B) Violation of Section 3 (g) of RA 3019 relative to the overpricing of construction materials with
the Sandiganbayan against:

1. DECS Regional Director VENANCIO NAVA (with salary [)],

2. DECS Assistant Director SUSANA CABAHUG,

3. DECS Regional Administrative Officer AQUILINA B. GRANADA,

4. DECS Finance Officer CARLOS BAUTISTA,

5. DECS Division Superintendent LUCERIA M. DE LEON,

6. DECS Division Administrative Officer EDILBERTO MADRIA,

7. DECS Supply Officer FELIPE PANCHO, and

8. GEOMICHE, Incorporated President JESUS A DELA CRUZ.

C) Violation of Section 3 (e) of RA 3019 relative to the full payment of undelivered desks with
the Regional Trial Court of Davao City against Division Superintendent Luceria de Leon,
Edilberto Madrias and Fernando Gaddi, Jr.;

D) Violation of Section 3 (e) of R.A. 3019 relative to the non-collection of liquidated damages
from Romars with the Regional Trial Court of Davao City against Division Superintendent
Luceria M. De Leon;

E) Falsification of public document relative to the falsified Inspection Report with the Regional
Trial Court of Davao City against Administrative Officer Edilberto Madria, Clerk Stephen
 Acosta and Clerk III Timoteo Fulguerinas the cases to prosecuted (sic) until their termination
by the Honorable Antonio V.A. Tan, City Prosecutor of Davao City except Violation of Section
3 (g) of RA 3019 which will have to be prosecuted by the Honorable Leonardo P. Tamayo,
Special Prosecutor.

FINDING insufficient evidence to hold the other respondents liable for the charge, let the instant case
against them be dismissed.

SO RESOLVED.12

Petitioners Nava, Cabahug, Granada, and Dela Cruz were subsequently charged with Violation of Section
3(g) of Republic Act No. 3019 in an Information13 filed on July 25, 1996. The accusatory portion of the
Information reads:chanRoblesvirtualLawlibrary

That on or during the period comprising the calendar year 1991, in the City of Davao, Philippines and
within the jurisdiction of this Honorable Court, the accused VENANCIO NAVA, SUSANA B. CABAHUG,
AQUILINA B. GRANADA, CARLOS BAUTISTA, LUCERIA M. DE LEON, EDILBERTO MADRIA, FELIPE PANCHO,
all public officers being then the Regional Director with salary grade of 27, Assistant Regional Director,
Administrative Officer, Finance Officer, Division Superintendent, Administrative Officer, Supply Officer,
respectively, of the Department of Education, Culture and Sports, Region XI, while in the performance of
their duties, committing the offense in relation to their office, taking advantage of their official positions,
conspiring, confederating with each other, and with Geomiche Incorporated President JESUSA DELA
CRUZ, to wit: 1. DECS Regional Director VENANCIO NAVA approved the disbursement voucher, purchase
order and invitation to bid and signed the checks for payment; 2. DECS Assistant Director SUSANA
CABAHUG approved the disbursement voucher and the purchase order for and in behalf of Regional
Director Nava; 3. DECS Regional Administrative Officer AQUILINA B. GRANADA signed two different sets
of purchase order with exactly the same contents and the abstract of price quotations; 4. DECS Finance
Officer CARLOS BAUTISTA signed Abstract of Quotations as canvassing member; 5. DECS Division
Superintendent LUCERIA M. DE LEON approved the disbursement voucher, signed the checks,
recommended the approval of two different sets of purchase order, directed the preparation of the
voucher and as (sic) signed the Abstract of Quotations as Canvassing member; 6. DECS Division
Administrative Officer EDILBERTO MADRIA signed the checks and the abstract of quotations and
canvass; 7. DECS Supply Officer FELIPE PANCHO directed the preparation of the disbursement voucher;
and 8. GEOMICHE, Incorporated President JESUSA DELA CRUZ supplied the aforementioned construction
materials despite knowledge that the same were overpriced, which acts though seemingly separate and
distinct yet parts of a grand conspiratorial design to defraud the government, did then and there,
wilfully, unlawfully, criminally, purchase in behalf of the DECS Division Office of Davao City, form (sic)
Geomiche Incorporated represented [by] Jesusa dela Cruz[,] construction materials at overpriced costs
ranging from 6.09% to 695.45% thus enter into a contract grossly and manifestly disadvantageous to the
government for it left the DECS short-changed by a hefty sum of P512,967.69 - the total amount of the
overprice.

CONTRARY TO LAW.14
On March 3, 1997, the Sandiganbayan issued a hold departure order against petitioners and the other
accused.15

Petitioners entered separate pleas of not guilty during their respective arraignments.16

On October 13, 1999, the parties admitted the following stipulations of facts and issues during pre-
trial:17

1. That all the accused, except Cabahug and Pancho, admit their official positions as mentioned in the
Information during the time relevant to this case. However, accused dela Cruz, who is not a public
officer, admits her personal circumstances as mentioned in the information;

2. That accused Venancio Nava was not the Chairman nor a member of the Pre-Qualification Bids and
Awards Committee (PBAC) at the time relevant to this case;

....

ISSUE

1. Whether or not the transactions entered into by the accused public officials with the accused supplier
for the purchase of construction materials and supplies in the amount of P2,072,318.25 were
unreasonably overpriced, thus, causing undue injury to the government.18

Luceria De Leon (De Leon) died before final judgment was handed down, thus, the Sandiganbayan
granted the motion to dismiss filed by her counsel.19

The prosecution presented the following witnesses: Araceli P. Geli (Geli), State Auditor for the
Department of Education, Culture and Sports Division Office, and Lagmay, State Auditor III for the
Commission on Audit.20

Geli was the state auditor stationed at Department of Education, Culture and Sports Division Office,
Davao City. Part of her duty as state auditor was to review and audit the transactions of the Division
Office.21

On March 6, 1992, Geli submitted her annual report22 to the Commission on Audit where she disclosed
the overpricing committed in the Elementary School Building Program.23 Geli recommended the
institution of the proper action against all Department of Education, Culture and Sports officials involved
in the transaction, and the restitution of the overpricing in the amount of P512,967.89.24

Geli testified that she re-canvassed the price of each item ordered by the Division Office after she was
informed that there was no public bidding undertaken prior to the purchase.25 Geli stressed that only
Director Venancio Nava, as the approving officer, signed the invitation to bid and that the invitation to
bid had no signature or even initials of the members of the Prequalification, Bids and Awards
Committee. After her re-canvass, Geli computed an excess payment of P512,967.69.26
Lagmay testified that she headed a special audit team sometime in 1992, pursuant to the August 5, 1992
Commission on Audit Assignment Order No. 92-2113 issued by Commission on Audit Regional Office No.
XI.27

The audit covered the period of January 1, 1991 to August 31, 1992, with the special audit team
examining the purchases of supplies and materials using the Maintenance and Operating Expenses
Funds and the purchase of materials for the Elementary School Building Project and grader's desks.
Lagmay testified that the special audit was prompted by Geli's findings.28

Lagmay identified the disbursement vouchers made to Geomiche Incorporated (Geomiche), a Manila-
based supplier,29 and the purchase orders that the special audit team examined during the audit. She
testified that the audited transactions required public bidding but the documents submitted to them for
audit did not show any indication that public bidding was conducted.30

The defense thereafter presented petitioners and the other accused as witnesses.

Nava was the Department of Education, Culture and Sports Regional Director for Davao City, Region XI
from March 12, 1990 to August 1, 1993. He was transferred to Department of Education, Culture and
Sports Region VIII, Eastern Visayas, and then to Region I. He was Regional Director of Region II when he
retired in 2000.31

Nava testified that then Secretary of Education Isidro Carino ordered that the construction of
elementary school buildings in Davao City should be prioritized. The Division Office and Regional Office
thus agreed to expedite the project and create a Prequalification, Bids and Awards Committee
(Committee) for its joint implementation.32

Nava admitted signing the invitations to bid but he asserted that the quotation of construction materials
were not yet indicated when he signed the invitations to bid.33 He testified that the abstract of bids was
attached to the invitations to bid sent to him and that it was signed by the members of the Committee.
The abstract of bids was also approved by De Leon, the Schools Division Superintendent of Davao City.34

Nava likewise admitted signing the disbursement vouchers. However, he claimed that he signed them
only after De Leon certified that "the expenses [were] necessary, lawful[,] and incurred in her direct
supervision."35

Bautista testified that he worked in the Budget and Finance Division of the Department of Education,
Culture and Sports Region XII, Cotabato City as a finance officer.36

Bautista attested that in 1991, he became a member of the Committee.37 He narrated that the
Committee had to evaluate the quotations or the bids from the suppliers and then enter these bids in
the abstract of bids. The Committee would then recommend for approval the quotation from the lowest
bidder. He admitted that after he received the quotations from the suppliers, he no longer verified the
accuracy of the submitted quotations.38
Cabahug was the Department of Education, Culture and Sports Assistant Regional Director for Region XI
from April 1, 1991 to June 30, 1992. She was transferred to Cebu, Region VII for a few years before being
re-assigned to Region XI on September 8, 1994. On January 9, 1995, she was assigned as the Regional
Director of Region XI, and served in that capacity until her retirement on August 10, 2000.39

Cabahug acknowledged that in 1991, in her capacity as Assistant Regional Director, she signed eight (8)
purchase orders and one (1) disbursement voucher on behalf of Regional Director Nava, who was then
on official leave. Cabahug asserted that before she signed the purchase orders, Granada and De Leon
had already affixed their signatures on the purchase orders.40 Granada certified that the prices of the
material purchased were reasonable, while De Leon certified that the purchases were necessary, legal,
and made under her direct supervision.41 The Fiscal Clerk of the Davao City Division then signed the
disbursement voucher, certifying the availability of funds and that all the supporting documents were in
order.42

Granada testified that in 1991, she was the Department of Education, Culture and Sports Regional
Administrative Officer for Region XI. As the Regional Administrative Officer, Granada prepared
communications for the Regional Director's signature. Her other functions included acting as Chairman
of the Committee in the absence of the Assistant Regional Director. However, she said that she was only
a member, and not the chair, in the bidding conducted in 1991.43

Granada stated that in preparation for the purchase of materials for the construction of school buildings,
bidding was conducted in 1991. The invitation to bid was published in a newspaper and copies were
sent to the different construction and hardware shops in Davao City.44 Interested parties then confirmed
their intention to bid and the actual bidding was conducted in the Department of Education, Culture and
Sports Regional Office.45 However, Granada admitted that she could no longer recall the number of
suppliers who participated.46

After evaluating the bids, Granada testified that the Committee awarded the project to petitioner Dela
Cruz of Geomiche, the bidder with the lowest submitted quotations.47

Pancho testified that in 1991, he was employed as a supply officer for the Department of Education,
Culture and Sports.48

Pancho attested that he was directed by De Leon to prepare payment vouchers for the deliveries made
by Geomiche.49 He stated that he did not consider going against the directives of De Leon, who was his
superior, because he did not think that there was anything irregular with her instructions.50

Counsel for Dela Cruz manifested that he would not be presenting testimonial evidence for Dela Cruz.51

On August 1, 2008, the Sandiganbayan ruled that the prosecution was able to prove the guilt of
petitioners. The Sandiganbayan also ruled that there was a concerted effort by the petitioners to
facilitate the release of funds and make it appear that a public bidding took place.52 The fallo of the
assailed Sandiganbayan Decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby rendered convicting accused VENANCIO R.
NAVA, SUSANA B. CABAHUG, AQUILINA B. GRANADA, CARLOS BAUTISTA, EDILBERTO MADRIA, FELIPE
PANCHO and JESUSA DELA CRUZ of the crime of violation of the Anti-graft and Corrupt Practices Act
particularly Section 3(g) thereof, or entering on behalf of government in a contract or transaction
manifestly and grossly disadvantageous to the same whether or not the public officer profited or did not
profit thereby.

In the absence of any aggravating or mitigating circumstances, applying the Indeterminate Sentence
Law, accused are hereby sentenced to suffer the penalty of imprisonment of six (6) years, and one (1)
day as minimum to twelve (12) years and one (1) day as maximum and to suffer perpetual
disqualification from public office. The accused are further ordered to pay, jointly and severally, the
government the amount of P512,967.69, which it suffered in view of the overpricing in the purchases
committed by them.

SO ORDERED.53 (Emphasis in the original)

On January 12, 2009, the Sandiganbayan denied54 the motions for reconsideration filed by Nava,
Cabahug, Granada, and Dela Cruz.

Nava filed a petition for certiorari,55 while Cabahug,56 Granada57 and Dela Cruz58 filed their respective

petitions for review of the Sandiganbayan Decision and Resolution.

Petitioner Nava asserts that his Petition for Certiorari under Rule 65 was filed in lieu of an appeal under
Rule 45 because the latter, being only limited to questions of law, was insufficient.59 Nava claims that the
assailed Decision and Resolution "were based on a gross misapprehension of facts arising from
the fraudulent conduct of the audit[.]"60 Furthermore, he asseverates that the Sandiganbayan findings
were not supported by evidence and were in fact, even contradicted by evidence.61

Nava posits that the Special Audit Report was baseless as it relied heavily on the personal and
unauthorized post-canvass conducted by Geli.62 Nava claims that Geli's post-canvass was full of
irregularities because it:chanRoblesvirtualLawlibrary

(i) intentionally did not detail and compare the brands to be purchased, (ii) failed to take into
consideration the level of inventory of the establishments, (iii) failed to get the name and designations,
as well as the sworn statements, of the persons who supposedly submitted the quotations, (iv) failed to
consider that the establishments did not intend to deliver the items quoted for the price quoted, and (v)
failed to consider the terms of the purchases made by the Division Office.63

Lastly, Nava asserts that the Decision erred in applying the presumption of regularity to Geli's canvass
when Geli did not follow the established Commission on Audit procedures.64

The Office of the Special Prosecutor states that Nava erred in filing a special civil action pursuant to Rule
65 when the proper remedy should have been an appeal under Rule 45.65 The Office of the Special
Prosecutor maintains that Nava's Petition involves questions of fact, which should not be allowed in a
petition for certiorari.66 It also posits that the Petition cannot be considered as a petition for review, as
the Court's jurisdiction in a petition for review is limited to errors of law.67
Furthermore, the Office of the Special Prosecutor argues that the Sandiganbayan did not commit grave
abuse of discretion in considering the finding of irregularities in the transaction, even if the pre-trial was
limited to the overpricing of the construction materials. The collateral matter of the irregularities in the
transaction is intimately related to the overpricing of the construction materials purchased.68 The Office
of the Special Prosecutor also argues that in the absence of bad faith or malice, the canvass perfonned
by the auditors should be given the benefit of the doubt due to the presumption of regularity accorded
to a public official.69

Finally, the Office of the Special Prosecutor asserts that the finding of conspiracy against Nava and the
other petitioners was sufficiently established.70

Petitioner Cabahug claims that she merely signed the disbursement vouchers and purchase orders
because her immediate superior, petitioner Nava, was absent and she had to act on his behalf so that
construction would not be stalled.71

Cabahug likewise claims that the prosecution failed to prove her participation in the supposed
conspiracy. Her participation was ministerial in nature since she had to sign on behalf of her immediate
supervisor in his absence. She also did not participate in the execution and consummation of the
contract, and she had no knowledge of the defects of the contract. Hence, she asserts that conspiracy
has not been proven beyond reasonable doubt against her.72

Cabahug maintains that the questioned documents "already passed [through] several layers of other
signatories before it reached her."73 She insists that she relied on the presumption of regularity in the
acts of her subordinates.74

The Office of the Special Prosecutor posits that Cabahug cannot claim good faith when she signed on
Nava's behalf because she was fully aware of the irregularities of the documents when she signed them.
The Office of the Special Prosecutor also asserts that the Arias doctrine cannot be applied to Cabahug,
and that her participation in the conspiracy was duly proven.75

Petitioner Granada claims that Geli's post-canvass should not have been considered by the
Sandiganbayan since the participants in the post-canvass were not the actual bidders in the previously
held bidding for the construction materials and supplies.76 Furthermore, Granada maintains that Geli's
canvassed prices, which were lower than Geomiche's, were not absolute proof that there was gross
disadvantage to the government.77

The Office of the Solicitor General contends that it was sufficiently proven that no public bidding was
conducted, leading to a violation of Section 3(g) of Republic Act No. 3019.78 The Office of the Solicitor
General also contends that the Sandiganbayan did not err in finding that Granada and her other co-
accused conspired with each other.79

The Office of the Special Prosecutor states that the prosecution sufficiently proved that the transactions
entered into by the petitioners caused undue injury to the government.80 The Office of the Special
Prosecutor further states that Granada's guilt was proven beyond reasonable doubt, and that conspiracy
was evident, making all the accused liable as principals.81

Petitioner Dela Cruz asserts that a strict construction of Section 3(g) of Republic Act No. 3019
"covers only public officers who enter into a proscribed contract or transaction 'on behalf of the
government'. It does not impose any penalty upon a private party - natural or juridical - with whom the
public officer contracts."82

Dela Cruz further asserts that even if she acted as Geomiche's president, as a corporate officer, she
cannot be held personally liable for the acts of the corporation.83 She maintains that while the
Information alleged conspiracy, the assailed Decision was silent on her conspiracy with the other
petitioners.84

Dela Cruz claims that the Sandiganbayan's finding of irregularities or deficiencies are in excess of its
jurisdiction for going beyond the issue formulated in the pre-trial order.85 She also avers that the finding
of excessive amounts by the state auditors was without factual or legal basis.86

The Office of the Special Prosecutor maintains that the finding of conspiracy against Dela Cruz and her
other co-accused makes her liable for violating Section 3(g) of Republic Act No. 3019, even if she was not
a public officer.87

We resolve the following issues:

First, whether Nava's Petition for Review on Certiorari under Rule 65 was the proper remedy to take;

Second, whether the presumption of regularity applies with the State Auditor's post-canvass of similar
items purchased by the Department of Education, Culture and Sports from Geomiche; and

Finally, whether conspiracy was sufficiently proven by the prosecution.

The petitions are devoid of merit.

The Office of the Special Prosecutor claims that Nava erred in filing a special civil action pursuant to Rule
65 when the proper remedy should have been an appeal under Rule 45.88 The Office of the Special
Prosecutor states that Nava's Petition asks for a re-examination of the evidence presented, which is not
proper in a petition for certiorari.89

The Office of the Special Prosecutor also posits that Nava's Petition cannot be considered as a petition
for review, as the Court's jurisdiction in a petition for review is limited to errors of law.90 It then points
out that the issues raised in Nava's Petition are primarily questions of fact, but "with [an] allegation that
there was grave abuse of discretion amounting to lack or excess of jurisdiction."91
Nava insists that his Petition for Certiorari under Rule 65 was not a substitute for a lost appeal since it
was timely filed. Nava further insists that while the remedy of appeal under Rule 45 was available to
him, the same was insufficient as it was limited to questions of law. Nava claims that the assailed
Decision and Resolution were based on a fraudulent audit, surmises, and speculations.92

Section 1 of Rule 45 of the Rules of Court provides the mode of appeal from judgments, final orders, or
resolutions of the Sandiganbayan:chanRoblesvirtualLawlibrary

SECTION 1. Filing of Petition with Supreme Court. - A party desiring to appeal by certiorari from a
judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial
Court or other courts whenever authorized by law, may file with the Supreme Court a verified petition
for review on certiorari. The petition shall raise only questions of law which must be distinctly set forth.

Icdang v. Sandiganbayan, et al.93 emphasized that the proper remedy to take from a judgment of
conviction by the Sandiganbayan is a petition for review on certiorari under Rule
45:chanRoblesvirtualLawlibrary

At the outset it must be emphasized that the special civil action of certiorari is not the proper remedy to
challenge a judgment conviction rendered by the [Sandiganbayan]. Petitioner should have filed a
petition for review on certiorari under Rule 45.

Pursuant to Section 7 of Presidential Decree No. 1606, as amended by Republic Act No. 8249, decisions
and final orders of the Sandiganbayan shall be appealable to the Supreme Court by petition for review
on certiorari raising pure questions of law in accordance with Rule 45 of the Rules of Court. Section 1 of
Rule 45 of the Rules of Court provides that "[a] party desiring to appeal by certiorari from a judgment,
final order or resolution of the . . . Sandiganbayan . . . whenever authorized by law, may file with the
Supreme Court a verified petition for review on certiorari. The petition . . . shall raise only questions of
law, which must be distinctly set forth." Section 2 of Rule 45 likewise provides that the petition should
be filed within the fifteen-day period from notice of the judgment or final order or resolution, or of the
denial of petitioner's motion for reconsideration filed in due time after notice of
judgment.94 (Underscoring in the original, citation omitted)

The assailed Decision and Resolution convicted Nava and the other petitioners of the crime of entering
into a manifestly and grossly disadvantageous contract or transaction on behalf of the government.
Thus, the proper remedy to take is a petition for review on certiorari under Rule 45.

Nonetheless, inasmuch as Nava's Petition was filed within the 15-day period provided under Section 2 of
Rule 45,95 this Court treated it as an appeal and did not dismiss it outright. While procedural rules should
be treated with utmost respect since they serve to facilitate the adjudication of cases in support of the
speedy disposition of cases mandated by the Constitution, "[a] liberal interpretation . . . of the rules of
procedure can be resorted to only in proper cases and under justifiable causes and circumstances."96

II

The Commission on Audit is the guardian of public funds and the Constitution has vested it with 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 [of] the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned or controlled corporations
with original charters."97

The Constitution likewise empowered the Commission on Audit with the:chanRoblesvirtualLawlibrary

exclusive authority . . . 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.98

The Commission on Audit's exercise of its general audit power is part of the checks and balances system
inherent in our form of government.99

Petitioner Nava insists that this Court's ruling in Arriola v. Commission on Audit,100 is applicable in the
case at bar.101 In Arriola, this Court ruled that in order to accord due process to the subjects of an audit
by the Commission on Audit, there should be a policy of transparency where the subjects of the audit
could access and review the documents used for the canvass.102Arriola also prompted the Commission
on Audit to issue Memorandum Order No. 97-102 dated March 31, 1997, which states:103

3.2 To firm up the findings to a reliable degree of certainty, initial findings of overpricing based on
market price indicators mentioned in pa. 2.1 above have to be supported with canvass sheet and/or
price quotations indicating:

a) the identities of the suppliers or sellers;

b) the availability of stock sufficient in quantity to meet the requirements of the procuring agency;

c) the specifications of the items which should match those involved in the finding of overpricing;

d) the purchase/contract terms and conditions which should be the same as those of the questioned
transaction.104

Unfortunately for petitioners, neither Arriola nor the Commission on Audit Memorandum Order No. 97-
102 can be applied retroactively.105

The questioned transactions and the delivery of construction materials happened sometime in 1991.
Geli then conducted her post-audit, and submitted her Memorandum106 and Report on the Annual
Operations Audit107 on March 6, 1992. Thus, the requirements of canvass sheets or price quotations
listed down in the Commission on Audit's Memorandum Order No. 97-102, which was issued on March
31, 1997, cannot be applied to Geli's 1992 audit.

More importantly, the Sandiganbayan found that the contract for the purchase of construction materials
and supplies from Geomiche for the construction of school buildings did not undergo public bidding.108

Petitioner Nava asserts that the Sandiganbayan erred in ruling on the issue of public bidding when the
same was not included in the Information. He argues that the only charge against him and the other
petitioners in the Information was whether they entered into a grossly and manifestly disadvantageous
contract to the government, and not whether public bidding was conducted.109

While it is true that the Information only charged petitioners with entering into a gross and manifestly
disadvantageous contract to the government, the Sandiganbayan's assailed Decision touched on the
issue of lack of public bidding as a circumstantial evidence in support of the accusation of overpricing.
The finding of overpricing was never determined simply because there was no public bidding. The
absence of public bidding only underscored the irregularity of the transactions. The various audits
conducted confirmed the fact of overpricing as follows:chanRoblesvirtualLawlibrary

To make things worse, it was also indubitably established that aside from the fact that there was no
public bidding conducted, the accused overpriced the construction supplies and materials in the amount
of P512,967.69, to the disadvantage and prejudice of the government (Exhibits "C", "C-1", "D", "D-1",
"D-2", "D-3", "D-3-a").

In the case at bar, there being no public bidding conducted, the government was deprived of setting the
standard or parameter upon which to lay the basis of what may be considered just or reasonable prices
of the purchases made from the lone supplier. In the absence of such indispensable basis, the purchases
made from Geomiche Incorporated are considered grossly or manifestly disadvantageous to the
government. Hence, the manifest or gross disadvantage complained of is not purely speculative or that
it has no basis in fact and in law because the same have been quantified by the overpriced purchases.
The prosecution, through testimonial and documentary evidence, was able to substantiate with
concrete evidence of what it claimed to be grossly or manifestly disadvantageous to the government.110

Petitioners fault Geli for conducting a purportedly personal and unauthorized canvass when she sent out
invitations to bid to the other suppliers of construction materials in Davao City.

We do not agree.

As an auditor of the Commission on Audit, Geli had the same mandate to audit all government agencies
and to be vigilant in safeguarding the proper use of the people's property,
thus:chanRoblesvirtualLawlibrary

[Pros. Calonge]: Will you kindly state briefly the basic or regular function of your job as State Auditor
2 stationed at DECS Division Office of Davao City?

[Geli]: My duties then as State Auditor among others was to examine, settle and audit the
regular accounts and transactions of the Division office.111

....

[Atty. But what you conducted, according to you, was a private canvass, was it not?
Fernandez]:
[Geli]: Yes, that was a canvass, sir.

Q: It was an informal canvass which you undertook on your own without any order or
directive from any superior officer, is it not?

A: No, sir, because we are covered by a particular circular which is COA Circular No. 76-
34 dated July 15, 1976.

Q: And what does that Circular provide?

A: It provides that in case of doubt as to the reasonableness of the price or prices of the
items purchased, the auditor shall canvass thereof.112

The Special Audit Report found that:chanRoblesvirtualLawlibrary

[d]uring the period of delivery, [Geli] made a canvass of prices of similar construction materials from
reputable suppliers/establishments in Davao City in order to determine the reasonableness of their
prices ... In the canvass conducted, the prices for each item were observed to have been excessive
ranging from 6.09% to 695.45% ... As a result, the government lost the amount of P512,967.69[.]113

Geli testified on the methodology she used in the re-canvass as follows:chanRoblesvirtualLawlibrary

[Pros. What formula did you adopt in arriving in the conclusion that there was overpricing in
Calonge]: this transaction?

[Geli]: The procedures, Your Honor, that I undertook is to re-canvass of the price of each and
every item ordered by the Division Office since I was told that there was no public
bidding conducted, as evidenced by the documents submitted like the disbursement
vouchers. First, the invitation to bid was only signed by Director Venancio Nava as the
approving officer; Second- there were no signatures or even initials by the members of
the PBAC which is the Prequalification Bid and Award Committee; Third- There is no
indication that there was participation by the resident auditor of the DECS Regional
Office or representative; and Fourth- As confirmed by the resident auditor herself from
the DECS Regional Office, she told me that indeed there was no public bidding conducted
as result of the re-canvass I made, I compared with the price list offered by the bidders
and, upon computation and the additional of the ten (10) percent tolerable allowance
granted by our Rules and Regulations, I came up with the total overpriced of
P512,967.69.

....

Q: Why did you conduct a personal canvass?

A: First, as I said, Your Honor the payment was to be made at the DECS Division Office;
Secondly- I doubted the reasonableness of the price offered by the winning bidder.114
In the absence of malice or bad faith, the canvass and audit performed by the auditors, which were
substantiated by evidence, should be upheld in recognition of their technical expertise. This finds
support in Lumayna, et al. v. Commission on Audit,115 citing Ocampo v. Commission on Elections,116 which
states:chanRoblesvirtualLawlibrary

[I]t must be stressed that factual findings of administrative bodies charged with their specific field of
expertise, are afforded great weight by the courts, and in the absence of substantial showing that such
findings were made from an erroneous estimation of the evidence presented, they are conclusive, and
in the interest of stability of the governmental structure, should not be disturbed.117

Instead of finding fault, the vigilance and initiative of Geli should be commended. Our audit officers
should be expected to discharge their duties with zeal within the bounds of the law.

III

Conspiracy happens "when two or more persons come to an agreement concerning the commission of a
felony and decide to commit it."118 Furthermore, conspiracy does not have to be established by direct
evidence since it may be inferred from the conduct of the accused taken collectively.119 However, it is
necessary that a conspirator directly or indirectly contributes to the execution of the crime committed
through the performance of an overt act.120

The Sandiganbayan found that there was a common design among the petitioners to make it appear
that bidding took place to effect the release of funds for the purchase of overpriced construction
supplies and materials, thus:chanRoblesvirtualLawlibrary

The series of acts of the accused in signing all the documents to effect the release of the funds for the
purchase of construction supplies and materials spelled nothing but conspiracy. The signatures of all the
accused appearing in the documents indicate accused's common design in achieving their one goal to
the damage and prejudice of the government.

As indubitably proved by the prosecution, the direct interrelated participation of each of the accused
(Exhibit "N-1") were as follows[:] Venancio Nava approved the Invitation to Bids, Disbursement
Vouchers, Purchase Orders and signed the checks; Aquilina Granada signed two (2) different sets of
Purchase Orders, with the same contents and signed the Abstract of Quotation as Chairman; Susan
Cabahug approved a Disbursement Voucher and another set of Purchase Order for Director Nava; Carlos
Bautista signed the Abstract of Quotation/Canvass as a member; Luceria M. De Leon directed the
preparation of Disbursement Vouchers and approved the same, recommended the approval of two (2)
different sets of Purchase Orders, signed the Abstract of Quotation/Canvass as member and signed the
checks; Edilberto Madria signed the Abstract of Quotation/Canvass as member and signed the checks;
and Felipe Pancho directed the preparation of the Disbursement Vouchers. In these series of
interconnected acts of the public officers, accused Dela Cruz was the beneficiary.

Verily, where the acts of the accused collectively and individually demonstrate the existence of a
common design towards the accomplishment of the same unlawful purpose, conspiracy is evident, and
all the perpetrators will be liable as principals.121
The records show that the invitations to bid122 were only signed by Nava as the approving officer without
the signature or initials of the members of the Committee, or the participation of the resident
auditor.123 Furthermore, the abstract of quotations was not signed by all the Committee members, or
the representative of the Commission on Audit, as testified by State Auditor
Geli:chanRoblesvirtualLawlibrary

AJ NAZARIO:

Why did you say that there was no public bidding?

[Geli]

:Firstly, Your Honor, I was told by the resident auditor that there was no public bidding because in
the first place all biddings conducted by the Regional office then were witnessed by the resident
auditor or any representative.

AJ NAZARIO:

You came to the conclusion that there was no public bidding because the resident auditor told you?

Witness:

Yes, Your Honor. Secondly, the documents supporting the disbursement voucher do not indicate
that there was any public bidding conducted.

AJ NAZARIO:

What was wrong with the documents?

Witness:

First, it should be the PBAC who will initiate the calling of the public bidding. Second- there was no
publication in any newspaper or general circulation. Third, there was never a posting of the
invitations to bid and then all the members of the PBAC have no participation as indicated in the
Invitations to Bid as well as the Abstract of Quotations.

AJ NAZARIO:

This Invitation to Bid, which was according to you, you were told that there was no public bidding.
Under what circumstances, how was it told to you?

Witness:

It was only verbally communicated to me. Not only by the resident auditor but also the DECS
 Division office' officials and employees.

AJ NAZARIO:

How did these employees get involved, was it in the course of the performance of your functions
that this information was given to you?

Witness:

Yes, Your Honors.124

The purchase orders certified by Granada and approved by Nava, were found to be grossly inadequate
to substantiate the payments made through the disbursement vouchers approved by Nava and
Cabahug.125 The Special Audit Report126 submitted by State Auditor Lagmay
reads:chanRoblesvirtualLawlibrary

The first payment to G[e]omich[e], Inc. under Voucher No. 91-05-02-SB for P1,500,000.00 (Appendix 11)
was supported by purchase orders issued by the DECS Division Office (Appendix 9) with a total amount
of only P70,505.21. The second voucher amounting to P557,093.25 (Appendix 12) was supported by the
DECS Regional Office purchase orders for only P71,459.25 (Appendix 10) while the third voucher for
P15,225.00 (Appendix 13) had no purchase order attached. From these payments, it appears that the
amounts indicated/appearing in the purchase orders were less than the payments made, as tabulated
hereunder:

Voucher No. Amount PO attached Diff.  

91-05-02-SB P1,500,000.00 P70,505.21 P1,429,494.79  

91-07-114SB 557,093.25 71,459.25 485,634.00  

91-07-179SB 15,225.00 - 15,225.00  

  ----------------- --------------- -----------------------  

P2,072.318.25 P141.964.46 P1,930,353.79127  

      (Underscoring in the original)  

Clearly, conspiracy between the accused-petitioners was duly established as their collective and
individual acts demonstrated a common design, to award the contract to Geomiche without a public
bidding. Their actions then led to the purchase of overpriced construction materials to the disadvantage
of the government.

Petitioner Dela Cruz asserts that as a private individual, she cannot be held liable under Section 3(g) of
Republic Act No. 3019 because it only covers public officers who enter into a contract or transaction on
behalf of the government.128

Dela Cruz is mistaken.

Section 3(g) of Republic Act No. 3019 reads:chanRoblesvirtualLawlibrary

Section 3.  Corrupt practices of public officers. — In addition to acts or omissions of public officers
already penalized by existing law, the following shall constitute corrupt practices of any public officer
and are hereby declared to be unlawful:

....

(g) Entering, on behalf of the Government, into any contract or transaction manifestly and grossly
disadvantageous to the same, whether or not the public officer profited or will profit thereby.

The elements of this offense are as follows:chanRoblesvirtualLawlibrary

(1) that the accused is a public officer; (2) that he entered into a contract or transaction on behalf of the
government; and (3) that such contract or transaction is grossly and manifestly disadvantageous to the
government.129

Private persons acting in conspiracy with public officers may be indicted and if found guilty, be held
liable for the pertinent offenses under Section 3 of Republic Act No. 3019. This supports the "policy of
the anti-graft law to repress certain acts of public officers and private persons alike [which constitute]
graft or corrupt practices act or which may lead thereto."130

In Singian, Jr. v. Sandiganbanyan, et al.:131

For one to be successfully prosecuted under Section 3(g) of RA 3019, the following elements must be
proven: "1) the accused is a public officer; 2) the public officer entered into a contract or transaction on
behalf of the government; and 3) the contract or transaction was grossly and manifestly
disadvantageous to the government." However, private persons may likewise be charged with violation
of Section 3(g) of RA 3019 if they conspired with the public officer. Thus, "if there is an allegation of
conspiracy, a private person may be held liable together with the public officer, in consonance with the
avowed policy of the Anti-Graft and Corrupt Practices Act which is to repress certain acts of public
officers and private persons alike which may constitute graft or corrupt practices or which may lead
thereto."132 (Citations omitted)

The prosecution, through testimonial and documentary evidence, sufficiently proved the connivance
between the public officers, who entered into and facilitated the grossly disadvantageous transactions
on behalf of the government with Dela Cruz's Geomiche as the beneficiary. Undoubtedly, the collective
and individual acts of petitioners showed a common design of purchasing the overpriced construction
materials from Dela Cruz to the disadvantage of the government.

When the separate juridical personality of a corporation is used "to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons."133
The Sandiganbayan has proven beyond reasonable doubt that petitioners conspired with each other to
forego the required bidding process and to purchase grossly overpriced construction materials from
Geomiche. There is sufficient basis to pierce the corporate veil, and Dela Cruz, as Geomiche's president,
should be held equally liable as her co-conspirators.

WHEREFORE, premises considered, the Petitions are DISMISSED.

The assailed Decision dated August 1, 2008 and Resolution dated January 12, 2009 of the Sandiganbayan
are AFFIRMED in toto.

SO ORDERED.

G.R. No. 185530, April 18, 2018

MAKATI TUSCANY CONDOMINIUM CORPORATION, Petitioner, v. MULTI-REALTY DEVELOPMENT

CORPORATION, Respondent.

DECISION

LEONEN, J.:

Reformation of an instrument may be allowed if subsequent and contemporaneous acts of the parties
show that their true intention was not accurately reflected in the written instrument.

This resolves the Petition for Review on Certiorari1 filed by Makati Tuscany Condominium Corporation
(Makati Tuscany), assailing the April 28, 2008 Amended Decision2 and December 4, 2008 Resolution3 of
the Court of Appeals in CA-G.R. CV No. 44696.

In 1974, Multi-Realty Development Corporation (Multi-Realty) built Makati Tuscany, a 26-storey

condominium building located at the corner of Ayala Avenue and Fonda Street, Makati City.4

Makati Tuscany had a total of 160 units, with 156 ordinary units from the 2nd to the 25th floors and four
(4) penthouse units on the 26th floor.5 It also had 270 parking slots which were apportioned as follows:
one (1) parking slot for each ordinary unit; two (2) parking slots for each penthouse unit; and the
balance of 106 parking slots were allocated as common areas.6

On July 30, 1975, Multi-Realty, through its president Henry Sy, Sr., executed and signed Makati Tuscany's
Master Deed and Declaration of Restrictions (Master Deed),7 which was registered with the Register of
Deeds of Makati in 1977.8

Sometime in 1977, pursuant to Republic Act No. 4726, or the Condominium Act, Multi-Realty created
and incorporated Makati Tuscany Condominium Corporation (MATUSCO) to hold title over and manage
Makati Tuscany's common areas. That same year, Multi-Realty executed a Deed of Transfer of
ownership of Makati Tuscany's common areas to MATUSCO.9

On April 26, 1990, Multi-Realty filed a complaint for damages and/or reformation of instrument with
prayer for temporary restraining order and/or preliminary injunction against MATUSCO. This complaint
was docketed as Civil Case No. 90-1110 and raffled to Branch 59 of Makati Regional Trial Court.10

Multi-Realty alleged in its complaint that of the 106 parking slots designated in the Master Deed as part
of the common areas, only eight (8) slots were actually intended to be guest parking slots; thus, it
retained ownership of the remaining 98 parking slots.11

Multi-Realty claimed that its ownership over the 98 parking slots was mistakenly not reflected in the
Master Deed "since the documentation and the terms and conditions therein were all of first
impression,"12 considering that Makati Tuscany was one of the first condominium developments in the
Philippines.13

On October 29, 1993, the Regional Trial Court14 dismissed MultiRealty's complaint. It noted that Multi-
Realty itself prepared the Master Deed and Deed of Transfer; therefore, it was unlikely that it had
mistakenly included the 98 parking slots among the common areas transferred to MATUSCO. It also
emphasized that Multi-Realty's prayer for the reformation of the Master Deed could not be granted
absent proof that MATUSCO acted fraudulently or inequitably towards Multi-Realty. Finally, it ruled that
Multi-Realty was guilty of estoppel by deed.15 The fallo of its Decision read:

Premises considered, this case is dismissed. [MATUSCO's] counterclaim is likewise dismissed the same
not being compulsory and no filing fee having been paid. [Multi-Realty] is however ordered to pay
[MATUSCO's] attorney's fees in the amount of P50,000.00

Cost against plaintiff.

SO ORDERED.16

Both parties appealed the Regional Trial Court Decision to the Court of Appeals. On August 21, 2000, the
Court of Appeals17 dismissed both appeals on the ground of prescription.

In dismissing Multi-Realty's appeal, the Court of Appeals held that an action for reformation of an
instrument must be brought within 10 years from the execution of the contract. As to the dismissal of
MATUSCO's appeal, the Court of Appeals ruled that its claim was based on a personal right to collect a
sum of money, which had a prescriptive period of four (4) years, and not based on a real right, with a
prescriptive period of 30 years.18

The fallo of the Court of Appeals August 21, 2000 Decision read:

WHEREFORE, foregoing premises considered, no merit in fact and in law is hereby ORDERED DISMISSED,
and the judgment of the trial court is MODIFIED by deleting the award of attorney's fees not having
been justified but AFFIRMED as to its Order dismissing both the main complaint of [Multi-Realty] and the
counterclaim of [MATUSCO]. With costs against both parties.

SO ORDERED.19
Multi-Realty moved for reconsideration,20 but its motion was denied in the Court of Appeals January 18,
2001 Resolution.21 It then filed a petition for review22 before this Court.

On June 16, 2006, this Court in Multi-Realty Development Corporation v. The Makati Tuscany
Condominium Corporation23 granted Multi-Realty's petition, set aside the assailed Court of Appea]s
August 21, 2000 Decision, and directed the Court of Appeals to resolve Multi-Realty's appeal.

Multi-Realty Development Corporation ruled that the Court of Appeals should have resolved the appeal
on the merits instead of motu proprio resolving the issue of whether or not the action had already
prescribed, as the issue of prescription was never raised by the parties before the lower courts.24

Nonetheless, Multi-Realty Development Corporation held that even if prescription was raised as an

issue, the Court of Appeals still erred in dismissing the case because Multi-Realty's right to file an action
only accrued in 1989 when MATUSCO denied Multi-Realty's ownership of the 98 parking slots. The Court
of Appeals ruled that it was only then that Multi-Realty became aware of the error in the Master Deed,
thereafter seeking its reformation to reflect the true agreement of the parties. Thus, prescription had
not yet set in when Multi-Realty filed its complaint for reformation of instrument in 1990.25

The fallo in Multi-Realty Development Corporation read:

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals in CA-
G.R. CV No. 44696 is SET ASIDE. The Court of Appeals is directed to resolve [Multi-Realty's] appeal with
reasonable dispatch. No costs.

ORDERED.26 (Emphasis in the original)

On November 5, 2007, the Court of Appeals27 denied both appeals.

Regarding Multi-Realty's appeal, the Court of Appeals held that the Master Deed could only be read to
mean that the 98 parking slots being claimed by Multi-Realty belonged to MATUSCO. It highlighted that
the language of the Master Deed, as prepared by Multi-Realty, was clear and not susceptible to any
other interpretation.28

The Court of Appeals upheld the Regional Trial Court's finding that Multi-Realty was guilty of estoppel by
deed and likewise declared that MATUSCO was not estopped from questioning Multi-Realty's claimed
ownership over and sales of the disputed parking slots.29

The fallo of the Court of Appeals November 5, 2007 Decision read:

WHEREFORE, the instant appeals are hereby DENIED. The assailed Decision dated October 29, 1993 of
the Regional Trial Court (Branch 65), Makati, Metro Manila (now Makati City), in Civil Case No.

90-1110 is MODIFIED-in that: (1) the counterclaim of The Makati Tuscany Condominium Corporation
is DISMISSED-not on the ground of non-payment of docket fees but on ground of prescription; and, (2)
the award of attorney's fees in favor of The Makati Tuscany Condominium Corporation is DELETED for
not having been justified. We however AFFIRM in all other aspects. Costs against both parties.
SO ORDERED.30 (Emphasis in the original)

Multi-Realty moved for the reconsideration of the Court of Appeals November 5, 2007 Decision and on
April 28, 2008, the Court of Appeals promulgated an Amended Decision,31 reversing its November 5,
2007 Decision and directing the reformation of the Master Deed and Deed of Transfer.

In reversing its November 5, 2007 Decision, the Court of Appeals ruled that the Master Deed and Deed
of Transfer did not reflect the true intention of the parties on the ownership of the 98 parking slots.32

The Court of Appeals stated that in reformation cases, the party asking for reformation had the burden
to overturn the presumption of validity accorded to a written contract. It held that Multi-Realty was able
to discharge this burden.33

The fallo of the Court of Appeals April 28, 2008 Amended Decision read:

WHEREFORE, premises considered, the present Motion for

Reconsideration is PARTLY GRANTED. Our Decision dated November

05, 2007 is hereby MODIFIED-in that We ORDER the reformation of the Master Deed and Declaration of
Restrictions of the Makati Tuscany Condominium Project and the Deed of Transfer-to clearly provide
that the ownership over the ninety[-]eight (98) extra parking lots be retained by Multi-Realty
Development Corporation. We however DENY the damages and attorney's fees prayed for by Multi-
Realty Development Corporation. We AFFIRM in all other respects. No costs.

SO ORDERED.34 (Emphasis in the original)

MATUSCO moved for the reconsideration35 of the Amended Decision, but its motion was denied in the
Court of Appeals December 4, 2008 Resolution.36

On February 5, 2009, MATUSCO filed its Petition for Review37 on Certiorari before this Court.

In its Petition, petitioner claims that the Court of Appeals erred in granting Multi-Realty's appeal because
there was no basis to reform the Master Deed and Deed of Transfer. It asserts that there was no
mistake, fraud, inequitable conduct, or accident which led to the execution of an instrument that did not
express the true intentions of the parties. It avers that the instruments clearly expressed what the
parties agreed upon.38

Petitioner also assails the Court of Appeals' ruling that it was estopped from questioning respondent's
sales of26 out of the 98 contested parking slots and from claiming ownership of the remaining unsold
parking slots because it was supposedly fully aware of respondent's ownership of them and did not
oppose its sales for 9 years.39

Petitioner maintains that estoppel cannot apply because the sales made by respondent were patently
illegal as they went against the stipulations in the Master Deed. Furthemore, petitioner contends that it
never misled respondent regarding ownership of the 98 parking slots since it was respondent itself
which drafted the Master Deed and Deed of Transfer that turned over ownership of the common areas,
including the 98 parking slots, to MATUSCO.40

In its Comment,41 respondent insists that it never intended to include the 98 parking slots among the
common areas transferred to MATUSCO. It avers that due to its then inexperience with the
condominium business, with Makati Tuscany being one of the Philippines' first condominium projects,
the Master Deed and Deed of Transfer failed to reflect the original intention to exclude the 98 parking
slots from Makati Tuscany's common areas.42

Respondent points to the parties' subsequent acts that led to the only conclusion that it was always the
intention to exclude the 98 parking slots from the common areas, and that this was known and accepted
by petitioner from the beginning.43

Respondent maintains that the Petition raises factual findings and prays that this Court take a second
look at the evidence presented and come up with its own factual findings, in derogation of the purpose
of an appeal under Rule 45 of the Rules of Court, which generally limits itself to questions of law.44

Respondent also points out that in Multi-Realty Development Corporation, this Court, in its recital of
material facts, acknowledged that it retained ownership over the 98 parking slots, but that its ownership
over them was not reflected in the Master Deed and Deed of Transfer. Thus, respondent asserts that the
issue of ownership can no longer be threshed out on appeal on the ground of res judicata.45

In its Reply,46 petitioner claims that just like respondent, it also committed a mistake in good faith and
"also labored under a mistaken appreciation of the nature and ownership of the ninety[-]eight (98)
parking slots"47 when it failed to object to respondent's sales of some of the parking slots from 1977 to
1986 and when it issued Certificates of Management over the sold parking slots. It was only later that
petitioner realized the extent of its legal right over the 98 parking slots; consequently, it exerted effort
to exercise its dominion over them. Petitioner argues that this cannot be characterized as bad faith on
its part.48

Petitioner adds that the Master Deed and Deed of Transfer are public documents, being duly registered
with the Register of Deeds of Makati City, ergo, their terms, conditions, and restrictions are valid and
binding in rem. It opines that for the Court of Appeals to change the clear and categorical wordings of
the Master Deed more than 30 years after its registration goes against public policy and the
Condominium Act.49

Petitioner insists that if respondent merely made a mistake in including the 98 parking slots among the
common areas transferred to petitioner, this mistake must be construed in petitioner's favor as
respondent is owned by one of the wealthiest family corporations in the country while petitioner is
merely an association of innocent purchasers for value.50

The issues raised for this Court's resolution are as follows:

First, whether or not there is a need to reform the Master Deed and the Deed of Transfer; and

Second, whether or not this Court is bound by the factual findings in Multi-Realty Development
Corporation v. The Makati Tuscany Condominium Corporation on the ground of conclusiveness of
judgment.

Reformation of an instrument is a remedy in equity where a valid existing contract is allowed by law to
be revised to express the true intentions of the contracting parties.51 The rationale is that it would be
unjust to enforce a written instrument which does not truly reflect the real agreement of the
parties.52 In reforming an instrument, no new contract is created for the parties, rather, the reformed
instrument establishes the real agreement between the parties as intended, but for some reason, was
not embodied in the original instrument.53

An action for reformation of an instrument finds its basis in Article 1359 of the Civil Code which
provides:

Article 1359. When, there having been a meeting of the minds of the parties to a contract, their true
intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake,
fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument
to the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties,
the proper remedy is not reformation of the instrument but annulment of the contract.

The National Irrigation Administration v. Gamit 54 stated that there must be a concurrence of the
following requisites for an action for reformation of instrument to prosper:

(1) there must have been a meeting of the minds of the parties to the contract; (2) the instrument does
not express the true intention of the parties; and (3) the failure of the instrument to express the true
intention of the parties is due to mistake, fraud, inequitable conduct or accident.55

The burden of proof then rests upon the party asking for the reformation of the instrument to overturn
the presumption that a written instrument already sets out the true intentions of the contracting
parties.56

It is not disputed that the parties entered into a contract regarding the management of Makati Tuscany's
common areas. A Master Deed and a Deed of Transfer were executed to contain all the terms and
conditions on the individual ownership of Makati Tuscany's units and the co-ownership over the
common areas. The question to be resolved is whether the provisions in the Master Deed and Deed of
Transfer over the 98 parking slots, as part of the common areas, expressed the true intentions of the
parties, and if not, whether it was due to mistake, fraud, inequitable conduct, or accident.

Sections 5 and 7(d) of the Master Deed provide as follows:

SEC. 5. Accessories to Units. - To be considered as part of each unit and reserved for the exclusive use of
its owner are the balconies adjacent thereto and the parking lot or lots which are to be assigned to each
unit.

....

SEC. 7. The Common Areas. - The common elements or areas of The Makati Tuscany shall comprise all
the parts of the project other than the units, including without limitation the following:

....

(d) All driveways, playgrounds, garden areas and parking areas other than those assigned to each unit
under Sec. 5 above[.]57

A plain and literal reading of Section 7(d) in relation to Section 5 shows that all parking areas which are
not assigned to units come under petitioner's authority because they are part of the common areas.

Respondent argues that what was written in the Master Deed and Deed of Transfer failed to fully
capture what was actually intended by the parties. However, intentions involve a state of mind, making
them difficult to decipher; therefore, the subsequent and contemporaneous acts of the parties must be
presented into evidence to reflect the parties' intentions.58

To substantiate its claim that there was a difference between the written terms in the Master Deed and
Deed of Transfer and the parties' intentions, respondent refers to their prior and subsequent acts.

First, respondent points out that in the color-coded floor plans for the ground floor, upper basement,
and lower basement, only eight (8) guest parking slots were indicated as part of the common areas.
However, respondent alleges that due to its inexperience with documenting condominium
developments, it failed to reflect the correct number of guest parking slots in the Master Deed and Deed
of Transfer.59

Second, acting under the honest belief that it continued to own the 98 parking slots, respondent sold 26
of them to Makati Tuscany's unit owners from 1977 to 1986, without any hint of a complaint or
opposition from petitioner. Respondent also states that petitioner repeatedly cooperated and
supported its sales by issuing Certificates of Management for the condominium units and parking slots
sold by respondent.60

Third, petitioner's Board of Directors made repeated offers to purchase the parking slots from
respondent, signifying petitioner's recognition of respondent's retained ownership over the disputed
parking slots. This was made evident in an excerpt from the minutes of the June 14, 1979 meeting of
MATUSCO's Board of Directors:

UNASSIGNED PARKING SLOTS

Mr. Jovencio Cinco informed the Board of the final proposal of Multi-Realty Development Corp. to sell
the condominium corp. all of the unassigned parking lots at a discounted price of P15,000.00 per lot, or
some 50% lower than their regular present price of P33,000.00 each.

After discussion, it was agreed to hold in abeyance any decision on the matter for all the members of the
Board in attendance to pass upon.61

Finally, respondent highlights that it was only in September 1989, when the value of the 72 remaining
unallocated parking slots had risen to approximately P250,000.00 each or approximately P18,000,000.00
for the 72 parking slots, that petitioner first claimed ownership of the remaining parking slots.62

At this juncture, it must be pointed out that petitioner never rebutted any of respondent's statements
regarding the subsequent acts of the parties after the execution and registration of the Master Deed and
Deed of Transfer. Petitioner even adopted the narration of facts in Multi-Realty Development
Corporation and declared in its Reply that:

1. The Petition does not raise questions of fact because no doubt or difference exists between the parties'
appreciation of the truth or falsehood of alleged facts, nor does it require the Honorable Court to
evaluate the credibility of witnesses or their testimonies. The resolution of the instant controversy rests
solely upon the correct application of principles of law and pertinent jurisprudence, as well as hallowed
ideals of fairness and public policy which are specific or germane to the undisputed facts. These facts
have already been framed by this Honorable Court in a related case brought before it by the same
parties, albeit limited to the sole issue of prescription of the action for reformation of instruments
initiated by [Multi-Realty]. For the avoidance of doubt, these facts are reproduced hereunder as follows:

....

1.3 Makati Tuscany consisted of 160 condominium units, with 156 units from the 2nd to the 25th floors,
and 4 penthouse units in the 26th floor. Two hundred seventy (270) parking slots were built therein for
appointment among its unit owners. One hundred sixty-four (164) of the parking slots were so allotted,
with each unit at the 2nd to the 25th floors being allotted one ( 1) parking slot each, and each penthouse
unit with two slots. Eight (8) other parking slots, found on the ground floor of the Makati Tuscany were
designated as guest parking slots, while the remaining ninety[-]eight (98) were to be retained by Multi-
Realty for sale to unit owners who would want to have additional slots.

....

1.7. The Master Deed was filed with the Register of Deeds in 1977. Multi-Realty executed a Deed of
Transfer in favor of Makati Tuscany over these common areas. However, the Master Deed and the Deed
of Transfer did not reflect or specify the ownership of the 98 parking slots. Nevertheless, Multi-Realty
sold 26 of them in 19 to 1986 to condominium unit buyers who needed additional parking slots. Makati
Tuscany did not object, and certificates of title were later issued by the Register of Deeds in favor of the
buyers. Makati Tuscany issued Certificates of Management covering the condominium units and parking
slots which Multi-Realty has sold.

1.8 At a meeting of Makati Tuscany's Board of Directors on 13 March 1979, a resolution was approved,
authorizing its President, Jovencio Cinco, to negotiate terms under which Makati Tuscany would buy 36
of the unallocated parking slots from Multi-Realty. During another meeting of the Board of Directors on
14 June 1979, Cinco informed the Board members of Multi-Realty's proposal to sell all of the unassigned
parking lots at a discounted price of P15,000.00 per lot, or some 50% lower than the then prevailing
price of P33,000.00 each. The Board agreed to hold in abeyance any decision on the matter to enable all
its members to ponder upon the matter.63 (Emphasis supplied, citations omitted)

Just like respondent, petitioner invokes mistake in good faith to explain its seeming recognition of
respondent's ownership of the 72 remaining parking slots, showing its acquiescence to respondent's
sale of the 26 parking slots and its issuance of the Certificates of Management for the sold condominium
units and parking slots.64

Petitioner fails to convince.

The totality of the undisputed evidence proving the parties' acts is consistent with the conclusion that
the parties never meant to include the 98 parking slots among the common areas to be transferred to
petitioner. The evidence is consistent to support the view that petitioner was aware of this fact.

From 1977 to 1986, respondent sold 26 of the 98 parking lots now under contention without protest
from petitioner. Petitioner recognized respondent's ownership of the disputed parking lots on at least
two (2) occasions when its Board of Directors made known its intention to purchase them from
respondent.

In its Manifestation Ad Cautelam,65 petitioner asked to be allowed to file a reply to respondent's

comment to rectify the "erroneous statements of fact and conclusions of law"66 contained in it.
However, petitioner in its Reply67 did not contradict any of the subsequent acts of the parties narrated
by respondent, showing petitioner's repeated acquiescence to respondent's acts of dominion over the
parking slots. Petitioner even adopted this Court's narration of facts in Multi-Realty Development
Corporation where this Court stated that "[e]ight (8) other parking slots, found on the ground floor of
the Makati Tuscany were designated as guest parking slots, while the remaining 98 were to be retained
by Multi-Realty for sale to unit owners who would want to have additional slots."68

Petitioner claims that it was confusion and not bad faith that caused its belated assertion of ownership
over the parking slots.69 However, the facts show that it was the intention of the parties all along for
Multi-Realty to retain ownership of the 98 parking slots and then sell them to unit owners who wanted
additional parking slots.

Petitioner argues its lack of bad faith in claiming ownership over the 98 parking slots. Whether or not it
acted in bad faith was never in issue. Instead, the issue to be resolved was whether or not respondent
committed a mistake in drafting and executing the Master Deed and Deed of Transfer, thereby leading
to the inadvertent inclusion of the 98 parking slots among the common areas transferred to petitioner.

Further, it is difficult to impute confusion and bad faith, which are states of mind appropriate for a
natural individual person, to an entire corporation. The fiction where corporations are granted both
legal personality separate from its owners and a capacity to act should not be read as endowing
corporations with a single mind. In truth, a corporation is a hierarchical community of groups of persons
both in the governing board and in management. Corporations have different minds working together
including its lawyers, auditors, and, in some cases, their compliance officers.

To grant the argument that a corporation, like a natural person, was confused or not in bad faith is to
extend to it too much analogy and to endow it more of the human characteristics beyond its legal
fiction. This Court is not endowed with such god-like qualities of a creator or should allow illicit
extensions of legal fiction to cause injustice.

Respondent, through a preponderance of evidence, was able to prove its claim that the Master Deed
and Deed of Transfer failed to capture the true intentions of the parties; hence, it is but right that the
instruments be reformed to accurately reflect the agreement of the parties.

Petitioner asserts that respondent's admission of committing a mistake in drafting the Master Deed and
Deed of Transfer makes it liable to suffer the consequences of its mistake and should be bound by the
plain meaning and import of the instruments. It contends that respondent should be estopped from
claiming that the Master Deed and Deed of Transfer failed to show the parties' true intentions.

Again, petitioner fails to convince.

In Philippine National Bank v. Court of Appeals,70 this Court held:

"The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice,
and its purpose is to forbid one to speak against his own act, representations, or commitments to the
injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel
springs from equitable principles and the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result." It has been applied by this Court
wherever and whenever special circumstances of a case so demand.71

In this case, except for the words in the contract, all of respondent's acts were consistent with its
position in the case.

Petitioner does not deny that it stayed silent when respondent sold the parking slots on several
occasions or that it offered to buy the parking slots from respondent on at least two (2) occasions. It
excuses itself by saying that just like respondent, it "also labored under a mistaken appreciation of the
nature and ownership of the ninety[-]eight (98) parking slots in question."72

Both parties recognized respondent's ownership of the parking slots. Petitioner initially respected
respondent's ownership despite the Master Deed's and Deed of Transfer's stipulations. It was petitioner
that changed its position decades after it acted as if it accepted respondent's ownership.

Petitioner cannot claim the benefits of estoppel. It was never made to rely on any false representations.
It knew from its inception as a corporation that ownership of the parking slots remained with
respondent. Its dealings with respondent and the actuations of its Board of Directors convincingly show
that it was aware of and respected respondent's ownership. The Court of Appeals ruled as follows:
Not even the registration of the Master Deed with the Makati City Register of Deeds renders Multi-
Realty guilty of estoppel by deed. For one, [MATUSCO] was not made to believe that it shall be the
owner of the questioned extra parking lots. And for another, [MATUSCO] was not made to rely on any
false representation. As we have earlier discussed-evidence is replete that both parties knew at the
outset that ownership over the said extra parking lots were to be retained by Multi-Realty. It is sad to
note, however, that such fact was not clearly reflected in the Master Deed and the Deed of Transfer.
Besides, it was only after the issue of ownership cropped up that Multi-Realty realized that, indeed,
there was a mistake in the drafting of the Master Deed.73

II

Despite petitioner's adoption of this Court's recital of facts in Multi-Realty Development Corporation,
this Court deems it proper to address respondent's claim that this Court upheld its ownership of the
disputed parking slots, as Multi-Realty Development Corporation supposedly contained final factual
findings on this very issue, which ought to be respected on the ground of res judicata.74

Respondent is mistaken.

There is res judicata when the following concur:

a) the former judgment must be final;

b) the court which rendered judgment had jurisdiction over the parties and the subject matter;

c) it must be a judgment on the merits;

d) and there must be between the first and second actions identity of parties, subject matter, and
cause of action.75 (Emphasis in the original, citation omitted)

Multi-Realty Development Corporation did not take on the merits of the case but only tackled the issue
of prescription n.ised to this Court on appeal. After finding that the action had not yet prescribed and
was mistakenly dismissed by the Court of Appeals because of a supposedly stale claim, this Court
directed that it be remanded to the Court of Appeals for a resolution of the appeal:

Nevertheless, given the factual backdrop of the case, it was inappropriate for the CA, motu proprio, to
delve into and resolve the issue of whether [Multi-Realty's] action had already prescribed. The appellate
court should have proceeded to resolve [Multi-Realty's] appeal on its merits instead of dismissing the
same on a ground not raised by the parties in the RTC and even in their pleadings in the CA.

....

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals in CA-
G.R. CV No. 44696 is SET ASIDE. The Court of Appeals is directed to resolve petitioner's appeal with
reasonable dispatch. No costs.
ORDERED.76

Clearly, res judicata had not yet set in and this Court was not precluded from evaluating all of the
evidence vis-a-vis the issues raised by both parties.

WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED. The Court of
Appeals April 28, 2008 Amended Decision and December 4, 2008 Resolution in CA-G.R. CV No. 44696
are AFFIRMED.

SO ORDERED.

G.R. No. 211780, November 21, 2018

CEZAR YATCO REAL ESTATE SERVICES, INC., GRD PROPERTY RESOURCES, INC., GAMALIEL PASCUAL,
JR., MA. LOURDES LIMJAP PASCUAL, AND AURORA PIJUAN, Petitioners, v. BEL-AIR VILLAGE
ASSOCIATION, INC., REPRESENTED BY ITS PRESIDENT ANTONIO GUERRERO, AND THE REGISTER OF
DEEDS, Respondents.

DECISION

LEONEN, J.:

In contract interpretation, courts must first determine whether a stipulation is ambiguous or susceptible
of multiple interpretations. If no ambiguity is found and the terms of the contract clearly reflect the
intentions of the contracting parties, the stipulation will be interpreted as it is written.

This resolves the Verified Petition for Review on Certiorari1 filed by Cezar Yatco Real Estate Services, Inc.
(Cezar Yatco Real Estate Services), GRD Property Resources, Inc. (GRD Property Resources), Gamaliel
Pascual, Jr. (Gamaliel), Ma. Lourdes Limjap Pascual (Lourdes), and Aurora Pijuan (Pijuan) assailing the
Court of Appeals September 5, 2013 Decision2 and March 17, 2014 Resolution3 in CA-G.R. SP. No.
122954, which upheld the Office of the President's May 19, 2011 Resolution,4 declaring the validity of
the term extension of Bel-Air Village's Deed Restrictions.5

Sometime in the 1950s, Makati Development Corporation developed Bel-Air Village, a residential
subdivision in Makati City, and sold lots to interested buyers.6 The contracts of sale between Makati
Development Corporation and the lot buyers in Bel-Air Village were subjected to specific conditions and
easements embodied in the Deed Restrictions, which had a lifetime of 50 years, or from January 15,
1957 to January 15, 2007.7

Bel-Air Village Association, Inc. (Association), Bel-Air Village's homeowners' association, was constituted
as a non-stock, non-profit association to promote its members' best interests. Under its by-laws, all lot
owners of Bel-Air Village automatically became members of the Association.8

Sometime in 1998, the Association created the 2007 Committee to assess and propose amendments to
the Deed Restrictions, in anticipation of its impending expiration. The 2007 Committee circulated
questionnaires among the homeowners and held meetings to gather input on the proposed
amendments.9

In June 2006, the Association had its annual meeting and discussed the proposed amendments and
revisions to the Deed Restrictions.10

In September 2006, the Association circulated copies of the proposed amendments and revisions to the
homeowners.11

In October 2006, in a special board meeting, the Association passed a board resolution calling for the
Deed Restrictions' amendment.12 The first of the 10 proposed amendments suggested extending the
Deed Restrictions' term to August 23, 2032. The proposed amendment read:
ChanRoblesVirtualawlibrary

Association's deed of restrictions shall remain in force from January 15, 2007 and the term thereof shall
be concurrent with the life of the Bel-Air Village Association, Inc. (Association) or up to August 23, 2032,
unless sooner cancelled in their entirety by a two-thirds vote of members in good standing of the
Association. However, the Association may, from time to time, add new ones, amend or abolish
particular restrictions or parts thereof by majority rule; provided, however, that the deed of restrictions
can be extended by amendment only if done so concurrently with an extension of the life of the
Association.13

The Association agreed to set on December 12, 2006 a special membership meeting to submit the board
resolution to the homeowners for their ratification.14

On December 12, 2006, 718 members out of a total of 934 members in good standing and eligible to
vote, attended the special membership meeting. Of the votes cast, 72% chose to extend the period of
the Deed Restrictions, 3% rejected the extension, and 25% abstained.15

On February 8, 2007, Cezar Yatco Real Estate Services, GRD Property Resources, Masterman Land
Corporation (Masterman), Gamaliel, Lourdes, Sofia Limjap (Sofia), and Pijuan (collectively, the
complainants), who had all voted against the Deed Restrictions' extension, filed a Verified
Complaint16 before the Housing and Land Use Regulatory Board.

In their Verified Complaint, the complainants alleged that the Deed Restrictions was only effective for 50
years, or from January 15, 1957 to January 15, 2007, as it did not provide for its extension. Thus, the
complainants contended that the Association's resolution extending the Deed Restrictions' effectivity
was illegally and arbitrarily approved.17 They also averred that no quorum was reached in the December
12, 2006 special membership meeting.18

Finally, the complainants claimed that they had individually resigned from the Association; however,
they feared that the latter would force them to keep their membership, abide by its illegal regulations,
and extract assessments, which would be considered as liens on their properties.19

In its Opposition,20 the Association maintained that the period of effectivity was an integral part of the
Deed Restrictions as showed by its plain wording. Thus, it may be extended upon a majority vote of the
Association's members.21 It further denied that the special membership meeting lacked quorum,
pointing out that proxies need not be notarized to be valid.22

In its May 21, 2008 Decision,23 the Housing and Land Use Regulatory Board Expanded National Capital
Region Field Office (Regional Field Office) declared the extension of the Deed Restrictions as null and
void.

The Regional Field Office held that the 50-year term of the Deed Restrictions could not be classified as a
restriction since it merely stated the Deed's effectivity; hence, the Association's members could not
validly amend the term of effectivity.24

The Regional Field Office also declared that the proxies submitted for the special membership meeting
involved the creation of real rights; thus, they should have been notarized.25

The dispositive portion of the Regional Field Office May 21, 2008 Decision read:
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WHEREFORE, the foregoing premises considered, the meetings held by the Board of Directors held on
10 October 2006, of the Special Membership meeting held on 12 December 2006, both of respondent
Bel Air Village Association, Inc. (BAVA) in relation to the extension of the effectivity of the Deed
Restrictions annotated on the Transfer Certificates of Title covering the properties of the complainants,
and the imposition of new ones are declared NULL AND VOID.

The Resolutions passed during said meetings in relation to said extension of the Deed Restrictions and
the imposition of new restrictions are likewise declared NULL AND VOID.

Respondent Bel-Air Village Association, Inc., its agent, and representatives are hereby ordered to cease
and desist from implementing the Resolutions passed during said meetings. The Registry of Deeds of
Makati is likewise ordered to cease and desist from causing or allowing the annotation of Restrictions on
[t]he Titles covering the properties of the Complainants.

SO ORDERED.26 (Emphasis in the original)

The Association appealed27 this Decision to the Board of Commissioners of the Housing and Land Use
Regulatory Board, to which the complainants filed their Counter-Memorandum.28

In its December 9, 2008 Decision,29 the Board of Commissioners granted the appeal, reversing the
Regional Field Office May 21, 2008 Decision. It declared that the Association may extend the Deed
Restrictions by a majority vote:
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The first sentence of par. 6 established the fact that the deed shall have a period of fifty years. The
second sentence starts with the word "However", implying that while the deed has a duration of fifty
years, the same may be extended by a majority vote of the members.30
The dispositive portion of its Decision read:
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Wherefore, the instant appeal is granted. The decision of the Regional Office dated May 21, 2008 is set
aside and a new decision is entered declaring the special meeting of December 12, 2006 as valid, and
declaring that the term subject deed of restrictions was validly extended until August 23, 2032.

So ordered.31

Complainants moved for reconsideration,32 but their motion was denied in the Board of Commissioners'
January 28, 2009 Resolution.33 Undaunted, they filed an Appeal34 before the Office of the President, to
which the Association filed a Reply.35

In its December 29, 2009 Decision,36 the Office of the President reversed the Board of Commissioners'
December 9, 2008 Decision and January 28, 2009 Resolution, and reinstated the Regional Field Office
May 21, 2008 Decision. It held that the Term of Restrictions of the Deed Restrictions may not be
increased, as the 50-year term was not one of the restrictions that may be amended by a majority vote
of the Association's members:
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This Office does not agree with the HLURB Board of Commissioners. The findings of Arbiter Babiano are
based on sturdier legal foundation. In fact, to any ordinary mind, the interpretation of the Term of
Restrictions is not even ambiguous. It is quite clear and unequivocal, to wit:
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"VI - Term of Restrictions

The foregoing restrictions shall remain in force for fifty years from January 15, 1957, unless sooner
cancelled in its entirety by two-thirds vote of members in good standing of the Bel-Air Association.
However, the Association may, from time to time, add new ones, amend or abolish particular
restrictions or parts thereof by majority rule."

It is very clear from the above-quoted provision that the restrictions are given a term of 50 years. The
word "However" in the second sentence does not mean that the term may be extended, otherwise the
framers could easily have stated the same in wording the provision ("unless sooner cancelled or
extended in its entirety") just like it was done in the Forbes Park Deed of Restrictions (p. 12, HLURB
records). The word "However" only means that while the restrictions have a term limit of 50 years, the
said restrictions may be increased, amended, or abolished FROM TIME TO TIME; meaning, within the
50[-]year term. The 50[]year term is not to be construed as one of the restrictions[;] otherwise[,] it
would be absurd to have a set of restrictions restricting each other.37

On the issue of proxies, the Office of the President ruled that the Civil Code should be applied
suppletorily to the Corporation Code; thus, the proxy should be in a public document when the proxy
issued is for the conveyance of real rights over immovable property. In addition, it declared that the
complainants could not be compelled to continue with their membership in the Association.38
The dispositive portion of the Office of the President's December 29, 2009 Decision read:
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WHEREFORE, the Decision dated December 9, 2008, and Resolution dated January 28, 2009, of the
HLURB Board of Commissioners are hereby REVERSED and SET ASIDE. The Decision of Housing and Land
Use Arbiter Michelle Jan B. Babiano dated May 21, 2008, is hereby REINSTATED.

SO ORDERED.39 (Emphasis in the original)

The Association moved for reconsideration,40 which was granted by the Office of the President in its May
19, 2011 Resolution.41

In reversing itself, the Office of the President conceded that the 50- year term was also subject to the
Association's amendment upon a majority vote of its members, as it was an essential element of the
Deed Restrictions.42

The Office of the President also noted that Ayala Land, Inc. (Ayala Land), Makati Development
Corporation's successor-in-interest, confirmed that the 50-year term was part of the Deed Restrictions.43

The Office of the President swept aside complainants' argument that their forced membership in the
Association violated their right to freedom of association. It proclaimed that the liberties guaranteed
under the Bill of Rights may only be invoked against the State, not against private individuals.44

The Office of the President cited Bel Air Village Association, Inc. v. Dionisio,45 which upheld the terms of
the Deed Restrictions against objections based on the right to freedom of association, since the
limitation was not on the individual, but on property ownership.46

Finally, the Office of the President also reversed its earlier ruling that the lack of notarization of proxies
meant that no quorum had been reached in the special membership meeting. It held that the
Corporation Code, a special law, prevailed over the Civil Code, a general law, and that the former states
that private corporations' by-laws may provide "the form of proxies of stockholders and members and
the manner of voting them."47

The Office of the President declared that the Association's by-laws did not provide a proxy form; thus,
the Corporation Code should be applied suppletorily.48 Its May 19, 2011 Resolution read:
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Evidently, the Corporation Code only prescribes three (3) requisites for the proxy to be valid, namely: (a)
the proxy must be in writing; (b) the proxy must be signed by the stockholder; and (c) the proxy must be
filed before the scheduled meeting with the corporate secretary. Significantly, all these requirements
have been complied with in this case.49

Its dispositive portion read:

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WHEREFORE, premises considered, the Appellee's Motion for Reconsideration is hereby GRANTED and

the Decision dated 29 December 2009 of this Office is REVERSED and SET ASIDE. Further, the appeal is
hereby DISMISSED and the Decision dated 9 December 2008 and Resolution dated 28 January 2009 both
rendered by the Board of Commissioners of the HLURB are REINSTATED.

SO ORDERED.50 (Emphasis in the original)

Complainants moved for reconsideration,51 but their motion was denied by the Office of the President's
August 9, 2011 Resolution.52

They filed an Appeal;53 however, it was denied by the Court of Appeals.54

In its September 5, 2013 Decision, the Court of Appeals confirmed that the Association had the power to
extend the Deed Restriction's effectivity, as the 50-year term was an integral part of the Deed
Restrictions and was included among the restrictions that may be amended by majority vote of the
Association members.55

The Court of Appeals also adopted the Office of the President's disquisition on proxies. It held that the
by-laws governed the required formality of a proxy, and that proxies need not be embodied in a public
document for their validity. It further affirmed that a quorum of the Association's members voted for
the extension of the term of restrictions.56

The dispositive portion of its Decision read:

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WHEREFORE, the instant petition for review is DENIED. The Resolution, dated May 19, 2011 of the
Office of the President through Executive Secretary Paquito N. Ochoa, Jr. reinstating the Decision of the
Board of Commissioners of the HLURB, and the Resolution, dated August 9, 2011, denying petitioners'
motion for reconsideration, are hereby AFFIRMED.

SO ORDERED.57 (Emphasis in the original)

Undaunted, complainants filed a Motion for Reconsideration,58 but it was denied in the Court of Appeals
March 17, 2014 Resolution.59

Hence, this Petition.

In their Verified Petition for Review on Certiorari,60 petitioners Cezar Yatco Real Estate Services, Inc.,
GRD Property Resources, Inc., Gamaliel Pascual, Jr., Ma. Lourdes Limjap Pascual, and Aurora Pijuan
maintain that although private respondent Bel-Air Village Association has power to shorten the Deed
Restrictions' period through its members' majority vote, it has no power to extend its effectivity beyond
50 years.61

Petitioners contend that "a term is not in itself a restriction,"62 as it sets the period of the Deed
Restrictions' effectivity, and is not a limitation on the use of property.63 They also assert that the power
to extend the Deed Restrictions' term was neither expressly nor impliedly granted to private
respondent.64
Additionally, petitioners underscore that their compulsory membership with private respondent violates
their constitutional right to association, which includes the freedom to resign or withdraw.65 They add
that homeowners' associations are not indispensable for the upkeep and safety of gated communities
like Bel-Air Village, since the barangay is mandated to provide the same services that private respondent
claims to have been supplying its members. They highlight that Barangay Bel-Air has been providing
these services to Bel-Air Village, and has more than enough funds for it.66

Finally, petitioners assert that in the December 12, 2007 special membership meeting, when the term
extension was voted upon, the proxies were invalid as they were not notarized:
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80. Petitioners respectfully assert that the subject of such meeting was the extension of the effectivity of
the Deed. Further, said meetings involved real rights over real properties, insofar as restrictions are
"real rights constituted on the corporeal immovable property".

80.1. It bears noting further that a proxy is an agency or authority to perform a specific act in
representation of the principal. The rules on agency are, therefore, applicable, and are worth
considering in determining whether the aforesaid proxies are defective or not.

80.2. It is provided that, "The power to administer property, or any other power which has for its
object an act appearing or which should appear in a public document, or should prejudice a third
person must appear in a public document".

80.3. Inasmuch as the power of the representatives who attended the special meeting involved the
creation of real rights, such power or authorization held by such representatives, should not only have
been in writing. It should also have been in public documents. Unfortunately, the above-mentioned
proxies were not executed in compliance with the afore-cited law.67 (Emphasis in the original, citations
omitted)

In its Comment,68 private respondent stresses that contrary to petitioners' "legally untenable,

erroneously narrow, and, illogical"69 interpretation, the 50-year term of the Deed Restrictions could be
extended. Its Comment read:
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3.4. A plain reading of [Article VI - Term of Restrictions], without having to go into semantics and
statutory construction, readily shows that the fifty-year term can be amended. The first sentence states
that the restrictions have a period of fifty (50) years, and the second sentence qualifies that while the
restrictions have a duration of fifty (50) years, the same may be amended (either shortened or
extended), by majority vote of the members.70

Private respondent states that the Deed Restrictions' term is a necessary element of the restrictive
covenant between lot buyers and sellers. Hence, it may be validly amended through a majority vote of
its members.71

Likewise, private respondent asserts that the primary consideration in interpreting a restrictive covenant
like the Deed Restrictions is the intention of the parties. It points out that the Makati Development
Corporation, through its successor-in-interest Ayala Land, confirmed that the 50-year term is part of the
Deed Restrictions, and thus, may be amended.72

Private respondent maintains that it did not violate petitioners' constitutional right to freedom of
association since the Bill of Rights could only be invoked against the State, not private individuals.73 It
points out that in Bel Air Village Association Inc., this Court has already ruled on the validity of the
limitations contained in the Deed Restrictions, and found that they were not contrary to "provisions of
laws, morals, good customs, public order[,] or public policy."74

Private respondent likewise disputes petitioners' claim that the proxies in the December 12, 2007
special membership meeting should have been notarized. It says that petitioners were mistaken to insist
that a proxy's validity depends on the subject matter to be taken up in the special membership
meeting.75 Its Comment read:
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3.53. The subject matter of the members' meeting is irrelevant for purposes of determining the validity
of a proxy. The rule on proxies, i.e. Section 58 of the Corporation Code, makes no qualification on the
subject matter of the members' meeting, such that, regardless of the subject matter, the same
requirements apply. Had it been the intention of the law to inquire into the subject matter of a
members' meeting, it could have easily qualified it in the law.

3.54. Even R.A. 9904 (Magna Carta for Homeowners and Homeowners' Associations ) does not impose
this requirement. It only states that "Association members may vote in person or by proxy in all
meetings of members. Proxies shall be in writing, signed by the member and filed before the scheduled
meeting with the association secretary." Thus, R.A. 9904 it (sic) even confirms the consistent SEC ruling
and the principles laid down in the Corporation Code.

3.55. Furthermore, a proxy to vote shares of stock is an authority given by the holder of the stock, who
has the right to vote, to another to exercise his voting rights. Clearly, the object of a proxy is the transfer
of the personal right of a stockholder or member to vote in a designated stockholders' or members'
meeting, and cannot in any manner be construed as a creation of real rights.

3.56. Considering that the object of a proxy is the transfer of a personal right, Articles 1358 and 1878 of
the Civil Code on the necessity of a public document and a special power of attorney, do not
apply.76 (Emphasis in the original, citations omitted)

Private respondent further points out that Article 1358 of the Civil Code does not require that acts or
contracts be notarized for their validity, but only for their efficacy, "so that after the existence of said
contract has been admitted, the party bound may be compelled to execute the proper
document."77 Assuming that the proxies in the special membership meeting were notarized, it further
opines that the remedy is not to void their votes or the meeting, but to demand that the assignor issue
notarized proxies.78

Finally, private respondent states that while Article 1878 of the Civil Code requires a special power of
attorney in specific cases, the lack of authority does not automatically void a contract entered into, since
the principal can still expressly or impliedly ratify the acts executed by its agent. It adds that its
members' continued silence means that they never disputed the authority of the proxy holders to act on
their behalf.79

In their Reply,80 petitioners continue to insist that the Deed Restrictions' term of effectivity, while part of
the covenant between the parties, is not a restriction per se.81 They stated:
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4. Petitioners respectfully posit the difference between the term and the restriction. The term is that
part of the Deed which sets the period within which the restrictions shall be effective. But a term is not
in itself a restriction. Apart from said restrictions, such term or period cannot stand alone. It loses its
significance if there is no restriction to speak of. Its relevance is solely dependent upon the existence of
the restrictions.

4.1. A restriction carries a technical definition. A restriction, or more often referred to as a servitude or
easement, is defined by Spanish Civilist Sanchez Roman as a "real right constituted on the corporeal
immovable property of another, by virtue of which the owner of the latter has to refrain from doing or
to allow that someone do something on his property, for the benefit of another thing or
person."82 (Citation omitted)

Petitioners then question Ayala Land's personality to issue the opinion on the contracting parties'
intention since it was not the original seller. They also maintain that under the parol evidence rule, when
an agreement has been reduced to writing, the parties cannot present evidence that will change the
terms of the written agreement.83

The issues for this Court's resolution are as follows:

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First, whether or not private respondent Bel-Air Village Association, Inc.'s members can, by majority
vote, extend the Deed Restrictions' term of effectivity;

Second, whether or not the extension of the Deed Restrictions' term of effectivity was validly voted
upon by a majority of private respondent Bel Air Village Association, Inc.'s members; and

Finally, whether or not petitioners Cezar Yatco Real Estate Services, Inc., GRD Property Resources, Inc.,
Gamaliel Pascual, Jr., Ma. Lourdes Limjap Pascual, and Aurora Pijuan can be compelled to maintain their
membership with respondent Bel-Air Village Association, Inc.

The cardinal rule84 in contract interpretation is found in Article 1370 of the Civil Code,85 which provides:
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Article 1370. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.86

In Abad v. Goldloop Properties, Inc.,87 this Court ruled:

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The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of
the Civil Code: "[i]f the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control." This provision is akin to the
"plain meaning rule" applied by Pennsylvania courts, which assumes that the intent of the parties to an
instrument is "embodied in the writing itself, and when the words are clear and unambiguous the intent
is to be discovered only from the express language of the agreement." It also resembles the "four
comers" rule, a principle which allows courts in some cases to search beneath the semantic surface for
clues to meaning. A court's purpose in examining a contract is to interpret the intent of the contracting
parties, as objectively manifested by them. The process of interpreting a contract requires the court to
make a preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written terms of
the contract are not ambiguous and can only be read one way, the court will interpret the contract as a
matter of law. If the contract is determined to be ambiguous, then the interpretation of the contract is
left to the court, to resolve the ambiguity in the light of the intrinsic evidence.88 (Emphasis in the
original, citation omitted)

As held in Abad, courts must first determine whether or not a stipulation in a contract is ambiguous or
susceptible of multiple interpretations. Absent any ambiguity, or when the terms of the contract are
found to clearly reflect the intentions of the contracting parties, the stipulation will be interpreted as it
is written, and will be treated as the binding law between the contracting parties.89

The Deed Restrictions annotated on the land title issued to the lot buyers in Bel-Air Subdivision stated:
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BEL-AIR SUBDIVISION
DEED RESTRICTIONS

I - BEL-AIR ASSOCIATION

The owner of this lot/s or his successors[-]in[-]interest is required to be and is automatically a member
of the Bel-Air Association and must abide by such rules and regulations laid down by the Association in
the interest of the sanitation, security[,] and the general welfare of the community. The Association will
also provide for and collect assessments, which will constitute as a lien on the property junior only to
liens of the government for taxes and to voluntary mortgages for sufficient consideration entered into in
good faith.

II - USE OF LOTS

Subject to such amendments, and additional restrictions, reservations, servitudes, etc., as the Bel-Air
Association may from time to time adopt and prescribe this lot is subject to the following restrictions:
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a. This lot/s shall not be subdivided. However, three or more lots may be consolidated and
subdivided into a lesser number of lots provided that none of the resulting lots be smaller in
area than the smallest lot before the consolidation and that the consolidation and subdivision
plan be duly approved by the governing body of the Bel-Air Association.

b. This lot/s shall only be used for residential purposes.

c. Only one single family house may be constructed on a single lot, although separate servant's
quarters or garage may be built.

d. Commercial or advertising signs shall not be placed, constructed, or erected on this lot. Name
plates and professional signs of home owners are permitted so long as they do not exceed 80 x
40 centimeters in size.

e. No cattle, pigs, sheep, goats, ducks, geese, roosters[,] or rabbits shall be maintained on the lot,
except that pets may be maintained but must be controlled in accordance with the rulings of the
Association. The term "pets" includes chickens not in commercial quantities.

f. The property is subject to an easement of two (2) meters within the lot and adjacent to the rear
and sides thereof not fronting a street for the purpose of drainage, sewage, water[,] and other
public facilities as may be necessary and desirable, and the owner, lessee[,] or his representative
shall permit access thereto by authorized representatives of the Bel-Air Association or public
utility entities for the purposes for which the easement is created.

g. This lot/s shall not be used for any immoral or illegal trade or activity.

h. The owner and/or lessee of this lot/s shall at all times keep the grass cut and trimmed to reduce
the fire hazard of the property.

III - BUILDINGS AND ARCHITECTURE

a. All buildings on this lot/s must be of strong materials.

b. Building/s shall not be higher than 9 meters above the ground directly beneath the point in
question.

c. All building plans must be approved by the Association before construction begins.

d. Minimum cost of the main residence of this lot shall not be less than P15,000 but this figure may
be adjusted by the Association from time to time.

e. All buildings, including garage, servant's quarters, or parts thereof (covered terraces, porte
cocheres) must be constructed at a distance of not less than from (sic) 3 meters from boundary
fronting a street/s (not including pedestrian paths) and not less than 2 meters from the other
boundaries of this lot. Completely open and unroofed terraces are not included in these
restrictions.
IV - SEWAGE DISPOSAL

Sewage disposal must be by means of septic tanks or into a sewage system. If septic tanks are used, they
must be maintained in sanitary condition at all times.

V - WALLS

Walls on the perimeter of this property shall not exceed 2 meters in height, except that no restriction as
to height applies to walls made of live vegetation.

VI - TERM OF RESTRICTIONS

The foregoing restrictions shall remain in force for fifty years from January 15, 1957, unless sooner
cancelled in its entirety by two-thirds vote of members in good standing of the Bel-Air Association.
However, the Association may, from time to time, add new ones, amend or abolish particular
restrictions [or] parts thereof by majority rule.

VII - ENFORCEMENT OF RESTRICTIONS

The foregoing restrictions may be enjoined and/or enforced by court action by the Bel-Air Association or
by the Makati Development Corporation or its assigns, or by any registered owner of land[.]90

Unsurprisingly, the parties present differing interpretations on the Deed Restrictions' term of effectivity.
Petitioners claim that a plain reading of the Deed Restrictions would show that the term is not a
restriction which can be validly amended by private respondent's members, as it is not a limitation on
the use of property. They also assert that the Deed Restrictions never expressly or impliedly authorized
private respondent to extend its term of effectivity.91

In contrast, private respondent insists that a plain reading of the Deed Restrictions would show that the
term of restrictions may be amended by a majority vote of the members. It emphasizes that the term of
effectivity is a necessary element of the Deed Restrictions; thus, its members may validly extend its
effectivity.92

The Deed Restrictions is a restrictive covenant that governs how lot owners can use or enjoy their
properties. It was annotated on the land titles issued to the lot owners and it is not disputed that lot
owners are bound by these annotations under Section 39 of Act 496, or the Land Registration Act, which
provides:
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Section 39. Every applicant receiving a certificate of title in pursuance of a decree of registration, and
every subsequent purchaser of registered land who takes a certificate of title for value in good
faith, shall hold the same free of all encumbrance except those noted on said certificate, and any of the
following incumbrances which may be subsisting, namely:
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First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or of
the Philippine Islands which the statutes of the Philippine Islands can not require to appear of record in
the registry.

Second. Taxes within two years after the same have become due and payable.

Third. Any public highway, way, or private way established by law, where the certificate of title does not
state that the boundaries of such highway or way have been determined. But if there are easements or
other rights appurtenant to a parcel of registered land which for any reason have failed to be registered,
such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be held to
pass with the land. until cut off or extinguished by the registration of the servient estate, or in any other
manner.93 (Emphasis supplied)

Petitioners admit that the Deed Restrictions may be canceled by a majority vote of private respondent's
members. Nonetheless, they claim that private respondent had no authority to extend the Deed
Restrictions' term of effectivity.

Petitioners are mistaken.

The Deed Restrictions is divided into seven (7) parts, with its term of effectivity provided for as follows:
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VI - TERM OF RESTRICTIONS

The foregoing restrictions shall remain in force for fifty years from January 15, 1957, unless sooner
cancelled in its entirety by two thirds vote of members in good standing of the Bel-Air Association.
However, the Association may, from time to time, add new ones, amend or abolish particular
restrictions [or] parts thereof by majority rule.94

Read as a whole, the Deed Restrictions as a restrictive covenant was intended for the "sanitation,
security and the general welfare of the community,"95 providing the rules and regulations for the lot
owners' privacy and continued enjoyment of their property.

Petitioners' interpretation of limiting amendments to so-called restrictions, then declaring that the term
is not a restriction, cannot be upheld. A plain reading of Part VI, or the Term of Restrictions, would show
that the term of effectivity was not set in stone, and that private respondent was empowered to cancel
it altogether, through its members' majority vote. The contracting parties' clear intention was to give the
lot owners freedom to establish rules and regulations, under which they could best use their properties
and protect their interests. This is apparent from the second sentence: "However, the Association may,
from time to time, add new ones, amend or abolish particular restrictions [or] parts thereof by majority
rule."96

This freedom granted to private respondent was confirmed by Ayala Land, Makati Development
Corporation's successor-in-interest, when it stated that it was never its intention to prohibit the lot
owners from extending the term of the Deed Restrictions:
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The current controversy in Bel-Air Village Association, Inc. (BAVA) concerning the extension of the Deed
Restrictions has come to our attention. More particularly, we understand that there is a claim by some
quarters that it was the intention of the Makati Development Corporation, the original seller of lots in
Bel-Air Village, "to withhold the power to extend the Deed of Restrictions beyond the fifty years
annotated in the owner's title."

As successor[-]in[-]interest of the former Makati Development Corporation (MDC), we wish to clarify

that it was never the intention to deny the lot-owners/homeowners the right to extend the Deed
Restrictions, nor was this situation contemplated with the preparation of the Deed Restrictions or the
original deeds of sale between MDC and the original buyers of lots in Bel-Air Village. This is evident in
the fact that Section VI, the provision on amendment, states that "the association may, from time to
time, . . . amend . . . particular restrictions or parts thereof by majority rule." Clearly, the term of
restrictions is  part of  the restrictions and could therefore, be amended. 97 (Emphasis supplied)

The Court of Appeals thus correctly ruled that the term of restrictions was also subject to amendment
by a majority vote of private respondent's members:
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Reading Article VI in its entirety will show that the restrictions embodied in the Deed shall be
enforceable for 50 years. This is immediately followed by the following proviso, "However, the
Association may, from time to time, add new ones, amend or abolish particular restrictions or parts
thereof by majority rule." The proviso clearly states that [the Association] is empowered under a
specific provision in the Deed Restrictions to amend or abolish particular restrictions or parts thereof
by majority rule. Note that the term of restrictions is an integral part of the Deed. Necessarily, when
Article VI states that the restrictions may be amended, the amendment can go as far as amending the
entire Deed Restrictions including the term or duration of the restrictions, which is part and parcel of the
Deed.

Corollarily, when [the Association] extended the effectivity of the Deed Restrictions, it did so in the
context of amending particular restrictions as provided in Article VI.

The import of Article VI is so clear that it precludes the Court from giving a different interpretation. In
many instances, the Supreme Court underscored that, as a rule, if the statute is clear, plain and free
from ambiguity, it must be given its literal meaning and applied without interpretation.98 (Emphasis in
the original)

II

A proxy is a form of agency created in instances when a person is unable to personally cast his or her
vote; hence, the act of voting is delegated to another person.

Section 89 of Batas Pambansa Blg. 68, or the Corporation Code of the Philippines,99 recognizes a
member's right to vote by proxy. Section 58 then provides that a proxy shall be in writing, signed by the
member, and filed with the corporate secretary before the scheduled meeting:
ChanRoblesVirtualawlibrary
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed
before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a
period longer than five (5) years at any one time.100

However, the Corporation Code also empowers the members to provide for their own proxy
requirements in their by-laws, as seen in Section 47(4), which provides:
ChanRoblesVirtualawlibrary

Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private corporation may provide in its by-laws for:
ChanRoblesVirtualawlibrary
....

4. The form for proxies of stockholders and members and the manner of voting them[.]

Nonetheless, in the absence of additional formal requirements for proxies in the by-laws, the basic
requirements for a written proxy submitted prior to the scheduled meeting under Section 58 govern.

Again, the Court of Appeals did not err when it upheld the validity of the submitted proxies and the
overwhelming vote to extend the Deed Restrictions term of effectivity, thus:
ChanRoblesVirtualawlibrary

The Court therefore finds it whimsical for [petitioners] to insist that the special BAVA membership
meeting did not constitute a quorum solely based on its lame excuse that the proxy letters during said
meeting were not notarized and lacking in authority or specific grant of power to approve the extension
of the effectivity of the term of restrictions. The adjudication of this matter by the Office of the President
through Executive Secretary Paquito N. Ochoa, Jr. is worthy of respect by the Court, thus:
ChanRoblesVirtualawlibrary

"In this regard, Section 47 (4) of the Corporation Code categorically states that private corporations may
provide in their by-laws for the 'form of proxies of stockholders and members and the manner of voting
them.' Consistent therewith, Section 89 of the same Code provides: '[u]nless otherwise provided by the
articles of incorporation or by-laws, a member may vote by proxy in accordance with the provisions of
the Code.' In addition, Section 30 of Resolution No. 770 of the HLURB Board of Commissioners
(Framework for Governance of Homeowners Associations) states that (P)roxies shall be in writing and
signed by the member. . . . There is no requirement that the same be notarized. Thus, the recognized
rule and practice on proxy form is summarized as follows . . . the formalities of a proxy may be
provided for in the [b]y-[l]aws. In the absence of any provision in the [b]y-laws, the proxy need not
comply with the minimum requirements provided for in Section 58 . . . Hence the by-laws of BAVA is
controlling insofar as execution of proxies is concerned . . . the entire [b]y-laws of BAVA readily reveals
that nowhere therein is it required that the proxy forms be in any particular form, much less be in a
public document or through a special power of attorney."101 (Emphasis in the original)

III
The issue of compulsory membership in a homeowners' association like private respondent was
discussed at length in Bel Air Village Association, Inc.,102 which explained that compulsory membership is
an annotation on a lot owner's certificate of title. Hence, petitioners were bound by this annotation:
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There is no dispute that Transfer Certificate of Title No. 81136 covering the subject parcel of land issued
in the name of the petitioner contains an annotation to the effect that the lot owner becomes an
automatic member of the respondent Bel-Air Association and must abide by such rules and regulations
laid down by the Association in the interest of the sanitation, security[,] and the general welfare of the
community. It is likewise not disputed that the provision on automatic membership was expressly
annotated on the petitioner's Transfer Certificate of Title and on the title of his predecessor-in-interest.

The question, therefore, boils down to whether or not the petitioner is bound by such annotation:
ChanRoblesVirtualawlibrary
Section 39 of Act 496 (The Land Registration Act) states:
ChanRoblesVirtualawlibrary

"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold
the same free of all encumbrances except those noted on said certificate . . . ["]

Thus, in the case of Tanchoco v. Aquino, (154 SCRA 1[1987]), we ruled that purchasers of a registered
land are bound by the annotations found at the back of the certificate of title covering the subject parcel
of land. . . .

....

In effect, the petitioner's contention that he has no privity of contract with the respondent association is
not persuasive. When the petitioner voluntarily bought the subject parcel of land it was understood that
he took the same free of all encumbrances except notations at the back of the certificate of title, among
them, that he automatically becomes a member of the respondent association.103

Bel Air Village Association, Inc.104 also underscored that the constitutional guarantee of freedom of
association can only be invoked against the State, and does not apply to private transactions, like a sale,
where a condition was validly imposed by the vendor.105

Finally, PADCOM Condominium Corporation v. Ortigas Center Association, Inc. 106 reiterated that

automatic membership in a homeowners' association does not violate lot owners' right to freedom of
association because they were not forced to buy their lots from the developer:
ChanRoblesVirtualawlibrary

Neither are we convinced by PADCOM's contention that the automatic membership clause is a violation
of its freedom of association. PADCOM was never forced to join the association. It could have avoided
such membership by not buying the land from TDC. Nobody forced it to buy the land when it bought the
building with the annotation of the condition or lien on the Certificate of Title thereof and accepted the
Deed. PADCOM voluntarily agreed to be bound by and respect the condition, and thus to join the
Association.107

WHEREFORE, premises considered, the Petition is DENIED. The assailed Court of Appeals September 5,
2013 Decision and March 17, 2014 Resolution in CA-G.R. SP. No. 122954 are AFFIRMED.

SO ORDERED.

G.R. Nos. 204187 and 206606, April 01, 2019

JAKA INVESTMENTS CORPORATION, PETITIONER,V. URDANETA VILLAGE ASSOCIATION, INC. AND

AYALA LAND, INC. (AS SUCCESSOR-IN-INTEREST OF MAKATI DEVELOPMENT CORPORATION),
RESPONDENTS.

DECISION

LEONEN, J.:

Cases involving intra-association controversies fall under the jurisdiction of the Housing and Land Use
Regulatory Board, the government agency with the technical expertise on the matter.

This resolves a Petition for Review on Certiorari1 assailing the June 13, 2012 Decision2 and October 15,
2012 Resolution3 of the Court of Appeals in CA-G.R. SP Nos. 121443 and 121676. The Court of Appeals
reversed and set aside the July 19, 20104 and July 13, 20115 orders of the Regional Trial Court, which
ruled that it had jurisdiction over the case filed by Jaka Investments Corporation (Jaka Investments)
despite allegations that the case involved an intra-association dispute.6

Ayala Land, Inc. (Ayala Land), the successor-in-interest of Makati Development Corporation, is the
developer and seller of lots in Urdaneta Village, Makati City.7 The Urdaneta Village Association, Inc. (the
Association) is its duly organized homeowners' association.8 All parcels of land sold by Ayala Land in
Urdaneta Village are subject to uniform restrictions, which are annotated on the transfer certificates of
title covering the lots.9 The uniform restrictions read:

The property described in this certificate of title is subject to the restrictions enumerated in Annex A of
the sale executed by Makati Development Corporation in favor of the registered owner which shall
remain in force for fifty years from June 1, 1958. Among the restrictions are as follows:

The owners of this lot or his successor in interest is required to be and is automatically a member of the
[Urdaneta] Village Association]. This lot may not be subdivided/ This lot shall only be used for residential
purposes. Only on[e] single family house may be constructed on a single lot, althought (sic) separate
servant's quarters or garage may be built. The property is subject to an easement of two meters within
the lot and adjacent to the rear and sides thereof not fronting a street for the purpose of drainage,
sewage, water and other public facilities as may be necessary and desirable.

All building[s] on this lot must be of strong materials. Buildings shall not be higher than 9 meters above
the ground directly beneath the point in question. All building plans must be approved by the
Association] before construction begins. All buildings, including garage, servant's quarters or parts
thereof, (covered terraces, porte cocheres) must be constructed at a distance of not less than 3 meters
from the boundary fronting a street, not less tha[n] 4 meters fronting the drainage creek or
underground culvert, and not less than 2 meters from the other boundaries of this lot. Sewage disposal
must be into a sewage system.

Walls on the perimeter of this property shall not exceed 2 meters in height, except that no restriction as
to height applies to walls made . .. of live vegetation[.]10

Jaka Investments bought three (3) lots in Urdaneta Village, which were covered by Transfer Certificate of
Title Nos. S-10603, S-10604, and S-74957.11

On March 15, 2007, the Association's Board of Governors held a meeting, where it approved the
extension of the Association's corporate life and the term of the Deed Restrictions, both for another 25
years:12

A. Amendment of the Articles of Incorporation (extension of corporate life):

"Fourth - The term for which this Corporation is to exist is extended for another twenty-five (25) years
after its expiration on August 13, 2008".

B. Extension and revision of Deed Restrictions:

....

VII - TERMS OF RESTRICTIONS

The foregoing restrictions shall remain in force for twenty-five years from June 1, 2008. However, the
Association may, by majority rule, from time to time, add new ones, amend or abolish building and
architectural restrictions specified in Part III. These restrictions may be reviewed every ten years or
more often, if necessary.13 (Emphasis in the original)

On September 6, 2007, the Association held a general membership meeting to vote on the changes. Of
its 331 members, 267 approved the corporate life extension while 257 approved the Deed Restrictions'
term extension. Jaka Investments, represented through proxy Estela Malabanan (Malabanan), voted in
favor of both extensions.14

On April 8, 2008, the Housing and Land Use Regulatory Board issued a certificate of the Association's
amended Articles of Incorporation.15

On July 30, 2008, Jaka Investments filed before the Regional Trial Court a Petition16 for the cancellation
of restrictions annotated in Transfer Certificate of Title Nos. S-10603, S-10604, and S-74957. The case
was docketed as LRC Case No. M-5124.17

Jaka Investments claimed that upon the expiration of the term of restrictions on June 1, 2008, the legal
or contractual basis for the restrictions ceased. Since the annotations became unlawful limitations on
petitioner's rights as the lots' owner, they should be canceled under Section 10818 of Presidential Decree
No. 1529, or the Property Registration Decree.19

On December 16, 2008, the Association filed its Opposition to the Petition with Motion to
Dismiss.20 Maintaining that this was an intra- corporate dispute on the validity of the uniform
restrictions' term extension, the Association argued that the Housing and Land Use Regulatory Board,
not the trial court, had exclusive and original jurisdiction over the case.21 Moreover, even if the trial
court had jurisdiction, Jaka Investments was still estopped from questioning the term extension since it
had already voted in favor of it via proxy in the general membership meeting.22

On January 8, 2009, Ayala Land filed its Opposition to the Petition.23 It argued that the uniform
restrictions had already been validly extended by a majority vote of the Association's members.24

In its July 19, 2010 Order,25 the Regional Trial Court ruled against the Association's and Ayala Land's
oppositions.26 Despite agreeing that the issue was intra-corporate, the trial court still held that it had
jurisdiction over the case. It took judicial notice of the Office of the President's Decision in Cezar Yatco
Real Estate Services, Inc. v. Bel-Air Village Association, Inc.27 and applied it in Jaka Investments' Petition.28

In Cezar Yatco, the Deed Restrictions' term read:

IV - Term of Restrictions

The foregoing restrictions shall remain in force for fifty years from January 15, 1957, unless sooner
cancelled in its entirety by two-thirds vote of members in good standing of the Bel-Air Association.
However, the Association may, from time to time, add new ones, amend or abolish particular
restrictions or parts thereof by majority rule.29

The trial court noted that in Cezar Yatco, the Office of the President held that the word "however" in the
second sentence of the term only meant that the restrictions may be amended, increased, or abolished
within the 50-year period. It, however, did not imply that the term of restrictions may be extended.30

As such, the trial court ruled that the term of restrictions in Jaka Investments' case had already expired.
Thus, the matter would already fall under the jurisdiction of the regional trial courts, which may act as
land registration courts.31

The dispositive portion of the trial court Order read:

WHEREFORE, the foregoing considered, the oppositions filed by Oppositor Urdaneta Village Association,
Inc., and Ayala Land, Inc., are both acted with disfavor.

This Petition is therefore set for hearing on September 27, 2010 at 8:30 o'clock in the morning (sic).

Let copies of this Order be furnished [to] all the parties concerned.

SO ORDERED.32

The Association33 and Ayala Land34 separately moved for reconsideration, but both their motions were
denied by the trial court in its July 13, 2011 Order.35

Thus, the Association36 and Ayala Land37 separately filed before the Court of Appeals petitions for
certiorari assailing the trial court's July 19, 2010 and July 13, 2011 orders.38

In its June 13, 2012 Decision,39 the Court of Appeals reversed and set aside the trial court's rulings and
dismissed Jaka Investments' Petition for lack of jurisdiction.40 It held that the trial court should have
dismissed Jaka Investments' Petition since it had already found that the issue raised in it was an intra-
corporate controversy. Since the case's controversy is between the homeowners' association and its
member, Jaka Investments, its jurisdiction lies with the Housing and Land Use Regulatory Board.41 The
Court of Appeals elaborated:
Respondent Jaka admits that the case is intra-corporate in nature but asserts that it is the RTC who has
jurisdiction over the petition since what is being questioned is the cancellation of the annotation on the
titles, not the validity of the restrictions. However, respondent Jaka's (sic) reveals that it is disregarding
the valid extension of the term of the restrictions by filing the petition for cancellation of the annotation.
Thus, an intra-corporate issue.42

Moreover, the Court of Appeals held that even if the trial court had jurisdiction, it still erred in ruling
that the Deed Restrictions could no longer be extended. It found that in the Office of the President's
May 19, 2011 Resolution, it reversed and set aside its December 29, 2009 Decision, the basis of the trial
court's Decision. In its latter ruling, the Office of the President also reinstated the Decision of the
Housing and Land Use Regulatory Board. Thus, the trial court's decision became ineffective and its
orders should be disregarded.43

The Court of Appeals held that Jaka Investments is estopped from questioning the extension's validity. It
pointed out that the Deed Restrictions' extension was valid as more than two-thirds (2/3) of the
homeowners, including Jaka Investments through its proxy, voted for it in their general membership
meeting. Jaka Investments could not put in issue its proxy's lack of special power of attorney since it is
not required for proxy voting.44

Jaka Investments filed a Motion for Reconsideration,45 which the Court of Appeals denied in its October
15, 2012 Resolution.46

On December 12, 2012, Jaka Investments filed before this Court a Petition for Review on
Certiorari47 against the Association and Ayala Land. It prays that the Court of Appeals June 13, 2012
Decision and October 15, 2012 Resolution be reversed and set aside, and that the trial court's July 19,
2010 and July 13, 2011 Orders be reinstated.48 Respondents filed their comments on June 17, 201349 and
July 19, 2013,50 respectively. In turn, petitioner filed its Consolidated Reply51 on November 19, 2013.

In its January 13, 2014 Resolution,52 this Court gave due course to the Petition and required the parties
to submit their respective memoranda. Respondents filed their memoranda on March 18, 201453 and
March 31, 2014,54 respectively, while petitioner filed its Memorandum55 on April 2, 2014.

Petitioner denies admitting that the case is intra-corporate. It insists that the Regional Trial Court, acting
as a land registration court, correctly assumed jurisdiction over the case since what it prayed for in its
Petition was the cancellation of the title's annotation. Moreover, it filed the Petition in the exercise of its
proprietary right as the property owner, not as member of respondent Association.56 Petitioner argues:

Thus, the Petition for Cancellation, as filed, sufficiently establishes a cause of action for cancellation of
the restrictions annotated in the Certificates of Title, to wit: (1) that petitioner is the registered owner of
three (3) parcels of land with improvements situated inside Urdaneta Village, Makati City as evidenced
by Transfer Certificate of Titles (sic) Nos. S-10603, S-10604 and S-74957, (2) that there appears in all
three (3) titles a uniform entry for restrictions which has already expired on 1 June 2008, and (3) that
said annotations now appear to be unlawful limitations on the rights of petitioner and must therefore be
cancelled in accordance with Section 108 of P.D. 1529.

Consequently, on the basis of the facts alleged, the RTC, in the exercise of its original and exclusive
jurisdiction, could validly render judgment over the petition for cancellation[.]57
Petitioner maintains that it is not estopped from assailing both the validity of the Deed Restrictions'
extension and the authority of its proxy who voted in its favor.58 It claims that since its proxy is "an agent
for a special purpose,"59 the general rules on agency should apply. Under Article 1878 of the Civil Code, a
special power of attorney is required "to create or convey real rights over immovable and for any other
act of strict dominion."60 Since the extension of the Deed Restrictions is an act of strict dominion or
ownership, the proxy should have been issued a special power of attorney to bind petitioner.
Malabanan's vote, then, cannot be enforced against petitioner.61

Additionally, petitioner did not ratify Malabanan's act. Neither was there any indication that its Board of
Directors authorized its vice president and general manager, Persiverando M. Lukban, to appoint
Malabanan as its proxy.62

Petitioner contends that respondent Association's extension of its corporate life and the Deed
Restrictions violated the Deed of Absolute Sale between the original lot buyers and the seller.63 It alleges
that the original buyers "could not have envisioned nor intended to be bound by the restrictions
indefinitely, nor the same be extended, especially when the terms of the restrictions clearly [show]
otherwise."64 The contract allows for the "addition, amendment[,] or abolition of particular or specific
parts of the restrictions . . . and not to the period of effectivity."65

Finally, petitioner claims that the Deed Restrictions' extension violated the doctrine of mutuality of
contracts:66

While it is not expressly found in the contract, it would be safe to assume that when they entered in the
deed of sale over the Urdaneta lots, the original buyers and their assignees, including herein petitioner,
individually and voluntarily, accepted the Deed of Restrictions as a pre-requisite to the purchase of the
properties. Hence, when the restriction automatically expired fifty (50) years from 1 June 1958, the
same restriction may no longer be extended, without the express and valid consent of the individual
owners of the properties even if more than 2/3 of the members of the association voted in its favor. To
do so otherwise is a violation of the principle of mutuality of contracts under Article 1308 of the Civil
Code, which provides that "the contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them."67

Respondent Ayala Land counters that the Housing and Land Use Regulatory Board, not the trial court,
should take cognizance of the case. It notes that the trial court itself admitted that the controversy is
intra-corporate, and that petitioner did not deny being a member of respondent Association. Moreover,
it points out that the Office of the President later reversed its ruling in Cezar Yatco, the trial court's basis
for holding that it had jurisdiction. It then reiterates that petitioner is estopped from assailing the
extension's validity.68

In addition, respondent Ayala Land argues that the restrictions were "reasonable liens and
encumbrances intended for the general welfare of the community."69

For its part, respondent Association asserts that the Petition should be dismissed because: (1) petitioner
failed to pay the docket and other lawful fees, rendering the Court of Appeals Decision final and
executory;70 and (2) it mainly assails the validity of both the Deed Restrictions' extension and proxy
votes, which are questions of fact improper in a Rule 45 petition.71
Respondent Association further argues that the Housing and Land Use Regulatory Board has jurisdiction
over the case as it involves an intra-association dispute.72 Moreover, it asserts that petitioner is
estopped from assailing the validity of the term extension and proxy votes. This is because its proxy had
already voted in its favor, and its Petition for Cancellation was only filed 10 months after the September
6, 2007 general membership meeting. Further, even if the proxy vote was not valid, it will not affect the
decision to extend the Deed Restrictions since two-thirds (2/3) of all respondent's members voted in its
favor.73

Lastly, respondent Association ascribes bad faith to petitioner for not disclosing that the Deed
Restrictions had already been extended by the time it filed its Petition before the trial court.74

The three (3) issues for this Court's resolution are:

First, whether or not the Regional Trial Court has jurisdiction over the case;

Second, whether or not the extension of the Deed Restrictions is valid; and

Finally, whether or not petitioner Jaka Investments Corporation is estopped from assailing the validity of
the Deed Restrictions' extension.

In Maria Luisa Park Association, Inc. v. Almendras,75 this Court discussed the scope of the Housing and
Land Use Regulatory Board's jurisdiction at length:

We agree with the trial court that the instant controversy falls squarely within the exclusive and original
jurisdiction of the Home Insurance and Guaranty Corporation (HIGC), now HLURB.

Originally, administrative supervision over homeowners' associations was vested by law with the
Securities and Exchange Commission (SEC). However, pursuant to Executive Order No. 535, the HIGC
assumed the regulatory and adjudicative functions of the SEC over homeowners' associations. Section 2
of E.O. No. 535 provides:

2. In addition to the powers and functions vested under the Home Financing Act, the Corporation, shall
have among others, the following additional powers:

(a) . . . and exercise all the powers, authorities and responsibilities that are vested on the Securities and
Exchange Commission with respect to homeowners associations, the provision of Act 1459, as amended
by P.D. 902-A, to the contrary notwithstanding;

(b) To regulate and supervise the activities and operations of all houseowners associations registered in
accordance therewith;

....

Moreover, by virtue of this amendatory law, the HIGC also assumed the SEC's original and exclusive
jurisdiction under Section 5 of Presidential Decree No. 902-A to hear and decide cases involving:

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

stockholders, members, or associates; between any and/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;

....

Consequently, in Sta. Clara Homeowners' Association v. Gaston and Metro Properties, Inc. v. Magallanes
Village Association, Inc., the Court recognized HIGC's "Revised Rules of Procedure in the Hearing of
Home Owner's Disputes," pertinent portions of which are reproduced below:

RULE II

Disputes Triable by HIGC/Nature of Proceedings

Section 1. Types of Disputes — The HIGC or any person, officer, body, board or committee duly
designated or created by it shall have jurisdiction to hear and decide cases involving the following:

....

(b) Controversies arising out of intra-corporate relations between and among members of the
association, between any or all of them and the association of which they are members, and between
such association and the state/general public or other entity in so far as it concerns its right to exist as a
corporate entity.

....

Later on, the above-mentioned powers and responsibilities, which had been vested in the HIGC with
respect to homeowners' associations, were transferred to the HLURB pursuant to Republic Act No. 8763,
entitled "Home Guaranty Corporation Act of 2000."

....

Indeed, in Sta. Clara Homeowners' Association v. Gaston, we held:

. . . the HIGC exercises limited jurisdiction over homeowners' disputes. The law confines its authority
to controversies that arise from any of the following intra-corporate relations: (1) between and among
members of the association; (2) between any and/or all of them and the association of which they are
members; and (3) between the association and the state insofar as the controversy concerns its right to
exist as a corporate entity.76 (Emphasis in the original, citations omitted)

To determine if this case falls under the agency's jurisdiction, it is necessary to examine whether the
controversy arose "from any of the following intra-corporate relations: (1) between and among
members of the association; (2) between any and/or all of them and the association of which they are
members; and (3) between the association and the state insofar as the controversy concerns its right to
exist as a corporate entity."77

This Court first resolves whether petitioner is a member of respondent Association.

Petitioner did not deny its membership in the Association. Despite its non-disclosure of its membership
status in its Petition for Cancellation before the Regional Trial Court, it impliedly admitted the same
when it mentioned in its later pleadings that it was filing its Petition for Cancellation as an owner,
and not as a member of respondent Association. Hence, this Court finds that petitioner is its member.
Second, this Court resolves whether the controversy arose from the parties' intra-corporate relation.

In its Petition before the trial court, petitioner sought for the cancellation of the Deed Restrictions
annotated in its lot titles. Petitioner claimed that with the Deed Restrictions' term expiration, its legal or
contractual basis no longer existed.

However, petitioner failed to disclose that the same Deed Restrictions had already been extended by a
vote of more than two-thirds (2/3) of respondent Association's members on September 6, 2007, or 10
months before it filed its Petition. Petitioner, then, cannot have the restrictions canceled without first
invalidating the act of respondent Association in extending the Deed Restrictions' term.

Here, respondent Association maintains that the extension is valid, while petitioner insists on its
invalidity. Clearly, the controversy arose from an intra-corporate relation between an association and its
member.

Even the Regional Trial Court, despite proceeding with the case, acknowledged in its July 19, 2010 Order
that the Housing and Land Use Regulatory Board had jurisdiction over the controversy:

Although this Court agrees on the contention of the oppositor [respondent UVAI] that the issue is intra
corporate, thus, the jurisdiction is lodged in the HLURB, such issue is now deemed mooted by the fact
that the Office of the President rendered a Decision dated December 29, 2009 in the case of Cesar (sic)
Yatco Real Estate Services, Inc., et al., v. Bel-Air Village Asso. Inc. . . . which settled the issue and resolved
that the Deed of Restrictions had already lapsed on January 15, 2007.78 (Emphasis supplied)

Moreover, the Office of the President later reversed its Decision in Cezar Yatco. As the Court of Appeals
found:

Assuming arguendo that the RTC has jurisdiction over the case, it still erred when it ruled that the Deed
Restrictions cannot be extended by virtue of the Bel-Air case. The Office of the President on December
29, 2009 reversed and set aside the decision of the HLURB and ruled that Bel-Air's Deed Restrictions
cannot be extended by amendment under Article VI of the Deed Restrictions. However, on May 19,
2011, the said office issued a Resolution reversing and setting aside its December 29, 2009 decision and
reinstated the decision of the HLURB. Hence, the basis of the decision by the RTC has now become
ineffective and the Orders of the RTC should be disregarded.79 (Emphasis supplied)

Accordingly, it is the Housing and Land Use Regulatory Board, not the Regional Trial Court, which has
jurisdiction over the case.

II

As for the second and third issues, their resolution would necessarily involve an examination of evidence
presented by the parties. These are questions of facts, which cannot be raised in a petition for review
under Rule 45 of the Rules of Court. In Heirs of Pedro Mendoza v. Valte:80

Resolving questions of fact is a function of the lower courts. This court is a collegiate body. It does not
receive evidence nor conduct trial procedures that involve the marking of documentary evidence by the
parties and hearing the direct and cross-examination of each and every witness presented for
testimonial evidence. This court does not deal with matters such as whether evidence presented
deserve probative weight or must be rejected as spurious; whether the two sides presented evidence
adequate to establish their proposition; whether evidence presented by one party can be considered as
strong, clear, and convincing when weighed and analyzed against the other party's evidence; whether
the documents presented by one party can be accorded full faith and credit considering the other
party's protests; or whether certain inconsistencies in the party's body of proofs can justify not giving
these evidence weight.

The doctrine on hierarchy of courts ensures that the different levels of the judiciary can perform its
designated roles in an effective and efficient manner. As the court of last resort, this court should not be
burdened with functions falling within the causes in the first instance so that it can focus on its
fundamental tasks under the Constitution. This court leads the judiciary by breaking new ground or
further reiterating precedents in light of new circumstances or confusion in the bench and bar. Thus,
"[r]ather than a court of first instance or as a repetition of the actions of the Court of Appeals, this court
promulgates these doctrinal devices in order that it truly performs that role."81 (Citations omitted)

The Housing and Land Use Regulatory Board is the appropriate government agency to resolve whether
the extension of the Deed Restrictions is valid, and whether petitioner is estopped to question it. It has
the technical expertise to analyze contracts between petitioner and respondent Association. In Spouses
Chua v. Ang,82 this Court declared that the agency, "[i]n the exercise of its powers, . . . is empowered to
interpret and apply contracts, and determine the rights of private parties under these contracts."83

This Court reminds litigants, counsels, and judges alike on the doctrine of primary administrative
jurisdiction. Maria Luisa Park Association, Inc. instructs:

[U]nder the doctrine of primary administrative jurisdiction, courts cannot or will not determine a
controversy where the issues for resolution demand the exercise of sound administrative discretion
requiring the special knowledge, experience, and services of the administrative tribunal to determine
technical and intricate matters of fact.84 (Citation omitted)

WHEREFORE, the Petition is DENIED. The June 13, 2012 Decision and October 15, 2012 Resolution of the
Court of Appeals in CA-G.R. SP Nos. 121443 and 121676 are AFFIRMED.

SO ORDERED.

G.R. No. 221771, September 18, 2019

TERP CONSTRUCTION CORPORATION, PETITIONER, v. BANCO FILIPINO SAVINGS AND MORTGAGE

BANK, RESPONDENT

DECISION

LEONEN, J.:

A corporation's repeated payment of an allegedly unauthorized obligation contracted by one (1) of its
officers effectively ratifies that corporate officer's allegedly unauthorized act.

This Court resolves a Petition for Review on Certiorari1 assailing the Decision2 and Resolution3 of the
Court of Appeals, which reversed and set aside the Regional Trial Court Decision and ordered Terp
Construction Corporation (Terp Construciton) to pay Banco Filipino Savings and Mortgage Bank (Banco
Filipino) interest differentials of P18,104,431.33.
Sometime in 1995, Terp Construction planned to develop a housing project called the Margarita Eastville
and a condominium called Margarita Plaza. To finance the projects, Terp Construction, Home Insurance
Guaranty Corporation, and Planters Development Bank (Planters Bank) agreed to raise funds through
the issuance of bonds worth P400 million called the Margarita Project Participation Certificates
(Margarita Bonds).4

The three (3) companies entered into a Contract of Guaranty in which they agreed that Terp
Construction would sell the Margarita Bonds and convey the funds generated into an asset pool named
the Margarita Asset Pool Formation and Trust Agreement. Planters Bank, as trustee, would be the
custodian of the assets in the asset pool with the corresponding obligation to pay the interests and
redeem the bonds at maturity. Home Insurance Guaranty Corporation, as guarantor, would pay
investors the value of the bond at maturity plus 8.5% interest per year.5

Banco Filipino purchased Margarita Bonds for P100 million. It asked for additional interest other than
the guaranteed 8.5% per annum, based on the letters dated February 3, 1997 and April 8, 1997 written
by Terp Construction Senior Vice President Alberto Escalona (Escalona).6

Terp Construction began constructing Margarita Eastville and Margarita Plaza. After the economic crisis
in 1997, however, it suffered unrealized income and could not proceed with the construction.7

When the Margarita Bonds matured, the funds in the asset pool were insufficient to pay the bond
holders. Pursuant to the Contract of Guaranty, Planters Bank conveyed the asset pool funds to Home
Insurance Guaranty Corporation, which then paid Banco Filipino interest earnings of 8.5% per year.
Banco Filipino, however, sent Terp Construction a demand letter dated January 31, 2001, alleging that it
was entitled to a 15.5% interest on its investment and that as of July 1, 2001, it was entitled to a seven
percent (7%) remaining unpaid interest of P 18,104,431.33.8 Terp Construction refused to pay the
demanded interest.9

Terp Construction filed a Complaint for declaration of nullity of interest, damages, and attorney's fees
against Banco Filipino. It alleged that it only agreed to pay the seven percent (7%) additional interest on
the condition that all the asset pool funds would be released to Terp Construction for it to pay the
additional interest. However, it could not have paid the additional interest since the funds of the asset
pool were never released to it.10

Banco Filipino, on the other hand, alleged that it was induced into buying the Margarita Bonds after Terp
Construction, through its senior vice president's letters, committed to pay 15.5% interest on a P50
million bond that Banco Filipino held for a client and 16.5% interest on a P50 million bond it held for
another client. It alleged that Terp Construction paid the additional interest twice during the Margarita
Bonds' holding period.11

Banco Filipino claimed that in September 1998, after no payment of interest on the bonds had been
made, Planters Bank called on the guaranty of Home Insurance Guaranty Corporation, which only paid
8.5% interest instead of the 15.5% and 16.5% interests that Terp Construction had committed to pay.
Thus, it demanded the interest differentials, but to no avail.12

Banco Filipino further alleged that it investigated the cause of default and found that it was because
Terp Construction was unable to finish the Margarita projects. It also found that despite raising P400
million from the bonds, only P39 million was actually used for the projects. It alleged that as of
November 30, 2001, the unpaid interest differentials already amounted to P29,932,827.71.13

On May 29, 2010, the Regional Trial Court issued a Decision in favor of Terp Construction. It found that
there was no evidence to show that Terp Construction was obligated to pay the interest differentials,
and that the act of Escalona, the senior vice president, were not binding on the corporation since they
were not ratified.14

Banco Filipino appealed before the Court of Appeals, arguing, among others, that the two (2) letters sent
by Escalona were sufficient evidence to prove that Terp Construction committed to pay the interest
differentials.15

On October 16, 2014, the Court of Appeals rendered a Decision16 setting aside the Regional Trial Court
Decision and ordering Terp Construction to pay Banco Filipino interest differentials of P18,104,431.33.17

According to the Court of Appeals, both parties agreed that Terp Construction would pay Banco Filipino
additional interest other than the guaranteed 8.5%. The only issue was Terp Construction's allegation
that the payment of this additional interest was subject to a condition that the asset pool funds would
be released to Terp Construction.18

The Court of Appeals, however, found that from the February 3, 1997 and April 8, 1997 letters of Terp
Construction to Banco Filipino, the obligation to pay 16.5% and 15.5% interest was a pure obligation
since the condition alleged was never mentioned.19

The Court of Appeals also found unmeritorious Terp Construction's defense that the letters were
unauthorized acts of Escalona, its then senior vice president, since his acts were ratified when Terp
Construction paid interest differentials twice to Banco Filipino during the Margarita Bonds' holding
period.20

Terp Construction filed a Motion for Reconsideration, but this was denied in a December 9, 2015
Resolution.21 Hence, this Petition22 was filed.

Petitioner submits that while a petition under Rule 45 of the Rules of Court is generally limited to
questions of law, its case falls under one (1) of the recognized exceptions since the factual findings of
the trial court and the Court of Appeals are conflicting.23

Petitioner also argues that it was not liable for the payment of interest differentials since there was no
written contract between the parties on any additional payment beyond the stipulated 8.5%.24 It asserts
that Escalona's acts as then senior vice president cannot bind the corporation since he was not
authorized to make such commitments.25 It also points out that its erroneous payment of additional
interest over the agreed interest of 8.5% cannot be interpreted as a ratification of its senior vice
president's acts because it was never obligated itself to pay in the first place.26

Respondent, on the other hand, counters that conflicting findings of fact between the trial court and the
Court of Appeals do not automatically grant petitioner an exception to the general rule in Rule 45 of the
Rules of Court.27 It contends that there was overwhelming evidence that petitioner agreed to pay
respondent interest differentials in view of the two (2) letters from Escalona.28 It maintains that
Escalona's acts as then senior vice president were subsequently ratified by the Board of Directors when
petitioner paid respondent additional interests during the Margarita Bonds' term.29
In rebuttal, petitioner insists that no agreement existed from the very beginning to pay these interest
differentials since the two (2) letters of its then senior vice president were merely offers made in a
contract's negotiation stage that was not perfected.30 It maintains that respondent, as bank accorded
with a higher standard of diligence, cannot merely rely on the legal precept of apparent authority to
prove the existence of a monetary obligation.31

This Court is asked to resolve the issue of whether or not the Court of Appeals erred in ruling that
petitioner Terp Construction Corporation expressly agreed to be bound to respondent Banco Filipino
Savings Mortgage Bank for additional interest in the bonds it purchased.

Before resolving this issue, however, this Court must first pass upon the procedural issue of whether or
not factual questions are proper in this case in view of the conflicting factual findings of the Regional
Trial Court and the Court of Appeals.

The Petition is denied.

As a general rule, only questions of law may be brought in a petition for review on certiorari under Rule
45 of the Rules of Court.32 This Court will not disturb the factual findings of the lower courts if they are
supported by substantial evidence.33 There are, of course, recognized exceptions to this rule, which are
provided in  Medina v. Mayor Asistio, Jr.:34

(1) When the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2)
When the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave abuse
of discretion; (4) When the judgment is based on a misapprehension of facts; (5) When the findings of
fact are conflicting; (6) When the Court of Appeals, in making its findings, went beyond the issues of the
case and the same is contrary to the admissions of both appellant and appellee; (7) The findings of the
Court of Appeals are contrary to those of the trial court; (8) When the findings of fact are conclusions
without citation of specific evidence on which they are based; (9) When the facts set forth in the petition
as well as in the petitioners' main and reply briefs are not disputed by the respondents; and (10) The
finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is
contradicted by the evidence on record.35 (Citations omitted)

However, a party cannot merely claim that its case falls under any of the exceptions to the general rule.
In Pascual v. Burgos,36 this Court explained that the party claiming the exception "must demonstrate and
prove"37 that a review of the factual findings is necessary.

Here, petitioner claims that its case falls under the exceptions since the factual findings of the trial court
are in conflict with the factual findings of the Court of Appeals.38 The Court of Appeals' reversal of the
trial court's factual findings, however, is not sufficient reason to warrant this Court's review. In Uniland
Resources v. Development Bank of the Philippines:39

It bears emphasizing that mere disagreement between the Court of . Appeals and the trial court as to
the facts of a case does not of itself warrant this Court's review of the same. It has been held that the
doctrine that the findings of fact made by the Court of Appeals, being conclusive in nature, are binding
on this Court, applies even if the Court of Appeals was in disagreement with the lower court as to the
weight of evidence with a consequent reversal of its findings of fact, so long as the findings of the Court
of Appeals are borne out by the record or based on substantial evidence. While the foregoing doctrine is
not absolute, petitioner has not sufficiently proved that his case falls under the known exceptions.40
The Court of Appeals is a trier of facts. Its factual findings, even if contradictory to those of the trial
court, may be binding on this Court when they are supported by substantial evidence. Pascual explains:

The Court of Appeals, acting as an appellate court, is still a trier of facts. Parties can raise questions of
fact before the Court of Appeals and it will have jurisdiction to rule on these matters. Otherwise, if only
questions of law are raised, the appeal should be filed directly before this court.41

In any case, there was no error in the factual findings of the Court of Appeals. Petitioner categorically
committed itself to pay respondent over and above the guaranteed interest of 8.5% per annum.

Relevant portions of the letters sent by its then Senior Vice President Escalona to respondent, as
reproduced in the Court of Appeals Decision read:

[February 3, 1997 letter]:

. . . We hereby commit a guaranteed floor rate of 16.5% as project proponent. This would commit us to
pay the differential interest earnings to be paid by Planters Development Bank as Trustee every 182
days from purchase date of period of three (3) years until maturity date....

[April 8, 1997 letter]:

Terp Construction commit (sic) that the yield to you for this investment is 15.5%. The difference
between the yield approved by the Project Governing Board will be paid for by, Terp Construction
Corp.42

Petitioner disavows this obligation and contends that it was merely an unauthorized offer made by one
(1) of its officers during the negotiation stage of a contract. Petitioner, however, does not deny that it
paid respondent the additional interest during the Margarita Bonds' holding period, not just once, but
twice.

A corporation exercises its corporate powers through its board of directors.43 This power may be validly
delegated to its officers, committees, or agencies. "The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of business[.]"44

The authority of the board of directors to delegate its corporate powers may either be: (1) actual; or (2)
apparent.45

Actual authority may be express or implied. Express actual authority refers to the corporate powers
expressly delegated by the board of directors. Implied actual authority, on the other hand, "can be
measured by his or her prior acts which have been ratified by the corporation or whose benefits have
been accepted by the corporation."46

Petitioner's subsequent act of twice paying the additional interest Escalona committed to during the
term of the Margarita Bonds is considered a ratification of Escalona's acts. Petitioner's only defense that
they were "erroneous payment[s]"47 since it never obligated itself from the start cannot stand.
Corporations are bound by errors of their own making.

Escalona likewise had apparent authority to transact on behalf of petitioner. In Yao Ka Sin Trading v.
Court of Appeals:48
The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual
authority if he acts within the scope of an apparent authority with which the corporation has clothed
him by holding him out or permitting him to appear as having such authority, the corporation is bound
thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect to the business, or a particular
branch of its continuously and publicly, for a considerable time."49

Apparent authority is ascertained through:

(1) the general manner by which the corporation holds out an officer or agent as having power to act or,
in other words, the apparent authority with which it clothes him to act in general, or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether
within or without the scope of his ordinary powers.50 (Citation omitted)

Here, respondent relied on Escalona's apparent authority to promise interest payments over and above
the guaranteed 8.5%, considering that Escalona was petitioner's then senior vice president. His apparent
authority was further demonstrated by petitioner paying respondent what Escalona promised during
the Margarita Bonds' term.

It should likewise be noted that at the time this Petition was filed, Escalona signed the Verification and
Certification51 as the president of the corporation, signifying that petitioner did not consider his alleged
unauthorized acts as fatal to his continued involvement in corporate affairs.

WHEREFORE, the Petition is DENIED. Petitioner Terp Construction Corporation is ordered to pay
respondent Banco Filipino Savings and Mortgage Bank the amount of Eighteen Million One Hundred
Four Thousand and Four Hundred Thirty-One Pesos and Thirty-Three Centavos (P18,104,431.33) with
legal interest of twelve percent (12%) to be computed from January 31, 2001 until June 30, 2013 and six
percent (6%) from July 1, 2013 until its full satisfaction. The total amount payable shall likewise earn
interest at the rate of six percent (6%) per annum from the finality of this Decision until its full
satisfaction.52

SO ORDERED.