R. No.

75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ,
COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B.
SIACUNCO, et al., respondents.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private corporation known as
the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2,
promulgated by President Corazon C. Aquino on February 28, 1986 and March 12, 1986,
respectively, and (2) the sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on Good Government and/or
its Commissioners and agents, affecting said corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its misery was
issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of
the agents of the Commission, hereafter simply referred to as PCGG. It reads as follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good Government,

by authority of the President of the Philippines, you are hereby directed to sequester
the following companies.

1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island

Shipyard and Mariveles Shipyard)

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

 7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo" Romualdez

You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these

companies' business activities.

2. To ensure the continuity of these companies as going concerns, the care and
maintenance of these assets until such time that the Office of the President through
the Commission on Good Government should decide otherwise.

3. To report to the Commission on Good Government periodically.

Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement of this
sequestration order. 1

b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG,
addressed a letter dated April 18, 1986 to the President and other officers of petitioner firm,
reiterating an earlier request for the production of certain documents, to wit:

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986

2.4. Minutes of the Regular and Special Meetings of the Board of

Directors from 1973 to 1986

2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings from 1973

to 1986 duly certified by the Corporate Secretary.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others
from 1973 to December 31, 1985.
 5. Monthly Financial Statements for the current year up to March 31, 1986.

6. Consolidated Cash Position Reports from January to April 15, 1986.

7. Inventory listings of assets up dated up to March 31, 1986.

8. Updated schedule of Accounts Receivable and Accounts Payable.

9. Complete list of depository banks for all funds with the authorized signatories for
withdrawals thereof.

10. Schedule of company investments and placements. 2

The letter closed with the warning that if the documents were not submitted within five days, the
officers would be cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that
issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to
carry out the basic sequestration order. He sent a letter to BASECO's Vice-President for
Finance, terminating the contract for security services within the Engineer Island compound
3

between BASECO and "Anchor and FAIRWAYS" and "other civilian security agencies," CAPCOM
military personnel having already been assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners and
Contractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of the
amendment in part of their contracts with BASECO in the sense that the stipulated charges for use
of the BASECO road network were made payable "upon entry and not anymore subject to monthly
billing as was originally agreed upon."4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO
with Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce
improvements costing approximately P210,000.00 on the BASECO wharf at Engineer Island,
allegedly then in poor condition, avowedly to "optimize its utilization and in return maximize the
revenue which would flow into the government coffers," in consideration of Deltamarine's being
granted "priority in using the improved portion of the wharf ahead of anybody" and exemption "from
the payment of any charges for the use of wharf including the area where it may install its bagging
equipments" "until the improvement remains in a condition suitable for port operations." It seems
5

however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG)
BASECO Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new
management is not in a position to honor the said contract" and thus "whatever improvements * *
(may be introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor
Melba O. Buenaventura, "to plan and implement progress towards maximizing the continuous
operation of the BASECO Sesiman Rock Quarry * * by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another party, A.T. Abesamis, to
operate the quarry, located at Mariveles, Bataan, an agreement to this effect having been executed
by them on September 17, 1986. 7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura
was also "authorized to clean and beautify the Company's compound," and in this connection, to
dispose of or sell "metal scraps" and other materials, equipment and machineries no longer usable,
subject to specified guidelines and safeguards including audit and verification.8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the
PCGG of BASECO, "the Philippine Dockyard Corporation and all their affiliated companies." Diaz
9

invoked the provisions of Section 3 (c) of Executive Order No. 1, empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal or

dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos,
until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.

A management team was designated to implement the order, headed by Capt. Siacunco, and was
given the following powers:

1. Conducts all aspects of operation of the subject companies;

2. Installs key officers, hires and terminates personnel as necessary;

3. Enters into contracts related to management and operation of the companies;

4. Ensures that the assets of the companies are not dissipated and used effectively
and efficiently; revenues are duly accounted for; and disburses funds only as may be
necessary;

5. Does actions including among others, seeking of military support as may be

necessary, that will ensure compliance to this order;

6. Holds itself fully accountable to the Presidential Commission on Good Government

on all aspects related to this take-over order.

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez,
Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of their services by the
PCGG. 10
 2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents which, to
repeat, petitioner BASECO would have this Court nullify. More particularly, BASECO prays that this
Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and
acts done on the basis thereof, inclusive of the takeover order of July 14, 1986 and the termination
of the services of the BASECO executives. 11

a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders

While BASECO concedes that "sequestration without resorting to judicial action, might be made
within the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom
Constitution was promulgated, under the principle that the law promulgated by the ruler under a
revolutionary regime is the law of the land, it ceased to be acceptable when the same ruler opted to
promulgate the Freedom Constitution on March 25, 1986 wherein under Section I of the same,
Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among others, that "No
person shall be deprived of life, liberty and property without due process of law." (Const., Art. I V,
Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order * * and Takeover Order * *
issued purportedly under the authority of said Executive Orders, rests on four fundamental considerations: First, no notice and hearing was
accorded * * (it) before its properties and business were taken over; Second, the PCGG is not a court, but a purely investigative agency and
therefore not competent to act as prosecutor and judge in the same cause; Third, there is nothing in the issuances which envisions any
proceeding, process or remedy by which petitioner may expeditiously challenge the validity of the takeover after the same has been effected;
and Fourthly, being directed against specified persons, and in disregard of the constitutional presumption of innocence and general rules and
procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has apparently
already complied with, was issued without court authority and infringed its constitutional right against
self-incrimination, and unreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of dominion and
management of its business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent and
against the will of the contracting parties; and amending the mode of payment of entry fees
stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation, these acts
being in violation of the non-impairment clause of the constitution; 15

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated Port Services, Inc., giving the
latter free use of BASECO premises; 16

3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at
Sesiman, Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S.
Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R.
Cuesta I; 19

7) planning to elect its own Board of Directors; 20

8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises
at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been
buried therein. 22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders
have been engendered by misapprehension, or incomplete comprehension if not indeed downright
ignorance of the law governing these remedies. It is needful that these misconceptions and doubts
be dispelled so that uninformed and useless debates about them may be avoided, and arguments
tainted b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this end,
this opinion will essay an exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit command of the
Provisional Constitution, ordained by Proclamation No. 3, that the President-in the exercise of
23

legislative power which she was authorized to continue to wield "(until a legislature is elected and
convened under a new Constitution" — "shall give priority to measures to achieve the mandate of
the people," among others to (r)ecover ill-gotten properties amassed by the leaders and supporters
of the previous regime and protect the interest of the people through orders of sequestration or
freezing of assets or accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that
"vast resources of the government have been amassed by former President Ferdinand E. Marcos,
his immediate family, relatives, and close associates both here and abroad." Upon these premises, 25

the Presidential Commission on Good Government was created, "charged with the task of 26

assisting the President in regard to (certain specified) matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President Ferdinand

E. Marcos, his immediate family, relatives, subordinates and close associates,
whether located in the Philippines or abroad, including the takeover or
sequestration of all business enterprises and entities owned or controlled by them,
during his administration, directly or through nominees, by taking undue advantage of
their public office and/or using their powers, authority, influence, connections or
relationship. 27
In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its
mission, the PCGG was granted "power and authority" to do the following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or possession any

building or office wherein any ill-gotten wealth or properties may be found, and any
records pertaining thereto, in order to prevent their destruction, concealment or
disappearance which would frustrate or hamper the investigation or otherwise
prevent the Commission from accomplishing its task.

2. To provisionally take over in the public interest or to prevent the disposal or

dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos,
until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by any person or

entity that may render moot and academic, or frustrate or otherwise make ineffectual
the efforts of the Commission to carry out its task under this order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to conduct
investigations; require submission of evidence by subpoenae ad testificandum and duces
tecum; administer oaths; punish for contempt. It was given power also to promulgate such rules
29

and regulations as may be necessary to carry out the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the
recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime." It
declares that:

1) * * the Government of the Philippines is in possession of evidence showing that

there are assets and properties purportedly pertaining to former Ferdinand E.
Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents or nominees which had been or
were acquired by them directly or indirectly, through or as a result of the improper or
illegal use of funds or properties owned by the government of the Philippines or any
of its branches, instrumentalities, enterprises, banks or financial institutions, or by
taking undue advantage of their office, authority, influence, connections or
relationship, resulting in their unjust enrichment and causing grave damage and
prejudice to the Filipino people and the Republic of the Philippines:" and

2) * * said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former President
Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives,
 subordinates, business associates, dummies, agents, or nominees have any interest
or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their close
relatives, subordinates, business associates, duties, agents, or nominees
from transferring, conveying, encumbering, concealing or dissipating said assets or
properties in the Philippines and abroad, pending the outcome of appropriate
proceedings in the Philippines to determine whether any such assets or properties
were acquired by them through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of their official position, authority, relationship, connection or
influence to unjustly enrich themselves at the expense and to the grave damage and
prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or otherwise

depleting or concealing such assets and properties or from assisting or taking part in
their transfer, encumbrance, concealment or dissipation under pain of such penalties
as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or properties, whether
located in the Philippines or abroad, in their names as nominees, agents or trustees,
to make full disclosure of the same to the Commission on Good Government within
thirty (30) days from publication of * (the) Executive Order, * *.
32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, by which the PCGG is empowered,
33

"with the assistance of the Office of the Solicitor General and other government agencies, * * to file
and prosecute all cases investigated by it * * as may be warranted by its findings." All such cases,
34

whether civil or criminal, are to be filed "with the Sandiganbayan which shall have exclusive and
original jurisdiction thereof." Executive Order No. 14 also pertinently provides that civil suits for
35

restitution, reparation of damages, or indemnification for consequential damages, forfeiture

proceedings provided for under Republic Act No. 1379, or any other civil actions under the Civil
Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may
be filed separately from and proceed independently of any criminal proceedings and may be proved
by a preponderance of evidence;" and that, moreover, the "technical rules of procedure and
evidence shall not be strictly applied to* * (said)civil cases."
36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the
previous regime"; 37

a) more particularly, that ill-gotten wealth (was) accumulated by former President

Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, * * located in the Philippines or abroad, * * (and) business enterprises
and entities (came to be) owned or controlled by them, during * * (the Marcos)
administration, directly or through nominees, by taking undue advantage of their
 public office and/or using their powers, authority, influence, Connections or
relationship;38

b) otherwise stated, that "there are assets and properties purportedly pertaining to
former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly, through or
as a result of the improper or illegal use of funds or properties owned by the
Government of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines";39

c) that "said assets and properties are in the form of bank accounts. deposits, trust.
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world;" and
40

2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to
recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the above described factual
premises of the Executive Orders and Proclamation No. 3 to be true, to be demonstrable by
competent evidence, the recovery from Marcos, his family and his dominions of the assets and
properties involved, is not only a right but a duty on the part of Government.

But however plain and valid that right and duty may be, still a balance must be sought with the
equally compelling necessity that a proper respect be accorded and adequate protection assured,
the fundamental rights of private property and free enterprise which are deemed pillars of a free
society such as ours, and to which all members of that society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its

necessary components freedom of conscience, freedom of expression, and freedom
in the pursuit of happiness. Along with these freedoms are included economic
freedom and freedom of enterprise within reasonable bounds and under proper
control. * * Evincing much concern for the protection of property, the Constitution
distinctly recognizes the preferred position which real estate has occupied in law for
ages. Property is bound up with every aspect of social life in a democracy as
democracy is conceived in the Constitution. The Constitution realizes the
indispensable role which property, owned in reasonable quantities and used
legitimately, plays in the stimulation to economic effort and the formation and growth
of a solid social middle class that is said to be the bulwark of democracy and the
backbone of every progressive and happy country. 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will
have to be duly established by adequate proof in each case, in a proper judicial proceeding, so that
the recovery of the ill-gotten wealth may be validly and properly adjudged and consummated;
although there are some who maintain that the fact-that an immense fortune, and "vast resources of
the government have been amassed by former President Ferdinand E. Marcos, his immediate
family, relatives, and close associates both here and abroad," and they have resorted to all sorts of
clever schemes and manipulations to disguise and hide their illicit acquisitions-is within the realm of
judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may,
the requirement of evidentiary substantiation has been expressly acknowledged, and the procedure
to be followed explicitly laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten
wealth" as the evidence at hand may reveal, there is an obvious and imperative need for preliminary,
provisional measures to prevent the concealment, disappearance, destruction, dissipation, or loss of
the assets and properties subject of the suits, or to restrain or foil acts that may render moot and
academic, or effectively hamper, delay, or negate efforts to recover the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1)
sequestration; (2) freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten
wealth." The remedy of "provisional takeover" is peculiar to cases where "business enterprises and
properties (were) taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos." 43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten"
means to place or cause to be placed under its possession or control said property, or any building
or office wherein any such property and any records pertaining thereto may be found, including
"business enterprises and entities,"-for the purpose of preventing the destruction, concealment or
dissipation of, and otherwise conserving and preserving, the same-until it can be determined,
through appropriate judicial proceedings, whether the property was in truth will- gotten," i.e.,
acquired through or as a result of improper or illegal use of or the conversion of funds belonging to
the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of official position, authority relationship, connection or influence,
resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the
State. And this, too, is the sense in which the term is commonly understood in other jurisdictions.
44 45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to constitute
"ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing
such property, or from assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." In other words, it commands the possessor to hold the property and conserve it
46

subject to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin
to a garnishment by which the possessor or ostensible owner of property is enjoined not to deliver,
transfer, or otherwise dispose of any effects or credits in his possession or control, and thus
becomes in a sense an involuntary depositary thereof. 47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction
between "ill gotten" "business enterprises and entities" (going concerns, businesses in actual
operation), generally, as to which the remedy of sequestration applies, it being necessarily inferred
that the remedy entails no interference, or the least possible interference with the actual
management and operations thereof; and "business enterprises which were taken over by the
government government of the Marcos Administration or by entities or persons close to him," in
particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent
disposal or dissipation of the enterprises." Such a "provisional takeover" imports something more
48

than sequestration or freezing, more than the placing of the business under physical possession and
control, albeit without or with the least possible interference with the management and carrying on of
the business itself. In a "provisional takeover," what is taken into custody is not only the physical
assets of the business enterprise or entity, but the business operation as well. It is in fine the
assumption of control not only over things, but over operations or on- going activities. But, to repeat,
such a "provisional takeover" is allowed only as regards "business enterprises * * taken over by the
government of the Marcos Administration or by entities or persons close to former President
Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of the
remedies just described. Indeed the law plainly qualifies the remedy of take-over by the adjective,
"provisional." These remedies may be resorted to only for a particular exigency: to prevent in the
public interest the disappearance or dissipation of property or business, and conserve it pending
adjudgment in appropriate proceedings of the primary issue of whether or not the acquisition of title
or other right thereto by the apparent owner was attended by some vitiating anomaly. None of the
remedies is meant to deprive the owner or possessor of his title or any right to the property
sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other
person. This can be done only for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to be
understood and exercised, the language of the executive orders in question leaves no doubt.
Executive Order No. 1 declares that the sequestration of property the acquisition of which is suspect
shall last "until the transactions leading to such acquisition * * can be disposed of by the appropriate
authorities." Executive Order No. 2 declares that the assets or properties therein mentioned shall
49

remain frozen "pending the outcome of appropriate proceedings in the Philippines to determine
whether any such assets or properties were acquired" by illegal means. Executive Order No. 14
makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or
not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

There is thus no cause for the apprehension voiced by BASECO that sequestration, freezing or
50

provisional takeover is designed to be an end in itself, that it is the device through which persons
may be deprived of their property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this is not so is quite explicitly
declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these
provisional remedies. Section 26 of its Transitory Provisions, lays down the relevant rule in plain
51

terms, apart from extending ratification or confirmation (although not really necessary) to the
institution by presidential fiat of the remedy of sequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation
No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag
remain operative for not more than eighteen months after the ratification of this
Constitution. However, in the national interest, as certified by the President,
the Congress may extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima

facie case. The order and the list of the sequestered or frozen properties shall
forthwith be registered with the proper court. For orders issued before the ratification
of this Constitution, the corresponding judicial action or proceeding shall be filed
within six months from its ratification. For those issued after such ratification, the
judicial action or proceeding shall be commenced within six months from the
issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action

or proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional
remedy of preliminary attachment, or receivership. By attachment, a sheriff seizes property of a
53

defendant in a civil suit so that it may stand as security for the satisfaction of any judgment that may
be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending the
action. By receivership, property, real or personal, which is subject of litigation, is placed in the
54

possession and control of a receiver appointed by the Court, who shall conserve it pending final
determination of the title or right of possession over it. All these remedies — sequestration,
55

freezing, provisional, takeover, attachment and receivership — are provisional, temporary, designed
for-particular exigencies, attended by no character of permanency or finality, and always subject to
the control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of
no moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936
the Commissioner of Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer. BASECO itself declares that it has not manifested "a rigid insistence on
56

sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point
that makes it insensitive to change." What it insists on, what it pronounces to be its "unyielding
position, is that any change in procedure, or the institution of a new one, should conform to due
process and the other prescriptions of the Bill of Rights of the Constitution." It is, to be sure, a
57

proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal property
in replevin suits, sequestration and provisional takeover writs may issue ex parte. And as in
58

preliminary attachment, receivership, and delivery of personality, no objection of any significance

may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its
fundamental character of temporariness or conditionality; and taking account specially of the
constitutionally expressed "mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the people;" as well as
59

the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause
that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-
evident, that "any transfer, disposition, concealment or disappearance of said assets and properties
would frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a
prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and adequate
and fair opportunity to contest it and endeavor to cause its negation or nullification.
61

Both are assured under the executive orders in question and the rules and regulations promulgated
by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due
process." Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets
62

and properties, "it is the position of the new democratic government that President Marcos * * (and
other parties affected) be afforded fair opportunity to contest these claims before appropriate
Philippine authorities." Section 7 of the Commission's Rules and Regulations provides that
63

sequestration or freeze (and takeover) orders issue upon the authority of at least two
commissioners, based on the affirmation or complaint of an interested party, or motu proprio when
the Commission has reasonable grounds to believe that the issuance thereof is warranted. A 64

similar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires
that a "sequestration or freeze order shall be issued only upon showing of a prima facie case." 65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party
may seek to set aside a writ of sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of sequestration or

freeze or hold order is directed may request the lifting thereof in writing, either
personally or through counsel within five (5) days from receipt of the writ or order, or
in the case of a hold order, from date of knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio
for good cause shown, the Commission may lift the writ or order unconditionally or
subject to such conditions as it may deem necessary, taking into consideration the
evidence and the circumstance of the case. The resolution of the commission may
be appealed by the party concerned to the Office of the President of the Philippines
within fifteen (15) days from receipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not
expressly imposed by some rule or regulation as a condition to warrant the sequestration or freezing
of property contemplated in the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in
fact or law, or are whimsical and capricious, are condemned and struck down. 66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and
propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that these
particular remedies and the authority of the PCGG to issue them have received constitutional
approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution
recognizes the power and duty of the President to enact "measures to achieve the mandate of the
people to * * * (recover ill- gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration or freezing of assets or
accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution treats
67

of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police power,
regarded, as t lie power of promoting the public welfare by restraining and regulating the use of
liberty and property," and as "the most essential, insistent and illimitable of powers * * in the
68

promotion of general welfare and the public interest," and said to be co-extensive with self-
69

protection and * * not inaptly termed (also) the'law of overruling necessity." "
70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not,
and was never intended to act as, a judge. Its general function is to conduct investigations in order
to collect evidence establishing instances of "ill-gotten wealth;" issue sequestration, and such
orders as may be warranted by the evidence thus collected and as may be necessary to preserve
and conserve the assets of which it takes custody and control and prevent their disappearance, loss
or dissipation; and eventually file and prosecute in the proper court of competent jurisdiction all
cases investigated by it as may be warranted by its findings. It does not try and decide, or hear and
determine, or adjudicate with any character of finality or compulsion, cases involving the essential
issue of whether or not property should be forfeited and transferred to the State because "ill-gotten"
within the meaning of the Constitution and the executive orders. This function is reserved to the
designated court, in this case, the Sandiganbayan. There can therefore be no serious regard
71

accorded to the accusation, leveled by BASECO, that the PCGG plays the perfidious role of
72

prosecutor and judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record,
hereafter to be discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed
for will not be issued.

The facts show that the corporation known as BASECO was owned or controlled by President
Marcos "during his administration, through nominees, by taking undue advantage of his public office
and/or using his powers, authority, or influence, " and that it was by and through the same means,
that BASECO had taken over the business and/or assets of the National Shipyard and Engineering
Co., Inc., and other government-owned or controlled entities.

12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as
a domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and
shipping executives. Its main office is at Engineer Island, Port Area, Manila, where its Engineer
Island Shipyard is housed, and its main shipyard is located at Mariveles Bataan." Its Articles of
73

Incorporation disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares,
of which 12,000 shares with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the incorporators. The same
74

articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony
P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11)
Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15)
Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely:
(1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw
Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in
BASECO's Stock and Transfer Book. Their names and the number of shares respectively held by
75

them are as follows:

1. Jose A. Rojas 1,248 shares

2. Severino G. de 1,248 shares

la Cruz

3. Emilio T. Yap 2,508 shares

4. Jose 1,248 shares

Fernandez

5. Jose Francisco 128 shares

6. Manuel S. 96 shares
Mendoza

7. Anthony P. Lee 1,248 shares

8. Hilario M. Ruiz 32 shares

9. Constante L. 8 shares
Fariñas

10. Fidelity 65,882

Management, Inc. shares

11. Trident 7,412 shares

Management

12. United Phil. 1,240 shares

Lines

13. Renato M. 8 shares

Tanseco

14. Fidel Ventura 8 shares

 15. Metro Bay 136,370
Drydock shares

16. Manuel Jacela 1 share

17. Jonathan G. 1 share

Lu

18. Jose J. 1 share

Tanchanco

19. Dioscoro 128 shares

Papa

20. Edward T. 4 shares

Marcelo

TOTAL 218,819
shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel
Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard at
Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and — except for NASSCO's
Engineer Island Shops and certain equipment of the BNS, consigned for future negotiation — all its
structures, buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in transit.
This it did in virtue of a "Contract of Purchase and Sale with Chattel Mortgage" executed on
February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO delivered
to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from
completion of the inventory undertaken pursuant to the contract. The balance of P41,600,000.00,
with interest at seven percent (7%) per annum, compounded semi-annually, was stipulated to be
paid in equal semi-annual installments over a term of nine (9) years, payment to commence after a
grace period of two (2) years from date of turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00,
about eight (8) months later. A document to this effect was executed on October 9, 1973, entitled
"Memorandum Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding Officer
of the Board of Directors, and David R. Ines, as General Manager. This agreement bore, at the top
77

right corner of the first page, the word "APPROVED" in the handwriting of President
Marcos, followed by his usual full signature. The document recited that a down payment of
P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was payable in
equal semi-annual installments over nine (9) years after a grace period of two (2) years, with interest
at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the
Export Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the
document of sale, P2,000.000.00 was paid upon its execution, and the balance stipulated to be
payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the
intervention of President Marcos, acquired ownership of the rest of the assets of NASSCO which
had not been included in the first two (2) purchase documents. This was accomplished by a deed
entitled "Contract of Purchase and Sale," which, like the Memorandum of Agreement dated
79

October 9, 1973 supra also bore at the upper right-hand corner of its first page, the handwritten
notation of President Marcos reading, "APPROVED, July 29, 1973," and underneath it, his usual full
signature. Transferred to BASECO were NASSCO's "ownership and all its titles, rights and interests
over all equipment and facilities including structures, buildings, shops, quarters, houses, plants and
expendable or semi-expendable assets, located at the Engineer Island, known as the Engineer
Island Shops, including all the equipment of the Bataan National Shipyards (BNS) which were
excluded from the sale of NBS to BASECO but retained by BASECO and all other selected
equipment and machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed,
NASSCO committed itself to cooperate with BASECO for the acquisition from the National
Government or other appropriate Government entity of Engineer Island. Consideration for the sale
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the
balance was stipulated to be paid at 7% interest per annum in equal semi annual installments over a
term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo Pacificador
again signed for NASSCO, together with the general manager, Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last
available Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy
equipment (brand new)." On September 3, 1975, it got another loan also from the NDC in the
80

amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the
GSIS, in the sum of P12,400,000.00. The claim has been made that not a single centavo has been
81

paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The
first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president. The 83

second was embodied in a confidential memorandum dated September 16, 1977 of Capt. A.T.
Romualdez. They further disclose the fine hand of Marcos in the affairs of BASECO, and that of a
84

Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been
"no orders or demands for ship construction" for some time and expressed the fear that if that state
of affairs persisted, BASECO would not be able to pay its debts to the Government, which at the
time stood at the not inconsiderable amount of P165,854,000.00. He suggested that, to "save the
85

situation," there be a "spin-off (of their) shipbuilding activities which shall be handled exclusively by
an entirely new corporation to be created;" and towards this end, he informed Marcos that BASECO
was —
 * * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding
loan to BASECO amounting to P341.165M and assuming and converting a portion of
BASECO's shipbuilding loans from REPACOM amounting to P52.2M or a total of
P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will
participate by absorbing and converting a portion of the REPACOM loan of Bay
Shipyard and Drydock, Inc., amounting to P32.538M. 86

b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with
the following caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due
chiefly to the fact that "orders to build ships as expected * * did not materialize."

He advised that five stockholders had "waived and/or assigned their holdings inblank," these being:
(1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony
P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major
heart attack," he made the following quite revealing, and it may be added, quite cynical and indurate
recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in the stock
book prior to the implementation of your instructions to pass a board resolution to
legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents: 88

1. Stock certificates indorsed and assigned in blank with assignments and waivers; 89

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in
"Engineer Island", Port Area, Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering

"Engineer Island";
 5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and
equipment at Mariveles, Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and
equipment at Engineer Island, Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of
land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of

P30,000,000.00;

10. BASECO-REPACOM Agreement dated May 27, 1975;

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the
housing facilities for BASECO's rank-and-file employees. 90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when
BASECO will have enough orders for ships in order for the company to meet loan obligations," and
that —

An LOI may be issued to government agencies using floating equipment, that a

linkage scheme be applied to a certain percent of BASECO's net profit as part of
BASECO's amortization payments to make it justifiable for you, Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of
BASECO, yet he has presented a report on BASECO to President Marcos, and his report
demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as

regards the "spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco
of the Philippine National Oil Company and Chairman Constante Fariñas of the National
Development Company, directing them "to participate in the formation of a new corporation resulting
from the spin-off of the shipbuilding component of BASECO along the following guidelines:

a. Equity participation of government shall be through LUSTEVECO and NDC in the

amount of P115,903,000 consisting of the following obligations of BASECO which
are hereby authorized to be converted to equity of the said new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

 b. Equity participation of government shall be in the form of non- voting shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after
receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and
Geronimo Z. Velasco, in representation of their respective corporations, executed a PRE-
INCORPORATION AGREEMENT dated October 20, 1977. In it, they undertook to form a
93

shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to

realization their president's instructions. It would seem that the new corporation ultimately formed
was actually named "Philippine Dockyard Corporation (PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February
14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations Commission
REPACOM the Philippine National Oil Company (PNOC), the Luzon Stevedoring Company
(LUSTEVECO), and the National Development Company (NDC). What is commanded therein is
summarized by the Solicitor General, with pithy and not inaccurate observations as to the effects
thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations be

transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount of
s allegedly representing the handling and incidental expenses incurred by BASECO
in the installation of said equipment (so instead of NDC getting paid on its loan to
BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now in the
possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred
to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred
be invested by LUSTEVECO, acting through PNOC and NDC, as the government's
equity participation in a shipbuilding corporation to be established in partnership with
the private sector.

xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's loan
obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's
REPACOM loan of P32.438M were wiped out and converted into non-voting
preferred shares. 95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the
control by President Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos not
only exercised control over BASECO, but also that he actually owns well nigh one hundred percent
of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares
of stock outstanding, ostensibly owned by twenty (20) stockholders. Four of these twenty are 96

juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity
Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil.
Lines, 1,240 shares. The first three corporations, among themselves, own an aggregate of 209,664
shares of BASECO stock, or 95.82% of the outstanding stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found
in Malacanang shortly after the sudden flight of President Marcos, were certificates corresponding to
more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding shares of stock of the
three (3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the
owners thereof although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management

Inc. — which supposedly owns as aforesaid 65,882 shares of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of

Metro Bay Drydock Corporation — which allegedly owns 136,370 shares of
BASECO stock;

3) the deeds of assignment of 800 outstanding shares of Trident Management Co.,

Inc. — which allegedly owns 7,412 shares of BASECO stock, assigned in
blank; and98

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares

of BASECO stock; that is, all but 5 % — all endorsed in blank. 99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the
BASECO stockholders were still in possession of their respective stock certificates and had "never
endorsed * * them in blank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded
statements as a mere gesture of defiance rather than a verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days
"to SUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders of * *
BASECO as of April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension;
and in his motion dated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of third parties, among
whom being the respondents themselves * * and petitioner is still endeavoring to secure copies thereof from them." 102 On the same day he
filed another motion praying that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of
all other Certificates, of Stock of petitioner's stockholders in possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's aforestated motion to secure
copies of the stock certificates "confirms the fact that stockholders of petitioner corporation are not in possession of * * (their) certificates of
stock," and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in Malacañang after the
former President and his family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to require * * the petitioner * *
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its possession or
accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from notice." 106 In a
motion filed on December 5, 1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with
the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates referred to" but that "it
needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to produce the originals of the
stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * * (him) to borrow said certificates, * *
some of * * (them) claimed that they had delivered the certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in view of last national emergency." 108 He has conveniently omitted,
nor has he offered to give the details of the transactions adverted to by him, or to explain why he had not impressed on the supposed
stockholders the primordial importance of convincing this Court of their present custody of the originals of the stock, or if he had done so,
why the stockholders are unwilling to agree to some sort of arrangement so that the originals of their certificates might at the very least be
exhibited to the Court. Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the
simple reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having
already been assigned in blank to then President Marcos.

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the stockholders
and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; at any
rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be avoided that said stockholders and
directors have no basis and no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to
BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business sequestered and taken over by the
PCGG to persons who are "dummies," nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the
private corporation known as BASECO was "owned or controlled by former President Ferdinand E.
Marcos * * during his administration, * * through nominees, by taking advantage of * * (his) public
office and/or using * * (his) powers, authority, influence * *," and that NASSCO and other property of
the government had been taken over by BASECO; and the situation justified the sequestration as
well as the provisional takeover of the corporation in the public interest, in accordance with the terms
of Executive Orders No. 1 and 2, pending the filing of the requisite actions with the Sandiganbayan
to cause divestment of title thereto from Marcos, and its adjudication in favor of the Republic
pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it
sustains the acts of sequestration and takeover by the PCGG as being in accord with the law, and,
in view of what has thus far been set out in this opinion, pronounces to be without merit the theory
that said acts, and the executive orders pursuant to which they were done, are fatally defective in not
according to the parties affected prior notice and hearing, or an adequate remedy to impugn, set
aside or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and judge at
the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of
attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the contrary, the
executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-
gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the
PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately
make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and
seizures had been transgressed by the Order of April 18, 1986 which required it "to produce
corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do so."
The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of the
PCGG's power to "issue subpoenas requiring * * the production of such books, papers, contracts,
records, statements of accounts and other documents as may be material to the investigation
conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to
"require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether
located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full
disclosure of the same * *." The contention lacks merit.

It is elementary that the right against self-incrimination has no application to juridical persons.

While an individual may lawfully refuse to answer incriminating questions unless

protected by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its hand when charged with an
abuse ofsuchprivileges * * 113

Relevant jurisprudence is also cited by the Solicitor General. 114

* * corporations are not entitled to all of the constitutional protections which private
individuals have. * * They are not at all within the privilege against self-
incrimination, although this court more than once has said that the privilege runs very
closely with the 4th Amendment's Search and Seizure provisions. It is also settled
that an officer of the company cannot refuse to produce its records in its possession
upon the plea that they will either incriminate him or may incriminate it." (Oklahoma
Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).

* * The corporation is a creature of the state. It is presumed to be incorporated for the

benefit of the public. It received certain special privileges and franchises, and holds
them subject to the laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its charter. Its rights to act
as a corporation are only preserved to it so long as it obeys the laws of its creation.
There is a reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly to hold that a
state, having chartered a corporation to make use of certain franchises, could not, in
the exercise of sovereignty, inquire how these franchises had been employed, and
whether they had been abused, and demand the production of the corporate books
and papers for that purpose. The defense amounts to this, that an officer of the
corporation which is charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To state this
proposition is to answer it. While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it does not follow
that a corporation, vested with special privileges and franchises may refuse to show
its hand when charged with an abuse of such privileges. (Wilson v. United States, 55
Law Ed., 771, 780 [emphasis, the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures
protection to individuals required to produce evidence before the PCGG against any possible
violation of his right against self-incrimination. It gives them immunity from prosecution on the basis
of testimony or information he is compelled to present. As amended, said Section 4 now provides
that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his privilege
against self-incrimination; but no testimony or other information compelled under the
order (or any information directly or indirectly derived from such testimony, or other
information) may be used against the witness in any criminal case, except a
 prosecution for perjury, giving a false statement, or otherwise failing to comply with
the order.

The constitutional safeguard against unreasonable searches and seizures finds no application to the
case at bar either. There has been no search undertaken by any agent or representative of the
PCGG, and of course no seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the powers
that may be wielded by the PCGG with regard to the properties or businesses placed under
sequestration or provisionally taken over. Obviously, it is not a question to which an answer can be
easily given, much less one which will suffice for every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of
dominion over property sequestered, frozen or provisionally taken over. AS already earlier stressed
with no little insistence, the act of sequestration; freezing or provisional takeover of property does not
import or bring about a divestment of title over said property; does not make the PCGG the owner
thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it can not perform acts of strict ownership; and this is specially
true in the situations contemplated by the sequestration rules where, unlike cases of receivership, for
example, no court exercises effective supervision or can upon due application and hearing, grant
authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least
possible interference with business operations or activities so that, in the event that the accusation of
the business enterprise being "ill gotten" be not proven, it may be returned to its rightful owner as far
as possible in the same condition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, 115 such as to bring and
defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may
be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its
efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance
of any office, agency or instrumentality of the government. 116 In the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator,
caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons

Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over
by the government of the Marcos Administration or by entities or persons close to former President
Marcos," 117 the PCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest or to
prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to going concerns, or business enterprises in
operation, something more than mere physical custody is connoted; the PCGG may in this case exercise some measure of control in the
operation, running, or management of the business itself. But even in this special situation, the intrusion into management should be
restricted to the minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business
enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement or substitution should be avoided if at all possible, and
undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without
saying that where replacement of management officers may be called for, the greatest prudence, circumspection, care and attention - should
accompany that undertaking to the end that truly competent, experienced and honest managers may be recruited. There should be no role to
be played in this area by rank amateurs, no matter how wen meaning. The road to hell, it has been said, is paved with good intentions. The
business is not to be experimented or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight
should never be lost sight of the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once judicially
established to be "ill-gotten." Reason dictates that it is only under these conditions and circumstances that the supervision, administration
and control of business enterprises provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may
properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the
President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum
authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of * *
(sequestered) shares of stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of directors, declaration of
dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed
in such a manner as to be consistent with, and not contradictory of the Executive Orders earlier
promulgated on the same matter. There should be no exercise of the right to vote simply because
the right exists, or because the stocks sequestered constitute the controlling or a substantial part of
the corporate voting power. The stock is not to be voted to replace directors, or revise the articles or
by-laws, or otherwise bring about substantial changes in policy, program or practice of the
corporation except for demonstrably weighty and defensible grounds, and always in the context of
the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or undue
disposal of the corporate assets. Directors are not to be voted out simply because the power to do
so exists. Substitution of directors is not to be done without reason or rhyme, should indeed be
shunned if at an possible, and undertaken only when essential to prevent disappearance or wastage
of corporate property, and always under such circumstances as assure that the replacements are
truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office and
elect others in their stead because the evidence showed prima facie that the former were just tools
of President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This
is why, in its Resolution of October 28, 1986; 118 this Court declared that —

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of
directors as authorized by the Memorandum of the President * * (to the PCGG) dated
June 26, 1986, particularly, where as in this case, the government can, through its
designated directors, properly exercise control and management over what appear to
be properties and assets owned and belonging to the government itself and over
which the persons who appear in this case on behalf of BASECO have failed to show
any right or even any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in
the management of the company's affairs should henceforth be guided and governed by the norms
herein laid down. They should never for a moment allow themselves to forget that they are
conservators, not owners of the business; they are fiduciaries, trustees, of whom the highest degree
of diligence and rectitude is, in the premises, required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the
execution of certain contracts, inclusive of the termination of the employment of some of its
executives, 119 this Court cannot, in the present state of the evidence on record, pass upon them. It is not necessary to do so. The
issues arising therefrom may and will be left for initial determination in the appropriate action. But the Court will state that absent any showing
of any important cause therefor, it will not normally substitute its judgment for that of the PCGG in these individual transactions. It is clear
however, that as things now stand, the petitioner cannot be said to have established the correctness of its submission that the acts of the
PCGG in question were done without or in excess of its powers, or with grave abuse of discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14,
1986 is lifted.

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

G.R. No. L-19550 June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his
capacity as Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS
PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL
MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE ROMAN
CANSINO, Municipal Court of Manila; JUDGE HERMOGENES CALUAG, Court of First
Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN JIMENEZ, Municipal Court of
Quezon City, respondents.

Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro,
Assistant Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason and Solicitor C. Padua for
respondents.

CONCEPCION, C.J.:

Upon application of the officers of the government named on the margin 1 — hereinafter referred to
as Respondents-Prosecutors — several judges2 — hereinafter referred to as Respondents-Judges
— issued, on different dates,3 a total of 42 search warrants against petitioners herein4 and/or the
corporations of which they were officers,5 directed to the any peace officer, to search the persons
above-named and/or the premises of their offices, warehouses and/or residences, and to seize and
take possession of the following personal property to wit:

Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals,

portfolios, credit journals, typewriters, and other documents and/or papers showing all
business transactions including disbursements receipts, balance sheets and profit and loss
statements and Bobbins (cigarette wrappers).

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or
intended to be used as the means of committing the offense," which is described in the applications
adverted to above as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue
(Code) and the Revised Penal Code."

Alleging that the aforementioned search warrants are null and void, as contravening the Constitution
and the Rules of Court — because, inter alia: (1) they do not describe with particularity the
documents, books and things to be seized; (2) cash money, not mentioned in the warrants, were
actually seized; (3) the warrants were issued to fish evidence against the aforementioned petitioners
in deportation cases filed against them; (4) the searches and seizures were made in an illegal
manner; and (5) the documents, papers and cash money seized were not delivered to the courts that
issued the warrants, to be disposed of in accordance with law — on March 20, 1962, said petitioners
filed with the Supreme Court this original action for certiorari, prohibition, mandamus and injunction,
and prayed that, pending final disposition of the present case, a writ of preliminary injunction be
issued restraining Respondents-Prosecutors, their agents and /or representatives from using the
effects seized as aforementioned or any copies thereof, in the deportation cases already adverted
to, and that, in due course, thereafter, decision be rendered quashing the contested search warrants
and declaring the same null and void, and commanding the respondents, their agents or
representatives to return to petitioners herein, in accordance with Section 3, Rule 67, of the Rules of
Court, the documents, papers, things and cash moneys seized or confiscated under the search
warrants in question.

In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are valid
and have been issued in accordance with law; (2) that the defects of said warrants, if any, were
cured by petitioners' consent; and (3) that, in any event, the effects seized are admissible in
evidence against herein petitioners, regardless of the alleged illegality of the aforementioned
searches and seizures.

On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition.
However, by resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the
papers, documents and things seized from the offices of the corporations above mentioned are
concerned; but, the injunction was maintained as regards the papers, documents and things found
and seized in the residences of petitioners herein.7

Thus, the documents, papers, and things seized under the alleged authority of the warrants in
question may be split into two (2) major groups, namely: (a) those found and seized in the offices of
the aforementioned corporations, and (b) those found and seized in the residences of petitioners
herein.

As regards the first group, we hold that petitioners herein have no cause of action to assail the
legality of the contested warrants and of the seizures made in pursuance thereof, for the simple
reason that said corporations have their respective personalities, separate and distinct from the
personality of herein petitioners, regardless of the amount of shares of stock or of the interest of
each of them in said corporations, and whatever the offices they hold therein may be. 8 Indeed, it is
well settled that the legality of a seizure can be contested only by the party whose rights have been
impaired thereby,9 and that the objection to an unlawful search and seizure is purely personal and
cannot be availed of by third parties. 10 Consequently, petitioners herein may not validly object to the
use in evidence against them of the documents, papers and things seized from the offices and
premises of the corporations adverted to above, since the right to object to the admission of said
papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and
may not be invoked by the corporate officers in proceedings against them in their individual
capacity. 11 Indeed, it has been held:

. . . that the Government's action in gaining possession of papers belonging to

the corporation did not relate to nor did it affect the personal defendants. If these papers
were unlawfully seized and thereby the constitutional rights of or any one were invaded, they
were the rights of the corporation and not the rights of the other defendants. Next, it is clear
that a question of the lawfulness of a seizure can be raised only by one whose rights have
been invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights
of defendants whose property had not been seized or the privacy of whose homes had not
been disturbed; nor could they claim for themselves the benefits of the Fourth Amendment,
 when its violation, if any, was with reference to the rights of another. Remus vs. United
States (C.C.A.)291 F. 501, 511. It follows, therefore, that the question of the admissibility of
the evidence based on an alleged unlawful search and seizure does not extend to the
personal defendants but embraces only the corporation whose property was taken. . . . (A
Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis supplied.)

With respect to the documents, papers and things seized in the residences of petitioners herein, the
aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued
by this Court, 12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in
evidence against petitioners herein.

In connection with said documents, papers and things, two (2) important questions need be settled,
namely: (1) whether the search warrants in question, and the searches and seizures made under the
authority thereof, are valid or not, and (2) if the answer to the preceding question is in the negative,
whether said documents, papers and things may be used in evidence against petitioners herein. 1äwphï1.ñët

Petitioners maintain that the aforementioned search warrants are in the nature of general warrants
and that accordingly, the seizures effected upon the authority there of are null and void. In this
connection, the Constitution 13 provides:

The right of the people to be secure in their persons, houses, papers, and effects against
unreasonable searches and seizures shall not be violated, and no warrants shall issue but
upon probable cause, to be determined by the judge after examination under oath or
affirmation of the complainant and the witnesses he may produce, and particularly describing
the place to be searched, and the persons or things to be seized.

Two points must be stressed in connection with this constitutional mandate, namely: (1) that no
warrant shall issue but upon probable cause, to be determined by the judge in the manner set forth
in said provision; and (2) that the warrant shall particularly describe the things to be seized.

None of these requirements has been complied with in the contested warrants. Indeed, the same
were issued upon applications stating that the natural and juridical person therein named had
committed a "violation of Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and
Revised Penal Code." In other words, no specific offense had been alleged in said applications. The
averments thereof with respect to the offense committed were abstract. As a consequence, it
was impossible for the judges who issued the warrants to have found the existence of probable
cause, for the same presupposes the introduction of competent proof that the party against whom it
is sought has performed particular acts, or committed specific omissions, violating a given provision
of our criminal laws. As a matter of fact, the applications involved in this case do not allege any
specific acts performed by herein petitioners. It would be the legal heresy, of the highest order, to
convict anybody of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue
(Code) and Revised Penal Code," — as alleged in the aforementioned applications — without
reference to any determinate provision of said laws or

To uphold the validity of the warrants in question would be to wipe out completely one of the most
fundamental rights guaranteed in our Constitution, for it would place the sanctity of the domicile and
the privacy of communication and correspondence at the mercy of the whims caprice or passion of
peace officers. This is precisely the evil sought to be remedied by the constitutional provision above
quoted — to outlaw the so-called general warrants. It is not difficult to imagine what would happen,
in times of keen political strife, when the party in power feels that the minority is likely to wrest it,
even though by legal means.
Such is the seriousness of the irregularities committed in connection with the disputed search
warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of
Court 14 by providing in its counterpart, under the Revised Rules of Court 15 that "a search warrant
shall not issue but upon probable cause in connection with one specific offense." Not satisfied with
this qualification, the Court added thereto a paragraph, directing that "no search warrant shall issue
for more than one specific offense."

The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit:

Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,

portfolios, credit journals, typewriters, and other documents and/or papers showing all
business transactions including disbursement receipts, balance sheets and related profit and
loss statements.

Thus, the warrants authorized the search for and seizure of records pertaining to all business
transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The
warrants sanctioned the seizure of all records of the petitioners and the aforementioned
corporations, whatever their nature, thus openly contravening the explicit command of our Bill of
Rights — that the things to be seized be particularly described — as well as tending to defeat its
major objective: the elimination of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that,
even if the searches and seizures under consideration were unconstitutional, the documents, papers
and things thus seized are admissible in evidence against petitioners herein. Upon mature
deliberation, however, we are unanimously of the opinion that the position taken in the Moncado
case must be abandoned. Said position was in line with the American common law rule, that the
criminal should not be allowed to go free merely "because the constable has blundered," 16 upon the
theory that the constitutional prohibition against unreasonable searches and seizures is protected by
means other than the exclusion of evidence unlawfully obtained, 17 such as the common-law action
for damages against the searching officer, against the party who procured the issuance of the
search warrant and against those assisting in the execution of an illegal search, their criminal
punishment, resistance, without liability to an unlawful seizure, and such other legal remedies as
may be provided by other laws.

However, most common law jurisdictions have already given up this approach and eventually
adopted the exclusionary rule, realizing that this is the only practical means of enforcing the
constitutional injunction against unreasonable searches and seizures. In the language of Judge
Learned Hand:

As we understand it, the reason for the exclusion of evidence competent as such, which has
been unlawfully acquired, is that exclusion is the only practical way of enforcing the
constitutional privilege. In earlier times the action of trespass against the offending official
may have been protection enough; but that is true no longer. Only in case the prosecution
which itself controls the seizing officials, knows that it cannot profit by their wrong will that
wrong be repressed.18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:

If letters and private documents can thus be seized and held and used in evidence against a
citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be
secure against such searches and seizures, is of no value, and, so far as those thus placed
 are concerned, might as well be stricken from the Constitution. The efforts of the courts and
their officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided
by the sacrifice of those great principles established by years of endeavor and suffering
which have resulted in their embodiment in the fundamental law of the land.19

This view was, not only reiterated, but, also, broadened in subsequent decisions on the same
Federal Court. 20 After reviewing previous decisions thereon, said Court held, in Mapp vs.
Ohio (supra.):

. . . Today we once again examine the Wolf's constitutional documentation of the right of
privacy free from unreasonable state intrusion, and after its dozen years on our books, are
led by it to close the only courtroom door remaining open to evidence secured by official
lawlessness in flagrant abuse of that basic right, reserved to all persons as a specific
guarantee against that very same unlawful conduct. We hold that all evidence obtained by
searches and seizures in violation of the Constitution is, by that same authority, inadmissible
in a State.

Since the Fourth Amendment's right of privacy has been declared enforceable against the
States through the Due Process Clause of the Fourteenth, it is enforceable against them by
the same sanction of exclusion as it used against the Federal Government. Were it
otherwise, then just as without the Weeks rule the assurance against unreasonable federal
searches and seizures would be "a form of words," valueless and underserving of mention in
a perpetual charter of inestimable human liberties, so too, without that rule the freedom from
state invasions of privacy would be so ephemeral and so neatly severed from its conceptual
nexus with the freedom from all brutish means of coercing evidence as not to permit this
Court's high regard as a freedom "implicit in the concept of ordered liberty." At the time that
the Court held in Wolf that the amendment was applicable to the States through the Due
Process Clause, the cases of this Court as we have seen, had steadfastly held that as to
federal officers the Fourth Amendment included the exclusion of the evidence seized in
violation of its provisions. Even Wolf "stoutly adhered" to that proposition. The right to when
conceded operatively enforceable against the States, was not susceptible of destruction by
avulsion of the sanction upon which its protection and enjoyment had always been deemed
dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the
substantive protections of due process to all constitutionally unreasonable searches — state
or federal — it was logically and constitutionally necessarily that the exclusion doctrine — an
essential part of the right to privacy — be also insisted upon as an essential ingredient of the
right newly recognized by the Wolf Case. In short, the admission of the new constitutional
Right by Wolf could not tolerate denial of its most important constitutional privilege, namely,
the exclusion of the evidence which an accused had been forced to give by reason of the
unlawful seizure. To hold otherwise is to grant the right but in reality to withhold its privilege
and enjoyment. Only last year the Court itself recognized that the purpose of the
exclusionary rule to "is to deter — to compel respect for the constitutional guaranty in the
only effectively available way — by removing the incentive to disregard it" . . . .

The ignoble shortcut to conviction left open to the State tends to destroy the entire system of
constitutional restraints on which the liberties of the people rest. Having once recognized that
the right to privacy embodied in the Fourth Amendment is enforceable against the States,
and that the right to be secure against rude invasions of privacy by state officers is, therefore
constitutional in origin, we can no longer permit that right to remain an empty promise.
Because it is enforceable in the same manner and to like effect as other basic rights secured
by its Due Process Clause, we can no longer permit it to be revocable at the whim of any
police officer who, in the name of law enforcement itself, chooses to suspend its enjoyment.
 Our decision, founded on reason and truth, gives to the individual no more than that which
the Constitution guarantees him to the police officer no less than that to which honest law
enforcement is entitled, and, to the courts, that judicial integrity so necessary in the true
administration of justice. (emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the
constitutional injunction against unreasonable searches and seizures. To be sure, if the applicant for
a search warrant has competent evidence to establish probable cause of the commission of a given
crime by the party against whom the warrant is intended, then there is no reason why the applicant
should not comply with the requirements of the fundamental law. Upon the other hand, if he has no
such competent evidence, then it is not possible for the Judge to find that there is probable cause,
and, hence, no justification for the issuance of the warrant. The only possible explanation (not
justification) for its issuance is the necessity of fishing evidence of the commission of a crime. But,
then, this fishing expedition is indicative of the absence of evidence to establish a probable cause.

Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant
and/or make unreasonable searches or seizures would suffice to protect the constitutional guarantee
under consideration, overlooks the fact that violations thereof are, in general, committed By agents
of the party in power, for, certainly, those belonging to the minority could not possibly abuse a power
they do not have. Regardless of the handicap under which the minority usually — but,
understandably — finds itself in prosecuting agents of the majority, one must not lose sight of the
fact that the psychological and moral effect of the possibility 21 of securing their conviction, is watered
down by the pardoning power of the party for whose benefit the illegality had been committed.

In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29,
1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey
Boulevard, House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be
included among the premises considered in said Resolution as residences of herein petitioners,
Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that,
furthermore, the records, papers and other effects seized in the offices of the corporations above
referred to include personal belongings of said petitioners and other effects under their exclusive
possession and control, for the exclusion of which they have a standing under the latest rulings of
the federal courts of federal courts of the United States. 22

We note, however, that petitioners' theory, regarding their alleged possession of and control over the
aforementioned records, papers and effects, and the alleged "personal" nature thereof, has Been
Advanced, not in their petition or amended petition herein, but in the Motion for Reconsideration and
Amendment of the Resolution of June 29, 1962. In other words, said theory would appear to be
readjustment of that followed in said petitions, to suit the approach intimated in the Resolution
sought to be reconsidered and amended. Then, too, some of the affidavits or copies of alleged
affidavits attached to said motion for reconsideration, or submitted in support thereof, contain either
inconsistent allegations, or allegations inconsistent with the theory now advanced by petitioners
herein.

Upon the other hand, we are not satisfied that the allegations of said petitions said motion for
reconsideration, and the contents of the aforementioned affidavits and other papers submitted in
support of said motion, have sufficiently established the facts or conditions contemplated in the
cases relied upon by the petitioners; to warrant application of the views therein expressed, should
we agree thereto. At any rate, we do not deem it necessary to express our opinion thereon, it being
best to leave the matter open for determination in appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby,
abandoned; that the warrants for the search of three (3) residences of herein petitioners, as
specified in the Resolution of June 29, 1962, are null and void; that the searches and seizures
therein made are illegal; that the writ of preliminary injunction heretofore issued, in connection with
the documents, papers and other effects thus seized in said residences of herein petitioners is
hereby made permanent; that the writs prayed for are granted, insofar as the documents, papers
and other effects so seized in the aforementioned residences are concerned; that the
aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and
that the petition herein is dismissed and the writs prayed for denied, as regards the documents,
papers and other effects seized in the twenty-nine (29) places, offices and other premises
enumerated in the same Resolution, without special pronouncement as to costs.

It is so ordered.

G.R. No. 154366 November 17, 2010

CEBU BIONIC BUILDERS SUPPLY, INC. and LYDIA SIA, Petitioners,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, JOSE TO CHIP, PATRICIO YAP and ROGER
BALILA, Respondents.

DECISION

LEONARDO – DE CASTRO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the
Resolution2 dated February 5, 2002 and the Amended Decision3 dated July 5, 2002 of the Court of
Appeals in CA-G.R. CV No. 57216. In the Resolution dated February 5, 2002, the Court of Appeals
admitted the Motion for Reconsideration4 of herein respondents Development Bank of the
Philippines (DBP), Jose To Chip, Patricio Yap and Roger Balila, notwithstanding the fact that the
same was filed more than six months beyond the reglementary period. Said motion prayed for the
reversal of the Court of Appeals Decision5 dated February 14, 2001, which affirmed the
Decision6 dated April 25, 1997 of the Regional Trial Court (RTC) of Cebu, Branch 8, in Civil Case
No. CEB-10104 that ruled in favor of petitioners. In the Amended Decision of July 5, 2002, the Court
of Appeals reversed its previous Decision dated February 14, 2001 and dismissed the petitioners’
complaint for lack of merit.

The facts leading to the instant petition are as follows:

On June 2, 1981, the spouses Rudy R. Robles, Jr. and Elizabeth R. Robles entered into a mortgage
contract7 with DBP in order to secure a loan from the said bank in the amount of ₱500,000.00. The
properties mortgaged were a parcel of land situated in Tabunoc, Talisay, Cebu, which was then
covered by Transfer Certificate of Title (TCT) No. T- 47783 of the Register of Deeds of Cebu,
together with all the existing improvements, and the commercial building to be constructed
thereon8 (subject properties). Upon completion, the commercial building was named the State
Theatre Building.

On October 28, 1981, Rudy Robles executed a contract of lease in favor of petitioner Cebu Bionic
Builders Supply, Inc. (Cebu Bionic), a domestic corporation engaged in the construction business, as
well as the sale of hardware materials. The contract pertinently provides:
 CONTRACT OF LEASE

KNOW ALL MEN BY THESE PRESENTS:

This Lease Contract made and entered into, by and between:

RUDY ROBLES, JR., Filipino, of legal age, married and resident of 173 Maria Cristina Ext., Cebu
City, hereinafter referred to as the LESSOR,

- and -

CEBU BIONIC BUILDER SUPPLY, represented by LYDIA SIA, Filipino, of legal age, married and
with address at 240 Magallanes St., Cebu City hereinafter known as the LESSEE;

WITNESSETH:

The LESSOR is the owner of a commercial building along Tabunok, Talisay, Cebu, known as the
State Theatre Building.

The LESSOR agrees to lease unto the LESSEE and the LESSEE accepts the lease from the
LESSOR, a portion of the ground floor thereof, consisting of one (1) unit/store space under the
following terms and conditions:

1. The LESSEE shall pay a monthly rental of One Thousand (₱1,000.00) Pesos,
Philippine Currency. The rental is payable in advance within the first five (5) days of
the month, without need of demand;

2. That the term of this agreement shall start on November 1, 1981 and shall
terminate on the last day of every month thereafter; provided however that this
contract shall be automatically renewed on a month to month basis if no notice, in
writing, is sent to the other party to terminate this agreement after fifteen (15) days
from receipt of said notice;

xxxx

9. Should the LESSOR decide to sell the property during the term of this lease
contract or immediately after the expiration of the lease, the LESSEE shall have the
first option to buy and shall match offers from outside parties.9 (Emphases ours.)

The above contract was not registered by the parties thereto with the Registry of Deeds of Cebu.

Subsequently, the spouses Robles failed to settle their loan obligation with DBP. The latter was,
thus, prompted to effect extrajudicial foreclosure on the subject properties. 10 On February 6, 1987,
DBP was the lone bidder in the foreclosure sale and thereby acquired ownership of the mortgaged
subject properties.11 On October 13, 1988, a final Deed of Sale12 was issued in favor of DBP.

Meanwhile, on June 18, 1987, DBP sent a letter to Bonifacio Sia, the husband of petitioner Lydia Sia
who was then President of Cebu Bionic, notifying the latter of DBP’s acquisition of the State Theatre
Building. Said letter reads:

June 18, 1987

Mr. Bonifacio Sia
Bionic Builders’ Inc.
State Theatre Bldg.
Tabunok, Talisay, Cebu

Sir:

This refers to the commercial space you are occupying in the acquired property of the Bank, formerly
owned by Rudy Robles, Jr.

Please be informed that said property has been acquired through foreclosure on February 6, 1987.
Considering thereat, we require you to remit the rental due for June 1987.

If you wish to continue on leasing the property, we request you to come to the Bank for the execution
of a Contract of Lease, the salient conditions of which are as follows:

1. The lease will be on month to month basis, for a maximum period of one (1) year;

2. Deposit equivalent to two (2) months rental and advance of one (1) month rental,
and the remaining amount for one year period (equivalent to 9 months rental) shall
be secured by either surety bond, cash bond or assigned time deposit;

3. That in case there is a better offer or if the property will be subject of a purchase
offer, within the term, the lessor is given an option of first refusal, otherwise he has to
vacate the premises within thirty (30) days from date of notice.

We consider, temporarily, the current monthly rental based on the six-month receipts, which we
require you to submit, until such time when we will fix the amount accordingly.

If the contract of lease is not executed within thirty (30) days from date hereof, it is construed that
you are not interested in leasing the premises and will vacate within the said period.

Please be guided accordingly.

Truly yours,

(SGD)LUCILO S. REVILLAS
Branch Head13 (Emphases ours.)

On July 7, 1987, the counsel of Bonifacio Sia replied to the above letter, to wit:

July 7, 1987

Mr. Lucilo S. Revillas

Branch Head
Development Bank of the Philippines

Dear Mr. Revillas,

This has reference to your letter of 18 June 1987 which you sent to my client, Mr. Bonifacio Sia of
Cebu Bionic Builders’ Supply – the lessee of a commercial space of the State Theatre Bldg., located
at Tabunok, Talisay, Cebu.

My client is amenable to the terms contained in your letter except the following:

1. In lieu of item no. 2 thereof, my client will deposit with your bank the amount of
P10,000.00, as assigned time deposit;

2. The 30 days notice you mentioned in your letter, (3), is too short. My client is
requesting for at least 60 days notice.

I sincerely hope that you will give due course to this request.

Thank you.

Truly yours,

(SGD) ANASTACIO T. MUNTUERTO, JR.14

Thereafter, on November 14, 1989, a Certificate of Time Deposit15 for ₱11,395.64 was issued in the
name of Bonifacio Sia and the same was allegedly remitted to DBP as advance rental deposit.

For reasons unclear, however, no written contract of lease was executed between DBP and Cebu
Bionic.

In the meantime, subsequent to the acquisition of the subject properties, DBP offered the same for
sale along with its other assets. Pursuant thereto, DBP published a series of invitations to bid on
such properties, which were scheduled on January 19, 1989,16 February 23, 1989,17 April 13,
1989,18 and November 15, 1990.19 As no interested bidder came forward, DBP publicized an
Invitation on Negotiated Sale/Offer, the relevant terms and conditions of which stated:

INVITATION ON NEGOTIATED SALE/OFFER

The DEVELOPMENT BANK OF THE PHILIPPINES, Cebu Branch, will receive SEALED
NEGOTIATED OFFERS/PURCHASE PROPOSALS tendered at its Branch Office, DBP Building,
Osmeña Boulevard, Cebu City for the sale of its acquired assets mentioned hereinunder within the
"15-Day-Acceptance-Period" starting from NOVEMBER 19, 1990 up to 12:00 o’clock noon of
DECEMBER 3, 1990. Sealed offers submitted shall be opened by the Committee on Negotiated
Offers at exactly 2:00 o’clock in the afternoon of the last day of the acceptance period in order to
determine the highest and/or most advantageous offer.

Item Description/Location Starting Price

No.
xxxx
II Commercial land, Lot No. 3681-C-3, having an area of ₱1,838,100.00
396 sq. m., situated in Tabunok, Talisay, Cebu and
covered by TCT No. T-65199 (DBP), including the
commercial building thereon.
 xxxx

A pre-numbered Acknowledgment Receipt duly signed by at least two (2) of the Committee
members shall be issued to the offeror acknowledging receipt of such offer.

Negotiated offers may be made in CASH or TERMS, the former requiring a deposit of 10% and
the latter 20% of the starting price, either in the form of cash or cashier’s/manager’s check to
be enclosed in the sealed offer.

xxxx

Interested negotiated offerors are requested to see Atty. Apolinar K. Panal, Jr., Acquired Asset in
Charge (Tel. No. 9-63-25), in order to secure copies of the Letter-Offer form and Negotiated Sale
Rules and Procedures.

NOTE: If no offer is received during the above stated acceptance period, the properties
described above shall be sold to the first offeror who submits an acceptable proposal on a
"First-Come-First-Served" basis.

City of Cebu, Philippines, November 16, 1990.

(SGD.) TIMOTEO P. OLARTE

Branch Head20 (Emphases ours.)

In the morning of December 3, 1990, the last day for the acceptance of negotiated offers, petitioners
submitted through their representative, Judy Garces, a letter-offer form, offering to purchase the
subject properties for ₱1,840,000.00. Attached to the letter-offer was a copy of the Negotiated Sale
Rules and Procedures issued by DBP and a manager’s check for the amount of ₱184,000.00,
representing 10% of the offered purchase price. This offer of petitioners was not accepted by DBP,
however, as the corresponding deposit therefor was allegedly insufficient.

After the lapse of the above-mentioned 15-day acceptance period, petitioners did not submit any
other offer/proposal to purchase the subject properties.1avvphi1

On December 17, 1990, respondents To Chip, Yap and Balila presented their letter-offer 21 to
purchase the subject properties on a cash basis for ₱1,838,100.00. Said offer was accompanied by
a downpayment of 10% of the offered purchase price, amounting to ₱183,810.00. On even date,
DBP acknowledged the receipt of and accepted their offer. On December 28, 1990, respondents To
Chip, Yap and Balila paid the balance of the purchase price and DBP issued a Deed of Sale 22 over
the subject properties in their favor.

On January 11, 1991, the counsel of respondents To Chip, Yap and Balila sent a letter 23 addressed
to the proprietor of Cebu Bionic, informing the latter of the transfer of ownership of the subject
properties. Cebu Bionic was ordered to vacate the premises within thirty (30) days from receipt of
the letter and directed to pay the rentals from January 1, 1991 until the end of the said 30-day
period.

The counsel of Cebu Bionic replied24 that his client received the above letter on January 11, 1991.
He stated that he has instructed Cebu Bionic to verify first the ownership of the subject properties
since it had the preferential right to purchase the same. He likewise requested that he be furnished a
copy of the deed of sale executed by DBP in favor of respondents To Chip, Yap and Balila.
On February 15, 1991, respondent To Chip wrote a letter25 to the counsel of Cebu Bionic, insisting
that he and his co-respondents Yap and Balila urgently needed the subject properties to pursue their
business plans. He also reiterated their demand for Cebu Bionic to vacate the premises.

Shortly thereafter, on February 27, 1991, the counsel of respondents To Chip, Yap and Balila sent
its final demand letter26 to Cebu Bionic, warning the latter to vacate the subject properties within
seven (7) days from receipt of the letter, otherwise, a case for ejectment with damages will be filed
against it.27

Despite the foregoing notice, Cebu Bionic still paid28 to DBP, on March 22, 1991, the amount of
₱5,000.00 as monthly rentals on the unit of the State Theatre Building it was occupying for period of
November 1990 to March 1991.

On April 10, 1991, petitioners filed against respondents DBP, To Chip, Yap and Balila
a complaint29 for specific performance, cancellation of deed of sale with damages, injunction with a
prayer for the issuance of a writ of preliminary injunction.30 The complaint was docketed as Civil
Case No. CEB-10104 in the RTC.

Petitioners alleged, inter alia, that Cebu Bionic was the lessee and occupant of a commercial space
in the State Theatre Building from October 1981 up to the time of the filing of the complaint. During
the latter part of 1990, DBP advertised for sale the State Theatre Building and the commercial lot on
which the same was situated. In the prior invitation to bid, the bidding was scheduled on November
15, 1990; while in the next, under the 15-day acceptance period, the submission of proposals was to
be made from November 19, 1990 up to 12:00 noon of December 3, 1990. Petitioners claimed that,
at about 10:00 a.m. on December 3, 1990, they duly submitted to Atty. Apolinar Panal, Jr., Chief of
the Acquired Assets of DBP, the following documents, namely:

6.1 Letter-offer form, offering to purchase the property advertised, for the price of
₱1,840,000, which was higher than the starting price of ₱1,838,100.00 on cash basis. x x x;

6.2 Negotiated Sale Rules and Procedures, duly signed by plaintiff, x x x;

6.3 Manager’s check for the amount of ₱184,000 representing 10% of the deposit dated
December 3, 1990 and issued by Allied Banking Corp. in favor of the Development Bank of
the Philippines. x x x.31 (Emphasis ours.)

Petitioners asserted that the above documents were initially accepted but later returned. DBP
allegedly advised petitioners that "there was no urgent need for the same x x x, considering that the
property will necessarily be sold to [Cebu Bionic] for the reasons that there was no other interested
party and that [Cebu Bionic] was a preferred party being the lessee and present occupant of the
property subject of the lease[.]"32 Petitioners then related that, without their knowledge, DBP sold the
subject properties to respondents To Chip, Yap and Balila. The sale was claimed to be simulated
and fictitious, as DBP still received rentals from petitioners until March 1991. By acquiring the
subject properties, petitioners contended that DBP was deemed to have assumed the contract of
lease executed between them and Rudy Robles. As such, DBP was bound by the provision of the
lease contract, which stated that:

9. Should the Lessor decide to sell the property during the term of this lease contract or immediately
after the expiration of the lease, the Lessee shall have the first option to buy and shall match offers
from outside parties.33
Petitioners sought the rescission of the contract of sale between DBP and respondents To Chip, Yap
and Balila. Petitioners also prayed for the issuance of a writ of preliminary injunction, restraining
respondents To Chip, Yap and Balila from registering the Deed of Sale in the latter’s favor and from
undertaking the ejectment of petitioners from the subject properties. Likewise, petitioners entreated
that DBP be ordered to execute a deed of sale covering the subject properties in their name and to
pay damages and attorney’s fees.

In its answer,34 DBP denied the existence of a contract of lease between itself and petitioners. DBP
countered that the letter-offer of petitioners was actually not accepted as their offer to purchase was
on a term basis, which therefore required a 20% deposit. The 10% deposit accompanying the
petitioners’ letter-offer was declared insufficient. DBP stated that the letter-offer form was not
completely filled out as the "Term" and "Mode of Payment" fields were left blank. DBP then informed
petitioner Lydia Sia of the inadequacy of her offer. After ascertaining that there was no other offeror
as of that time, Lydia Sia allegedly summoned back her representative who did not leave a copy of
the letter-offer and the attached documents. DBP maintained that petitioners’ documents did not
show that the same were received and approved by any approving authority of the bank. The letter-
offer attached to the complaint, which indicated that the mode of payment was on a cash basis, was
allegedly not the document shown to DBP. In addition, DBP argued that there was no assumption of
the lease contract between Rudy Robles and petitioners since it acquired the subject properties
through the involuntary mode of extrajudicial foreclosure and its request to petitioners to sign a new
lease contract was simply ignored. DBP, therefore, insisted that petitioners’ occupancy of the unit in
the State Theatre Building was merely upon its acquiescence. The petitioners’ payment of rentals on
March 22, 1991 was supposedly made in bad faith as they were made to a mere teller who had no
knowledge of the sale of the subject properties to respondents To Chip, Yap and Balila. DBP, thus,
prayed for the dismissal of the complaint and, by way of counterclaim, asked that petitioners be
ordered to pay damages and attorney’s fees.

Respondents To Chip, Yap and Balila no longer filed a separate answer, adopting instead the
answer of DBP.35

In an Order36 dated July 31, 1991, the RTC granted the prayer of petitioners for the issuance of a writ
of preliminary injunction.37

On April 25, 1997, the RTC rendered judgment in Civil Case No. CEB-10104, finding meritorious the
complaint of the petitioners. Explained the trial court:

It is a fact on record that [petitioners] complied with the requirements of deposit and advance rental
as conditions for constitution of lease between the parties. [Petitioners] in complying with the
requirements, issued a time deposit in the amount of ₱11,395.64 and remitted faithfully its monthly
rentals until April, 1991, which monthly rental was no longer accepted by the DBP. Although there
was no formal written contract executed between [respondent] DBP and the [petitioners], it is
very clear that DBP opted to continue the old and previous contract including the terms
thereon by accepting the requirements contained in paragraph 2 of its letter dated June 18,
1987. It is also a fact on record that under the lease contract continued by the DBP on the
[petitioners], it is provided in paragraph 9 thereof that the lessee shall have the first option to buy and
shall match offers from outside parties. And yet, [respondent] DBP never gave [petitioners] the
first option to buy or to match offers from outside parties, more specifically [respondents] To
Chip, Balila and Yap. It is also a fact on record that [respondent] DBP in its letter dated June 18,
1987 to [petitioners] wrote in paragraph 3 thereof, "that in case there is better offer or if a property
will be subject of purchase offer, within the term, the lessee is given the option of first refusal,
otherwise, he has to vacate the premises within thirty (30) days". Yet, [respondent] DBP never
informed [petitioners] that there was an interested party to buy the property, meaning,
[respondents To Chip, Yap and Balila], thus depriving [petitioners] of the opportunity of first
refusal promised to them in its letter dated June 18, 1987. x x x.38 (Emphases ours.)

As regards the offer of petitioners to purchase the subject properties from DBP, the RTC gave more
credence to the petitioners’ version of the facts, to wit:

It is also a fact on record that when [respondent] DBP offered the property for negotiated sale under
the 15-day acceptance period[, which] ended at noon of December 3, 1991, [Cebu Bionic] submitted
its offer, complete with [the required documents.] x x x.

xxxx

These requirements, however, were unceremoniously returned by [respondent] bank with the
assurance that since there was no other bidder of the said property, there was no urgency for the
same and that [Cebu Bionic] also, in all events, is entitled to first option being the present lessee.

The declaration of Atty. Panal to the effect that Cebu Bionic wanted to buy the property on
installment terms, such that the deposit of ₱184,000.00 was insufficient being only 10% of the offer,
could not be given much credence as it is refuted by Exh. "H" which is the negotiated offer to
purchase form under the 15-day acceptance period accomplished by [petitioners] which shows
clearly the written word "Cash" after the printed words "Term" and "Mode of Payment", Exhibit "J",
the Manager’s check issued by Allied Banking Corporation dated December 3, 1990 in the amount
of ₱184,000.00 representing 10% of the offer showing the mode of payment is for cash; Exhibit "K"
which is the application for Manager’s check in the amount of ₱184,000.00 dated December 3, 1990
showing the beneficiary as DBP. If it is true that the offer of [petitioners] was for installment
payments, then in the ordinary course of human behavior, it would not have wasted effort in
securing a Manager’s check in the amount of ₱184,000.00 which was insufficient for 20%
deposit as required for installment payments. More credible is the explanation [given by]
witness Judy Garces when she said that DBP through Atty. Panal returned the documents
submitted by her, saying that there was no urgency for the same as there was no other
bidder of [the said] property and that Cebu Bionic was entitled to a first option to buy being
the present lessee. In the letter also of [respondent] bank dated June 18, 1987, it is important to
note that aside from requiring Cebu Bionic to comply with certain requirements of time deposit and
advance rental, as condition for constitution of lease between the parties and which was complied by
Cebu Bionic[,] said letter further states in paragraph 3 thereof that "in case there is [a] better offer or
if the property will be subject of a purchase offer, within the term, the lessee is given the option of
first refusal, otherwise, he has to vacate the premises within thirty days". In answer to the Court’s
question, however, Atty. Panal admitted that he did not tell [petitioners] that there was another party
who was willing to purchase the property, in violation of [petitioners]’ right of first refusal. 39 (Emphasis
ours.)

Likewise, the RTC found that respondents To Chip, Yap and Balila were aware of the lease contract
involving the subject properties before they purchased the same from DBP. Thus:

[Respondent] Jose To Chip lamely pretends ignorance that [petitioners] are lessees of the property,
subject matter of this case. He states that he and his partners, the other [respondents], were given
assurances by Atty. Panal of the DBP that [Lydia Sia] is not a lessee, although he knew that
[petitioners] were presently occupying the property and that it was possessed by [petitioners] even
before it was owned by the DBP. x x x.

xxxx
[Respondent] Roger Balila, in his testimony, likewise pretended ignorance that he knew that [Lydia
Sia] was a lessee of the property. x x x.

xxxx

Upon further questioning by the Court, he admitted that [Lydia Sia] was not possessing the building
freely; that she was a lessee of Rudy Robles, the former owner, but cleverly insisted in disowning
knowledge that [Lydia Sia] was a lessee, denying knowledge that [Lydia Sia] was paying rentals to
[respondent] bank. His pretended ignorance x x x was a way of evading [Cebu Bionic’s] right of first
priority to buy the property under the contract of lease. x x x The Court is convinced that
[respondents To Chip, Yap and Balila] knew that [Cebu Bionic] was the present lessee of the
property before they bought the same from [respondent] bank. Common observation, knowledge
and experience dictates that as a prudent businessman, it was but natural that he ask Lydia Sia
what her status was in occupying the property when he went to talk to her, that he ask her if she was
a lessee. But he said, all he asked her was whether she was interested to buy the property. x x x. 40

The trial court, therefore, concluded that:

From the foregoing facts on record, it is thus clear that [petitioner] Cebu Bionic is the present lessee
of the property, the lease contract having been continued by [respondent] DBP when it received
rental payments up to March of 1991 as well as the advance rental for one year represented by the
assigned time deposit which is still in [respondent] bank’s possession. The provision, therefore, in
the lease contract, on the right of first option to buy and the right of first refusal contained in
[respondent] bank’s letter dated June 18, 1987, are still subsisting and binding up to the present, not
only on [respondent] bank but also on [respondents To Chip, Yap and Balila]. x x x.

xxxx

WHEREFORE, THE FOREGOING PREMISES CONSIDERED, judgment is hereby rendered:

(1) Rescinding the Deed of Sale dated December 28, 1990 between [respondent]
Development Bank of the Philippines and [respondents] Roger Balila, Jose To Chip and
Patricio Yap;

(2) Ordering the [respondent] Development Bank of the Philippines to execute a Deed of
Sale over the property, subject matter of this case upon payment by [petitioners] of the whole
consideration involved and to complete all acts or documents necessary to have the title over
said property transferred to the name of [petitioners];

(3) Costs against [respondents].41

DBP forthwith filed a Notice of Appeal.42 Respondents To Chip, Yap and Balila filed a Motion for
Reconsideration43 of the above decision, but the RTC denied the same in an Order44 dated July 4,
1997. Said respondents then filed their Notice of Appeal.45

On February 14, 2001, the Court of Appeals promulgated its Decision,46 pronouncing that:

We find nothing erroneous with the judgment rendered by the trial court. Perforce, We sustain it and
dismiss the [respondents’] submission.
The RTC determined, upon evidence on record after a careful evaluation of the witnesses and their
testimonies during the trial that indeed [petitioners’] right of first option was violated and thus,
rescission of the sale made by DBP to [respondents To Chip, Yap and Balila] are in order.

xxxx

Apparently, DBP accepted [the documents submitted by petitioners] and thereafter, through Atty.
Panal (of DBP), returned all of it to the [petitioners] "with the assurance that since there was no other
bidder of the said property, there was no urgency for the same and that [Cebu Bionic] also, in all
events, is entitled to first option being the present lessee.

[DBP] maintains that the return of the documents [submitted by petitioners] was in order since the
[petitioners] offered to buy the property in question on installment basis requiring a higher 20%
deposit. This, however, was correctly rejected by the trial court[.] x x x

The binding effect of the lease agreement upon the [respondents To Chip, Yap and Balila] must be
sustained since from existing jurisprudence cited by the lower court, it was determined during trial
that:

"... [respondents To Chip, Yap and Balila] knew that [Cebu Bionic] was the present lessee of
the property before they bought the same from [respondent] bank. Common observation,
knowledge and experience dictates that as a prudent businessman, it was but natural that he
ask Lydia Sia what her status was in occupying the property when he went to talk to her, that
he ask her if she was a lessee. But he said, all he asked her was whether she was interested
to buy the property. x x x.

Moreover, We find that the submissions presented by the [respondents] in their respective briefs
argue against questions of facts as found and determined by the lower court. The respondents’
contentions consist of crude attempts to question the assessment and evaluation of testimonies and
other evidence gathered by the trial court.

It must be remembered that findings of fact as determined by the trial court are entitled to great
weight and respect from appellate courts and should not be disturbed on appeal unless for [strong]
and cogent reasons. These findings generally, so long as supported by evidence on record, are not
to be disturbed unless there are some facts or evidence which the trial court has misappreciated or
overlooked, and which if considered would have altered the results of the entire case. Sad to say for
the [respondents], We see no reason to depart from this well-settled legal principle.

WHEREFORE, in view of the foregoing, the judgment of the Regional Trial Court of Cebu City,
Branch 8, in Civil Case No. 10104 is hereby AFFIRMED in toto.47

On October 1, 2001, petitioners filed a Motion for Issuance of Entry of Judgment. 48 Petitioners
stressed that, based on the records of the case, respondents were served a copy of the Court of
Appeals Decision dated February 14, 2001 sometime on March 7, 2001. However, petitioners
discovered that respondents have not filed any motion for reconsideration of the said decision within
the reglementary period therefor, nor was there any petition for certiorari or appeal filed before the
Supreme Court.

In response to the above motion, respondents To Chip, Yap and Balila filed on October 8, 2001 a
Motion to Admit Motion for Reconsideration.49 Atty. Francis M. Zosa, the counsel for respondents To
Chip, Yap and Balila, explained that he sent copies of the motion for reconsideration to petitioners
and DBP via personal delivery. On the other hand, the copies of the motion to be filed with the Court
of Appeals were purportedly sent to Mr. Domingo Tan, a friend of Atty. Zosa in Quezon City, who
agreed to file the same personally with the appellate court in Manila. When Atty. Zosa inquired if the
motion for reconsideration was accordingly filed, Mr. Tan allegedly answered in the affirmative. To
his surprise, Atty. Zosa received a copy of petitioners’ Motion for Issuance of Entry of Judgment.
Atty. Zosa, thus, attributed the failure of his clients to file a motion for reconsideration on the mistake,
excusable negligence and/or fraud committed by Mr. Tan.

In the assailed Resolution dated February 5, 2002, the Court of Appeals granted the motion of
respondents To Chip, Yap and Balila and admitted the motion for reconsideration attached therewith
"in the higher interest of substantial justice."50

On July 5, 2002, the Court of Appeals reversed its original Decision dated February 14, 2001,
reasoning thus:

After a judicious review and reevaluation of the evidence and facts on record, we are convinced that
DBP had terminated the Robles lease contract. From its letter of June 18, 1987, DBP had expressly
notified [petitioners] that "(I)f they wish to continue on leasing the property x x x" "to come to the
Bank for the execution of a Contract of Lease, the salient conditions of which are as follows:

‘1. The lease will be on a month to month basis for a maximum period of one (1) year;

‘2. Deposit equivalent to two (2) months rental and advance of one (1) month rental,
and the remaining amount for one year (equivalent to 9 months rental) shall be
secured by either surety bond, cash bond or assigned time deposit;

‘3. That in case there is a better offer or if the property will be subject of a purchase
offer, within the term, the lessor is given an option of first refusal, otherwise he has to
vacate the premises within thirty (30) days from date of notice.’

We consider, temporarily, the current monthly rental based on the six-month receipts, which we
require you to submit, until such time when we will fix the amount accordingly."

Evidently, except for the remittance of the monthly rentals up to March 1991, the conditions imposed
by DBP have never been complied with. [Petitioners] did not go to the Bank to sign any new written
contract of lease with DBP. [Petitioners] also did not put up a surety bond nor cash bond nor assign
a time deposit to secure the payment of rental for nine (9) months, although the [petitioners] opened
a time deposit but did not assign it to DBP.

But even with the remittance and acceptance of the deposit made by [petitioners] equivalent to two
(2) months rental and advance of one (1) month rental it does not necessarily follow that DBP opted
to continue with the Robles lease. This is because the Robles contract provides:

"That the term of the agreement shall start on November 1, 1981 and shall terminate on the
last day of every month thereafter, provided however, that this contract shall be automatically
renewed on a month to month basis if no notice in writing is sent to the other party to
determine to terminate this agreement after fifteen (15) days from the receipt of said notice."

Here, a notice was sent to [petitioners] on June 18, 1987, informing them that if they "wish to
continue on leasing the property, we request you to come to the Bank for the execution of a Contract
of Lease x x x."
[Petitioners] failed to enter into the contract of lease required by DBP for it to continue occupying the
leased premises.

Because of [petitioners’] failure to comply with the conditions embodied in the 18 June 1987 letter, it
cannot be said that [petitioners] entered into a new contract with DBP where they were given the first
option to buy the leased property and to match offers from outside parties.

xxxx

Be that as it may, DBP continued to accept the monthly rentals based on the old Robles contract
despite the fact that the [petitioners] failed to enter into a written lease contract with it. Corollarily, the
relations between the parties is now governed by Article 1670 of the New Civil Code, thus:

"Art. 1670. If at the end of contract the lessee should continue enjoying the thing leased for fifteen
days with the acquiescence of the lessor, and unless a notice to the contrary by either party has
previously been given, it is understood that there is an implied new lease, not for the period of the
original contract, but for the time established in Articles 1682 and 1687. The other terms of the
original contract shall be revived."

xxxx

x x x [T]he acceptance by DBP of the monthly rentals does not mean that the terms of the Robles
contract were revived. In the case of Dizon vs. Court of Appeals, the Supreme Court declared that:

"The other terms of the original contract of lease which are revived in the implied new lease under
Article 1670 of the New Civil Code are only those terms which are germane to the lessee’s right [of]
continued enjoyment of the property leased – an implied new lease does not ipso facto carry with it
any implied revival of any option to purchase the leased premises."

In view of the foregoing, it is clear that [petitioners] had no right to file a case for rescission of the
deed of sale executed by DBP in favor of [respondents To Chip, Yap and Balila] because said deed
of sale did not violate their alleged first option to buy or match offers from outside parties which is
legally non-existent and which was not impliedly renewed under Article 1670 of the Civil Code.

WHEREFORE, premises considered, the 14 February 2001 Decision is

hereby RECONSIDERED and another one is issued REVERSING the 25 April 1997 Decision of the
Regional Trial Court, Branch 8, Cebu City in Civil Case No. CEB-10104 and the complaint of
[petitioners] is DISMISSED for lack of merit.51

Without seeking a reconsideration of the above decision, petitioners filed the instant petition. In their
Comment, respondents opposed the petition on both procedural and substantive grounds.

In petitioners’ Memorandum, they summarized the issues to be resolved in the present case as
follows:

A) PRELIMINARY ISSUES:

I
 WHETHER OR NOT THE VERIFICATION (AND CERTIFICATION OF NON-FORUM
SHOPPING) IN THE INSTANT PETITION WAS PROPER AND VALID DESPITE ITS
BEING SIGNED BY ONLY ONE OF THE TWO PETITIONERS.

II

WHETHER OR NOT ONLY QUESTIONS OF LAW AND NOT OF FACT CAN BE

RAISED IN THE INSTANT PETITION BEFORE THIS HON. SUPREME COURT.

B) MAIN AND PRINCIPAL ISSUES IN THE INSTANT PETITION:

WHETHER OR NOT THE HON. COURT OF APPEALS ERRED IN ADMITTING

RESPONDENTS’ MOTION FOR RECONSIDERATION DESPITE ITS BEING FILED
OUT OF TIME

II

WHETHER OR NOT THE HON. COURT OF APPEALS ERRED IN DECLARING

THAT PETITIONERS DID NOT ENTER INTO CONTRACT WITH RESPONDENT
DBP CONTINUING THE TERMS OF THE ROBLES CONTRACT

III

WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT

DECLARED THAT THE CONTINUATION BY RESPONDENT DBP OF THE LEASE
CONTRACT DID NOT CONTAIN THE RIGHT OF FIRST REFUSAL

IV

WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT

DECLARED THAT THE LEASE CONTRACT IS GOVERNED BY ART. 1670 OF
THE NEW CIVIL CODE

WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT FAILED

TO RECOGNIZE PETITIONERS’ RIGHT OF FIRST REFUSAL TO WHICH
RESPONDENTS WERE BOUND

VI

WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT FAILED

TO DECLARE THAT RESPONDENT DBP HAD VIOLATED PETITIONERS’ RIGHTS

VII

WHETHER OR NOT THE HON. COURT OF APPEALS ERRED IN REVERSING ITS

OWN JUDGMENT AND DISMISSING PETITIONERS’ CLAIM FOR RESCISSION 52
We shall first resolve the preliminary issues.

Respondents To Chip, Yap and Balila argue that the instant petition should be dismissed outright as
the verification and certification of non-forum shopping was executed only by petitioner Lydia Sia in
her personal capacity, without the participation of Cebu Bionic.

The Court is not persuaded.

Except for the powers which are expressly conferred on it by the Corporation Code and those that
are implied by or are incidental to its existence, a corporation has no powers. It exercises its powers
through its board of directors and/or its duly authorized officers and agents. Thus, its power to sue
and be sued in any court is lodged with the board of directors that exercises its corporate
powers.53 Physical acts, like the signing of documents, can be performed only by natural persons
duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. 54

In this case, respondents To Chip, Yap and Balila obviously overlooked the Secretary’s
Certificate55 attached to the instant petition, which was executed by the Corporate Secretary of Cebu
Bionic. Unequivocally stated therein was the fact that the Board of Directors of Cebu Bionic held a
special meeting on July 26, 2002 and they thereby approved a Resolution authorizing Lydia Sia to
elevate the present case to this Court in behalf of Cebu Bionic, to wit:

Whereas, the board appointed LYDIA I. SIA to act and in behalf of the corporation to file the
CERTIORARI with the Supreme Court in relations to the decision of the Court of Appeals dated July
5, 2002 which reversed its own judgment earlier promulgated on February 14, 2001 entitled CEBU
BIONIC BUILDERS SUPPLY, INC. and LYDIA SIA, (Petitioners- Appellants) –versus – THE
DEVELOPMENT BANK OF THE PHILIPPINES, JOSE TO CHIP, PATRICIO YAP and ROGER
BALILA (Respondents- Appelles), docketed CA-G.R. NO. 57216.

Whereas, on mass unanimously motion of all members of directors present hereby approved the
appointment of LYDIA I. SIA to act and sign all papers in connection of CA-G.R. NO. 57216.

Resolved and it is hereby resolve to appoint and authorized LYDIA I. SIA to sign and file with the
SUPREME COURT in connection to decision of the Court of Appeals as above mention. 56

Respondents To Chip, Yap and Balila next argue that the instant petition raises questions of fact,
which are not allowed in a petition for review on certiorari. They, therefore, submit that the factual
findings of the Court of Appeals are binding on this Court.

Section 1, Rule 45 of the Rules of Court categorically states that the petition filed thereunder shall
raise only questions of law, which must be distinctly set forth. A question of law arises when there is
doubt as to what the law is on a certain state of facts, while there is a question of fact when the
doubt arises as to the truth or falsity of the alleged facts. For a question to be one of law, the same
must not involve an examination of the probative value of the evidence presented by the litigants or
any of them. The resolution of the issue must rest solely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of the evidence presented, the
question posed is one of fact.57

The above rule, however, admits of certain exceptions,58 one of which is when the findings of the
Court of Appeals are contrary to those of the trial court. As will be discussed further, this exception is
attendant in the case at bar.
We now determine the principal issues put forward by petitioners.

First off, petitioners fault the Court of Appeals for admitting the Motion for Reconsideration of its
Decision dated February 14, 2001, which was filed by respondents To Chip, Yap and Balila more
than six months after receipt of the said decision. The motion was eventually granted and the Court
of Appeals issued its assailed Amended Decision, ruling in favor of respondents.

Indeed, the appellate court’s Decision dated February 14, 2001 would have ordinarily attained finality
for failure of respondents to seasonably file their Motion for Reconsideration thereon. However, we
agree with the Court of Appeals that the higher interest of substantial justice will be better served if
respondents’ procedural lapse will be excused.

Verily, we had occasion to apply this liberality in the application of procedural rules in Barnes v.
Padilla59 where we aptly declared that –

The failure of the petitioner to file his motion for reconsideration within the period fixed by law
renders the decision final and executory. Such failure carries with it the result that no court can
exercise appellate jurisdiction to review the case. Phrased elsewise, a final and executory judgment
can no longer be attacked by any of the parties or be modified, directly or indirectly, even by the
highest court of the land.

However, this Court has relaxed this rule in order to serve substantial justice considering (a) matters
of life, liberty, honor or property, (b) the existence of special or compelling circumstances, (c) the
merits of the case, (d) a cause not entirely attributable to the fault or negligence of the party favored
by the suspension of the rules, (e) a lack of any showing that the review sought is merely frivolous
and dilatory, and (f) the other party will not be unjustly prejudiced thereby. 60

In this case, what are involved are the property rights of the parties given that, ultimately, the
fundamental issue to be determined is who among the petitioners and respondents To Chip, Yap
and Balila has the better right to purchase the subject properties. More importantly, the merits of the
case sufficiently called for the suspension of the rules in order to settle conclusively the rights and
obligations of the parties herein.

In essence, the questions that must be resolved are: 1) whether or not there was a contract of lease
between petitioners and DBP; 2) if in the affirmative, whether or not this contract contained a right of
first refusal in favor of petitioners; and 3) whether or not respondents To Chip, Yap and Balila are
likewise bound by such right of first refusal.

Petitioners contend that there was a contract of lease between them and DBP, considering that they
had been allowed to occupy the premises of the subject property from 1987 up to 1991 and DBP
received their rental payments corresponding to the said period. Petitioners claim that DBP were
aware of their lease on the subject property when the latter foreclosed the same and the acquisition
of the subject properties through foreclosure did not terminate the lease. Petitioners subscribe to the
ruling of the RTC that even if there was no written contract of lease, DBP chose to continue the
existing contract of lease between petitioners and Rudy Robles by accepting the requirements set
down by DBP on the letter dated June 18, 1987. Petitioners likewise posit that the contract of lease
between them and Rudy Robles never expired, inasmuch as the contract did not have a definite
term and none of the parties thereto terminated the same. In view of the continuation of the lease
contract between petitioners and Rudy Robles, petitioners submit that Article 1670 of the Civil Code
on implied lease is not applicable on the instant case.

We are not persuaded.

In Uy v. Land Bank of the Philippines,61 the Court held that "[i]n respect of the lease on the
foreclosed property, the buyer at the foreclosure sale merely succeeds to the rights and obligations
of the pledgor-mortgagor subject to the provisions of Article 1676 of the Civil Code on its possible
termination. This article provides that ‘[t]he purchaser of a piece of land which is under a lease that is
not recorded in the Registry of Property may terminate the lease, save when there is a stipulation to
the contrary in the contract of sale, or when the purchaser knows of the existence of the lease.’ In
short, the buyer at the foreclosure sale, as a rule, may terminate an unregistered lease except when
it knows of the existence of the lease."

In the instant case, the lease contract between petitioners and Rudy Robles was not
registered.62 During trial, DBP denied having any knowledge of the said lease contract.63 It asserted
that the lease was merely presumed in view of the existence of tenants in the subject
property.64 Nevertheless, DBP recognized and acknowledged this lease contract in its letter dated
June 18, 1987, which was addressed to Bonifacio Sia, then President of Cebu Bionic. DBP even
required Sia to pay the monthly rental for the month of June 1987, thereby exercising the right of the
previous lessor, Rudy Robles, to collect the rental payments from the lessee. In the same letter,
DBP extended an offer to Cebu Bionic to continue the lease on the subject property, outlining the
provisions of the proposed contract and specifically instructing the latter to come to the bank for the
execution of the same. DBP likewise gave Cebu Bionic a 30-day period within which to act on the
said contract execution. Should Cebu Bionic fail to do so, it would be deemed uninterested in
continuing with the lease. In that eventuality, the letter states that Cebu Bionic should vacate the
premises within the said period.

Instead of acceding to the terms of the aforementioned letter, the counsel of Cebu Bionic sent a
counter-offer to DBP dated July 7, 1987, suggesting a different mode of payment for the rentals and
requesting for a 60-day period within which time the parties will execute a new contract of lease.

The parties, however, failed to execute a written contract of lease. Petitioners put the blame on DBP,
asserting that no contract was signed because DBP did not prepare it for them. DBP, on the other
hand, counters that it was petitioners who did not positively act on the conditions for the execution of
the lease contract. In view of the counter-offer of petitioners, DBP and respondents To Chip, Yap
and Balila argue that there was no meeting of minds between DBP and petitioners, which would
have given rise to a new contract of lease.

The Court rules that, indeed, no new contract of lease was ever perfected between petitioners and
DBP.

In Metropolitan Manila Development Authority v. JANCOM Environmental Corporation,65 we

emphasized that:

Under Article 1305 of the Civil Code, "[a] contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to give something or to render some service."
A contract undergoes three distinct stages — preparation or negotiation, its perfection, and finally, its
consummation. Negotiation begins from the time the prospective contracting parties manifest their
interest in the contract and ends at the moment of agreement of the parties. The perfection or birth
of the contract takes place when the parties agree upon the essential elements of the contract. The
last stage is the consummation of the contract wherein the parties fulfill or perform the terms agreed
upon in the contract, culminating in the extinguishment thereof (Bugatti vs. CA, 343 SCRA 335
[2000]). Article 1315 of the Civil Code, provides that a contract is perfected by mere consent.
Consent, on the other hand, is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract (See Article 1319, Civil Code). x x x. 66
In the case at bar, there was no concurrence of offer and acceptance vis-à-vis the terms of the
proposed lease agreement. In fact, after the reply of petitioners’ counsel dated July 7, 1987, there
was no indication that the parties undertook any other action to pursue the execution of the intended
lease contract. Petitioners even admitted that they merely waited for DBP to present the contract to
them, despite being instructed to come to the bank for the execution of the same. 67

Contrary to the ruling of the RTC, the Court is also not convinced that DBP opted to continue the
existing lease contract between petitioners and Rudy Robles.

The findings of the RTC that DBP supposedly accepted the requirements the latter set forth in its
letter dated June 18, 1987 is not well taken. To recapitulate, the third paragraph of the letter reads:

If you wish to continue on leasing the property, we request you to come to the Bank for the execution
of a Contract of Lease, the salient conditions of which are as follows:

1. The lease will be on month to month basis, for a maximum period of one (1) year;

2. Deposit equivalent to two (2) months rental and advance of one (1) month rental, and the
remaining amount for one year period (equivalent to 9 months rental) shall be secured by
either surety bond, cash bond or assigned time deposit;

3. That in case there is a better offer or if the property will be subject of a purchase offer,
within the term, the lessor is given an option of first refusal, otherwise he has to vacate the
premises within thirty (30) days from date of notice.68

The so-called "requirements" enumerated in the above paragraph are not really requirements to be
complied with by the petitioners for the execution of the proposed lease contract, as apparently
considered by the RTC and the petitioners. A close reading of the letter reveals that the items
enumerated therein were in fact the salient terms and conditions of the proposed contract of lease,
which the DBP and the petitioners were to execute if the latter were so willing. Also, the Certificate of
Time Deposit in the amount of ₱11,395.64, which was allegedly paid to DBP as advance rental
deposit pursuant to the said requirements, was not even clearly established as such since it was
neither secured by a security bond or a cash bond, nor was it assigned to DBP.

The contention that the lease contract between petitioners and Rudy Robles did not expire, given
that it did not have a definite term and the parties thereto failed to terminate the same, deserves
scant consideration. To recall, the second paragraph of the terms and conditions of the contract of
lease between petitioners and Rudy Robles reads:

2. That the term of this agreement shall start on November 1, 1981 and shall terminate on the last
day of every month thereafter; provided however that this contract shall be automatically renewed on
a month to month basis if no notice, in writing, is sent to the other party to terminate this agreement
after fifteen (15) days from receipt of said notice.69 (Emphases ours.)

Crystal clear from the above provision is that the lease is on a month-to-month basis. Relevantly, the
well-entrenched principle is that a lease from month-to-month is with a definite period and expires at
the end of each month upon the demand to vacate by the lessor.70 As held by the Court of Appeals in
the assailed Amended Decision, the above-mentioned lease contract was duly terminated by DBP
by virtue of its letter dated June 18, 1987. We reiterate that the letter explicitly directed the
petitioners to come to the office of the DBP if they wished to enter into a new lease agreement with
the said bank. Otherwise, if no contract of lease was executed within 30 days from the date of the
letter, petitioners were to be considered uninterested in entering into a new contract and were
thereby ordered to vacate the property. As no new contract was in fact executed between petitioners
and DBP within the 30-day period, the directive to vacate, thus, took effect. DBP’s letter dated June
18, 1987, therefore, constituted the written notice that was required to terminate the lease
agreement between petitioners and Rudy Robles. From then on, the petitioners’ continued
possession of the subject property could be deemed to be without the consent of DBP.

Thusly, petitioners’ assertion that Article 1670 of the Civil Code is not applicable to the instant case
is correct. The reason, however, is not that the existing contract was continued by DBP, but because
the lease was terminated by DBP, which termination was accompanied by a demand to petitioners
to vacate the premises of the subject property.

Article 1670 states that "[i]f at the end of the contract the lessee should continue enjoying the thing
leased for fifteen days with the acquiescence of the lessor, and unless a notice to the contrary by
either party has previously been given, it is understood that there is an implied new lease, not for the
period of the original contract, but for the time established in Articles 1682 and 1687. The other
terms of the original contract shall be revived." In view of the order to vacate embodied in the letter
of DBP dated June 18, 1987 in the event that no new lease contract is entered into, the petitioners’
continued possession of the subject properties was without the acquiescence of DBP, thereby
negating the constitution of an implied lease.

Contrary to the ruling of the RTC, DBP’s acceptance of petitioners’ rental payments of ₱5,000.00 for
the period of November 1990 to March 1991 did not likewise give rise to an implied lease between
petitioners and DBP. In Tagbilaran Integrated Settlers Association (TISA) Incorporated v. Court of
Appeals,71 we held that "the subsequent acceptance by the lessor of rental payments does not,
absent any circumstance that may dictate a contrary conclusion, legitimize the unlawful character of
their possession." In the present case, the petitioners’ rental payments to DBP were made in lump
sum on March 22, 1991. Significantly, said payments were remitted only after petitioners were
notified of the sale of the subject properties to respondents To Chip, Yap and Balila and after the
petitioners were given a final demand to vacate the properties. These facts substantially weaken, if
not controvert, the finding of the RTC and the argument of petitioners that the latter were faithfully
remitting their rental payments to DBP until the year 1991.

Thus, having determined that the petitioners and DBP neither executed a new lease agreement, nor
entered into an implied lease contract, it follows that petitioners’ claim of entitlement to a right of first
refusal has no leg to stand on. Furthermore, even if we were to grant, for the sake of argument, that
an implied lease was constituted between petitioners and the DBP, the right of first refusal that was
contained in the prior lease contract with Rudy Robles was not renewed therewith. This is in
accordance with the ruling in Dizon v. Magsaysay,72 which involved the issue of whether a provision
regarding a preferential right to purchase is revived in an implied lease under Article 1670, to wit:

"[T]he other terms of the original contract" which are revived in the implied new lease under Article
1670 are only those terms which are germane to the lessee’s right of continued enjoyment of the
property leased. This is a reasonable construction of the provision, which is based on the
presumption that when the lessor allows the lessee to continue enjoying possession of the property
for fifteen days after the expiration of the contract he is willing that such enjoyment shall be for the
entire period corresponding to the rent which is customarily paid – in this case up to the end of the
month because the rent was paid monthly. Necessarily, if the presumed will of the parties refers to
the enjoyment of possession the presumption covers the other terms of the contract related to such
possession, such as the amount of rental, the date when it must be paid, the care of the property,
the responsibility for repairs, etc. But no such presumption may be indulged in with respect to special
agreements which by nature are foreign to the right of occupancy or enjoyment inherent in a contract
of lease.73

DBP cannot, therefore, be accused of violating the rights of petitioners when it offered the subject
properties for sale, and eventually sold the same to respondents To Chip, Yap and Balila, without
first notifying petitioners. Neither were the said respondents bound by any right of first refusal in
favor of petitioners. Consequently, the sale of the subject properties to respondents was valid.
Petitioners’ claim for rescission was properly dismissed.

WHEREFORE, the Petition for Review on Certiorari under Rule 45 of the Rules of Court is DENIED.
The Resolution dated February 5, 2002 and the Amended Decision dated July 5, 2002 of the Court
of Appeals in CA-G.R. CV No. 57216 are hereby AFFIRMED. No costs.

SO ORDERED.

THIRD DIVISION

[G.R. NO. 178352 : June 17, 2008]

VIRGILIO S. DELIMA, Petitioner, v. SUSAN MERCAIDA GOIS, Respondent.

DECISION

YNARES-SANTIAGO, J.:

This Petition for Review under Rule 45 of the Rules of Court assails the December 21, 2006
Decision1 of the Court of Appeals which annulled and set aside the May 31, 2006 and August 22, 2006
Resolutions of the National Labor Relations Commission (NLRC) in NLRC Case No. V-000188-2006 and
ordered herein petitioner to return the cash bond released to him. Also assailed is the February 5,
2007 Resolution2 denying the Motion for Reconsideration.

The antecedent facts are as follows:

A case for illegal dismissal was filed by petitioner Virgilio S. Delima against Golden Union Aquamarine
Corporation (Golden), Prospero Gois and herein respondent Susan Mercaida Gois before the Regional
Arbitration Branch No. VIII of the National Labor Relations Commission on October 29, 2004, docketed
as NLRC RAB VIII Case No. 10-0231-04.

On April 29, 2005, Labor Arbiter Philip B. Montaces rendered a decision, the dispositive portion of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered'

1. Finding illegality in the dismissal of complainant Virgilio Delima from his employment;

2. Ordering respondent Golden Union Aquamarine Corporation to pay complainant the following:

A. Backwages (July 30, 2004 to April 29, 2005 =

9 mos.; P5,350.50 x 9 months) - '. .'. . P 48,154.50

 b. Separation Pay (P5,350.50 x 4 years) 21,402.00

c. Salary Differentials 32,679.00

d. Service Incentive Leave Pay 2,820.00

Sub-Total P105,055.50

e. Attorney's fee (10%) 10,505.55

TOTAL P115,561.05

=========

3. Dismissing all other claims for lack of merit.

SO ORDERED.3

Golden failed to appeal the aforesaid decision; hence, it became final and executory. A writ of
execution was issued and an Isuzu Jeep with plate number PGE-531 was attached.

Thereafter, respondent Gois filed an Affidavit of Third Party Claim claiming that the attachment of the
vehicle was irregular because said vehicle was registered in her name and not Golden's; and that she
was not a party to the illegal dismissal case filed by Delima against Golden.4

In an Order5 dated December 29, 2005, the Labor Arbiter denied respondent's third-party claim on
grounds that respondent was named in the complaint as one of the respondents; that summons were
served upon her and Prospero Gois; that both verified Golden's Position Paper and alleged therein that
they are the respondents; and that respondent is one of the incorporators/officers of the corporation.

Gois filed an appeal before the NLRC. At the same time, she filed a motion before the Labor Arbiter to
release the motor vehicle after substituting the same with a cash bond in the amount of P115,561.05.

On January 16, 2006, an Order was issued by the Labor Arbiter which states:

Filed by Third Party Claimant SUSAN M. GOIS is a Motion to Release Motor Vehicle after substituting

same with a cash bond of P115,561.05 under O.R. No. 8307036 which amount is equivalent to the

judgment award in the instant case, in the meantime that she has appealed the Order denying her

Third Party Claim.

Finding said Motion in order and with merit, Sheriff Felicisimo T. Basilio is directed to release from his

custody the Isuzu jeep with Plate No. PGE-532 and return same to SUSAN M. GOIS.

SO ORDERED.6

Meanwhile, on May 31, 2006, the NLRC issued a Resolution7 which dismissed respondent's appeal for
lack of merit. A Motion for Reconsideration8 was filed but it was denied on August 22, 2006.9 On
September 12, 2006, the NLRC Resolution became final and executory; subsequently, an Entry of
Judgment10 was issued on September 29, 2006.

On October 13, 2006, Gois filed a petition for certiorari 11 before the Court of Appeals as well as a
Supplement to Petition12 on October 27, 2006. Gois alleged that the NLRC committed grave abuse of
discretion when it dismissed her appeal. She claimed that by denying her third-party claim, she was in
effect condemned to pay a judgment debt issued against a corporation of which she is neither a
president nor a majority owner but merely a stockholder. She further argued that her personality is
separate and distinct from that of Golden; thus, the judgment ordering the corporation to pay the
petitioner could not be satisfied out of her personal assets.

On December 21, 2006, the appellate court rendered a Decision in favor of respondent, which reads in
part:

In the decision dated April 29, 2005 rendered by Labor Arbiter Montaces, the dispositive portion

confined itself in directing Golden Union Aquamarine Corporation only, no more and no less, to pay

private respondent the award stated therein, but did not mention that the liability is joint and solidary

with petitioner Susan Gois although the complaint filed by the private respondent included petitioner

as among the respondents therein.

It bears stress also that corporate officers cannot be held liable for damages on account of the

employee's dismissal because the employer corporation has a personality separate and distinct from

its officers who merely acted as its agents. They are only solidarily liable with the corporation for the

termination of employment of employees if the same was done with malice or in bad faith. In the case

at bench, it was not clearly shown and established that the termination of private respondent from

employment was tainted with evident malice and bad faith. As elucidated in the case of Reahs

Corporation v. NLRC, the main doctrine of separate personality of a corporation should remain as the

guiding rule in determining corporate liability to its employees, and that, at the very least, to justify

solidary liability, "there must be an allegation or showing that the officers of the corporation

deliberately or maliciously designed to evade the financial obligation of the corporation to its

employees."

Further, as wisely put by the petitioner, while it may be true that the subject vehicle was used by the

corporation in transporting the products bought by the corporation from Eastern Samar to Manila, it

does not necessarily follow that it is owned by the corporation as in fact petitioner was able to duly
establish that the said vehicle is hers and is registered under her name. Nor does it imply that the

corporation is free to dispose of the same and neither does it imply that the said vehicle may and can

be levied by respondent NLRC to satisfy a judgment against the corporation.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us GRANTING the

petition filed in this case, ANNULLING and SETTING ASIDE the Resolutions dated May 31, 2006 and

August 22, 2006, respectively, issued by the respondent National Labor Relations Commission (NLRC),

4th Division in NLRC Case No. V-000188-2006 and ORDERING private respondent to return to

petitioner the cash bond earlier released to him.

SO ORDERED.13

Petitioner filed a Motion for Reconsideration14 which was denied. Hence, the present petition raising the
following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS, NINETEENTH (19th) DIVISION, ERRED:

1. WHEN IT OMMITED PRIVATE RESPONDENT AS ONE OF THE PRINCIPAL RESPONDENTS IN THE

ORIGINAL COMPLAINT AS ILLUSTRATED IN ITS BRIEF STATEMENT OF FACTS;

2. WHEN IT CONSIDERED THAT THE VEHICLE PRINCIPALLY USED IN THE BUSINESS OPERATIONS OF

THE CORPORATION, WHICH WAS REGISTERED UNDER THE NAME OF PRIVATE RESPONDENT WHO

WAS ALSO THE CORPORATION PRESIDENT, CANNOT BE SUBJECT OF GARNISHMENT;

3. WHEN IT ANNULLED AND SET ASIDE A FINAL AND EXECUTED ORDER/RESOLUTION OF THE

NATIONAL LABOR RELATIONS COMMISSION.15

A corporation has a personality distinct and separate from its individual stockholders or members and
from that of its officers who manage and run its affairs. The rule is that obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities. Thus, property
belonging to a corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the
latter having only an indirect interest in the assets and business of the former.16

Since the Decision of the Labor Arbiter dated April 29, 2005 directed only Golden to pay the petitioner
the sum of P115,561.05 and the same was not joint and solidary obligation with Gois, then the latter
could not be held personally liable since Golden has a separate and distinct personality of its own. It
remains undisputed that the subject vehicle was owned by Gois, hence it should not be attached to
answer for the liabilities of the corporation. Unless they have exceeded their authority, corporate
officers are, as a general rule, not personally liable for their official acts, because a corporation, by
legal fiction, has a personality separate and distinct from its officers, stockholders and members. No
evidence was presented to show that the termination of the petitioner was done with malice or in bad
faith for it to hold the corporate officers, such as Gois, solidarily liable with the corporation.

We note that the Resolution of the NLRC dismissing respondent's appeal was entered in the Book of
Entries of Judgment on September 29, 2006 after it allegedly became final and executory on
September 12, 2006.
It will be recalled, however, that the NLRC issued the Resolution dismissing the appeal of the
respondent on May 31, 2006. A motion for reconsideration was filed on July 24, 2006 but it was
denied by the NLRC on August 22, 2006. Copy of the denial was received by the respondent on
September 1, 2006.17 Thus, respondent has sixty (60) days from receipt of the denial of the motion for
reconsideration or until October 31, 2006, within which to file the petition for certiorari under Section
4 of Rule 65 of the Rules of Court. Thus, the petition for certiorari filed by respondent before the Court
of Appeals on October 13, 2006 was timely.18 Consequently, the NLRC erred in declaring its May 31,
2006 Resolution final and executory.

A decision issued by a court is final and executory when such decision disposes of the subject matter
in its entirety or terminates a particular proceeding or action, leaving nothing else to be done but to
enforce by execution what has been determined by the court, such as when after the lapse of the
reglementary period to appeal, no appeal has been perfected.19

In the instant case, it is undisputed that when the entry of judgment was issued by the NLRC on
September 12, 2006 and entered in the Book of Entries of Judgment on September 29, 2006, the
reglementary period to file a petition for certiorari has not yet lapsed. In fact, when the petition
for certiorari was filed on October 13, 2006, the same was still within the reglementary period. It
bears stressing that a petition for certiorari under Rule 65 must be filed "not later than 60 days from
notice of the judgment, order or resolution" sought to be annulled.20

The period or manner of "appeal" from the NLRC to the Court of Appeals is governed by Rule 65
pursuant to the ruling of this Court in the case of St. Martin Funeral Home v. National Labor Relations
Commission.21 Section 4 of Rule 65, as amended, states that the "petition may be filed not later than
sixty (60) days from notice of the judgment, or resolution sought to be assailed."22

Corollarily, Section 4, Rule III of the New Rules of Procedure of the NLRC expressly mandates that
"(f)or the purpose(s) of computing the period of appeal, the same shall be counted from receipt of
such decisions, awards or orders by the counsel of record." Although this rule explicitly contemplates
an appeal before the Labor Arbiter and the NLRC, we do not see any cogent reason why the same rule
should not apply to petitions for certiorari filed with the Court of Appeals from decisions of the NLRC.23

We note that in the dispositive portion of its Decision, the appellate court ordered petitioner to return
to respondent the cash bond earlier released to him. However, petitioner admitted that the monies
were spent to defray the medical expenses of his ailing mother. Considering that petitioner is legally
entitled to receive said amount, Golden must reimburse respondent Gois the amount of P115,561.05.
To rule otherwise would result in unjust enrichment of Golden. The corporation has benefited from the
payment made by Gois because it was relieved from its obligation to pay to petitioner the judgment
debt.

WHEREFORE, the petition is PARTLY GRANTED. The assailed Decision of the Court of Appeals dated
December 21, 2006 annulling and setting aside the May 31, 2006 and August 22, 2006 Resolutions of
the National Labor Relations Commission; and its Resolution dated February 5, 2007 are AFFIRMED
with the MODIFICATION that Golden Union Aquamarine Corporation is ordered
to REIMBURSE Respondent Susan M. Gois the amount of P115,561.05.

SO ORDERED.

Endnotes:

G.R. No. 90580 April 8, 1991

RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND EVELYN
SAW, petitioners,
vs.
HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43,
(Regional Trial Court of Manila), FREEMAN MANAGEMENT AND DEVELOPMENT
CORPORATION, EQUITABLE BANKING CORPORATION, FREEMAN INCORPORATED, SAW
CHIAO LIAN, THE REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY SHERIFF
ROSALIO G. SIGUA, respondents.

Benito O. Ching, Jr. for petitioners.

William R. Vetor for Equitable Banking Corp.
Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.

CRUZ, J.:

right is actual, material, direct and immediate and not simply contingent or expectant." A collection
suit with preliminary attachment was filed by Equitable Banking Corporation against Freeman, Inc.
and Saw Chiao Lian, its President and General Manager. The petitioners moved to intervene,
alleging that (1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp. were
not approved by the stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao Lian
had no authority to contract such loans; and (3) there was collusion between the officials of
Freeman, Inc. and Equitable Banking Corp. in securing the loans. The motion to intervene was
denied, and the petitioners appealed to the Court of Appeals.

Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they
submitted to and was approved by the lower court. But because it was not complied with, Equitable
secured a writ of execution, and two lots owned by Freeman, Inc. were levied upon and sold at
public auction to Freeman Management and Development Corp.

The Court of Appeals sustained the denial of the petitioners' motion for intervention, holding that
1

"the compromise agreement between Freeman, Inc., through its President, and Equitable Banking
Corp. will not necessarily prejudice petitioners whose rights to corporate assets are at most
inchoate, prior to the dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the
Revised Rules of Court is proper only when one's

It also ruled against the petitioners' argument that because they had already filed a notice of appeal,
the trial judge had lost jurisdiction over the case and could no longer issue the writ of execution.

The petitioners are now before this Court, contending that:

1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in
Civil Case No. 88-44404 because their rights as stockholders of Freeman are merely
inchoate and not actual, material, direct and immediate prior to the dissolution of the
corporation;

2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said
Civil Case No. 88-44404 was confined only to the order denying their motion to intervene
and did not divest the trial court of its jurisdiction over the whole case.

The petitioners base their right to intervene for the protection of their interests as stockholders
on Everett v. Asia Banking Corp. where it was held:
2
 The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs
done to the corporation, but that the action must be brought by the Board of Directors, . . .
has its exceptions. (If the corporation [were] under the complete control of the principal
defendants, . . . it is obvious that a demand upon the Board of Directors to institute action
and prosecute the same effectively would have been useless, and the law does not require
litigants to perform useless acts.

Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is
essentially in personam and, as an action against defendants in their personal capacities, will not
prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable
because it involved an action filed by the minority stockholders where the board of directors refused
to bring an action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that was being
sued by the creditor bank.

Equitable also argues that the subject matter of the intervention falls properly within the original and
exclusive jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In fact, at
the time the motion for intervention was filed, there was pending between Freeman, Inc. and the
petitioners SEC Case No. 03577 entitled "Dissolution, Accounting, Cancellation of Certificate of
Registration with Restraining Order or Preliminary Injunction and Appointment of Receiver." It also
avers in its Comment that the intervention of the petitioners could have only caused delay and
prejudice to the principal parties.

On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply
to the denial of their motion for intervention and not to the main case because their personality as
party litigants had not been recognized by the trial court.

After examining the issues and arguments of the parties, the Court finds that the respondent court
committed no reversible error in sustaining the denial by the trial court of the petitioners' motion for
intervention.

In the case of Magsaysay-Labrador v. Court of Appeals, we ruled as follows:

3

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners herein have no legal interest in the subject matter
in litigation so as to entitle them to intervene in the proceedings below. In the case of Batama
Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in
Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action,
the party must have a legal interest in the matter in litigation, or in the success of either of the
parties or an interest against both, or he must be so situated as to be adversely affected by a
distribution or other disposition of the property in the custody of the court or an officer
thereof."

To allow intervention, [a] it must be shown that the movant has legal interest in the matter in
litigation, or otherwise qualified; and [b] consideration must be given as to whether the
adjudication of the rights of the original parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate proceeding or not. Both requirements
must concur as the first is not more important than the second.

The interest which entitles a person to intervene in a suit between other parties must be in
the matter in litigation and of such direct and immediate character that the intervenor will
either gain or lose by the direct legal operation and effect of the judgment. Otherwise, if
 persons not parties of the action could be allowed to intervene, proceedings will become
unnecessarily complicated, expensive and interminable. And this is not the policy of the law.

The words "an interest in the subject" mean a direct interest in the cause of action as
pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the
complaint, without the establishment of which plaintiff could not recover.

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,

conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or
in sheer expectancy of a right in the management of the corporation and to share in the
profits thereof and in the properties and assets thereof on dissolution, after payment of the
corporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the
property, his interest in the corporate property being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person.

On the second assignment of error, the respondent court correctly noted that the notice of appeal
was filed by the petitioners on October 24, 1988, upon the denial of their motion to intervene, and
the writ of execution was issued by the lower court on January 30, 1989. The petitioners' appeal
could not have concerned the "whole" case (referring to the decision) because the petitioners "did
not appeal the decision as indeed they cannot because they are not parties to the case despite their
being stockholders of respondent Freeman, Inc." They could only appeal the denial of their motion
for intervention as they were never recognized by the trial court as party litigants in the main case.

Intervention is "an act or proceeding by which a third person is permitted to become a party to an
action or proceeding between other persons, and which results merely in the addition of a new party
or parties to an original action, for the purpose of hearing and determining at the same time all
conflicting claims which may be made to the subject matter in litigation. 4

It is not an independent proceeding, but an ancillary and supplemental one which, in the nature of
things, unless otherwise provided for by the statute or Rules of Court, must be in subordination to
the main proceeding. It may be laid down as a general rule that an intervenor is limited to the field of
5

litigation open to the original parties.

6

In the case at bar, there is no more principal action to be resolved as a writ of execution had already
been issued by the lower court and the claim of Equitable had already been satisfied. The decision
of the lower court had already become final and in fact had already been enforced. There is
therefore no more principal proceeding in which the petitioners may intervene.

As we held in the case of Barangay Matictic v. Elbinias: 7

An intervention has been regarded, as merely "collateral or accessory or ancillary to the

principal action and not an independent proceedings; and interlocutory proceeding
dependent on and subsidiary to, the case between the original parties." (Fransisco, Rules of
Court, Vol. 1, p. 721). With the final dismissal of the original action, the complaint in
intervention can no longer be acted upon. In the case of Clareza v. Resales, 2 SCRA 455,
457-458, it was stated that:
 That right of the intervenor should merely be in aid of the right of the original party,
like the plaintiffs in this case. As this right of the plaintiffs had ceased to exist, there is
nothing to aid or fight for. So the right of intervention has ceased to exist.

Consequently, it will be illogical and of no useful purpose to grant or even consider further
herein petitioner's prayer for the issuance of a writ of mandamus to compel the lower court to
allow and admit the petitioner's complaint in intervention. The dismissal of the expropriation
case has no less the inherent effect of also dismissing the motion for intervention which is
but the unavoidable consequence.

The Court observes that even with the denial of the petitioners' motion to intervene, nothing is really
lost to them. The denial did not necessarily prejudice them as their rights are being litigated in the
1âwphi1

case now before the Securities and Exchange Commission and may be fully asserted and protected
in that separate proceeding.

WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.

Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

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. However, by October 1991, Shangri-La started defaulting in payment.
3 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. According to BF
5

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. Shangri-La allegedly took
7

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. It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs.
9

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.

xxx xxx xxx

(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. . . . (Underscoring in the original)
12

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. They alleged that they
15

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. On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that
19

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. On October
21

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. According to the trial court, Shangri-La’s directors were
25

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." Petitioners’ motion for reconsideration ofthis order was denied by the trial
26

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, the Court of Appeals dismissed petitioners’ petition for certiorari. The
29

Court of Appeals ruled that ShangriLa’s directors were necessary parties in the arbitration
proceedings. According to the Court of Appeals:
30

[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. The36

corporation is a separate being, and nothing justifies BF Corporation’s allegation that they are
solidarily liable with Shangri-La. Neither did they bind themselves personally nor did they undertake
37

to shoulder Shangri-La’s obligations should it fail in its obligations. BF Corporation also failed to
38

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. Provisions including arbitration stipulations should bind only the parties. Based on our
40 41

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. Compelling them to submit to arbitration is against this purpose and may
43

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. Since the contract was executed only by BF Corporation and Shangri-La, only
46

they should be affected by the contract’s stipulation. BF Corporation also failed to specifically allege
47

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[.]" BF49

Corporation also argued that while petitioners were not parties to the agreement, they were still
impleaded under Section 31 of the Corporation Code. Section 31 makes directors solidarily liable
50

for fraud, gross negligence, and bad faith. Petitioners are not really third parties to the agreement
51

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. The full resolution of all disputes in the
53

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. The Arbitral Tribunal denied BF
55

Corporation’s claims against them. Petitioners stated that "[they] were included by the Arbitral
56
Tribunal in the proceedings conducted . . . notwithstanding [their] continuing objection
thereto. . . ." They also stated that "[their] unwilling participation in the arbitration case was done ex
57

abundante ad cautela, as manifested therein on several occasions." Petitioners informed the court
58

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." It pointed out
60

that the case had already been mooted by the termination of the arbitration proceedings, which
petitioners actively participated in. Moreover, BF Corporation assailed only the correctness of the
61

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 dismiss in lieu of the required

63

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." The court’s decision in this case will no longer have any effect on the issue
64

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, this court disregarded the fact that petitioner in that case already escaped from prison and
66

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, which was approved as early
69

as 1949. It was later institutionalized by the approval of Republic Act No. 876, which expressly
70

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. (Emphasis supplied)
72

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., this court said:
73

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. (Emphasis supplied)
74

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. This means that while it is not a person,
76

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, and other juridical entities. The law vests in
77

corporations rights,powers, and attributes as if they were natural persons with physical existence
and capabilities to act on their own. For instance, they have the power to sue and enter into
78

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 Corporation that an
79

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. (Citations
80

omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals, this court ruled:

81

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. (Citation omitted)
82

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc. and Stanfilco Employees v. DOLE Philippines, Inc., et al.
83 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." It is also warranted in alter ego
85

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"; and
88

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. They are alleging that contracts executed by the corporation are contracts executed by
90

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. Under the Rules of Court, filing of multiple suits for a single cause of action is prohibited.
1âwphi1

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." This court also intimated that the
91

interest of justice would be best observed if it adjudicated rights in a single proceeding. While the
92

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. 114286 April 19, 2001

THE COSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner

vs.
THE COURT OF APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and
SPOUSE, respondents.

YNARES-SANTIAGO, J.:
The instant petition for review seeks to partially set aside the July 26, 1993 Decision of respondent
1

Court of Appeals in CA-GR. CV No. 29950, insofar as it orders petitioner to reimburse respondent
Continental Cement Corporation the amount of P490, 228.90 with interest thereon at the legal rate
from July 26, 1988 until fully paid. The petition also seeks to set aside the March 8, 1994
Resolution of respondent Court of Appeals denying its Motion for Reconsideration.
2

The facts are as follows:

On July 13, 1982, respondents Continental Cement Corporation (hereinafter, respondent

Corporation) and Gregory T. Lim (hereinafter, respondent Lim) obtained from petitioner Consolidated
Bank and Trust Corporation Letter of Credit No. DOM-23277 in the amount of P 1,068,150.00 On the
same date, respondent Corporation paid a marginal deposit of P320,445.00 to petitioner. The letter
of credit was used to purchase around five hundred thousand liters of bunker fuel oil from Petrophil
Corporation, which the latter delivered directly to respondent Corporation in its Bulacan plant. In
relation to the same transaction, a trust receipt for the amount of P 1,001,520.93 was executed by
respondent Corporation, with respondent Lim as signatory.

Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds
thereof, petitioner filed a complaint for sum of money with application for preliminary
attachment before the Regional Trial Court of Manila. In answer to the complaint, respondents
3

averred that the transaction between them was a simple loan and not a trust receipt transaction, and
that the amount claimed by petitioner did not take into account payments already made by them.
Respondent Lim also denied any personal liability in the subject transactions. In a Supplemental
Answer, respondents prayed for reimbursement of alleged overpayment to petitioner of the amount
of P490,228.90.

At the pre-trial conference, the parties agreed on the following issues:

1) Whether or not the transaction involved is a loan transaction or a trust receipt transaction;

2) Whether or not the interest rates charged against the defendants by the plaintiff are
proper under the letter of credit, trust receipt and under existing rules or regulations of the
Central Bank;

3) Whether or not the plaintiff properly applied the previous payment of P300,456.27 by the
defendant corporation on July 13, 1982 as payment for the latter’s account; and

4) Whether or not the defendants are personally liable under the transaction sued for in this
case.4

On September 17, 1990, the trial court rendered its Decision,5 dismissing the Complaint and ordering
petitioner to pay respondents the following amounts under their counterclaim: P490,228.90
representing overpayment of respondent Corporation, with interest thereon at the legal rate from
July 26, 1988 until fully paid; P10,000.00 as attorney's fees; and costs.

Both parties appealed to the Court of Appeals, which partially modified the Decision by deleting the
award of attorney's fees in favor of respondents and, instead, ordering respondent Corporation to
pay petitioner P37,469.22 as and for attorney's fees and litigation expenses.

Hence, the instant petition raising the following issues:

 1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED INCORRECTLY
OR COMMITTED REVERSIBLE ERROR IN HOLDING THAT THERE WAS
OVERPAYMENT BY PRIVATE RESPONDENTS TO THE PETITIONER IN THE AMOUNT
OF P490,228.90 DESPITE THE ABSENCE OF ANY COMPUTATION MADE IN THE
DECISION AND THE ERRONEOUS APPLICATION OF PAYMENTS WHICH IS IN
VIOLATION OF THE NEW CIVIL CODE.

2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE MARGINAL DEPOSIT

BY THE RESPONDENT APPELLATE COURT IS IN ACCORDANCE WITH BANKING
PRACTICE.

3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE FLOATING

OF INTEREST RATE IS VALID UNDER APPLICABLE JURISPRUDENCE AND THE
RULES AND REGULATIONS OF THE CENTRAL BANK.

4. WHETHER OR NO THE RESPONDENT APPELLATE COUR GRIEVOUSLY ERRED IN

NOT CONSIDERING THE TRANSACTION AT BAR AS A TRUST RECEIPT
TRANSACTION ON THE BASIS OF THE JUDICIAL ADMISSIONS OF THE PRIVATE
RESPONDENTS AND FOR WHICH RESPONDENTS ARE LIABLE THEREFOR.

5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED

IN NOT HOLDING PRIVATE RESPONDENT SPOUSES LIABLE UNDER THE TRUST
RECEIPT TRANSACTION.6

The petition must be denied.

On the first issue respecting the fact of overpayment found by both the lower court and respondent
Court of Appeals, we stress the time-honored rule that findings of fact by the Court of Appeals
especially if they affirm factual findings of the trial court will not be disturbed by this Court, unless
these findings are not supported by evidence.7

Petitioner decries the lack of computation by the lower court as basis for its ruling that there was an
overpayment made. While such a computation may not have appeared in the Decision itself, we
note that the trial court's finding of overpayment is supported by evidence presented before it. At any
rate, we painstakingly reviewed and computed the payments together with the interest and penalty
charges due thereon and found that the amount of overpayment made by respondent Bank to
petitioner, i.e., P263,070.13, was more than what was ordered reimbursed by the lower court.
However, since respondents did not file an appeal in this case, the amount ordered reimbursed by
the lower court should stand.

Moreover, petitioner's contention that the marginal deposit made by respondent Corporation should
not be deducted outright from the amount of the letter of credit is untenable. Petitioner argues that
the marginal deposit should be considered only after computing the principal plus accrued interest
and other charges. However, to sustain petitioner on this score would be to countenance a clear
case of unjust enrichment, for while a marginal deposit earns no interest in favour of the debtor-
depositor, the bank is not only able to use the same for its own purposes, interest-free, but is also
able to earn interest on the money loaned to respondent Corporation. Indeed, it would be onerous to
compute interest and other charges on the face value of the letter of credit which the petitioner
issued, without first crediting or setting off the marginal deposit which the respondent Corporation
paid to it. Compensation is proper and should take effect by operation of law because the requisites
in Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent
amount.8
Hence, the interests and other charges on the subject letter of credit should be computed only on the
balance of P681,075.93, which was the portion actually loaned by the bank to respondent
Corporation.

Neither do we find error when the lower court and the Court of Appeals set aside as invalid the
floating rate of interest exhorted by petitioner to be applicable. The pertinent provision in the trust
receipt agreement of the parties fixing the interest rate states:

I, WE jointly and severally agree to any increase or decrease in the interest rate which may
occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay
additionally the penalty of 1% per month until the amount/s or instalments/s due and unpaid
under the trust receipt on the reverse side hereof is/are fully paid. 9

We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no
reference rate set either by it or by the Central Bank, leaving the determination thereof at the sole
will and control of petitioner.
1âwphi1.nêt

While it may be acceptable, for practical reasons given the fluctuating economic conditions, for
banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon
prevailing market conditions, there should always be a reference rate upon which to peg such
variable interest rates. An example of such a valid variable interest rate was found in Polotan, Sr. v.
Court of Appeals. 10 In that case, the contractual provision stating that "if there occurs any change in
the prevailing market rates, the new interest rate shall be the guiding rate in computing the
interest due on the outstanding obligation without need of serving notice to the Cardholder other
than the required posting on the monthly statement served to the Cardholder" was considered valid.
11

The aforequoted provision was upheld notwithstanding that it may partake of the nature of an
escalation clause, because at the same time it provides for the decrease in the interest rate in case
the prevailing market rates dictate its reduction. In other words, unlike the stipulation subject of the
instant case, the interest rate involved in the Polotan case is designed to be based on the prevailing
market rate. On the other hand, a stipulation ostensibly signifying an agreement to "any increase or
decrease in the interest rate," without more, cannot be accepted by this Court as valid for it leaves
solely to the creditor the determination of what interest rate to charge against an outstanding loan.

Petitioner has also failed to convince us that its transaction with respondent Corporation is really a
trust receipt transaction instead of merely a simple loan, as found by the lower court and the Court of
Appeals.

The recent case of Colinares v. Court of Appeals appears to be foursquare with the facts obtaining
12

in the case at bar. There, we found that inasmuch as the debtor received the goods subject of the
trust receipt before the trust receipt itself was entered into, the transaction in question was a simple
loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership
over the goods was already transferred to the debtor. This situation is inconsistent with what
normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the
bank and are only released to the importer in trust after the loan is granted.

In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of
the trust receipt occurred long before the trust receipt itself was executed. More specifically, delivery
of the bunker fuel oil to respondent Corporation's Bulacan plant commenced on July 7, 1982 and
was completed by July 19, 1982.13 Further, the oil was used up by respondent Corporation in its
normal operations by August, 1982. On the other hand, the subject trust receipt was only executed
14

nearly two months after full delivery of the oil was made to respondent Corporation, or on September
2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction was explained
in Colinares, to wit:

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner. Here, it is crystal clear that on the part
of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money
to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as
shown by several receipts issued by PBC acknowledging payment of the loan.

The Information charges Petitioners with intent to defraud and misappropriating the money
for their personal use. The mala prohibita nature of the alleged offense notwithstanding,
intent as a state of mind was not proved to be present in Petitioners' situation. Petitioners
employed no artifice in dealing with PBC and never did they evade payment of their
obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to
meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale,
contrary to the express provision embodied in the trust receipt. They are contractors who
obtained the fungible goods for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the Petitioners from CM Builders
Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which
should not be the basis for criminal prosecution in the event of violation of its provisions.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans
and place them under the threats of criminal prosecution should they be unable to pay it may
be unjust and inequitable if not reprehensible. Such agreements are contracts of adhesion
which borrowers have no option but to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to
misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money, as manifested by its Affidavit of
Desistance.

Similarly, respondent Corporation cannot be said to have been dishonest in its dealings with
petitioner. Neither has it been shown that it has evaded payment of its obligations. Indeed, it
continually endeavored to meet the same, as shown by the various receipts issued by petitioner
acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan
with a principal amount of only P681,075.93 negates any badge of dishonesty , abuse of confidence
or mishandling of funds on the part of respondent Corporation, which are the gravamen of a trust
receipt violation. Furthermore, Respondent Corporation is not an importer, which acquired the
bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly, at no time did
title over the oil pass to petitioner, but directly to respondent Corporation to which the oil was directly
delivered long before the trust receipt was executed. The fact that ownership of the oil belonged to
respondent Corporation, through its President, Gregory Lim, was acknowledged by petitioner's own
account officer on the witness stand, to wit:

Q -After the bank opened a letter of credit in favor of Petrophil Corp. for the account of the
defendants thereby paying the value of the bunker fuel oil what transpired next after that?

A -Upon purchase of the bunker fuel oil and upon the requests of the defendant possession
of the bunker fuel oil were transferred to them.
 Q -You mentioned them to whom are you referring to?

A -To the Continental Cement Corp. upon the execution of the trust receipt acknowledging
the ownership of the bunker fuel oil this should be acceptable for whatever disposition he
may make.

Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by whom?

A - By the Continental Cement Corp.

Q – So by your statement who really owns the bunker fuel oil?

A TTY. RACHON:

Objection already answered,

COURT:

Give time to the other counsel to object.

A TTY. RACHON :

He has testified that ownership was acknowledged in favor of Continental Cement Corp. so
that question has already been answered.

A TTY. BANAGA:

That is why I made a follow up question asking ownership of the bunker fuel oil.

COURT:

Proceed.

A TTY .BANAGA:

Q - Who owns the bunker fuel oil after purchase from Petrophil Corp. ?

A - Gregory Lim. 15

By all indications, then, it is apparent that there was really no trust receipt transaction that took
place. Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate
collection by petitioner of the loan it had extended to the former.

Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be personally
liable under the subject trust receipt. Petitioner's argument that respondent Corporation and
respondent Lim and his spouse are one and the same cannot be sustained. The transactions sued
upon were clearly entered into by respondent Lim in his capacity as Executive Vice President of
respondent Corporation. We stress the hornbook law that corporate personality is a shield against
personal liability of its officers. Thus, we agree that respondents Gregory T. Lim and his spouse
cannot be made personally liable since respondent Lim entered into and signed the contract clearly
in his official capacity as Executive Vice President. The personality of the corporation is separate
and distinct from the persons composing it.16

WHEREFORE, in view of all the foregoing, the instant Petition for Review is DENIED. The Decision
of the Court of Appeals dated July 26, 1993 in CA-G.R. CY No.29950 is AFFIRMED.

SO ORDERED.

RAYMUNDO ODANI SECOSA, EL BUENASENSO SYand DASSAD

WAREHOUSINGand PORT SERVICES, INCORPORATED, Petitioners, v. HEIRS OF
ERWIN SUAREZ FRANCISCO, Respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a Petition for Review under Rule 45 of the Rules of Court seeking the reversal of
the decision1 of the Court of Appeals dated February 27, 2003 in CA-G.R. CV No.
61868, which affirmed in toto the June 19, 1998 decision2 of Branch 20 of the Regional
Trial Court of Manila in Civil Case No. 96-79554.

The facts are as follows: chanroblesvirtua1awlibrary

On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old
third year physical therapy student of the Manila Central University, was riding a
motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of
Manila.At the same time, Petitioner, Raymundo Odani Secosa, was driving an Isuzu
cargo truck with plate number PCU-253 on the same road. The truck was owned by
petitioner, Dassad Warehousing and Port Services, Inc.

Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which
in turn was being tailed by the Isuzu truck driven by Secosa.The three vehicles were
traversing the southbound lane at a fairly high speed.When Secosa overtook the sand
and gravel truck, he bumped the motorcycle causing Francisco to fall.The rear wheels of
the Isuzu truck then ran over Francisco, which resulted in his instantaneous
death.Fearing for his life, petitioner Secosa left his truck and fled the scene of the
collision.3cralawred

Respondents, the parents of Erwin Francisco, thus filed an action for damages against
Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and Dassads
president, El Buenasucenso Sy.The complaint was docketed as Civil Case No.96-79554
of the RTC of Manila, Branch 20.

On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in favor
of herein respondents, the dispositive portion of which states: chanroblesvirtua1awlibrary

WHEREFORE, premised on the foregoing, judgment is hereby rendered in favor of the

plaintiffs ordering the defendants to pay plaintiffs jointly and severally: chanroblesvirtua1awlibrary
1.The sum of P55,000.00 as actual and compensatory damages; chanroblesvirtuallawlibrary

2.The sum of P20,000.00 for the repair of the motorcycle; chanroblesvirtuallawlibrary

3.The sum of P100,000.00 for the loss of earning capacity; chanroblesvirtuallawlibrary

4.The sum of P500,000.00 as moral damages; chanroblesvirtuallawlibrary

5.The sum of P50,000.00 as exemplary damages; chanroblesvirtuallawlibrary

6.The sum of P50,000.00 as attorneys fees plus cost of suit.

SO ORDERED.

Petitioners appealed the decision to the Court of Appeals, which affirmed the appealed
decision in toto.4 cralawred

Hence the present petition, based on the following arguments:

I.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF

THE TRIAL COURT THAT PETITIONER DASSAD DID NOT EXERCISE THE DILIGENCE OF
A GOOD FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF ITS
EMPLOYEES WHICH IS NOT IN ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL
CODE AND RELATED JURISPRUDENCE ON THE MATTER.

II.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF

THE TRIAL COURT IN HOLDING PETITIONER EL BUENASENSO SY SOLIDARILY LIABLE
WITH PETITIONERS DASSAD AND SECOSA IN VIOLATION OF THE CORPORATION LAW
AND RELATED JURISPRUDENCE ON THE MATTER.

III.

THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF APPEALS

AWARDING P500,000.00 AS MORAL DAMAGES IS MANIFESTLY ABSURD, MISTAKEN
AND UNJUST.5 cralawred

The petition is partly impressed with merit.

On the issue of whether petitioner Dassad Warehousing and Port Services, Inc.
exercised the diligence of a good father of a family in the selection and supervision of
its employees, we find the assailed decision to be in full accord with pertinent provisions
of law and established jurisprudence.

Article 2176 of the Civil Code provides: chanroblesvirtua1awlibrary

Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done.Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter.

On the other hand, Article 2180, in pertinent part, states: chanroblesvirtua1awlibrary

The obligation imposed by article 2176 is demandable not only for ones own acts or
omissions, but also for those of persons for whom one is responsible x x x.

Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks, even though the former are not
engaged in any business or industry x x x.

The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.

Based on the foregoing provisions, when an injury is caused by the negligence of an

employee, there instantly arises a presumption that there was negligence on the part of
the employer either in the selection of his employee or in the supervision over him after
such selection.The presumption, however, may be rebutted by a clear showing on the
part of the employer that it exercised the care and diligence of a good father of a family
in the selection and supervision of his employee.Hence, to evade solidary liability for
quasi-delict committed by an employee, the employer must adduce sufficient proof that
it exercised such degree of care.6cralawred

How does an employer prove that he indeed exercised the diligence of a good father of
a family in the selection and supervision of his employee? The case of Metro Manila
Transit Corporation v. Court of Appeals7 is instructive:
chanroblesvirtua1awlibrary

In fine, the party, whether plaintiff or defendant, who asserts the affirmative of the
issue has the burden of presenting at the trial such amount of evidence required by law
to obtain a favorable judgment8 . .. In making proof in its or his case, it is paramount
that the best and most complete evidence is formally entered.9 cralawred

Coming now to the case at bar, while there is no rule which requires that testimonial
evidence, to hold sway, must be corroborated by documentary evidence, inasmuch as
the witnesses testimonies dwelt on mere generalities, we cannot consider the same as
sufficiently persuasive proof that there was observance of due diligence in the selection
and supervision of employees. Petitioners attempt to prove its deligentissimi patris
familias in the selection and supervision of employees through oral evidence must fail
as it was unable to buttress the same with any other evidence, object or documentary,
which might obviate the apparent biased nature of the testimony.10 cralawred

Our view that the evidence for petitioner MMTC falls short of the required evidentiary
quantum as would convincingly and undoubtedly prove its observance of the diligence
of a good father of a family has its precursor in the underlying rationale pronounced in
the earlier case of Central Taxicab Corp. v. Ex-Meralco Employees Transportation Co.,
et al.,11 set amidst an almost identical factual setting, where we held that: chanroblesvirtua1awlibrary

The failure of the defendant company to produce in court any record or other
documentary proof tending to establish that it had exercised all the diligence of a good
father of a family in the selection and supervision of its drivers and buses,
notwithstanding the calls therefor by both the trial court and the opposing counsel,
argues strongly against its pretensions.

We are fully aware that there is no hard-and-fast rule on the quantum of evidence
needed to prove due observance of all the diligence of a good father of a family as
would constitute a valid defense to the legal presumption of negligence on the part of
an employer or master whose employee has by his negligence, caused damage to
another. x x x (R) educing the testimony of Albert to its proper proportion, we do not
have enough trustworthy evidence left to go by. We are of the considered opinion,
therefore, that the believable evidence on the degree of care and diligence that has
been exercised in the selection and supervision of Roberto Leon y Salazar, is not legally
sufficient to overcome the presumption of negligence against the defendant company.

The above-quoted ruling was reiterated in a recent case again involving the Metro
Manila Transit Corporation,12 thus: chanroblesvirtua1awlibrary

In the selection of prospective employees, employers are required to examine them as

to their qualifications, experience, and service records.13 On the other hand, with
respect to the supervision of employees, employers should formulate standard
operating procedures, monitor their implementation, and impose disciplinary measures
for breaches thereof. To establish these factors in a trial involving the issue of vicarious
liability, employers must submit concrete proof, including documentary evidence.

In this case, MMTC sought to prove that it exercised the diligence of a good father of a
family with respect to the selection of employees by presenting mainly testimonial
evidence on its hiring procedure. According to MMTC, applicants are required to submit
professional driving licenses, certifications of work experience, and clearances from the
National Bureau of Investigation; to undergo tests of their driving skills, concentration,
reflexes, and vision; and, to complete training programs on traffic rules, vehicle
maintenance, and standard operating procedures during emergency cases.

xxx

Although testimonies were offered that in the case of Pedro Musa all these precautions
were followed, the records of his interview, of the results of his examinations, and of his
service were not presented.. . [T]here is no record that Musa attended such training
programs and passed the said examinations before he was employed. No proof was
presented that Musa did not have any record of traffic violations. Nor were records of
daily inspections, allegedly conducted by supervisors, ever presented.. . The failure of
MMTC to present such documentary proof puts in doubt the credibility of its witnesses.

Jurisprudentially, therefore, the employer must not merely present testimonial evidence
to prove that he observed the diligence of a good father of a family in the selection and
supervision of his employee, but he must also support such testimonial evidence with
concrete or documentary evidence. The reason for this is to obviate the biased nature
of the employers testimony or that of his witnesses.14 cralawred

Applying the foregoing doctrines to the present case, we hold that petitioner Dassad
Warehousing and Port Services, Inc. failed to conclusively prove that it had exercised
the requisite diligence of a good father of a family in the selection and supervision of its
employees.

Edilberto Duerme, the lone witness presented by Dassad Warehousing and Port
Services, Inc. to support its position that it had exercised the diligence of a good father
of a family in the selection and supervision of its employees, testified that he was the
one who recommended petitioner Raymundo Secosa as a driver to Dassad Warehousing
and Port Services, Inc.; that it was his duty to scrutinize the capabilities of drivers; and
that he believed petitioner to be physically and mentally fit for he had undergone rigid
training and attended the PPA safety seminar.15 cralawred

Petitioner Dassad Warehousing and Port Services, Inc. failed to support the testimony
of its lone witness with documentary evidence which would have strengthened its claim
of due diligence in the selection and supervision of its employees.Such an omission is
fatal to its position, on account of which, Dassad can be rightfully held solidarily liable
with its co-petitioner Raymundo Secosa for the damages suffered by the heirs of Erwin
Francisco.

However, we find that petitioner El Buenasenso Sy cannot be held solidarily liable with
his co-petitioners. While it may be true that Sy is the president of petitioner Dassad
Warehousing and Port Services, Inc., such fact is not by itself sufficient to hold him
solidarily liable for the liabilities adjudged against his co-petitioners.

It is a settled precept in this jurisdiction that a corporation is invested by law with a

personality separate from that of its stockholders or members.16 It has a personality
separate and distinct from those of the persons composing it as well as from that of any
other entity to which it may be related. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not in itself
sufficient ground for disregarding the separate corporate personality.17 A corporations
authority to act and its liability for its actions are separate and apart from the
individuals who own it.18 cralawred

The so-called veil of corporation fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation will be
looked upon as a legal entity, unless and until sufficient reason to the contrary
appears.When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons.19 Also, the corporate entity may be disregarded in the interest of
justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons.In both
instances, there must have been fraud and proof of it. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established.20 It cannot be presumed.21 cralawred
The records of this case are bereft of any evidence tending to show the presence of any
grounds enumerated above that will justify the piercing of the veil of corporate fiction
such as to hold the president of Dassad Warehousing and Port Services, Inc. solidarily
liable with it.

The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of
Dassad Warehousing and Port Services, Inc., and not in the name of El Buenasenso
Sy.Raymundo Secosa is an employee of Dassad Warehousing and Port Services, Inc.
and not of El Buenasenso Sy.All these things, when taken collectively, point toward El
Buenasenso Sys exclusion from liability for damages arising from the death of Erwin
Francisco.

Having both found Raymundo Secosa and Dassad Warehousing and Port Services, Inc.
liable for negligence for the death of Erwin Francisco on June 27, 1996, we now
consider the question of moral damages which his parents, herein respondents, are
entitled to recover.Petitioners assail the award of moral damages of P500,000.00 for
being manifestly absurd, mistaken and unjust.We are not persuaded.

Under Article 2206, the spouse, legitimate and illegitimate descendants and ascendants
of the deceased may demand moral damages for mental anguish for the death of the
deceased. The reason for the grant of moral damages has been explained in this
wise:chanroblesvirtua1awlibrary

.. . the award of moral damages is aimed at a restoration, within the limits possible, of
the spiritual status quo ante; and therefore, it must be proportionate to the suffering
inflicted. The intensity of the pain experienced by the relatives of the victim is
proportionate to the intensity of affection for him and bears no relation whatsoever with
the wealth or means of the offender.22 cralawred

In the instant case, the spouses Francisco presented evidence of the searing pain that
they felt when the premature loss of their son was relayed to them. That pain was
highly evident in the testimony of the father who was forever deprived of a son, a son
whose untimely death came at that point when the latter was nearing the culmination
of every parents wish to educate their children.The death of Francis has indeed left a
void in the lives of the respondents. Antonio Francisco testified on the effect of the
death of his son, Francis, in this manner: chanroblesvirtua1awlibrary

Q: (Atty. Balanag) :What did you do when you learned that your son was killed on June
27, 1996? chanroblesvirtualawlibrary

A: (ANTONIO FRANCISCO) :I boxed the door and pushed the image of St. Nio telling
why this happened to us.

Q: Mr. Witness, how did you feel when you learned of the untimely death of your son,
Erwin Suares (sic) ? chanroblesvirtualawlibrary

A: Masakit po ang mawalan ng anak. Its really hard for me, the thought that my son is
dead.
 xxx

Q: How did your family react to the death of Erwin Suarez Francisco? chanroblesvirtualawlibrary

A: All of my family and relatives were felt (sic) sorrow because they knew that my son
is (sic) good.

Q: We know that it is impossible to put money terms(s) [on] the life of [a] human, but
since you are now in court and if you were to ask this court how much would you and
your family compensate? (sic)

23
A: Even if they pay me millions, they cannot remove the anguish of my son (sic). cralawred

Moral damages are emphatically not intended to enrich a plaintiff at the expense of the
defendant. They are awarded to allow the former to obtain means, diversion or
amusements that will serve to alleviate the moral suffering he has undergone due to
the defendants culpable action and must, perforce, be proportional to the suffering
inflicted.24 We have previously held as proper an award of P500,000.00 as moral
damages to the heirs of a deceased family member who died in a vehicular accident. In
our 2002 decision in Metro Manila Transit Corporation v. Court of Appeals, et al.,25 we
affirmed the award of moral damages of P500,000.00 to the heirs of the victim, a
mother, who died from injuries she sustained when a bus driven by an employee of the
petitioner hit her.In the case at bar, we likewise affirm the portion of the assailed
decision awarding the moral damages.

Since the petitioners did not question the other damages adjudged against them by the
court a quo, we affirm the award of these damages to the Respondents.

WHEREFORE, the petition is DENIED.The assailed decision is AFFIRMED with the

MODIFICATION that petitioner El Buenasenso Sy is ABSOLVED from any liability
adjudged against his co-petitioners in this case.

Costs against petitioners.

SO ORDERED.

G. R. No. 150978 - April 3, 2003

POWTON CONGLOMERATE1, INC., and PHILIP C. CHIEN, Petitioners, vs. JOHNNY

AGCOLICOL, Respondent.

YNARES-SANTIAGO, J.:

In a contract to build a structure or any other work for a stipulated price, the contractor
cannot demand an increase in the contract price on account of higher cost of labor or
materials, unless there has been a change in the plan and specification which was
authorized in writing by the other party and the price has been agreed upon in writing
by both parties.2
This is a petition for review on certiorari assailing the September 3, 2001 Decision3 of
the Court of Appeals in CA-G.R. CV No. 65100, and its December 5, 2001
Resolution4 denying petitioners motion for reconsideration.

Sometime in November 1990, respondent Johnny Agcolicol, proprietor of Japerson

Engineering, entered into an "Electrical Installation Contract" with Powton
Conglomerate, Inc. (Powton), thru its President and Chairman of the Board, Philip C.
Chien. For a contract price of P5,300,000.00, respondent undertook to provide electrical
works as well as the necessary labor and materials for the installation of electrical
facilities at the Ciano Plaza Building owned by Powton, located along M. Reyes Street,
corner G. Mascardo Street, Bangkal, Makati, Metro Manila.5 In August 1992, the City
Engineers Office of Makati inspected the electrical installations at the Ciano Plaza
Building and certified that the same were in good condition. Hence, it issued the
corresponding certificate of electrical inspection.

On December 16, 1994, respondent filed with the Regional Trial Court of Pasay City,
Branch 115, the instant complaint for sum of money against the petitioners.6 He alleged
that despite the completion of the electrical works at Ciano Plaza Building, the latter
only paid the amount of P5,031,860.40, which is equivalent to more than 95% of the
total contract price, thereby leaving a balance of P268,139.80. Respondent likewise
claimed the amount of P722,730.38 as additional electrical works which were
necessitated by the alleged revisions in the structural design of the building.7

In their answer, petitioners contended that they cannot be obliged to pay the balance of
the contract price because the electrical installations were defective and were
completed beyond the agreed period.8 During the trial, petitioner Chien testified that
they should not be held liable for the additional electrical works allegedly performed by
the petitioner because they never authorized the same.9

At the pre-trial conference, the parties stipulated, inter alia, that the unpaid balance
claimed by the respondent is P268,139.60 and the cost of additional work is
P722,730.38.10

On August 16, 1999, a decision was rendered awarding the respondent the total award
of P990,867.38 representing the unpaid balance and the costs of additional works. The
dispositive portion thereof reads:

Wherefore, this Court renders its judgment in favor of the plaintiff and orders the
defendants Powton Congolmerate and Philip C. Chien to pay the plaintiff, jointly and
severally, the amount of P990,867.38 representing their total unpaid obligations plus
legal interest from the time of the filing of this complaint. No pronouncement as to
costs.

SO ORDERED.11

Aggrieved, petitioners appealed to the Court of Appeals which, however, affirmed the
decision of the trial court.12 The motion for reconsideration was likewise denied.13

Hence, the instant petition.

Is the petitioner liable to pay the balance of the contract price and the increase in costs
brought about by the revision of the structural design of the Ciano Plaza Building?

The petition is partly meritorious.

We agree with the findings of both the trial court and the Court of Appeals that
petitioners failed to show that the installations made by respondent were defective and
completed beyond the agreed period. The justification cited by petitioners for not
paying the balance of the contract price is the self-serving allegation of petitioner
Chien. Pertinent portion of his testimony, reads:

COURT:

Q: You are telling the Court that you did not accept the job because it is not yet
complete. That is [a] general statement.

ATTY. FLORENCIO:

Q: Why did you say that the job was not yet complete?

COURT: Specify.

WITNESS:

A: I am not an electrical engineer but my menwe also get independent engineer

to certify that the job was not complete, your Honor.

COURT:

Q: You mean to say you hired an independent electrical engineer and he certified
that the job is not yet complete and there is danger?

WITNESS:

A: Yes, your Honor.

COURT:

Q: You have to present that engineer.

ATTY. FLORENCIO:

A: Yes, your Honor.14

Notwithstanding the above promise, petitioners never presented the engineer or any
other competent witness to testify on the matter of delay and defects. Having failed to
present sufficient proof, petitioners bare assertion of unsatisfactory and delayed
installation will not justify their non-payment of the balance of the contract price.
Hence, we affirm the ruling of the trial court and the Court of Appeals ordering
petitioners to pay the balance of P268,139.80.

In awarding additional costs to respondent, both the trial court and the Court of
Appeals sweepingly applied the principle of unjust enrichment without discussing the
relevance in the instant case of Article 1724 of the Civil Code, which provides:

Art. 1724. The contractor who undertakes to build a structure or any other work for a
stipulated price, in conformity with plans and specifications agreed upon with the
landowner, can neither withdraw from the contract nor demand an increase in the price
on account of the higher cost of labor or materials, save when there has been a change
in the plans and specifications, provided:

(1) Such change has been authorized by the proprietor in writing; and

(2) The additional price to be paid to the contractor has been determined in writing by
both parties.

Article 1724 of the Civil Code was copied from Article 1593 of the Spanish Civil
Code,15 which provided as follows:

No architect or contractor who, for a lump sum, undertakes the construction of a

building, or any other work to be done in accordance with a plan agreed upon with the
owner of the ground, may demand an increase of the price, even if the costs of the
materials or labor has increased; but he may do so when any change increasing the
work is made in the plans, provided the owner has given his consent thereto.16

The present Civil Code added substantive requisites before recovery of the contractor
may be validly had. It will be noted that while under the precursor provision, recovery
for additional costs may be allowed if consent to make such additions can be proved,
the present provision clearly requires that the changes should be authorized, such
authorization by the proprietor in writing. The evident purpose of the amendment is to
prevent litigation for additional costs incurred by reason of additions or changes in the
original plan. Undoubtedly, it was adopted to serve as a safeguard or a substantive
condition precedent to recovery.17

In Weldon Construction Corporation v. Court of Appeals,18 involving a contract of

supervision of construction of a theater, we denied the contractors claim to recover
costs for additional works. It was held that the contract entered into by the parties was
one for a piece of work for a stipulated price, wherein the right of the contractor to
recover the cost of additional works is governed by Article 1724 of the Civil Code. Thus

In addition to the owner's authorization for any change in the plans and specifications,
Article 1724 requires that the additional price to be paid for the contractor be likewise
reduced in writing. Compliance with the two requisites in Article 1724, a specific
provision governing additional works, is a condition precedent to recovery (San Diego
v. Sayson, supra.). The absence of one or the other bars the recovery of additional
costs. Neither the authority for the changes made nor the additional price to be paid
therefor may be proved by any other evidence for purposes of recovery.
In the case before this Court, the records do not yield any written authority for the
changes made on the plans and specifications of the Gay Theater building. Neither can
there be found any written agreement on the additional price to be paid for said "extra
works." While the trial court may have found in the instant case that the private
respondent admitted his having requested the "extra works" done by the contractor
(Record on Appeal, p. 66 [C.F.I. Decision]), this does not save the day for the
petitioner. The private respondent claims that the contractor agreed to make the
additions without additional cost. Expectedly, the petitioner vigorously denies said claim
of the private respondent. This is precisely a misunderstanding between parties to a
construction agreement which the lawmakers sought to avoid in prescribing the two
requisites under Article 1724 (Report of the Code Commission, p. 148). And this case is
a perfect example of a tedious litigation which had ensued between the parties as a
result of such misunderstanding. Again, this is what the law endeavors to prevent (San
Diego v. Sayson, supra.)

In the absence of a written authority by the owner for the changes in the plans and
specifications of the building and of a written agreement between the parties on the
additional price to be paid to the contractor, as required by Article 1724, the claim for
the cost of additional works on the Gay Theater building must be denied.19

In the instant case, the parties entered into a contract for the execution of all the
electrical works at the Ciano Plaza "as shown and described in the plans and
specification prepared by RCG Consult (hereinafter referred to as the
ARCHITECT/ENGINEER)."20 The contract was for a fixed price of P5,300,000, with the
stipulation that "any addition or reduction in the cost of work shall be mutually agreed
in writing by both the OWNER and [the] CONTRACTOR upon
recommendation/advisement of the ARCHITEC/ENGINEERS before execution."21 As
admitted by both parties, several revisions and deviations from the original plan and
specification of the building were introduced during the construction thereof.22 It
appears, however, that though respondent was aware of such revisions and of the
consequent increase in the cost of the electrical works, he nevertheless completed the
installation of electrical facilities in the constructed building without first entering into a
written agreement with the petitioners for the increase in costs. The fact that petitioner
Chien testified23 that his Engineer/Architect, the R.C. Gaite & Associates, recommended
payment of the increase in costs, does not prove that he was informed of such increase
before the job was completed.24 The records reveal that the demand letter which in
effect notified the petitioners of the increase in the costs of electrical installations was
sent by the respondent to petitioners after the completion of the project.25 This was
clearly not in accord with the express stipulation of the parties requiring a prior written
agreement authorizing the increased costs, as well as with the provisions of Article
1724.

It must be stressed that the "change in the plans and specifications" referred to in
Article 1724 pertains to the very contract entered into by the owner of the building and
the contractor. While there is a revision of plan and specification in the instant case, the
same pertains to the structural design of the building and not to the electrical
installation contract of the parties. The consent given by the petitioners to the revision
of the former will not necessarily extend to the latter. As emphasized in Weldon
Construction Corporation, the issue of consent to the higher cost could have been
determined with facility had the respondent complied with the requirement of a written
agreement for additional costs as mandated not only by their contract but also by
Article 1724 of the Civil Code. The written consent of the owner to the increased costs
sought by the respondent is not a mere formal requisite, but a vital precondition to the
validity of a subsequent contract authorizing a higher or additional contract price.
Moreover, the safeguards enshrined in the provisions of Article 1724 are not only
intended to obviate future misunderstandings but also to give the parties a chance to
decide whether to bind ones self to or withdraw from a contract. Had the increase in
costs of the electrical installations been disclosed before completion of the project,
petitioners could have opted to bargain with the respondent or hire another contractor
for a cheaper price. Respondent, on the other hand, could have gladly accepted the
bargain or simply backed out from the contract instead of gambling on the
consequences of assuming the increased costs without the prior written authorization of
the petitioners. Indeed, the principle of unjust enrichment cannot be validly invoked by
the respondent who, through his own act or omission, took the risk of being denied
payment for additional costs by not giving the petitioners prior notice of such costs
and/or by not securing their written consent thereto, as required by law and their
contract.

Finally, we note that the trial court held petitioner Chien solidarily liable with petitioner
Powton. The settled rule is that, a corporation is invested by law with a personality
separate and distinct from those of the persons composing it, such that, save for
certain exceptions, corporate officers who entered into contracts in behalf of the
corporation cannot be held personally liable for the liabilities of the latter. Personal
liability of a corporate director, trustee or officer along (although not necessarily) with
the corporation may so validly attach, as a rule, only when (1) he assents to a patently
unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in
directing its affairs, or when there is a conflict of interest resulting in damages to the
corporation, its stockholders or other persons; (2) he consents to the issuance of
watered down stocks or who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto; (3) he agrees to hold himself
personally and solidarily liable with the corporation; or (4) he is made by a specific
provision of law personally answerable for his corporate action. 26 Considering that none
of the foregoing exceptions was established in the case at bar, petitioner Chien, who
entered into a contract with respondent in his capacity as President and Chairman of
the Board of Powton, cannot be held solidarily liable with the latter.

WHEREFORE, in view of all the foregoing, the instant petition is PARTIALLY GRANTED.
The Decision of the Court of Appeals in CA-G.R. CV No. 65100 is MODIFIED. Petitioner
Powton Conglomerate, Inc. is ordered to pay respondent Johnny Agcolicol the sum of
P268,139.60 representing the unpaid balance in the "Electrical Installation Contract"
between them. Petitioner Philip C. Chien, President and Chairman of the Board of
Powton Conglomerate, Inc. is absolved from personal liability.

SO ORDERED.

G.R. No. 202215, December 09, 2015

VICMAR DEVELOPMENT CORPORATION AND/OR ROBERT KUA, OWNER, AND

ENGR. JUANITO C. PAGCALIWAGAN,1 MANAGER, Petitioners, v. CAMILO
ELARCOSA, MARLON BANDA, DANTE L. BALAMAD, RODRIGO
 COLANSE,2 CHIQUITO PACALDO, ROBINSON PANAGA, JUNIE ABUGHO,
SBLVERIO NARISMA, ARMANDO GONZALES, TEOFILO ELBINA, FRANCISCO
BAGUIO, GELVEN RHYAN RAMOS, JULITO SIMAN, RECARIDO4 PANES, JESUS
TINSAY, AGAPITO CANAS, JR., OLIVER LOBAYNON, SIMEON BAGUIO, JOSEPH
SALCEDO, DONIL INDINO, WILFREDO GULBEN, JESRILE5 TANIO, RENANTE
PAMON, RICHIE6 GULBEN, DANIEL ELLO, REXY DOFELIZ, RONALD NOVAL,
NORBERTO BELARGA, ALLAN BAGUIO, ROBERTO PAGUICAN, ROMEO7 PATOY,
ROLANDO TACBOBO, WILFREDO LADRA, RUBEN PANES, RUEL CABANDAY, AND
JUNARD8 ABUGHO, Respondent.

DECISION

DEL CASTILLO, J.:

Before us is a Petition for Review on Certiorari assailing the November 24, 2009
Decision9 of the Court of Appeals (CA) in CA-G.R SP No. 01853-MN. The CA granted the
Petition for Certiorari filed therewith, and reversed and set aside the February 2,
200710 Resolution of the National Labor Relations Commission (NLRC), Fifth Division,
Cagayan de Oro, which in turn, affirmed the May 25, 200611 and May 29,
200612 respective Decisions of Executive Labor Arbiters (LA) Benjamin E. Pelaez
(Pelaez) and Noel Augusto S. Magbanua (Magbanua) dismissing the complaints for lack
of merit. Also assailed is the May 10, 2012 CA Resolution13 denying the motion for
reconsideration.

Factual Antecedents

This case stemmed from a Complaint for illegal dismissal and money claims filed by
Ruben Panes, Ruel Cabanday and Jonard Abugho (respondents) against Vicmar
Development Corporation (Vicmar) and/or Robert Kua (Kua), its owner and Juanito
Pagcaliwagan (Pagcaliwagan), its manager, docketed as NLRC Case No. RAB-10-08-
00593-2005;14 and consolidated Complaints for illegal dismissal and money claims filed
by Camilo Elarcosa, Marlon Banda, Dante Balamad, Rodrigo Colanse, Chiquito Pacaldo,
Robinson Panaga, Romel Patoy, Wilfredo Ladra, Junie Abugho, Silverio Narisma,
Armando Gonzales, Teofilo Elbina, Francisco Baguio, Gelven Rhyan Ramos, Julito
Siman, Recarido Panes, Jesus Tinsay, Agapito Cafias, Jr., Oliver Lobaynon, Rolando
Tacbobo, Simeon Baguio, Roberto Paguican, Joseph Salcedo, Donil Indino, Wilfredo
Gulben, Jesreil Taneo, Renante Pamon, Richie Gulben, Daniel EUo, Rexy Dofeliz, Ronald
Noval, Norberto Belarca, and Allan Baguio (respondents), among others, against
Vicmar, Kua, and Pagcaliwagan (petitioners), docketed as NLRC Case Nos. RAB-10-09-
00603-2004; RAB-10-09-00609-2004; RAB-10-09-00625-2004; and RAB-10-02-
00190-2005.15

Respondents alleged that Vicmar, a domestic corporation engaged in manufacturing of

plywood for export and for local sale, employed them in various capacities - as boiler
tenders, block board receivers, waste feeders, plywood checkers, plywood sander,
conveyor operator, ripsaw operator, lumber grader, pallet repair, glue mixer, boiler
fireman, steel strap repair, debarker operator, plywood repair and reprocessor, civil
workers and plant maintenance. They averred that Vicmar has two branches, Top
Forest Developers, Incorporated (TFDI) and Greenwood International Industries,
Incorporated (GUI) located in the same compound where Vicmar operated.16
According to respondents, Vicmar employed some of them as early as 1990 and since
their engagement they had been performing the heaviest and dirtiest tasks in the plant
operations. They claimed that they were supposedly employed as "extra" workers;
however, their assignments were necessary and desirable in the business of Vicmar.
They asserted that many of them were assigned at the boilers for at least 11 hours
daily.17 They emphasized that the boiler section was necessary to Vicmar's business
because it was where pieces of plywood were dried and cooked to perfection.18 They
further stated that a number of them were also assigned at the plywood repair and
processing section, which required longer working hours.19

Respondents declared that Vicmar paid them minimum wage and a small amount for
overtime but it did not give them benefits as required by law, such as Philhealth, Social
Security System, 13th month pay, holiday pay, rest day and night shift
differential.20 They added that Vicmar employed more than 200 regular employees and
more than 400 "extra" workers.21

Sometime in 2004, Vicmar allegedly informed respondents that they would be handled
by contractors.22 Respondents stated that these contractors were former employees of
Vicmar and had no equipment and facilities of their own.23 Respondents averred that as
a result thereof, the wages of a number of them who were receiving P276.00 as daily
wage, were reduced to P200.00 or P180.00, despite overtime work; and the wages of
those who were receiving P200.00 and P180.00 were reduced to P145.00 or P131.00.
Respondents protested said wage decrease but to no avail. Thus, they filed a Complaint
with the DOLE24 for violations of labor standards for which appropriate compliance
orders were issued against Vicmar.25 cralawred

Respondents claimed that on September 13, 2004, 28 of them were no longer

scheduled for work and that the remaining respondents, including their sons and
brothers, were subsequently not given any work schedule.26

Respondents maintained that they were regular employees of Vicmar; that Vicmar
employed a number of them as early as 1990 and as late as 200327 through
Pagcaliwagan, its plant manager; that Vicmar made them perform tasks necessary and
desirable to its usual business; and that Vicmar paid their wages and controlled the
means and methods of their work to meet the standard of its products. Respondents
averred that Vicmar dismissed them from service without cause or due process that
prompted the filing of this illegal dismissal case.28

Respondents claimed that they were illegally dismissed after "vicmar learned that they
instituted the subject Complaint through the simple expedience of not being scheduled
for work. Even those persons associated with them were dismissed. They also asserted
that Vicmar did not comply with the twin notice requirement in dismissing employees.29

Furthermore, respondents contended that while Vicmar, TFDI and Gin were separately
registered with the SEC,30 they were involved in the same business, located in the same
compound, owned by one person, had one resident manager, and one and the same
administrative department, personnel and finance sections. They claimed that the
employees of these companies were identified as employees of Vicmar even if they
were assigned in TFDI or GIII.31
On the other hand, petitioners stated that Vicmar is a domestic corporation engaged in
wood processing, including the manufacture of plywood since 1970;32 that Vicmar
employed adequate regular rank-and-file employees for its normal operation; and that
it engaged the services of additional workers when there were unexpected high
demands of plywood products and when several regular employees were unexpectedly
absent or on leave.33

Petitioners pointed out that the engagement of Vicmar's "extra" workers was not
continuous and not more than four of them were engaged per section in every shift.
They added that from the time of engagement, respondents were not assigned for more
than one year in a section or a specific activity.34 They explained that some of Vicmar's
"extra" workers were engaged under "pakyaw" system and were paid based on the
items repaired or retrieved.35 Petitioners also stated that respondents Allan Baguio,
Romel Patoy, Rexy Dofeliz, Marlon Banda, Gulben Rhyan Ramos, Julieto Simon and
Agapito Canas, Jr. were "extra" workers of TFDI, not Vicmar.36 They likewise alleged
that a number of respondents were engaged to assist regular employees in the
company,37 and the others were hired to repair used steel straps and retrieve useable
veneer materials, or to perform janitorial services.38

Moreover, petitioners argued that the engagement of additional workforce was subject
to the availability of forest products, as well as veneer materials from Malaysia or
Indonesia and the availability of workers.39

Petitioners further asseverated that sometime in August 2004, they decided to engage
the services of legitimate independent contractors, namely, E.A. Rosales Contracting
Services and Candole Contracting Services, to provide additional
workforce.40 Petitioners claimed that they were unaware that respondents were
dissatisfied with this decision leading to the DOLE case.41 They insisted that hiring said
contractors was a cost-saving measure, which was part of Vicmar's management
prerogative.42

Ruling of the Executive Labor Arbiters

On May 25, 2006, ELA Pelaez dismissed the complaints in NLRC Case Nos. RAB-10-09-
00603-2004; RAB-10-09-00609-2004; RAB-10-09-00625-2004; and RAB-10-02-
00190-2005.43 On May 29, 2006, ELA Magbanua dismissed the complaint in NLRC Case
No. RAB-10-08-00593-2005.44

Both ELAs Pelaez and Magbanua held that respondents were seasonal employees of
Vicmar, whose work was "co-terminus or dependent upon the extraordinary demands
for plywood products and also on the availability of logs or timber to be processed into
plywood."45 They noted that Vicmar could adopt cost-saving measures as part of its
management prerogative, including engagement of legitimate independent
contractors.46

Ruling of the National Labor Relations Commission

Consequently, respondents filed a Notice of Appeal with Motion to Consolidate

Cases47 alleging that the foregoing cases involved same causes of actions, issues,
counsels, and respondents, and complainants therein were similarly situated.

Thereafter, in their Consolidated Memorandum on Appeal,48 respondents argued that

their work in Vicmar was not seasonal. They averred that since their employment in
1990 until their termination in 2004, they continuously worked for Vicmar and were not
allowed to work for other companies. They alleged that there was never a decline in the
demand and production of plywood. They also claimed that they continuously worked in
Vicmar the whole year, except in December during which the machines were shut down
for servicing and clean-up. They, nonetheless, stated that some of them were the ones
who had been cleaning these machines.

In addition, respondents averred that even assuming that they were seasonal
employees, they were still regular employees whose employment was never severed
during off-season. Thus, they asserted that the decision to farm them out to contractors
was in violation of their right to security of tenure and was an evidence of bad faith on
the part of Vicmar.

On February 2, 2007, the NLRC affirmed the Decisions of ELAs Pelaez and
Magbanua.49 On April 30, 2007, it denied respondents' motion for reconsideration.50

Ruling of the Court of Appeals

Undaunted, respondents filed with the CA a Petition51 for Certiorari maintaining that
they were regular employees of Vicmar and that the latter illegally dismissed them.
They insisted that the labor contractors engaged by Vicmar were "labor-only"
contractors, as they have no equipment and facilities of their own.

Petitioners, for their part, reiterated that Vicmar employed respondents as additional
workforce when there was high demand for plywood thus, they were merely seasonal
employees of Vicmar. They argued that Vicmar engaged independent contractors as a
cost-saving measure; and these contractors exercised direct control and supervision
over respondents. In conclusion, petitioners declared that respondents were not illegally
dismissed but lost their employment because of refusal to coordinate with Vicmar's
independent contractors.

On November 24,2009, the CA rendered the assailed Decision granting the Petition
for Certiorari, the dispositive portion of which reads:

WHEREFORE, premises considered, the Petition is GRANTED. The Resolution dated

February 2,2007 of the National Labor Relations Commission (NLRC), Fifth Division,
Cagayan de Oro City is REVERSED and SET ASIDE. Private respondents are ORDERED
to reinstate petitioners to their former positions, without loss of seniority rights, and to
pay full backwages from the time they were illegally dismissed until actual
reinstatement.

SO ORDERED.52 ChanRoblesVirtualawlibrary

The CA held that a number of respondents were assigned to the boiler section where
plywood was dried and cooked to perfection; and while the other respondents were said
to have been assigned at the general service section, they were "cleaners on an
industrial level handling industrial refuse."53 As such, according to the CA, respondents
performed activities necessary and desirable in the usual business of Vicmar, as they
were assigned to departments vital to its operations. It also noted that the repeated
hiring of respondents proved the importance of their work to Vicmar's business. It
maintained that the contractors were engaged by Vicmar only for the convenience of
Vicmar. In sum, the CA declared that respondents were illegally dismissed since there
was no showing of just cause for their termination and of compliance by Vicmar to due
process of law.

On May 10, 2012, the CA denied petitioners' motion for reconsideration.54

Petitioners thus filed this Petition raising the sole ground as follows:
THE HONORABLE COURT OF APPEALS, WITH ALL DUE RESPECT AND DEFERENCE,
ERRED IN REVERSING AND SETTING ASIDE THE FINDINGS OF FACTS AND
CONCLUSIONS OF THE NATIONAL LABOR RELATIONS COMMISSION (NLRC). THE
DECISION AS WELL AS THE RESOLUTION ARE NOT IN ACCORDANCE WITH LAW AND
APPLICABLE JURISPRUDENCE AND IF NOT CORRECTED, WILL CAUSE GRAVE INJUSTICE
AND IRREPERABLE [SIC] DAMAGE TO THE PETITIONERS WHO WILL BE CONSTRAINED
TO ABSORB UNCESSARY [SIC] WORKFORCE, WHICH WILL LEAD TO THE FURTHER
DETERIORATION OF ITS FINANCIAL INSTABILITY [SIC] AND POSSIBLY TO ITS
CLOSURE.55 ChanRoblesVirtualawlibrary

Petitioners contend that it is irregular for the CA to reverse the findings of facts of the
NLRC and the ELAs based on two work schedules of different companies and
identification cards of five respondents. They maintain that said evidence cannot
conclusively prove that respondents were regular employees of Vicmar.56

Additionally, petitioners argue that the CA erred in finding that they (petitioners) have
the burden to prove that respondents were hired for only one season to establish that
they were mere seasonal employees. Petitioners emphasize that since the inception of
this case, they have been denying respondents' claim that they were working under
regular working hours and working days.57

Petitioners maintain that respondents were Vicmar's "extra" workers;58 that the
engagement of independent contractors was a management prerogative exercised in
good faith;59 that some of the respondents were engaged by TFDI and thus, they have
no standing in this case.60

Respondents, on their part, assert that petitioners have the burden to prove that they
(respondents) were seasonal employees because such allegation is a critical fact that
must be substantiated.61 They likewise restate that they were regular employees of
Vicmar because they had been performing tasks necessary and desirable for the
production of plywood; they continuously worked in Vicmar for more than 11 hours
daily until they were terminated in September 2004; and they were not allowed to work
for companies other than Vicmar.62

Respondents claim that assuming that they were "extra" workers, still, their continued
and repeated hiring for more than 10 years made their functions necessary or desirable
in the usual business of Vicmar.63

Issue
Did the CA err in finding that the NLRC gravely abused its discretion in affirming the
ELAs' Decisions dismissing the complaint?

Our Ruling

In labor cases, grave abuse of discretion may be ascribed to the NLRC when its findings
and conclusions are not supported by substantial evidence or such relevant evidence
that a reasonable mind might accept as adequate to support a conclusion.64 The CA
may grant a Petition for Certiorari if it finds that the NLRC committed grave abuse of
discretion by capriciously, whimsically or arbitrarily disregarding the material evidence
decisive of a case. It cannot "make this determination without looking into the evidence
presented by the parties. Necessarily, the appellate court can only evaluate the
materiality or significance of the evidence, which is alleged to have been capriciously,
whimsically, or arbitrarily disregarded by the NLRC, in relation to all other evidence on
record."65

In this case, we find that the CA correctly granted respondents' Petition

for Certiorari because the NLRC gravely abused its discretion when it affirmed the
dismissal of respondents' Complaints.

Section 280 of the Labor Code defines a regular employee as one who is 1) engaged to
perform tasks usually necessary or desirable in the usual business or trade of the
employer, unless the employment is one for a specific project or undertaking or where
the work is seasonal and for the duration of a season; or 2) has rendered at least 1
year of service, whether such service is continuous or broken, with respect to the
activity for which he is employed and his employment continues as long as such activity
exists.66

Here, there is substantial evidence to prove that respondents were regular employees
such that their separation from work without valid cause amounted to illegal dismissal.

To support their illegal dismissal case, respondents listed the date of their hiring, the
date they were terminated and the sections where they were assigned prior to
dismissal, to wit:67
NAMES DATE HIRED SECTION DATE FIRED
Panes, Ruben June 1990 Boiler Oct. 2004
Panes, Recarido August 1990 Boiler Sept. 2004
Tinsay, Jesus 1991 Boiler Sept. 2004
Gonzales, Armando June 1991 Assy./Fin. Feb. 2004
Patoy, Romel Nov. 1991 Boiler Sept. 2004
Ladra, Wilfredo 1992 Plant Maint. Sept. 2004
Balamad, Dante July 1994 Boiler Sept. 2004
Baguio, Simeon 1995 Boiler Sept. 2004
Baguio, Francisco 1995 Block Board June 2004
Tacbobo, Rolando Jan. 1995 Plant Maint. Sept. 2004
Belarga, Norberto 1995 Boiler July 2004
Elarcosa, Camilo 1995 Boiler Sept. 2004
Abugho, Junie June 1996 Boiler Sept. 2004
Pamon, Renante June 1996 Assy./Fin. Sept. 2004
Abugho, Jonard June 1996 Boiler Oct. 2004
Noval, Ronald 1997 Boiler Aug. 2004
Siman, Julito 1997 Boiler Sept. 2004
Baguio, Allan 1997 Boiler Sept. 2004
Cabanday, Ruel 1998 Assy./Fin. Oct. 2004
Salcedo, Joseph 1998 Assy./Fin. Sept. 2004
Lobaynon, Oliver 1998 Boiler Sept. 2004
Panaga, Robinson 1999 Assy./Fin. March 2004
Paguican, Roberto 1999 Boiler Sept. 2004
Ello, Daniel 1999 Boiler Sept. 2004
Taneo, Jesrile 1999 Plywood Rep. Sept. 2004
Indino, Donil 1999 Plywood Rep. Sept. 2004
Narisma, Silverio July 1999 Assy ./Fin. Sept. 2004
Canas, Agapito Jr. Jan. 2000 Plant Maint. Sept. 2004
Gulben, Wilfredo Dec. 2000 Plywood Rep. Sept. 2004
Gulben, Rechie Mar. 2000 Plywood Rep. Sept. 2004
Pacaldo, Chiquito Mar. 2000 Green End May 2002
Dofeliz, Rexy June 2001 Boiler Aug. 2004
xxxx � � �
Ramos, Gelven Rhyan July 2002 Boiler Sept. 2004
Colansi, Rodrigo Oct. 2002 Assy./Fin. Sept. 2004
xxxx Jan. 2002 Boiler Sept. 2004
Banda, Marlon June 2003 Boiler Sept. 2004
Elbina, Teofilo Nov. 2003 Boiler July 2004
The foregoing allegations were uncontroverted as no relevant employment files,
payrolls and records were submitted by petitioners to refute the information. Being the
employer, petitioners have custody and control of important employment documents.
As such, failure to submit them gives rise to the presumption that their presentation
would be prejudicial to petitioners' cause and leads the Court to conclude that the
assertions of respondents are truthful declarations.68

Interestingly, in the DOLE case filed by respondents against Vicmar and TFDI, the latter
did not also submit documents to disprove respondents' claim for wage differentials,
13th month pay and holiday pay. Because of this, the DOLE Secretary denied their
appeal. In her February 17, 2006 Order,69 the DOLE Secretary made the following
pronouncements:
In this case, the appellants (Vicmar and TFDI) were given seven x x x days to comply
with the Notice of Inspection Results or to contest the findings therein, but they chose
to ignore the directive. Summary hearings were conducted x x x to give the appellants
ample time to submit payrolls, but they merely promised to do so x x x [A]t the extra
hearing on 18 November, they still failed to do so. x x x There being none, the Director
could not but sustain the inspection report.

Neither can the Director be faulted for not referring the case to the NLRC on the ground
that material evidence, namely, the payrolls and the daily time records, were not duly
considered during inspection. The appellants cannot raise this argument because it was
they who failed to produce the records for the consideration of the inspector and the
Regional Director[.]70ChanRoblesVirtualawlibrary

Similarly, we cannot fault the CA in the instant case for giving credence to the
assertions and documentary evidence adduced by respondents. Petitioners had the
opportunity to discredit them had they presented material evidence, including payrolls
and daily time records, which are within their custody, to prove that respondents were
mere additional workforce engaged when there are extraordinary situations, such as
high demands for plywood products or unexpected absences of regular employees; and
that respondents were not assigned for more than one year to the same section or
activity.

Moreover, respondents were shown to have performed activities necessary in the usual
business of Vicmar. Most of them were assigned to activities essential for plywood
production, the central business of Vicmar. In the list above, more than half of the
respondents were assigned to the boiler, where pieces of plywood were cooked to
perfection. While the other respondents appeared to have been assigned to other
sections in the company, the presumption of regular employment should be granted in
their favor pursuant to Article 280 of the Labor Code since they had been performing
the same activity for at least one year, as they were assigned to the same sections, and
there is no indication that their respective activities ceased.71

The test to determine whether an employee is regular is the reasonable connection

between the activity he performs and its relation to the employer's business or trade,
as in the case of respondents assigned to the boiler section. Nonetheless, the
continuous re-engagement of all respondents to perform the same kind of tasks proved
the necessity and desirability of their services in the business of Vicmar.72 Likewise,
considering that respondents appeared to have been performing their duties for at least
one year is sufficient proof of the necessity, if not the indispensability of their activities
in Vicmar's business.73

The Court also holds that Vicmar failed to prove that the contractors it engaged were
legitimate labor contractors.

To determine the existence of independent contractorship, it is necessary to establish

that the contractor carries a distinct and independent business, and undertakes to
perform work on its own account and under its responsibility and pursuant to its own
manner and method, without the control of the principal, except as to the result; that
the contractor has substantial capital or investment; and, that the agreement between
the principal and the contractor assures the contractual employees to all labor and
occupational safety and health standards, to right to self-organization, security of
tenure and other benefits.74

Other than their respective Certificates75 of Registration issued by the DOLE on August
12, 2004, E.A Rosales Contracting Services and Candole Labor Contracting Services
were not shown to have substantial capital or investment, tools and the like. Neither
was it established that they owned equipment and machineries for the purported
contracted job. Also, the allegation that they had clients other than Vicmar remained to
be bare assertion without corresponding proof. More importantly, there was no
evidence presented that these contractors undertook the performance of their service
contracts with Vicmar pursuant to their own manner and method, without the control
and supervision of Vicmar.76

Petitioners cannot rely on the registration of their contractors to prove that the latter
are legitimate independent contractors. Such registration is not conclusive of the status
of a legitimate contractor; rather, it merely prevents the presumption of being a labor-
only contractor from arising. Indeed, to determine whether labor-only contracting
exists, the totality of the facts and circumstances of the case must be considered.77

The Court also gives merit to the finding of the CA that Vicmar is the employer of
respondents despite the allegations that a number of them were assigned to the
branches of Vicmar. Petitioners failed to refute the contention that Vicmar and its
branches have the same owner and management - which included one resident
manager, one administrative department, one and the same personnel and finance
sections. Notably, all respondents were employed by the same plant manager, who
signed their identification cards some of whom were under Vicmar, and the others
under TFDI.

Where it appears that business enterprises are owned, conducted and controlled by the
same parties, law and equity will disregard the legal fiction that these corporations are
distinct entities and shall treat them as one. This is in order to protect the rights of third
persons, as in this case, to safeguard the rights of respondents.78

Considering that respondents were regular employees and their termination without
valid cause amounts to illegal dismissal, then for its contrary ruling unsupported by
substantial evidence, the NLRC gravely abused its discretion in dismissing the
complaints for illegal dismissal. Therefore, the CA Decision setting aside that of the
NLRC is in order and must be sustained.79
WHEREFORE, the Petition is DENIED. The Decision dated November 24,2009 and
Resolution dated May 10, 2012 of the Court of Appeals in CA-G.R. SP No. 01853-MIN
are AFFIRMED.

G.R. No. 153535. July 28, 2005

SOLIDBANK CORPORATION, Petitioners,

vs.
MINDANAO FERROALLOY CORPORATION, Spouses JONG-WON HONG and SOO-OK KIM
HONG,* TERESITA CU, and RICARDO P. GUEVARA and Spouse,** respondents.

DECISION

PANGANIBAN, J.:

To justify an award for moral and exemplary damages under Articles 19 to 21 of the Civil Code (on
human relations), the claimants must establish the other party’s malice or bad faith by clear and
convincing evidence.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the December 21,
2001 Decision2 and the May 15, 2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
67482. The CA disposed as follows:

"IN THE LIGHT OF ALL THE FOREGOING, the appeal is DISMISSED. The Decision appealed
from is AFFIRMED."4

The assailed Resolution, on the other hand, denied petitioner’s Motion for Reconsideration.

The Facts

The CA narrated the antecedents as follows:

"The Maria Cristina Chemical Industries (MCCI) and three (3) Korean corporations, namely, the
Ssangyong Corporation, the Pohang Iron and Steel Company and the Dongil Industries Company,
Ltd., decided to forge a joint venture and establish a corporation, under the name of the Mindanao
Ferroalloy Corporation (Corporation for brevity) with principal offices in Iligan City. Ricardo P.
Guevara was the President and Chairman of the Board of Directors of the Corporation. Jong-Won
Hong, the General Manager of Ssangyong Corporation, was the Vice-President of the Corporation
for Finance, Marketing and Administration. So was Teresita R. Cu. On November 26, 1990, the
Board of Directors of the Corporation approved a ‘Resolution’ authorizing its President and
Chairman of the Board of Directors or Teresita R. Cu, acting together with Jong-Won Hong, to
secure an omnibus line in the aggregate amount of ₱30,000,000.00 from the Solidbank x x x.

xxxxxxxxx

"In the meantime, the Corporation started its operations sometime in April, 1991. Its indebtedness
ballooned to ₱200,453,686.69 compared to its assets of only ₱65,476,000.00. On May 21, 1991, the
Corporation secured an ordinary time loan from the Solidbank in the amount of ₱3,200,000.00.
Another ordinary time loan was granted by the Bank to the Corporation on May 28, 1991, in the
amount of ₱1,800,000.00 or in the total amount of ₱5,000,000.00, due on July 15 and 26, 1991,
respectively.

"However, the Corporation and the Bank agreed to consolidate and, at the same time, restructure
the two (2) loan availments, the same payable on September 20, 1991. The Corporation executed
‘Promissory Note No. 96-91-00865-6’ in favor of the Bank evidencing its loan in the amount of
₱5,160,000.00, payable on September 20, 1991. Teresita Cu and Jong-Won Hong affixed their
signatures on the note. To secure the payment of the said loan, the Corporation, through Jong-Won
Hong and Teresita Cu, executed a ‘Deed of Assignment’ in favor of the Bank covering its rights, title
and interest to the following:

‘The entire proceeds of drafts drawn under Irrevocable Letter of Credit No. M-S-041-2002080
opened with The Mitsubishi Bank Ltd. – Tokyo dated June 13, 1991 for the account of Ssangyong
Japan Corporation, 7F. Matsuoka-Tamura-Cho Bldg., 22-10, 5-Chome, Shimbashi, Minato-Ku,
Tokyo, Japan up to the extent of US$197,679.00’

"The Corporation likewise executed a ‘Quedan’, by way of additional security, under which the
Corporation bound and obliged to keep and hold, in trust for the Bank or its Order, ‘Ferrosilicon for
US$197,679.00’. Jong-Won Hong and Teresita Cu affixed their signatures thereon for the
Corporation. The Corporation, also, through Jong-Won Hong and Teresita Cu, executed a ‘Trust
Receipt Agreement’, by way of additional security for said loan, the Corporation undertaking to hold
in trust, for the Bank, as its property, the following:

‘1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S-041-2002080 for account of Ssangyong
Japan Corporation, Tokyo, Japan for US$197,679.00 Ferrosilicon to expire September 20, 1991.

‘2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the following:

Ferrosilicon for US$197,679.00’

"However, shortly after the execution of the said deeds, the Corporation stopped its operations. The
Corporation failed to pay its loan availments from the Bank inclusive of accrued interest. On
February 11, 1992, the Bank sent a letter to the Corporation demanding payment of its loan
availments inclusive of interests due. The Corporation failed to comply with the demand of the Bank.
On November 23, 1992, the Bank sent another letter to the [Corporation] demanding payment of its
account which, by November 23, 1992, had amounted to ₱7,283,913.33. The Corporation again
failed to comply with the demand of the Bank.

"On January 6, 1993, the Bank filed a complaint against the Corporation with the Regional Trial
Court of Makati City, entitled and docketed as ‘Solidbank Corporation vs. Mindanao Ferroalloy
Corporation, Sps. Jong-Won Hong and the Sps. Teresita R. Cu, Civil Case No. 93-038’ for ‘Sum of
Money’ with a plea for the issuance of a writ of preliminary attachment. x x x

xxxxxxxxx

"Under its ‘Amended Complaint’, the Plaintiff alleged that it impleaded Ricardo Guevara and his wife
as Defendants because, [among others]:

‘Defendants JONG-WON HONG and TERESITA CU, are the Vice-Presidents of defendant
corporation, and also members of the company’s Board of Directors. They are impleaded as joint
and solidary debtors of [petitioner] bank having signed the Promissory Note, Quedan, and Trust
Receipt agreements with [petitioner], in this case.

x x x x x x x x x’

"[Petitioner] likewise filed a criminal complaint x x x entitled and docketed as ‘Solidbank Corporation
vs. Ricardo Guevara, Teresita R. Cu and Jong Won Hong x x x for ‘Violation of P.D. 115’. On April
14, 1993, the investigating Prosecutor issued a ‘Resolution’ finding no probable cause for violation of
P.D. 115 against the Respondents as the goods covered by the quedan ‘were nonexistent’:

xxxxxxxxx

"In their Answer to the complaint [in the civil case], the Spouses Jong-Won Hong and Soo-ok Kim
Hong alleged, inter alia, that [petitioner] had no cause of action against them as:

‘x x x the clean loan of ₱5.1 M obtained was a corporate undertaking of defendant

MINFACO executed through its duly authorized representatives, Ms. Teresita R. Cu and Mr. Jong-
Won Hong, both Vice Presidents then of MINFACO. x x x.’

xxxxxxxxx

"[On their part, respondents] Teresita Cu and Ricardo Guevara alleged that [petitioner] had no cause
of action against them because: (a) Ricardo Guevara did not sign any of the documents in favor of
[petitioner]; (b) Teresita Cu signed the ‘Promissory Note’, ‘Deed of Assignment’, ‘Trust Receipt’ and
‘Quedan’ in blank and merely as representative and, hence, for and in behalf of the Defendant
Corporation and, hence, was not personally liable to [petitioner].

"In the interim, the Corporation filed, on June 20, 1994, a ‘Petition’, with the Regional Trial Court of
Iligan City, for ‘Voluntary Insolvency’ x x x.

xxxxxxxxx

"Appended to the Petition was a list of its creditors, including [petitioner], for the amount of
₱8,144,916.05. The Court issued an Order, on July 12, 1994, finding the Petition sufficient in form
and substance x x x.

xxxxxxxxx

"In view of said development, the Court issued an Order, in Civil Case No. 93-038, suspending the
proceedings as against the Defendant Corporation but ordering the proceedings to proceed as
against the individual defendants x x x.

xxxxxxxxx

"On December 10, 1999, the Court rendered a Decision dismissing the complaint for lack of cause of
action of [petitioner] against the Spouses Jong-Won Hong, Teresita Cu and the Spouses Ricardo
Guevara, x x x.

xxxxxxxxx
"In dismissing the complaint against the individual [respondents], the Court a quo found and
declared that [petitioner] failed to adduce a morsel of evidence to prove the personal liability of the
said [respondents] for the claims of [petitioner] and that the latter impleaded the [respondents], in its
complaint and amended complaint, solely to put more pressure on the Defendant Corporation to pay
its obligations to [petitioner].

"[Petitioner] x x x interposed an appeal, from the Decision of the Court a quo and posed, for x x x
resolution, the issue of whether or not the individual [respondents], are jointly and severally liable to
[petitioner] for the loan availments of the [respondent] Corporation, inclusive of accrued interests and
penalties.

"In the meantime, on motion of [petitioner], the Court set aside its Order, dated February 2, 1995,
suspending the proceedings as against the [respondent] Corporation. [Petitioner] filed a ‘Motion for
Summary Judgment’ against the [respondent] Corporation. On February 28, 2000, the Court
rendered a ‘Summary Judgment’ against the [respondent] Corporation, the decretal portion of which
reads as follows:

‘WHEREFORE, premises considered, this Court hereby resolves to give due course to the motion
for summary judgment filed by herein [petitioner]. Consequently, judgment is hereby rendered in
favor of [Petitioner] SOLIDBANK CORPORATION and against [Respondent] MINDANAO
FERROALLOY CORPORATION, ordering the latter to pay the former the amount of ₱7,086,686.70,
representing the outstanding balance of the subject loan as of 24 September 1994, plus stipulated
interest at the rate of 16% per annum to be computed from the aforesaid date until fully paid together
with an amount equivalent to 12% of the total amount due each year from 24 September 1994 until
fully paid. Lastly, said [respondent] is hereby ordered to pay [petitioner] the amount of ₱25,000.00 to
[petitioner] as reasonable attorney’s fees as well as cost of litigation." 5

In its appeal, petitioner argued that (1) it had adduced the requisite evidence to prove the solidary
liability of the individual respondents, and (2) it was not liable for their counterclaims for damages
and attorney’s fees.

Ruling of the Court of Appeals

Affirming the RTC, the appellate court ruled that the individual respondents were not solidarily liable
with the Mindanao Ferroalloy Corporation, because they had acted merely as officers of the
corporation, which was the real party in interest. Respondent Guevara was not even a signatory to
the Promissory Note, the Trust Receipt Agreement, the Deed of Assignment or the Quedan; he was
merely authorized to represent Minfaco to negotiate with and secure the loans from the bank. On the
other hand, the CA noted that Respondents Cu and Hong had not signed the above documents as
comakers, but as signatories in their representative capacities as officers of Minfaco.

Likewise, the CA held that the individual respondents were not liable to petitioner for damages,
simply because (1) they had not received the proceeds of the irrevocable Letter of Credit, which was
the subject of the Deed of Assignment; and (2) the goods subject of the Trust Receipt Agreement
had been found to be nonexistent. The appellate court took judicial notice of the practice of banks
and financing institutions to investigate, examine and assess all properties offered by borrowers as
collaterals, in order to determine the feasibility and advisability of granting loans. Before agreeing to
the consolidation of Minfaco’s loans, it presumed that petitioner had done its homework.

As to the award of damages to the individual respondents, the CA upheld the trial court’s findings
that it was clearly unfair on petitioner’s part to have impleaded the wives of Guevara and Hong,
because the women were not privy to any of the transactions between petitioner and Minfaco. Under
Articles 19, 20 and 2229 of the Civil Code, such reckless and wanton act of pressuring individual
respondents to settle the corporation’s obligations is a ground to award moral and exemplary
damages, as well as attorney’s fees.

Hence this Petition.6

Issues

In its Memorandum, petitioner raises the following issues:

"A. Whether or not there is ample evidence on record to support the joint and solidary liability of
individual respondents with Mindanao Ferroalloy Corporation.

"B. In the absence of joint and solidary liability[,] will the provision of Article 1208 in relation to Article
1207 of the New Civil Code providing for joint liability be applicable to the case at bar.

"C. May bank practices be the proper subject of judicial notice under Sec. 1 [of] Rule 129 of the
Rules of Court.

"D. Whether or not there is evidence to sustain the claim that respondents were impleaded to apply
pressure upon them to pay the obligations in lieu of MINFACO that is declared insolvent.

"E. Whether or not there are sufficient bases for the award of various kinds of and substantial
amounts in damages including payment for attorney’s fees.

"F. Whether or not respondents committed fraud and misrepresentations and acted in bad faith.

"G. Whether or not the inclusion of respondents spouses is proper under certain circumstances and
supported by prevailing jurisprudence."7

In sum, there are two main questions: (1) whether the individual respondents are liable, either jointly
or solidarily, with the Mindanao Ferroalloy Corporation; and (2) whether the award of damages to the
individual respondents is valid and legal.

The Court’s Ruling

The Petition is partly meritorious.

First Issue:

Liability of Individual Respondents

Petitioner argues that the individual respondents were jointly or solidarily liable with Minfaco, either
because their participation in the loan contract and the loan documents made them comakers; or
because they committed fraud and deception, which justifies the piercing of the corporate veil.

The first contention hinges on certain factual determinations made by the trial and the appellate
courts. These tribunals found that, although he had not signed any document in connection with the
subject transaction, Respondent Guevara was authorized to represent Minfaco in negotiating for a
₱30 million loan from petitioner. As to Cu and Hong, it was determined, among others, that their
signatures on the loan documents other than the Deed of Assignment were not prefaced with the
word "by," and that there were no other signatures to indicate who had signed for and on behalf of
Minfaco, the principal borrower. In the Promissory Note, they signed above the printed name of the
corporation -- on the space provided for "Maker/Borrower," not on that provided for "Co-maker."

Petitioner has not shown any exceptional circumstance that sanctions the disregard of these findings
of fact, which are thus deemed final and conclusive upon this Court and may not be reviewed on
appeal.8

No Personal Liability

for Corporate Deeds

Basic is the principle that a corporation is vested by law with a personality separate and distinct from
that of each person composing9 or representing it.10 Equally fundamental is the general rule that
corporate officers cannot be held personally liable for the consequences of their acts, for as long as
these are for and on behalf of the corporation, within the scope of their authority and in good
faith.11 The separate corporate personality is a shield against the personal liability of corporate
officers, whose acts are properly attributed to the corporation.12

Tramat Mercantile v. Court of Appeals13 held thus:

"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when —

‘1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;

‘2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;

‘3. He agrees to hold himself personally and solidarily liable with the corporation; or

‘4. He is made, by a specific provision of law, to personally answer for his corporate action.’"

Consistent with the foregoing principles, we sustain the CA’s ruling that Respondent Guevara was
not personally liable for the contracts. First, it is beyond cavil that he was duly authorized to act on
behalf of the corporation; and that in negotiating the loans with petitioner, he did so in his official
capacity. Second, no sufficient and specific evidence was presented to show that he had acted in
bad faith or gross negligence in that negotiation. Third, he did not hold himself personally and
solidarily liable with the corporation. Neither is there any specific provision of law making him
personally answerable for the subject corporate acts.

On the other hand, Respondents Cu and Hong signed the Promissory Note without the word "by"
preceding their signatures, atop the designation "Maker/Borrower" and the printed name of the
corporation, as follows:

__(Sgd) Cu/Hong__

(Maker/Borrower)
MINDANAO FERROALLOY

While their signatures appear without qualification, the inference that they signed in their individual
capacities is negated by the following facts: 1) the name and the address of the corporation
appeared on the space provided for "Maker/Borrower"; 2) Respondents Cu and Hong had only one
set of signatures on the instrument, when there should have been two, if indeed they had intended to
be bound solidarily -- the first as representatives of the corporation, and the second as themselves in
their individual capacities; 3) they did not sign under the spaces provided for "Co-maker," and
neither were their addresses reflected there; and 4) at the back of the Promissory Note, they signed
above the words "Authorized Representative."

Solidary Liability

Not Lightly Inferred

Moreover, it is axiomatic that solidary liability cannot be lightly inferred.14 Under Article 1207 of the
Civil Code, "there is a solidary liability only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity." Since solidary liability is not clearly expressed in
the Promissory Note and is not required by law or the nature of the obligation in this case, no
conclusion of solidary liability can be made.

Furthermore, nothing supports the alleged joint liability of the individual petitioners because, as
correctly pointed out by the two lower courts, the evidence shows that there is only one debtor: the
corporation. In a joint obligation, there must be at least two debtors, each of whom is liable only for a
proportionate part of the debt; and the creditor is entitled only to a proportionate part of the credit. 15

Moreover, it is rather late in the day to raise the alleged joint liability, as this matter has not been
pleaded before the trial and the appellate courts. Before the lower courts, petitioner anchored its
claim solely on the alleged joint and several (or solidary) liability of the individual respondents.
Petitioner must be reminded that an issue cannot be raised for the first time on appeal, but
seasonably in the proceedings before the trial court.16

So too, the Promissory Note in question is a negotiable instrument. Under Section 19 of the
Negotiable Instruments Law, agents or representatives may sign for the principal. Their authority
may be established, as in other cases of agency. Section 20 of the law provides that a person
signing "for and on behalf of a [disclosed] principal or in a representative capacity x x x is not liable
on the instrument if he was duly authorized."

The authority of Respondents Cu and Hong to sign for and on behalf of the corporation has been
amply established by the Resolution of Minfaco’s Board of Directors, stating that "Atty. Ricardo P.
Guevara (President and Chairman), or Ms. Teresita R. Cu (Vice President), acting together with Mr.
Jong Won Hong (Vice President), be as they are hereby authorized for and in behalf of the
Corporation to: 1. Negotiate with and obtain from (petitioner) the extension of an omnibus line in the
aggregate of ₱30 million x x x; and 2. Execute and deliver all documentation necessary to implement
all of the foregoing."17

Further, the agreement involved here is a "contract of adhesion," which was prepared entirely by one
party and offered to the other on a "take it or leave it" basis. Following the general rule, the contract
must be read against petitioner, because it was the party that prepared it, 18 more so because a bank
is held to high standards of care in the conduct of its business.19
In the totality of the circumstances, we hold that Respondents Cu and Hong clearly signed the Note
merely as representatives of Minfaco.

No Reason to Pierce

the Corporate Veil

Under certain circumstances, courts may treat a corporation as a mere aggroupment of persons, to
whom liability will directly attach. The distinct and separate corporate personality may be
disregarded, inter alia, when the corporate identity is used to defeat public convenience, justify a
wrong, protect a fraud, or defend a crime. Likewise, the corporate veil may be pierced when the
corporation acts as a mere alter ego or business conduit of a person, or when it is so organized and
controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.20 But to disregard the separate juridical personality of a corporation,
the wrongdoing must be clearly and convincingly established; it cannot be presumed. 21

Petitioner contends that the corporation was used to protect the fraud foisted upon it by the
individual respondents. It argues that the CA failed to consider the following badges of fraud and
evident bad faith: 1) the individual respondents misrepresented the corporation as solvent and
financially capable of paying its loan; 2) they knew that prices of ferrosilicon were declining in the
world market when they secured the loan in June 1991; 3) not a single centavo was paid for the
loan; and 4) the corporation suspended its operations shortly after the loan was granted. 22

Fraud refers to all kinds of deception -- whether through insidious machination, manipulation,
concealment or misrepresentation -- that would lead an ordinarily prudent person into error after
taking the circumstances into account.23 In contracts, a fraud known as dolo causante or causal
fraud24 is basically a deception used by one party prior to or simultaneous with the contract, in order
to secure the consent of the other.25 Needless to say, the deceit employed must be serious. In
contradistinction, only some particular or accident of the obligation is referred to by incidental fraud
or dolo incidente,26 or that which is not serious in character and without which the other party would
have entered into the contract anyway.27

Fraud must be established by clear and convincing evidence; mere preponderance of evidence is
not adequate.28 Bad faith, on the other hand, imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, not simply bad judgment or negligence.29 It is synonymous with
fraud, in that it involves a design to mislead or deceive another.30

Unfortunately, petitioner was unable to establish clearly and precisely how the alleged fraud was
committed. It failed to establish that it was deceived into granting the loans because of respondents’
misrepresentations and/or insidious actions. Quite the contrary, circumstances indicate the
weakness of its submission.

First, petitioner does not deny that the ₱5 million loan represented the consolidation of two
loans,31 granted long before the bank required the individual respondents to execute the Promissory
Note, Trust Receipt Agreement, Quedan or Deed of Assignment. Hence, no words, acts or
machinations arising from any of those instruments could have been used by them prior to or
simultaneous with the execution of the contract, or even as some accident or particular of the
obligation.

Second, petitioner bank was in a position to verify for itself the solvency and trustworthiness of
respondent corporation. In fact, ordinary business prudence required it to do so before granting the
multimillion loans. It is of common knowledge that, as a matter of practice, banks conduct exhaustive
investigations of the financial standing of an applicant debtor, as well as appraisals of collaterals
offered as securities for loans to ensure their prompt and satisfactory payment. To uphold
petitioner’s cry of fraud when it failed to verify the existence of the goods covered by the Trust
Receipt Agreement and the Quedan is to condone its negligence.

Judicial Notice

of Bank Practices

This point brings us to the alleged error of the appellate court in taking judicial notice of the practice
of banks in conducting background checks on borrowers and sureties. While a court is not mandated
to take judicial notice of this practice under Section 1 of Rule 129 of the Rules of Court, it
nevertheless may do so under Section 2 of the same Rule. The latter Rule provides that a court, in
its discretion, may take judicial notice of "matters which are of public knowledge, or ought to be
known to judges because of their judicial functions."

Thus, the Court has taken judicial notice of the practices of banks and other financial institutions.
Precisely, it has noted that it is their uniform practice, before approving a loan, to investigate,
examine and assess would-be borrowers’ credit standing or real estate32 offered as security for the
loan applied for.

Second Issue:

Award of Damages

The individual respondents were awarded moral and exemplary damages as well as attorney’s fees
under Articles 19 to 21 of the Civil Code, on the basic premise that the suit was clearly malicious and
intended merely to harass.

Article 19 of the Civil Code expresses the fundamental principle of law on human conduct that a
person "must, in the exercise of his rights and in the performance of his duties, act with justice, give
every one his due, and observe honesty and good faith." Under this basic postulate, the exercise of
a right, though legal by itself, must nonetheless be done in accordance with the proper norm. When
the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal
wrong is committed for which the wrongdoer must be held responsible.33

To be liable under the abuse-of-rights principle, three elements must concur: a) a legal right or duty,
b) its exercise in bad faith, and c) the sole intent of prejudicing or injuring another. 34 Needless to say,
absence of good faith35 must be sufficiently established.

Article 20 makes "[e]very person who, contrary to law, willfully or negligently causes damage to
another" liable for damages. Upon the other hand, held liable for damages under Article 21 is one
who "willfully causes loss or injury to another in a manner that is contrary to morals, good customs or
public policy."

For damages to be properly awarded under the above provisions, it is necessary to demonstrate by
clear and convincing evidence36 that the action instituted by petitioner was clearly so unfounded and
untenable as to amount to gross and evident bad faith.37 To justify an award of damages for
malicious prosecution, one must prove two elements: malice or sinister design to vex or humiliate
and want of probable cause.38
Petitioner was proven wrong in impleading Spouses Guevara and Hong. Beyond that fact, however,
respondents have not established that the suit was so patently malicious as to warrant the award of
damages under the Civil Code’s Articles 19 to 21, which are grounded on malice or bad faith. 39 With
the presumption of law on the side of good faith, and in the absence of adequate proof of malice, we
find that petitioner impleaded the spouses because it honestly believed that the conjugal
partnerships had benefited from the proceeds of the loan, as stated in their Complaint and
subsequent pleadings. Its act does not amount to evident bad faith or malice; hence, an award for
damages is not proper. The adverse result of an act per se neither makes the act wrongful nor
subjects the actor to the payment of damages, because the law could not have meant to impose a
penalty on the right to litigate.40

For the same reason, attorney’s fees cannot be granted. Article 2208 of the Civil Code states that in
the absence of a stipulation, attorney’s fees cannot be recovered, except in any of the following
circumstances:

"(1) When exemplary damages are awarded;

"(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or
to incur expenses to protect his interest;

"(3) In criminal cases of malicious prosecution against the plaintiff;

"(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

"(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s
plainly valid, just and demandable claim;

"(6) In actions for legal support;

"(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

"(8) In actions for indemnity under workmen’s compensation and employer’s liability laws;

"(9) In a separate civil action to recover civil liability arising from a crime;

"(10) When at least double judicial costs are awarded;

"(11) In any other case where the court deems it just and equitable that attorney’s fees and
expenses of litigation should be recovered."

In the instant case, none of the enumerated grounds for recovery of attorney’s fees are present.

WHEREFORE, this Petition is PARTIALLY GRANTED. The assailed Decision is AFFIRMED, but the
award of moral and exemplary damages as well as attorney’s fees is DELETED. No costs.

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.