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PARA?AQUE KINGS ENTERPRISES, INCORPORATED, petitioner vs.

COURT OF APPEALS, CATALINA L. SANTOS, represented by her attorney-


in-fact, LUZ B. PROTACIO, and DAVID A. RAYMUNDO, respondents.
G.R. No. 111538 | 1997-02-26

D E C I S I O N


PANGANIBAN, J.:

Do allegations in a complaint showing violation of a contractual right of "first option or priority to buy
the properties subject of the lease" constitute a valid cause of action? Is the grantee of such right
entitled to be offered the same terms and conditions as those given to a third party who eventually
bought such properties? In short, is such right of first refusal enforceable by an action for specific
performance?

These questions are answered in the affirmative by this Court in resolving this petition for review
under Rule 45 of theRules of Court challenging the Decision 1 of the Court of Appeals 2
promulgated on March 29, 1993, in CA-G.R. CV No. 34987 entitled "Paraaque Kings Enterprises,
Inc. vs. Catalina L. Santos, et al.," which affirmed the order 3 of September 2, 1991, of the Regional
Trial Court of Makati, Branch 57, 4 dismissing Civil Case No. 91-786 for lack of a valid cause of
action.

Facts of the Case

On March 19, 1991, herein petitioner filed before the Regional Trial Court of Makati a complaint, 5
which is reproduced in full below:

Plaintiff, by counsel, respectfully states that:

1. Plaintiff is a private corporation organized and existing under and by virtue of the laws of the
Philippines, with principal place of business of (sic) Dr. A. Santos Avenue, Paraaque, Metro Manila,
while defendant Catalina L. Santos, is of legal age, widow, with residence and postal address at 444
Plato Street, Ct., Stockton, California, USA, represented in this action by her attorney-in-fact, Luz B.
Protacio, with residence and postal address at No, 12, San Antonio Street, Magallanes Village,
Makati, Metro Manila, by virtue of a general power of attorney. Defendant David A. Raymundo, is of
legal age, single, with residence and postal address at 1918 Kamias Street, Damarias Village,
Makati, Metro Manila, where they (sic) may be served with summons and other court processes.
Xerox copy of the general power of attorney is hereto attached as Annex "A".

2. Defendant Catalina L. Santos is the owner of eight (8) parcels of land located at (sic) Paraaque,
Metro Manila withtransfer certificate of title nos. S-19637, S-19638 and S-19643 to S-19648. Xerox
copies of the said title (sic) are hereto attached as Annexes "B" to "I", respectively.

3. On November 28, 1977, a certain Frederick Chua leased the above-described property from
defendant Catalina L. Santos, the said lease was registered in the Register of Deeds. Xerox copy of
the lease is hereto attached as Annex "J".

4. On February 12, 1979, Frederick Chua assigned all his rights and interest and participation in the
leased property to Lee Ching Bing, by virtue of a deed of assignment and with the conformity of
defendant Santos, the said assignment was also registered. Xerox copy of the deed of assignment is
hereto attached as Annex "K".

5. On August 6, 1979, Lee Ching Bing also assigned all his rights and interest in the leased property
to Paraaque Kings Enterprises, Incorporated by virtue of a deed of assignment and with the
conformity of defendant Santos, the same was duly registered, Xerox copy of the deed of
assignment is hereto attached as Annex "L".

6. Paragraph 9 of the assigned leased (sic) contract provides among others that:

"9. That in case the properties subject of the lease agreement are sold or encumbered, Lessors shall
impose as a condition that the buyer or mortgagee thereof shall recognize and be bound by all the
terms and conditions of this lease agreement and shall respect this Contract of Lease as if they are
the LESSORS thereof and in case of sale, LESSEE shall have the first option or priority to buy the
properties subject of the lease;"

7. On September 21, 1988, defendant Santos sold the eight parcels of land subject of the lease to
defendant David Raymundo for a consideration of FIVE MILLION (P5,000,000.00) PESOS. The said
sale was in contravention of the contract of lease, for the first option or priority to buy was not offered
by defendant Santos to the plaintiff. Xerox copy of the deed of sale is hereto attached as Annex "M".

8. On March 5, 1989, defendant Santos wrote a letter to the plaintiff informing the same of the sale
of the properties to defendant Raymundo, the said letter was personally handed by the attorney-in-
fact of defendant Santos, Xerox copy of the letter is hereto attached as Annex "N".

9. Upon learning of this fact plaintiff's representative wrote a letter to defendant Santos, requesting
her to rectify the error and consequently realizing the error, she had it reconveyed to her for the
same consideration of FIVE MILLION (P5,000,000.00) PESOS. Xerox copies of the letter and the
deed of reconveyance are hereto attached as Annexes "O" and "P".

10. Subsequently the property was offered for sale to plaintiff by the defendant for the sum of
FIFTEEN MILLION (P15,000,000.00) PESOS. Plaintiff was given ten (10) days to make good of the
offer, but therefore (sic) the said period expired another letter came from the counsel of defendant
Santos, containing the same tenor of (sic) the former letter. Xerox copies of the letters are hereto
attached as Annexes "Q" and "R".

11. On May 8, 1989, before the period given in the letter offering the properties for sale expired,
plaintiff's counsel wrote counsel of defendant Santos offering to buy the properties for FIVE MILLION
(P5,000,000.00) PESOS. Xerox copy of the letter is hereto attached as Annex "S".

12. On May 15, 1989, before they replied to the offer to purchase, another deed of sale was
executed by defendant Santos (in favor of) defendant Raymundo for a consideration of NINE
MILLION (P9,000,000.00) PESOS. Xerox copy of the second deed of sale is hereto attached as
Annex "T".

13. Defendant Santos violated again paragraph 9 of the contract of lease by executing a second
deed of sale to defendant Raymundo.

14. It was only on May 17, 1989, that defendant Santos replied to the letter of the plaintiff's offer to
buy or two days after she sold her properties. In her reply she stated among others that the period
has lapsed and the plaintiff is not a privy (sic) to the contract. Xerox copy of the letter is hereto
attached as Annex "U".

15. On June 28, 1989, counsel for plaintiff informed counsel of defendant Santos of the fact that
plaintiff is the assignee of all rights and interest of the former lessor. Xerox copy of the letter is
hereto attached as Annex "V".

16. On July 6, 1989, counsel for defendant Santos informed the plaintiff that the new owner is
defendant Raymundo. Xerox copy of the letter is hereto attached as Annex "W".

17. From the preceding facts it is clear that the sale was simulated and that there was a collusion
between the defendants in the sales of the leased properties, on the ground that when plaintiff wrote
a letter to defendant Santos to rectify the error, she immediately have (sic) the property reconveyed
it (sic) to her in a matter of twelve (12) days.

18. Defendants have the same counsel who represented both of them in their exchange of
communication with plaintiff's counsel, a fact that led to the conclusion that a collusion exist (sic)
between the defendants.

19. When the property was still registered in the name of defendant Santos, her collector of the
rental of the leased properties was her brother-in-law David Santos and when it was transferred to
defendant Raymundo the collector was still David Santos up to the month of June, 1990. Xerox
copies of cash vouchers are hereto attached as Annexes "X" to "HH", respectively.

20. The purpose of this unholy alliance between defendants Santos and Raymundo is to mislead the
plaintiff and make it appear that the price of the leased property is much higher than its actual value
of FIVE MILLION (P5,000,000.00) PESOS, so that plaintiff would purchase the properties at a higher
price.

21. Plaintiff has made considerable investments in the said leased property by erecting a two (2)
storey, six (6) doors commercial building amounting to THREE MILLION (P3,000,000.00) PESOS.
This considerable improvement was made on the belief that eventually the said premises shall be
sold to the plaintiff.

22. As a consequence of this unlawful act of the defendants, plaintiff will incurr (sic) total loss of
THREE MILLION (P3,000,000.00) PESOS as the actual cost of the building and as such defendants
should be charged of the same amount for actual damages.

23. As a consequence of the collusion, evil design and illegal acts of the defendants, plaintiff in the
process suffered mental anguish, sleepless nights, bismirched (sic) reputation which entitles plaintiff
to moral damages in the amount of FIVE MILLION (P5,000,000.00) PESOS.

24. The defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent manner and
as a deterrent to the commission of similar acts, they should be made to answer for exemplary
damages, the amount left to the discretion of the Court.

25. Plaintiff demanded from the defendants to rectify their unlawful acts that they committed, but
defendants refused and failed to comply with plaintiffs just and valid and (sic) demands. Xerox
copies of the demand letters are hereto attached as Annexes "KK" to "LL", respectively.

26. Despite repeated demands, defendants failed and refused without justifiable cause to satisfy
plaintiff's claim, and was constrained to engaged (sic) the services of undersigned counsel to
institute this action at a contract fee of P200,000.00, as and for attorney's fees, exclusive of cost and
expenses of litigation.

PRAYER

WHEREFORE, it is respectfully prayed, that judgment be rendered in favor of the plaintiff and
against defendants and ordering that:

a. The Deed of Sale between defendants dated May 15, 1989, be annulled and the leased
properties be sold to the plaintiff in the amount of P5,000,000.00;
b. Dependants (sic) pay plaintiff the sum of P3,000,000.00 as actual damages;
c. Defendants pay the sum of P5,000,000.00 as moral damages;
d. Defendants pay exemplary damages left to the discretion of the Court;
e. Defendants pay the sum of not less than P200,000.00 as attorney's fees.

Plaintiff further prays for other just and equitable reliefs plus cost of suit.

Instead of filing their respective answers, respondents filed motions to dismiss anchored on the
grounds of lack of cause of action, estoppel and laches.

On September 2, 1991, the trial court issued the order dismissing the complaint for lack of a valid
cause of action. It ratiocinated thus:

Upon the very face of the plaintiff's Complaint itself, it therefore indubitably appears that the
defendant Santos had verily complied with paragraph 9 of the Lease Agreement by twice offering the
properties for sale to the plaintiff for ~1 5 M. The said offers, however, were plainly rejected by the
plaintiff which scorned the said offer as "RIDICULOUS". There was therefore a definite refusal on the
part of the plaintiff to accept the offer of defendant Santos. For in acquiring the said properties back
to her name, and in so making the offers to sell both by herself (attorney-in-fact) and through her
counsel, defendant Santos was indeed conscientiously complying with her obligation under
paragraph 9 of the Lease Agreement. . . . .

Xxx xxx xxx

This is indeed one instance where a Complaint, after barely commencing to create a cause of action,
neutralized itself by its subsequent averments which erased or extinguished its earlier allegations of
an impending wrong. Consequently, absent any actionable wrong in the very face of the Complaint
itself, the plaintiffs subsequent protestations of collusion is bereft or devoid of any meaning or
purpose. . . . .

The inescapable result of the foregoing considerations point to no other conclusion than that the
Complaint actually does not contain any valid cause of action and should therefore be as it is hereby
ordered DISMISSED. The Court finds no further need to consider the other grounds of estoppel and
laches inasmuch as this resolution is sufficient to dispose the matter. 6

Petitioners appealed to the Court of Appeals which affirmed in toto the ruling of the trial court, and
further reasoned that:

. . . . Appellant's protestations that the P15 million price quoted by appellee Santos was reduced to
P9 million when she later resold the leased properties to Raymundo has no valid legal moorings
because appellant, as a prospective buyer, cannot dictate its own price and forcibly ram it against
appellee Santos, as owner, to buy off her leased properties considering the total absence of any
stipulation or agreement as to the price or as to how the price should be computed under paragraph
9 of the lease contract, . . . . 7

Petitioner moved for reconsideration but was denied in an order dated August 20, 1993. 8

Hence this petition. Subsequently, petitioner filed an "Urgent Motion for the Issuance of Restraining
Order and/or Writ of Preliminary Injunction and to Hold Respondent David A. Raymundo in
Contempt of Court." 9 The motion sought to enjoin respondent Raymundo and his counsel from
pursuing the ejectment complaint filed before the barangay captain of San Isidro, Paraaque, Metro
Manila; to direct the dismissal of said ejectment complaint or of any similar action that may have
been filed; and to require respondent Raymundo to explain why he should not be held in contempt of
court for forum-shopping. The ejectment suit initiated by respondent Raymundo against petitioner
arose from the expiration of the lease contract covering the property subject of this case. The
ejectment suit was decided in favor of Raymundo, and the entry of final judgment in respect thereof
renders the said motion moot and academic.

Issue

The principal legal issue presented before us for resolution is whether the aforequoted complaint
alleging breach of the contractual right of "first option or priority to buy" states a valid cause of
action.

Petitioner contends that the trial court as well as the appellate tribunal erred in dismissing the
complaint because it in fact had not just one but at least three (3) valid causes of action, to wit: (1)
breach of contract, (2) its right of first refusal founded in law, and (3) damages.

Respondents Santos and Raymundo, in their separate comments, aver that the petition should be
denied for not raising a question of law as the issue involved is purely factual whether respondent
Santos complied with paragraph 9 of the lease agreement and for not having complied with Section
2, Rule 45 of the Rules of Court, requiring the filing of twelve (12) copies of the petitioner's brief.
Both maintain that the complaint filed by petitioner before the Regional Trial Court of Makati stated
no valid cause of action and that petitioner failed to substantiate its claim that the lower courts
decided the same "in a way not in accord with law and applicable decisions of the Supreme Court";
or that the Court of Appeals has "sanctioned departure by a trial court from the accepted and usual
course of judicial proceedings" so as to merit the exercise by this Court of the power of review under
Rule 45 of the Rules of Court. Furthermore, they reiterate estoppel and laches as grounds for
dismissal, claiming that petitioner's payment of rentals of the leased property to respondent
Raymundo from June 15, 1989, to June 30, 1990, was an acknowledgment of the latter's status as
new owner-lessor of said property, by virtue of which petitioner is deemed to have waived or
abandoned its first option to purchase.

Private respondents likewise contend that the deed of assignment of the lease agreement did not
include the assignment of the option to purchase. Respondent Raymundo further avers that he was
not privy to the contract of lease, being neither the lessor nor lessee adverted to therein, hence he
could not be held liable for violation thereof.

The Court's Ruling

Preliminary Issue: Failure to FileSufficient Copies of Brief

We first dispose of the procedural issue raised by respondents, particularly petitioner's failure to file
twelve (12) copies of its brief. We have ruled that when non-compliance with the Rules was not
intended for delay or did not result in prejudice to the adverse party, dismissal of appeal on mere
technicalities in cases where appeal is a matter of right may be stayed, in the exercise of the court's
equity jurisdiction. 10 It does not appear that respondents were unduly prejudiced by petitioner's
nonfeasance. Neither has it been shown that such failure was intentional.

Main Issue: Validity of Cause of Action

We do not agree with respondents' contention that the issue involved is purely factual. The principal
legal question, as stated earlier, is whether the complaint filed by herein petitioner in the lower court
states a valid cause of action. Since such question assumes the facts alleged in the complaint as
true, it follows that the determination thereof is one of law, and not of facts. There is a question of
law in a given case when the doubt or difference arises as to what the law is on a certain state of
facts, and there is a question of fact when the doubt or difference arises as to the truth or the
falsehood of alleged facts. 11

At the outset, petitioner concedes that when the ground for a motion to dismiss is lack of cause of
action, such ground must appear on the face of the complaint; that to determine the sufficiency of a
cause of action, only the facts alleged in the complaint and no others should be considered; and that
the test of sufficiency of the facts alleged in a petition or complaint to constitute a cause of action is
whether, admitting the facts alleged, the court could render a valid judgment upon the same in
accordance with the prayer of the petition or complaint.

A cause of action exists if the following elements are present: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created; (2) an obligation on the part of the
named defendant to respect or not to violate such right, and (3) an act or omission on the part of
such defendant violative of the right of plaintiff or constituting a breach of the obligation of defendant
to the plaintiff for which the latter may maintain an action for recovery of damages. 12

In determining whether allegations of a complaint are sufficient to support a cause of action, it must
be borne in mind that the complaint does not have to establish or allege facts proving the existence
of a cause of action at the outset; this will have to be done at the trial on the merits of the case. To
sustain a motion to dismiss for lack of cause of action, the complaint must show that the claim for
relief does not exist, rather than that a claim has been defectively stated, or is ambiguous, indefinite
or uncertain. 13

Equally important, a defendant moving to dismiss a complaint on the ground of lack of cause of
action is regarded as having hypothetically admitted all the averments thereof. 14

A careful examination of the complaint reveals that it sufficiently alleges an actionable contractual
breach on the part of private respondents. Under paragraph 9 of the contract of lease between
respondent Santos and petitioner, the latter was granted the "first option or priority" to purchase the
leased properties in case Santos decided to sell. If Santos never decided to sell at all, there can
never be a breach, much less an enforcement of such "right." But on September 21, 1988, Santos
sold said properties to Respondent Raymundo without first offering these to petitioner. Santos
indeed realized her error, since she repurchased the properties after petitioner complained.
Thereafter, she offered to sell the properties to petitioner for P15 million, which petitioner, however,
rejected because of the "ridiculous" price. But Santos again appeared to have violated the same
provision of the lease contract when she finally resold the properties to respondent Raymundo for
only P9 million without first offering them to petitioner at such price. Whether there was actual
breach which entitled petitioner to damages and/or other just or equitable relief, is a question which
can better be resolved after trial on the merits where each party can present evidence to prove their
respective allegations and defenses. 15

The trial and appellate courts based their decision to sustain respondents' motion to dismiss on the
allegations of Paraaque Kings Enterprises that Santos had actually offered the subject properties
for sale to it prior to the final sale in favor of Raymundo, but that the offer was rejected.

According to said courts, with such offer, Santos had verily complied with her obligation to grant the
right of first refusal to petitioner.

We hold, however, that in order to have full compliance with the contractual right granting petitioner
the first option to purchase, the sale of the properties for the amount of P9 million, the price for which
they were finally sold to respondent Raymundo, should have likewise been first offered to petitioner.

The Court has made an extensive and lengthy discourse on the concept of, and obligations under, a
right of first refusal in the case of Guzman, Bocaling & Co. vs. Bonnevie. 16 In that case, under a
contract of lease, the lessees (Raul and Christopher Bonnevie) were given a "right of first priority" to
purchase the leased property in case the lessor (Reynoso) decided to sell. The selling price quoted
to the Bonnevies was 600,000.00 to be fully paid in cash, less a mortgage lien of P100,000.00. On
the other hand, the selling price offered by Reynoso to and accepted by Guzman was only
P400,000.00 of which P137,500.00 was to be paid in cash while the balance was to be paid only
when the property was cleared of occupants. We held that even if the Bonnevies could not buy it at
the price quoted (P600,000.00), nonetheless, Reynoso could not sell it to another for a lower price
and under more favorable terms and conditions without first offering said favorable terms and price
to the Bonnevies as well. Only if the Bonnevies failed to exercise their right of first priority could
Reynoso thereafter lawfully sell the subject property to others, and only under the same terms and
conditions previously offered to the Bonnevies.

Of course, under their contract, they specifically stipulated that the Bonnevies could exercise the
right of first priority, "all things and conditions being equal." This Court interpreted this proviso to
mean that there should be identity of terms and conditions to be offered to the Bonnevies and all
other prospective buyers, with the Bonnevies to enjoy the right of first priority. We hold that the same
rule applies even without the same proviso if the right of first refusal (or the first option to buy) is not
to be rendered illusory.

From the foregoing, the basis of the right of first refusal* must be the current offer to sell of the seller
or offer to purchase of any prospective buyer. Only after the optionee fails to exercise its right of first
priority under the same terms and within the period contemplated, could the owner validly offer to
sell the property to a third person, again, under the same terms as offered to the optionee.

This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair Theater, Inc. 17
which was decided en banc. This Court upheld the right of first refusal of the lessee Mayfair, and
rescinded the sale of the property by the lessor Carmelo to Equatorial Realty "considering that
Mayfair, which had substantial interest over the subject property, was prejudiced by its sale to
Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day
stipulated period".

In that case, two contracts of lease between Carmelo and Mayfair provided "that if the LESSOR
should desire to sell the leased premises, the LESSEE shall be given 30 days exclusive option to
purchase the same." Carmelo initially offered to sell the leased property to Mayfair for six to seven
million pesos. Mayfair indicated interest in purchasing the property though it invoked the 30-day
period. Nothing was heard thereafter from Carmelo. Four years later, the latter sold its entire Recto
Avenue property, including the leased premises, to Equatorial for P11,300,000.00 without priorly
informing Mayfair. The Court held that both Carmelo and Equatorial acted in bad faith: Carmelo for
knowingly violating the right of first option of Mayfair, and Equatorial for purchasing the property
despite being aware of the contract stipulation. In addition to rescission of the contract of sale, the
Court ordered Carmelo to allow Mayfair to buy the subject property at the same price of
P11,300,000.00.

No cause of actionunder P.D. 1517

Petitioner also invokes Presidential Decree No. 1517, or the Urban Land Reform Law, as another
source of its right of first refusal. It claims to be covered under said law, being the "rightful occupant
of the land and its structures" since it is the lawful lessee thereof by reason of contract. Under the
lease contract, petitioner would have occupied the property for fourteen (14) years at the end of the
contractual period.

Without probing into whether petitioner is rightfully a beneficiary under said law, suffice it to say that
this Court has previously ruled that under Section 6 18 of P.D. 1517, "the terms and conditions of the
sale in the exercise of the lessee's right of first refusal to purchase shall be determined by the Urban
Zone Expropriation and Land Management Committee. Hence, . . . . certain prerequisites must be
complied with by anyone who wishes to avail himself of the benefits of the decree." 19 There being
no allegation in its complaint that the prerequisites were complied with, it is clear that the complaint
did fail to state a cause of action on this ground.

Deed of Assignment includedthe option to purchase

Neither do we find merit in the contention of respondent Santos that the assignment of the lease
contract to petitioner did not include the option to purchase. The provisions of the deeds of
assignment with regard to matters assigned were very clear. Under the first assignment between
Frederick Chua as assignor and Lee Ching Bing as assignee, it was expressly stated that:

. . . . the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to herein ASSIGNEE, all his
rights, interest and participation over said premises afore-described, . . . . 20

And under the subsequent assignment executed between Lee Ching Bing as assignor and the
petitioner, represented by its Vice President Vicenta Lo Chiong, as assignee, it was likewise
expressly stipulated that;

. . . . the ASSIGNOR hereby sells, transfers and assigns all his rights, interest and participation over
said leased premises, . . . . 21

One of such rights included in the contract of lease and, therefore, in the assignments of rights was
the lessee's right of first option or priority to buy the properties subject of the lease, as provided in
paragraph 9 of the assigned lease contract. The deed of assignment need not be very specific as to
which rights and obligations were passed on to the assignee. It is understood in the general
provision aforequoted that all specific rights and obligations contained in the contract of lease are
those referred to as being assigned. Needless to state, respondent Santos gave her unqualified
conformity to both assignments of rights.

Respondent Raymundo privyto the Contract of Lease

With respect to the contention of respondent Raymundo that he is not privy to the lease contract, not
being the lessor nor the lessee referred to therein, he could thus not have violated its provisions, but
he is nevertheless a proper party. Clearly, he stepped into the shoes of the owner-lessor of the land
as, by virtue of his purchase, he assumed all the obligations of the lessor under the lease contract.
Moreover, he received benefits in the form of rental payments. Furthermore, the complaint, as well
as the petition, prayed for the annulment of the sale of the properties to him. Both pleadings also
alleged collusion between him and respondent Santos which defeated the exercise by petitioner of
its right of first refusal.

In order then to accord complete relief to petitioner, respondent Raymundo was a necessary, if not
indispensable, party to the case. 22 A favorable judgment for the petitioner will necessarily affect the
rights of respondent Raymundo as the buyer of the property over which petitioner would like to
assert its right of first option to buy.

Having come to the conclusion that the complaint states a valid cause of action for breach of the
right of first refusal and that the trial court should thus not have dismissed the complaint, we find no
more need to pass upon the question of whether the complaint states a cause of action for damages
or whether the complaint is barred by estoppel or laches. As these matters require presentation
and/or determination of facts, they can be best resolved after trial on the merits.

While the lower courts erred in dismissing the complaint, private respondents, however, cannot be
denied their day in court. While, in the resolution of a motion to dismiss, the truth of the facts alleged
in the complaint are theoretically admitted, such admission is merely hypothetical and only for the
purpose of resolving the motion. In case of denial, the movant is not to be deprived of the right to
submit its own case and to submit evidence to rebut the allegations in the complaint. Neither will the
grant of the motion by a trial court and the ultimate reversal thereof by an appellate court have the
effect of stifling such right. 23 So too, the trial court should be given the opportunity to evaluate the
evidence, apply the law and decree the proper remedy. Hence, we remand the instant case to the
trial court to allow private respondents to have their day in court.

WHEREFORE, the petition is GRANTED. The assailed decisions of the trial court and Court of
Appeals are hereby REVERSED and SET ASIDE. The case is REMANDED to the Regional Trial
Court of Makati for further proceedings.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.
ESTATE OF ROGELIO G. ONG, Petitioner, versus Minor JOANNE RODJIN
DIAZ, Represented by Her Mother and Guardian, Jinky C. Diaz,
Respondent.
G.R. No. 171713 | 2007-12-17

D E C I S I O N


CHICO-NAZARIO, J.:

This is a petition for Review on Certiorari under Rule 45 of the Revised Rules of Civil
Procedure assailing (1) the Decision[1] of the Court of Appeals dated 23 November 2005 and (2) the
Resolution[2] of the same court dated 1 March 2006 denying petitioner's Motion for Reconsideration
in CA-G.R. CV No. 70125.

A Complaint[3] for compulsory recognition with prayer for support pending litigation was filed by
minor Joanne Rodjin Diaz (Joanne), represented by her mother and guardian, Jinky C. Diaz (Jinky),
against Rogelio G. Ong (Rogelio) before the Regional Trial Court (RTC) of Tarlac City. In her
Complaint, Jinky prayed that judgment be rendered:

(a) Ordering defendant to recognize plaintiff Joanne Rodjin Diaz as his daughter.

(b) Ordering defendant to give plaintiff monthly support of P20,000.00 pendente lite and thereafter to
fix monthly support.

(c) Ordering the defendant to pay plaintiff attorney's fees in the sum of P100,000.00.

(d) Granting plaintiff such other measure of relief as maybe just and equitable in the premises.[4]

As alleged by Jinky in her Complaint in November 1993 in Tarlac City, she and Rogelio got
acquainted. This developed into friendship and later blossomed into love. At this time, Jinky was
already married to a Japanese national, Hasegawa Katsuo, in a civil wedding solemnized on 19
February 1993 by Municipal Trial Court Judge Panfilo V. Valdez.[5]

From January 1994 to September 1998, Jinky and Rogelio cohabited and lived together at Fairlane
Subdivision, and later at Capitol Garden, Tarlac City.

From this live-in relationship, minor Joanne Rodjin Diaz was conceived and on 25 February 1998
was born at the Central Luzon Doctors' Hospital, Tarlac City.

Rogelio brought Jinky to the hospital and took minor Joanne and Jinky home after delivery. Rogelio
paid all the hospital bills and the baptismal expenses and provided for all of minor Joanne's needs -
recognizing the child as his.

In September 1998, Rogelio abandoned minor Joanne and Jinky, and stopped supporting minor
Joanne, falsely alleging that he is not the father of the child.

Rogelio, despite Jinky's remonstrance, failed and refused and continued failing and refusing to give
support for the child and to acknowledge her as his daughter, thus leading to the filing of the
heretofore adverted complaint.

After summons had been duly served upon Rogelio, the latter failed to file any responsive pleading
despite repeated motions for extension, prompting the trial court to declare him in default in its Order
dated 7 April 1999. Rogelio's Answer with Counterclaim and Special and Affirmative Defenses was
received by the trial court only on 15 April 1999. Jinky was allowed to present her evidence ex parte
on the basis of which the trial court on 23 April 1999 rendered a decision granting the reliefs prayed
for in the complaint.

In its Decision[6] dated 23 April 1999, the RTC held:

WHEREFORE, judgment is hereby rendered:

1. Ordering defendant to recognize plaintiff as his natural child;

2. Ordering defendant to provide plaintiff with a monthly support of P10,000.00 and further

3. Ordering defendant to pay reasonable attorney's fees in the amount of P5,000.00 and the cost of
the suit.

On 28 April 1999, Rogelio filed a motion to lift the order of default and a motion for reconsideration
seeking the court's understanding, as he was then in a quandary on what to do to find a solution to a
very difficult problem of his life.[7]

On 29 April 1999, Rogelio filed a motion for new trial with prayer that the decision of the trial court
dated 23 April 1999 be vacated and the case be considered for trial de novo pursuant to the
provisions of Section 6, Rule 37 of the 1997 Rules of Civil Procedure.[8]

On 16 June 1999, the RTC issued an Order granting Rogelio's Motion for New Trial:

WHEREFORE, finding defendant's motion for new trial to be impressed with merit, the same is
hereby granted.

The Order of this court declaring defendant in default and the decision is this court dated April 23,
1999 are hereby set aside but the evidence adduced shall remain in record, subject to cross-
examination by defendant at the appropriate stage of the proceedings.

In the meantime defendant's answer is hereby admitted, subject to the right of plaintiff to file a reply
and/or answer to defendant's counterclaim within the period fixed by the Rules of Court.

Acting on plaintiff's application for support pendente lite which this court finds to be warranted,
defendant is hereby ordered to pay to plaintiff immediately the sum of P2,000.00 a month from
January 15, 1999 to May 1999 as support pendente lite in arrears and the amount of P4,000.00
every month thereafter as regular support pendente lite during the pendency of this case.[9]

The RTC finally held:

The only issue to be resolved is whether or not the defendant is the father of the plaintiff Joanne
Rodjin Diaz.

Since it was duly established that plaintiff's mother Jinky Diaz was married at the time of the birth of
Joanne Rodjin Diaz, the law presumes that Joanne is a legitimate child of the spouses Hasegawa
Katsuo and Jinky Diaz (Article 164, Family Code). The child is still presumed legitimate even if the
mother may have declared against her legitimacy (Article 167, Ibid).

The legitimacy of a child may be impugned only on the following grounds provided for in Article 166
of the same Code. Paragraph 1 of the said Article provides that there must be physical impossibility
for the husband to have sexual intercourse with the wife within the first 120 days of the 300 days
following the birth of the child because of -

a) physical incapacity of the husband to have sexual intercourse with his wife;

b) husband and wife were living separately in such a way that sexual intercourse was not possible;

c) serious illness of the husband which prevented sexual intercourse.

It was established by evidence that the husband is a Japanese national and that he was living
outside of the country (TSN, Aug. 27, 1999, page 5) and he comes home only once a year. Both
evidence of the parties proved that the husband was outside the country and no evidence was
shown that he ever arrived in the country in the year 1997 preceding the birth of plaintiff Joanne
Rodjin Diaz.

While it may also be argued that plaintiff Jinky had a relationship with another man before she met
the defendant, there is no evidence that she also had sexual relations with other men on or about
the conception of Joanne Rodjin. Joanne Rodjin was her second child (see Exh. "A"), so her first
child, a certain Nicole (according to defendant) must have a different father or may be the son of
Hasegawa K[u]tsuo.

The defendant admitted having been the one who shouldered the hospital bills representing the
expenses in connection with the birth of plaintiff. It is an evidence of admission that he is the real
father of plaintiff. Defendant also admitted that even when he stopped going out with Jinky, he and
Jinky used to go to motels even after 1996. Defendant also admitted that on some instances, he still
used to see Jinky after the birth of Joanne Rodjin. Defendant was even the one who fetched Jinky
after she gave birth to Joanne.

On the strength of this evidence, the Court finds that Joanne Rodjin is the child of Jinky and
defendant Rogelio Ong and it is but just that the latter should support plaintiff.[10]

On 15 December 2000, the RTC rendered a decision and disposed:

WHEREFORE, judgment is hereby rendered declaring Joanne Rodjin Diaz to be the illegitimate
child of defendant Rogelio Ong with plaintiff Jinky Diaz. The Order of this Court awarding support
pendente lite dated June 15, 1999, is hereby affirmed and that the support should continue until
Joanne Rodjin Diaz shall have reached majority age.[11]

Rogelio filed a Motion for Reconsideration, which was denied for lack of merit in an Order of the trial
court dated 19 January 2001.[12] From the denial of his Motion for Reconsideration, Rogelio
appealed to the Court of Appeals. After all the responsive pleadings had been filed, the case was
submitted for decision and ordered re-raffled to another Justice for study and report as early as 12
July 2002.[13]

During the pendency of the case with the Court of Appeals, Rogelio's counsel filed a manifestation
informing the Court that Rogelio died on 21 February 2005; hence, a Notice of Substitution was filed
by said counsel praying that Rogelio be substituted in the case by the Estate of Rogelio Ong,[14]
which motion was accordingly granted by the Court of Appeals.[15]

In a Decision dated 23 November 2005, the Court of Appeals held:

WHEREFORE, premises considered, the present appeal is hereby GRANTED. The appealed
Decision dated December 15, 2000 of the Regional Trial Court of Tarlac, Tarlac, Branch 63 in Civil
Case No. 8799 is hereby SET ASIDE. The case is hereby REMANDED to the court a quo for the
issuance of an order directing the parties to make arrangements for DNA analysis for the purpose of
determining the paternity of plaintiff minor Joanne Rodjin Diaz, upon consultation and in coordination
with laboratories and experts on the field of DNA analysis.

No pronouncement as to costs.[16]

Petitioner filed a Motion for Reconsideration which was denied by the Court of Appeals in a
Resolution dated 1 March 2006.

In disposing as it did, the Court of Appeals justified its Decision as follows:

In this case, records showed that the late defendant-appellant Rogelio G. Ong, in the early stage of
the proceedings volunteered and suggested that he and plaintiff's mother submit themselves to a
DNA or blood testing to settle the issue of paternity, as a sign of good faith. However, the trial court
did not consider resorting to this modern scientific procedure notwithstanding the repeated denials of
defendant that he is the biological father of the plaintiff even as he admitted having actual sexual
relations with plaintiff's mother. We believe that DNA paternity testing, as current jurisprudence
affirms, would be the most reliable and effective method of settling the present paternity dispute.
Considering, however, the untimely demise of defendant-appellant during the pendency of this
appeal, the trial court, in consultation with out laboratories and experts on the field of DNA analysis,
can possibly avail of such procedure with whatever remaining DNA samples from the deceased
defendant alleged to be the putative father of plaintiff minor whose illegitimate filiations is the subject
of this action for support.[17]

Hence, this petition which raises the following issues for resolution:

I
WHETHER OR NOT THE COURT OF APPEALS ERRED WHEN IT DID NOT DISMISS
RESPONDENT'S COMPLAINT FOR COMPULSORY RECOGNITION DESPITE ITS FINDING
THAT THE EVIDENCE PRESENTED FAILED TO PROVE THAT ROGELIO G. ONG WAS HER
FATHER.

II
WHETHER OR NOT THE COURT OF APPEALS ERRED WHEN IT DID NOT DECLARE
RESPONDENT AS THE LEGITIMATE CHILD OF JINKY C. DIAZ AND HER JAPANESE
HUSBAND, CONSIDERING THAT RESPONDENT FAILED TO REBUT THE PRESUMPTION OF
HER LEGITIMACY.

III
WHETHER OR NOT THE COURT OF APPEALS ERRED WHEN IT REMANDED THE CASE TO
THE COURT A QUO FOR DNA ANALYSIS DESPITE THE FACT THAT IT IS NO LONGER
FEASIBLE DUE TO THE DEATH OF ROGELIO G. ONG.[18]

Petitioner prays that the present petition be given due course and the Decision of the Court of
Appeals dated November 23, 2005 be modified, by setting aside the judgment remanding the case
to the trial court for DNA testing analysis, by dismissing the complaint of minor Joanne for
compulsory recognition, and by declaring the minor as the legitimate child of Jinky and Hasegawa
Katsuo.[19]

From among the issues presented for our disposition, this Court finds it prudent to concentrate its
attention on the third one, the propriety of the appellate court's decision remanding the case to the
trial court for the conduct of DNA testing. Considering that a definitive result of the DNA testing will
decisively lay to rest the issue of the filiation of minor Joanne, we see no reason to resolve the first
two issues raised by the petitioner as they will be rendered moot by the result of the DNA testing.

As a whole, the present petition calls for the determination of filiation of minor Joanne for purposes
of support in favor of the said minor.

Filiation proceedings are usually filed not just to adjudicate paternity but also to secure a legal right
associated with paternity, such as citizenship, support (as in the present case), or inheritance. The
burden of proving paternity is on the person who alleges that the putative father is the biological
father of the child. There are four significant procedural aspects of a traditional paternity action which
parties have to face: a prima facie case, affirmative defenses, presumption of legitimacy, and
physical resemblance between the putative father and child.[20]

A child born to a husband and wife during a valid marriage is presumed legitimate.[21] As a guaranty
in favor of the child and to protect his status of legitimacy, Article 167 of the Family Code provides:

Article 167. The children shall be considered legitimate although the mother may have declared
against its legitimacy or may have been sentenced as an adulteress.

The law requires that every reasonable presumption be made in favor of legitimacy. We explained
the rationale of this rule in the recent case of Cabatania v. Court of Appeals[22]:

The presumption of legitimacy does not only flow out of a declaration in the statute but is based on
the broad principles of natural justice and the supposed virtue of the mother. The presumption is
grounded on the policy to protect the innocent offspring from the odium of illegitimacy.

The presumption of legitimacy of the child, however, is not conclusive and consequently, may be
overthrown by evidence to the contrary. Hence, Article 255 of the New Civil Code[23] provides:

Article 255. Children born after one hundred and eighty days following the celebration of the
marriage, and before three hundred days following its dissolution or the separation of the spouses
shall be presumed to be legitimate.

Against this presumption no evidence shall be admitted other than that of the physical impossibility
of the husband's having access to his wife within the first one hundred and twenty days of the three
hundred which preceded the birth of the child.

This physical impossibility may be caused:

1) By the impotence of the husband;

2) By the fact that husband and wife were living separately in such a way that access was not
possible;

3) By the serious illness of the husband.[24]

The relevant provisions of the Family Code provide as follows:

ART. 172. The filiation of legitimate children is established by any of the following:

(1) The record of birth appearing in the civil register or a final judgment; or

(2) An admission of legitimate filiation in a public document or a private handwritten instrument and
signed by the parent concerned.

In the absence of the foregoing evidence, the legitimate filiation shall be proved by:

(1) The open and continuous possession of the status of a legitimate child; or

(2) Any other means allowed by the Rules of Court and special laws.

ART. 175. Illegitimate children may establish their illegitimate filiation in the same way and on the
same evidence as legitimate children.

There had been divergent and incongruent statements and assertions bandied about by the parties
to the present petition. But with the advancement in the field of genetics, and the availability of new
technology, it can now be determined with reasonable certainty whether Rogelio is the biological
father of the minor, through DNA testing.

DNA is the fundamental building block of a person's entire genetic make-up. DNA is found in all
human cells and is the same in every cell of the same person. Genetic identity is unique. Hence, a
person's DNA profile can determine his identity.[25]

DNA analysis is a procedure in which DNA extracted from a biological sample obtained from an
individual is examined. The DNA is processed to generate a pattern, or a DNA profile, for the
individual from whom the sample is taken. This DNA profile is unique for each person, except for
identical twins.

Everyone is born with a distinct genetic blueprint called DNA (deoxyribonucleic acid). It is exclusive
to an individual (except in the rare occurrence of identical twins that share a single, fertilized egg),
and DNA is unchanging throughout life. Being a component of every cell in the human body, the
DNA of an individual's blood is the very DNA in his or her skin cells, hair follicles, muscles, semen,
samples from buccal swabs, saliva, or other body parts.

The chemical structure of DNA has four bases. They are known as A (Adenine), G (guanine), C
(cystosine) and T (thymine). The order in which the four bases appear in an individual's DNA
determines his or her physical make up. And since DNA is a double stranded molecule, it is
composed of two specific paired bases, A-T or T-A and G-C or C-G. These are called "genes."

Every gene has a certain number of the above base pairs distributed in a particular sequence. This
gives a person his or her genetic code. Somewhere in the DNA framework, nonetheless, are
sections that differ. They are known as "polymorphic loci," which are the areas analyzed in DNA
typing (profiling, tests, fingerprinting). In other words, DNA typing simply means determining the
"polymorphic loci."

How is DNA typing performed? From a DNA sample obtained or extracted, a molecular biologist
may proceed to analyze it in several ways. There are five (5) techniques to conduct DNA typing.
They are: the RFLP (restriction fragment length polymorphism); "reverse dot blot" or HLA DQ a/Pm
loci which was used in 287 cases that were admitted as evidence by 37 courts in the U.S. as of
November 1994; DNA process; VNTR (variable number tandem repeats); and the most recent which
is known as the PCR-([polymerase] chain reaction) based STR (short tandem repeats) method
which, as of 1996, was availed of by most forensic laboratories in the world. PCR is the process of
replicating or copying DNA in an evidence sample a million times through repeated cycling of a
reaction involving the so-called DNA polymerize enzyme. STR, on the other hand, takes
measurements in 13 separate places and can match two (2) samples with a reported theoretical
error rate of less than one (1) in a trillion.

Just like in fingerprint analysis, in DNA typing, "matches" are determined. To illustrate, when DNA or
fingerprint tests are done to identify a suspect in a criminal case, the evidence collected from the
crime scene is compared with the "known" print. If a substantial amount of the identifying features
are the same, the DNA or fingerprint is deemed to be a match. But then, even if only one feature of
the DNA or fingerprint is different, it is deemed not to have come from the suspect.

As earlier stated, certain regions of human DNA show variations between people. In each of these
regions, a person possesses two genetic types called "allele," one inherited from each parent. In [a]
paternity test, the forensic scientist looks at a number of these variable regions in an individual to
produce a DNA profile. Comparing next the DNA profiles of the mother and child, it is possible to
determine which half of the child's DNA was inherited from the mother. The other half must have
been inherited from the biological father. The alleged father's profile is then examined to ascertain
whether he has the DNA types in his profile, which match the paternal types in the child. If the man's
DNA types do not match that of the child, the man is excluded as the father. If the DNA types match,
then he is not excluded as the father.[26]

In the newly promulgated rules on DNA evidence it is provided:

SEC. 3 Definition of Terms. - For purposes of this Rule, the following terms shall be defined as
follows:

x x x x

(c) "DNA evidence" constitutes the totality of the DNA profiles, results and other genetic information
directly generated from DNA testing of biological samples;

(d) "DNA profile" means genetic information derived from DNA testing of a biological sample
obtained from a person, which biological sample is clearly identifiable as originating from that
person;

(e) "DNA testing" means verified and credible scientific methods which include the extraction of DNA
from biological samples, the generation of DNA profiles and the comparison of the information
obtained from the DNA testing of biological samples for the purpose of determining, with reasonable
certainty, whether or not the DNA obtained from two or more distinct biological samples originates
from the same person (direct identification) or if the biological samples originate from related
persons (kinship analysis); and

(f) "Probability of Parentage" means the numerical estimate for the likelihood of parentage of a
putative parent compared with the probability of a random match of two unrelated individuals in a
given population.

Amidst the protestation of petitioner against the DNA analysis, the resolution thereof may provide the
definitive key to the resolution of the issue of support for minor Joanne. Our articulation in Agustin v.
Court of Appeals[27] is particularly relevant, thus:

Our faith in DNA testing, however, was not quite so steadfast in the previous decade. In Pe Lim v.
Court of Appeals (336 Phil. 741, 270 SCRA 1), promulgated in 1997, we cautioned against the use
of DNA because "DNA, being a relatively new science, (had) not as yet been accorded official
recognition by our courts. Paternity (would) still have to be resolved by such conventional evidence
as the relevant incriminating acts,verbal and written, by the putative father."

In 2001, however, we opened the possibility of admitting DNA as evidence of parentage, as
enunciated in Tijing v. Court of Appeals [G.R. No. 125901, 8 March 2001, 354 SCRA 17]:

x x x Parentage will still be resolved using conventional methods unless we adopt the modern and
scientific ways available. Fortunately, we have now the facility and expertise in using DNA test for
identification and parentage testing. The University of the Philippines Natural Science Research
Institute (UP-NSRI) DNA Analysis Laboratory has now the capability to conduct DNA typing using
short tandem repeat (STR) analysis. The analysis is based on the fact that the DNA of a child/person
has two (2) copies, one copy from the mother and the other from the father. The DNA from the
mother, the alleged father and child are analyzed to establish parentage. Of course, being a novel
scientific technique, the use of DNA test as evidence is still open to challenge. Eventually, as the
appropriate case comes, courts should not hesitate to rule on the admissibility of DNA evidence. For
it was said, that courts should apply the results of science when competently obtained in aid of
situations presented, since to reject said results is to deny progress.

The first real breakthrough of DNA as admissible and authoritative evidence in Philippine
jurisprudence came in 2002 with out en banc decision in People v. Vallejo [G.R. No. 144656, 9 May
2002, 382 SCRA 192] where the rape and murder victim's DNA samples from the bloodstained
clothes of the accused were admitted in evidence. We reasoned that "the purpose of DNA testing
(was) to ascertain whether an association exist(ed) between the evidence sample and the reference
sample. The samples collected (were) subjected to various chemical processes to establish their
profile.

A year later, in People v. Janson [G.R. No. 125938, 4 April 2003, 400 SCRA 584], we acquitted the
accused charged with rape for lack of evidence because "doubts persist(ed) in our mind as to who
(were) the real malefactors. Yes, a complex offense (had) been perpetrated but who (were) the
perpetrators? How we wish we had DNA or other scientific evidence to still our doubts."

In 2004, in Tecson, et al. v. COMELEC [G.R. Nos. 161434, 161634 and 161824, 3 March 2004, 424
SCRA 277], where the Court en banc was faced with the issue of filiation of then presidential
candidate Fernando Poe, Jr., we stated:

In case proof of filiation or paternity would be unlikely to satisfactorily establish or would be difficult to
obtain, DNA testing, which examines genetic codes obtained from body cells of the illegitimate child
and any physical residue of the long dead parent could be resorted to. A positive match would clear
up filiation or paternity. In Tijing v. Court of Appeals, this Court has acknowledged the strong weight
of DNA testing...

Moreover, in our en banc decision in People v. Yatar [G.R. No. 150224, 19 May 2004, 428 SCRA
504], we affirmed the conviction of the accused for rape with homicide, the principal evidence for
which included DNA test results. x x x.

Coming now to the issue of remand of the case to the trial court, petitioner questions the
appropriateness of the order by the Court of Appeals directing the remand of the case to the RTC for
DNA testing given that petitioner has already died. Petitioner argues that a remand of the case to the
RTC for DNA analysis is no longer feasible due to the death of Rogelio. To our mind, the alleged
impossibility of complying with the order of remand for purposes of DNA testing is more ostensible
than real. Petitioner's argument is without basis especially as the New Rules on DNA Evidence[28]
allows the conduct of DNA testing, either motu proprio or upon application of any person who has a
legal interest in the matter in litigation, thus:

SEC. 4. Application for DNA Testing Order. - The appropriate court may, at any time, either motu
proprio or on application of any person who has a legal interest in the matter in litigation, order a
DNA testing. Such order shall issue after due hearing and notice to the parties upon a showing of
the following:

(a) A biological sample exists that is relevant to the case;

(b) The biological sample: (i) was not previously subjected to the type of DNA testing now requested;
or (ii) was previously subjected to DNA testing, but the results may require confirmation for good
reasons;

(c) The DNA testing uses a scientifically valid technique;

(d) The DNA testing has the scientific potential to produce new information that is relevant to the
proper resolution of the case; and

(e) The existence of other factors, if any, which the court may consider as potentially affecting the
accuracy or integrity of the DNA testing.

From the foregoing, it can be said that the death of the petitioner does not ipso facto negate the
application of DNA testing for as long as there exist appropriate biological samples of his DNA.

As defined above, the term "biological sample" means any organic material originating from a
person's body, even if found in inanimate objects, that is susceptible to DNA testing. This includes
blood, saliva, and other body fluids, tissues, hairs and bones.[29]

Thus, even if Rogelio already died, any of the biological samples as enumerated above as may be
available, may be used for DNA testing. In this case, petitioner has not shown the impossibility of
obtaining an appropriate biological sample that can be utilized for the conduct of DNA testing.

And even the death of Rogelio cannot bar the conduct of DNA testing. In People v. Umanito,[30]
citing Tecson v. Commission on Elections,[31] this Court held:

The 2004 case of Tecson v. Commission on Elections [G.R. No. 161434, 3 March 2004, 424 SCRA
277] likewise reiterated the acceptance of DNA testing in our jurisdiction in this wise: "[i]n case proof
of filiation or paternity would be unlikely to satisfactorily establish or would be difficult to obtain, DNA
testing, which examines genetic codes obtained from body cells of the illegitimate child and any
physical residue of the long dead parent could be resorted to."

It is obvious to the Court that the determination of whether appellant is the father of AAA's child,
which may be accomplished through DNA testing, is material to the fair and correct adjudication of
the instant appeal. Under Section 4 of the Rules, the courts are authorized, after due hearing and
notice, motu proprio to order a DNA testing. However, while this Court retains jurisdiction over the
case at bar, capacitated as it is to receive and act on the matter in controversy, the Supreme Court
is not a trier of facts and does not, in the course of daily routine, conduct hearings. Hence, it would
be more appropriate that the case be remanded to the RTC for reception of evidence in appropriate
hearings, with due notice to the parties. (Emphasis supplied.)

As we have declared in the said case of Agustin v. Court of Appeals[32]:

x x x [F]or too long, illegitimate children have been marginalized by fathers who choose to deny their
existence. The growing sophistication of DNA testing technology finally provides a much needed
equalizer for such ostracized and abandoned progeny. We have long believed in the merits of DNA
testing and have repeatedly expressed as much in the past. This case comes at a perfect time when
DNA testing has finally evolved into a dependable and authoritative form of evidence gathering. We
therefore take this opportunity to forcefully reiterate our stand that DNA testing is a valid means of
determining paternity.

WHEREFORE, the instant petition is DENIED for lack of merit. The Decision of the Court of Appeals
dated 23 November 2005 and its Resolution dated 1 March 2006 are AFFIRMED. Costs against
petitioner.

SO ORDERED.

NATIONAL POWER CORPORATION, Petitioner, versus HON. RAMON G.
CODILLA, JR., Presiding Judge, RTC of Cebu, Br. 19, BANGPAI SHIPPING
COMPANY, and WALLEM SHIPPING, INCORPORATED, Respondents.
G.R. No. 170491 | 2007-04-04

D E C I S I O N


CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil
Procedure, assailing the Decision[1] of the Court of Appeals in CA-G.R. CEB-SP No.
00848, dated 9 November 2005, which dismissed the Petition for Certiorari filed by the
National Power Corporation seeking to set aside the Order[2] issued by the Regional
Trial Court (RTC) of Cebu, Branch 19 dated 16 November 2004, denying admission and
excluding from the records plaintiff's (herein petitioner) Exhibits "A", "C", "D", "E", "H"
and its sub-markings, "I", "J", and its sub-markings, "K", "L", "M" and its sub-markings,
"N" and its sub-markings, "O", "P" and its sub-markings, "Q" and its sub-markings, "R"
and "S" and its sub-markings.

On 20 April 1996, M/V Dibena Win, a vessel of foreign registry owned and operated by
private respondent Bangpai Shipping, Co., allegedly bumped and damaged petitioner's
Power Barge 209 which was then moored at the Cebu International Port. Thus, on 26
April 1996, petitioner filed before the Cebu RTC a complaint for damages against
private respondent Bangpai Shipping Co., for the alleged damages caused on
petitioner's power barges.

Thereafter, petitioner filed an Amended Complaint dated 8 July 1996 impleading herein
private respondent Wallem Shipping, Inc., as additional defendant, contending that the
latter is a ship agent of Bangpai Shipping Co. On 18 September 1996, Wallem Shipping,
Inc. filed a Motion to Dismiss which was subsequently denied by public respondent
Judge in an Order dated 20 October 1998. Bangpai Shipping Co. likewise filed a Motion
to Dismiss which was also denied by public respondent Judge in an Order issued on 24
January 2003.

Petitioner, after adducing evidence during the trial of the case, filed a formal offer of
evidence before the lower court on 2 February 2004 consisting of Exhibits "A" to "V"
together with the sub-marked portions thereof. Consequently, private respondents
Bangpai Shipping Co. and Wallem Shipping, Inc. filed their respective objections to
petitioner's formal offer of evidence.

On 16 November 2004, public respondent judge issued the assailed order denying the
admission and excluding from the records petitioner's Exhibits "A", "C", "D", "E", "H"
and its sub-markings, "I", "J" and its sub-markings, "K", "L", "M" and its sub-markings,
"N" and its sub-markings, "O", "P" and its sub-markings, "Q" and its sub-markings, "R"
and "S" and its sub-markings. According to the court a quo:

The Court finds merit in the objections raised and the motion to strike out filed
respectively by the defendants. The record shows that the plaintiff has been given
every opportunity to present the originals of the Xerox or photocopies of the documents
it offered. It never produced the originals. The plaintiff attempted to justify the
admission of the photocopies by contending that "the photocopies offered are
equivalent to the original of the document" on the basis of the Electronic
Evidence (Comment to Defendant Wallem Philippines' Objections and Motion to Strike).
But as rightly pointed out in defendant Wallem's Reply to the Comment of Plaintiff, the
Xerox copies do not constitute the electronic evidence defined in Section 1 of Rule 2 of
the Rules on Electronic Evidence as follows:

"(h) "Electronic document" refers to information or the representation of information,
data, figures, symbols or other models of written expression, described or however
represented, by which a right is established or an obligation extinguished, or by which a
fact may be proved and affirmed, which is received, recorded, transmitted, stored,
processed, retrieved or produced electronically. It includes digitally signed documents
and any printout, readable by sight or other means which accurately reflects the
electronic data message or electronic document. For the purpose of these Rules, the
term "electronic document" may be used interchangeably with "electronic data
message".

The information in those Xerox or photocopies was not received, recorded, retrieved or
produced electronically. Moreover, such electronic evidence must be authenticated
(Sections 1 and 2, Rule 5, Rules on Electronic Evidence), which the plaintiff failed to do.
Finally, the required Affidavit to prove the admissibility and evidentiary weight of the
alleged electronic evidence (Sec. 1, Rule 9, Ibid) was not executed, much less
presented in evidence.

The Xerox or photocopies offered should, therefore, be stricken off the record. Aside
from their being not properly identified by any competent witness, the loss of the
principals thereof was not established by any competent proof.

x x x x

WHEREFORE, plaintiff's Exhibits "A", "C", "D", "E", "H" and its sub-markings, "I", "J",
and its sub-markings, "K", "L", "M" and its sub-markings, "N" and its sub-markings,
"O", "P" and its sub-markings, "Q" and its sub-markings, and "R" are hereby DENIED
admission and excluded from the records. However, these excluded evidence should be
attached to the records of this case to enable the appellate court to pass upon them
should an appeal be taken from the decision on the merits to be rendered upon the
termination of the trial of this case.

Exhibits "S" and its sub-markings are also DENIED admission for lack of proper
identification since the witness who brought these pictures expressly admitted that he
was not present when the photos were taken and had not knowledge when the same
where taken.[3]

Upon denial of petitioner's Motion for Reconsideration in an Order dated 20 April 2005,
petitioner filed aPetition for Certiorari under Rule 65 of the Rules of Civil Procedure
before the Court of Appeals maintaining that public respondent Judge acted with grave
abuse of discretion amounting to lack or excess of jurisdiction in denying the admission
of its Exhibits "A", "C", "D", "E", "H" and its sub-markings, "I", "J" and its sub-
markings, "K", "L", "M" and its sub-markings, "N" and its sub-markings, "O", "P" and its
sub-markings, "Q" and its sub-markings, "R", and "S" and its sub-markings.

On 9 November 2005, the appellate court issued a Decision dismissing petitioner's
petition for certiorari, the pertinent portions of which elucidate:

After a judicious scrutiny of the record of the case on hand, together with the rules and
jurisprudence which are applicable in the premises, we have come up with a finding
that the petition for certiorari filed in this case is not meritorious.

It appears that there is no sufficient showing by the petitioner that the respondent
judge acted with grave abuse of discretion in issuing the assailed orders in Civil Case
No. CEB-18662. As what our jurisprudence tells us, grave abuse of discretion is meant
such capricious and whimsical exercise of judgment as would be equivalent to lack of
jurisdiction x x x.

In the case at bench, what has been shown to the contrary by the totality of the record
on hand is that the respondent judge acted correctly and within the pale of his sound
discretion in issuing the assailed order, dated November 16, 2004, in Civil Case No.
CEB-18662.

Indeed, it appears that the pieces of petitioner's documentary evidence which were
denied admission by the respondent judge were not properly identified by any
competent witness. As pointed out by the respondent Bangpai Shipping Company in its
comment on the petition filed in this case which reproduces some excerpts of the
testimonies in the court a quo of Atty. Marianito De Los Santos, Engr. Nestor Enriquez,
Jr. and Mr. Rodulfo I. Pagaling, the said witnesses did not have personal knowledge of
and participation in the preparation and making of the pieces of documentary evidence
denied admission by respondent judge x x x. In other words, there was lack of proper
identification of said pieces of documentary evidence. x x x.

Then another ground for denying admission of petitioner's Exhibits A, C, D, E, H, I, J, K,
L, M, N, O, P, Q, R, and S by the respondent judge is that said pieces of documentary
evidence were merely photocopies of purported documents or papers. There is no
gainsaying the fact that the respondent judge acted within the pale of his discretion
when he denied admission of said documentary evidence. Section 3 of Rule 130 of the
Rules of Court of the Philippines is very explicit in providing that, when the subject of
inquiry are the contents of documents, no evidence shall be admissible other than the
original documents themselves, except in certain cases specifically so enumerated
therein, and the petitioner has not shown that the non-presentation or non-production
of its original documentary pieces of evidence falls under such exceptions. As aptly
pointed out by the respondent judge in the order issued by him on November 16, 2004:

"x x x The record shows that the plaintiff (petitioner herein) has been given every
opportunity to present the originals of the Xerox or photocopies of the documents it
offered. It never produced said originals."

So, the petitioner has only itself to blame for the respondent judge's denial of
admission of its aforementioned documentary evidence.

Of course, the petitioner tries to contend that the photocopies of documents offered by
it are equivalent to the original documents that it sought to offer in evidence, based on
the Rules on Electronic Evidence which were in force and effect since August 1, 2001.
However, such a contention is devoid of merit. The pieces of documentary evidence
offered by the petitioner in Civil Case CEB-18662 which were denied admission by the
respondent judge do not actually constitute as electronic evidence as defined in the
Rules on Electronic Evidence. The informations therein were not received, retrieved or
produced electronically. The petitioner has not adequately established that its
documentary evidence were electronic evidence. it has not properly authenticated such
evidence as electronic documents, assuming arguendo that they are. Lastly, the
petitioner has not properly established by affidavit pursuant to Rule 9 of the Rules on
Electronic Evidence the admissibility and evidentiary weight of said documentary
evidence.

Thus, by any legal yardstick, it is manifest that the respondent judge did not commit
grave abuse of discretion in denying admission of the aforementioned documentary
evidence of petitioner.

But even if it be granted just for the sake of argument that the respondent judge
committed an error in denying the aforementioned documentary evidence of the
petitioner, still the petition for certiorari filed in this case must fail. Such error would at
most be only an error of law and not an error of jurisdiction. In Lee vs. People, 393
SCRA 397, the Supreme Court of the Philippines said that certiorari will not lie in case
of an error of law. x x x.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us
DISMISSING the petition filed in this case and AFFIRMING the assailed orders issued by
respondent judge in Civil Case No. CEB-18662.[4]

Aggrieved by the aforequoted decision, petitioner filed the instant petition.

The focal point of this entire controversy is petitioner's obstinate contention that the
photocopies it offered as formal evidence before the trial court are the functional
equivalent of their original based on its inimitable interpretation of the Rules on
Electronic Evidence.

Petitioner insists that, contrary to the rulings of both the trial court and the appellate
court, the photocopies it presented as documentary evidence actually constitute
electronic evidence based on its own premise that an "electronic document" as defined
under Section 1(h), Rule 2 of the Rules on Electronic Evidence is not limited to
information that is received, recorded, retrieved or produced electronically. Rather,
petitioner maintains that an "electronic document" can also refer to other modes of
written expression that is produced electronically, such as photocopies, as included in
the section's catch-all proviso: "any print-out or output, readable by sight or other
means".

We do not agree.

In order to shed light to the issue of whether or not the photocopies are indeed
electronic documents as contemplated in Republic Act No. 8792 or the Implementing
Rules and Regulations of the Electronic Commerce Act, as well as the Rules on
Electronic Evidence, we shall enumerate the following documents offered as evidence
by the petitioner, to wit:

Exhibit "A" is a photocopy of a letter manually signed by a certain Jose C. Troyo, with
"RECEIVED" stamped thereon, together with a handwritten date;

Exhibit "C" is a photocopy of a list of estimated cost of damages of petitioner's power
barges 207 and 209 prepared by Hopewell Mobile Power Systems Corporation and
manually signed by Messrs. Rex Malaluan and Virgilio Asprer;

Exhibit "D" is a photocopy of a letter manually signed by a certain Nestor G. Enriquez,
Jr., with "RECEIVED" stamped thereon, together with a handwritten notation of the date
it was received;

Exhibit "E" is a photocopy of a Standard Marine Protest Form which was filled up and
accomplished by Rex Joel C. Malaluan in his own handwriting and signed by him.
Portions of the Jurat were handwritten, and manually signed by the Notary Public;

Exhibit "H" is a photocopy of a letter manually signed by Mr. Nestor G. Enriquez, Jr.
with "RECEIVED" stamped thereon, together with a handwritten notation of the date it
was received;

Exhibit "I" is a photocopy of a computation of the estimated energy loss allegedly
suffered by petitioner which was manually signed by Mr. Nestor G. Enriquez, Jr.;

Exhibit "J" is a photocopy of a letter containing the breakdown of the cost estimate,
manually signed by Mr. Nestor G. Enriquez, Jr., with "RECEIVED" stamped thereon,
together with a handwritten notation of the date it was received, and other handwritten
notations;

Exhibit "K" is a photocopy of the Subpoena Duces Tecum Ad Testificandum written
using a manual typewriter, signed manually by Atty. Ofelia Polo-De Los Reyes, with a
handwritten notation when it was received by the party;

Exhibit "L" is a photocopy of a portion of the electricity supply and operation and
maintenance agreement between petitioner and Hopewell, containing handwritten
notations and every page containing three unidentified manually placed signatures;

Exhibit "M" is a photocopy of the Notice of Termination with attachments addressed to
Rex Joel C. Malaluan, manually signed by Jaime S. Patinio, with a handwritten notation
of the date it was received. The sub-markings also contain manual signatures and/or
handwritten notations;

Exhibit "N" is a photocopy of a letter of termination with attachments addressed to
VIrgilio Asprer and manually signed by Jaime S. Patino. The sub-markings contain
manual signatures and/or handwritten notations;

Exhibit "O" is the same photocopied document marked as Annex C;

Exhibit "P" is a photocopy of an incident report manually signed by Messrs. Malaluan
and Bautista and by the Notary Public, with other handwritten notations;

Exhibit "Q" is a photocopy of a letter manually signed by Virgilio Asprer and by a Notary
Public, together with other handwritten notations.

On the other hand, an "electronic document" refers to information or the
representation of information, data, figures, symbols or other models of
written expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be proved and
affirmed,which is received, recorded, transmitted, stored, processed, retrieved
or produced electronically.[5] It includes digitally signed documents and any
printout, readable by sight or other means which accurately reflects the electronic data
message or electronic document.[6]

The rules use the word "information" to define an electronic document received,
recorded, transmitted, stored, processed, retrieved or produced electronically. This
would suggest that an electronic document is relevant only in terms of the information
contained therein, similar to any other document which is presented in evidence as
proof of its contents.[7] However, what differentiates an electronic document from a
paper-based document is the manner by which the information is processed; clearly,
the information contained in an electronic document is received, recorded, transmitted,
stored, processed, retrieved or produced electronically.

A perusal of the information contained in the photocopies submitted by petitioner will
reveal that not all of the contents therein, such as the signatures of the persons who
purportedly signed the documents, may be recorded or produced electronically. By no
stretch of the imagination can a person's signature affixed manually be considered as
information electronically received, recorded, transmitted, stored, processed, retrieved
or produced. Hence, the argument of petitioner that since these paper printouts were
produced through an electronic process, then these photocopies are electronic
documents as defined in the Rules on Electronic Evidence is obviously an erroneous, if
not preposterous, interpretation of the law. Having thus declared that the offered
photocopies are not tantamount to electronic documents, it is consequential that the
same may not be considered as the functional equivalent of their original as decreed in
the law.

Furthermore, no error can be ascribed to the court a quo in denying admission and
excluding from the records petitioner's Exhibits "A", "C", "D", "E", "H" and its sub-
markings, "I", "J" and its sub-markings, "K", "L", "M" and its sub-markings, "N" and its
sub-markings, "O", "P" and its sub-markings, "Q" and its sub-markings, and "R". The
trial court was correct in rejecting these photocopies as they violate the best evidence
rule and are therefore of no probative value being incompetent pieces of evidence.
Before the onset of liberal rules of discovery, and modern technique of electronic
copying, the best evidence rule was designed to guard against incomplete or fraudulent
proof and the introduction of altered copies and the withholding of the originals.[8] But
the modern justification for the rule has expanded from the prevention of fraud to a
recognition that writings occupy a central position in the law.[9] The importance of the
precise terms of writings in the world of legal relations, the fallibility of the human
memory as reliable evidence of the terms, and the hazards of inaccurate or incomplete
duplicate are the concerns addressed by the best evidence rule.[10]

Moreover, as mandated under Section 2, Rule 130 of the Rules of Court:

"SECTION 2. Original writing must be produced; exceptions. - There can be no evidence
of a writing the contents of which is the subject of inquiry, other than the original
writing itself, except in the following cases:

(a) When the original has been lost, destroyed, or cannot be produced in court;

(b) When the original is in the possession of the party against whom the evidence is
offered, and the latter fails to produce it after reasonable notice;

(c) When the original is a record or other document in the custody of a public officer;

(d) When the original has been recorded in an existing record a certified copy of which
is made evidence by law;

(e) When the original consists of numerous accounts or other documents which cannot
be examined in court without great loss of time and the fact sought to be established
from them is only the general result of the whole."

When the original document has been lost or destroyed, or cannot be produced in
court, the offeror, upon proof of its execution or existence and the cause of its
unavailability without bad faith on his part, may prove its contents by a copy, or by a
recital of its contents in some authentic document, or by the testimony of witnesses in
the order stated.[11] The offeror of secondary evidence is burdened to prove the
predicates thereof: (a) the loss or destruction of the original without bad faith on the
part of the proponent/offeror which can be shown by circumstantial evidence of routine
practices of destruction of documents;[12] (b) the proponent must prove by a fair
preponderance of evidence as to raise a reasonable inference of the loss or destruction
of the original copy; and (c) it must be shown that a diligent and bona fide but
unsuccessful search has been made for the document in the proper place or places.[13]
However, in the case at bar, though petitioner insisted in offering the photocopies as
documentary evidence, it failed to establish that such offer was made in accordance
with the exceptions as enumerated under the abovequoted rule. Accordingly, we find no
error in the Order of the court a quo denying admissibility of the photocopies offered by
petitioner as documentary evidence.

Finally, it perplexes this Court why petitioner continued to obdurately disregard the
opportunities given by the trial court for it to present the originals of the photocopies it
presented yet comes before us now praying that it be allowed to present the originals
of the exhibits that were denied admission or in case the same are lost, to lay the
predicate for the admission of secondary evidence. Had petitioner presented the
originals of the documents to the court instead of the photocopies it obstinately offered
as evidence, or at the very least laid the predicate for the admission of said
photocopies, this controversy would not have unnecessarily been brought before the
appellate court and finally to this Court for adjudication. Had it not been for petitioner's
intransigence, the merits of petitioner's complaint for damages would have been
decided upon by the trial court long ago. As aptly articulated by the Court of Appeals,
petitioner has only itself to blame for the respondent judge's denial of admission of its
aforementioned documentary evidence and consequently, the denial of its prayer to be
given another opportunity to present the originals of the documents that were denied
admission nor to lay the predicate for the admission of secondary evidence in case the
same has been lost.

WHEREFORE, premises considered, the instant petition is hereby DENIED. The
Decision of the Court of Appeals in CA-G.R. CEB-SP No. 00848, dated 9 November 2005
is hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

FRANCISCO I. CHAVEZ, petitioner, vs. PUBLIC ESTATES AUTHORITY and
AMARI COASTAL BAY DEVELOPMENT CORPORATION, respondents.
G.R. No. 133250 | 2002-07-09


Discussions citing this case are available.
Executive privilege
Judicial Review
EN BANC

D E C I S I O N

CARPIO, J.:

This is an original Petition for Mandamus with prayer for a writ of preliminary injunction and
a temporary restraining order. The petition seeks to compel the Public Estates Authority
("PEA" for brevity) to disclose all facts on PEA's then on-going renegotiations with Amari
Coastal Bay and Development Corporation ("AMARI" for brevity) to reclaim portions of
Manila Bay. The petition further seeks to enjoin PEA from signing a new agreement with
AMARI involving such reclamation.

The Facts

On November 20, 1973, the government, through the Commissioner of Public Highways,
signed a contract with the Construction and Development Corporation of the Philippines
("CDCP" for brevity) to reclaim certain foreshore and offshore areas of Manila Bay. The
contract also included the construction of Phases I and II of the Manila-Cavite Coastal Road.
CDCP obligated itself to carry out all the works in consideration of fifty percent of the total
reclaimed land.

On February 4, 1977, then President Ferdinand E. Marcos issued Presidential Decree No.
1084 creating PEA. PD No. 1084 tasked PEA "to reclaim land, including foreshore and
submerged areas," and "to develop, improve, acquire, x x x lease and sell any and all kinds
of lands."[1] On the same date, then President Marcos issued Presidential Decree No. 1085
transferring to PEA the "lands reclaimed in the foreshore and offshore of the Manila Bay"[2]
under the Manila-Cavite Coastal Road and Reclamation Project (MCCRRP).

On December 29, 1981, then President Marcos issued a memorandum directing PEA to
amend its contract with CDCP, so that "[A]ll future works in MCCRRP x x x shall be funded
and owned by PEA." Accordingly, PEA and CDCP executed a Memorandum of Agreement
dated December 29, 1981, which stated:

"(i) CDCP shall undertake all reclamation, construction, and such other works in the
MCCRRP as may be agreed upon by the parties, to be paid according to progress of works
on a unit price/lump sum basis for items of work to be agreed upon, subject to price
escalation, retention and other terms and conditions provided for in Presidential Decree No.
1594. All the financing required for such works shall be provided by PEA.

x x x

(iii) x x x CDCP shall give up all its development rights and hereby agrees to cede and
transfer in favor of PEA, all of the rights, title, interest and participation of CDCP in and to
all the areas of land reclaimed by CDCP in the MCCRRP as of December 30, 1981 which
have not yet been sold, transferred or otherwise disposed of by CDCP as of said date, which
areas consist of approximately Ninety-Nine Thousand Four Hundred Seventy Three (99,473)
square meters in the Financial Center Area covered by land pledge No. 5 and approximately
Three Million Three Hundred Eighty Two Thousand Eight Hundred Eighty Eight (3,382,888)
square meters of reclaimed areas at varying elevations above Mean Low Water Level located
outside the Financial Center Area and the First Neighborhood Unit."[3]

On January 19, 1988, then President Corazon C. Aquino issued Special Patent No. 3517,
granting and transferring to PEA "the parcels of land so reclaimed under the Manila-Cavite
Coastal Road and Reclamation Project (MCCRRP) containing a total area of one million nine
hundred fifteen thousand eight hundred ninety four (1,915,894) square meters."
Subsequently, on April 9, 1988, the Register of Deeds of the Municipality of Paraaque
issued Transfer Certificates of Title Nos. 7309, 7311, and 7312, in the name of PEA,
covering the three reclaimed islands known as the "Freedom Islands" located at the
southern portion of the Manila-Cavite Coastal Road, Paraaque City. The Freedom Islands
have a total land area of One Million Five Hundred Seventy Eight Thousand Four Hundred
and Forty One (1,578,441) square meters or 157.841 hectares.

On April 25, 1995, PEA entered into a Joint Venture Agreement ("JVA" for brevity) with
AMARI, a private corporation, to develop the Freedom Islands. The JVA also required the
reclamation of an additional 250 hectares of submerged areas surrounding these islands to
complete the configuration in the Master Development Plan of the Southern Reclamation
Project-MCCRRP. PEA and AMARI entered into the JVA through negotiation without public
bidding.[4] On April 28, 1995, the Board of Directors of PEA, in its Resolution No. 1245,
confirmed the JVA. [5] On June 8, 1995, then President Fidel V. Ramos, through then
Executive Secretary Ruben Torres, approved the JVA.[6]

On November 29, 1996, then Senate President Ernesto Maceda delivered a privilege speech
in the Senate and denounced the JVA as the "grandmother of all scams." As a result, the
Senate Committee on Government Corporations and Public Enterprises, and the Committee
on Accountability of Public Officers and Investigations, conducted a joint investigation. The
Senate Committees reported the results of their investigation in Senate Committee Report
No. 560 dated September 16, 1997.[7] Among the conclusions of their report are: (1) the
reclaimed lands PEA seeks to transfer to AMARI under the JVA are lands of the public
domain which the government has not classified as alienable lands and therefore PEA
cannot alienate these lands; (2) the certificates of title covering the Freedom Islands are
thus void, and (3) the JVA itself is illegal.

On December 5, 1997, then President Fidel V. Ramos issued Presidential Administrative
Order No. 365 creating a Legal Task Force to conduct a study on the legality of the JVA in
view of Senate Committee Report No. 560. The members of the Legal Task Force were the
Secretary of Justice,[8] the Chief Presidential Legal Counsel ,[9] and the Government
Corporate Counsel.[10] The Legal Task Force upheld the legality of the JVA, contrary to the
conclusions reached by the Senate Committees.[11]

On April 4 and 5, 1998, the Philippine Daily Inquirer and Today published reports that there
were on-going renegotiations between PEA and AMARI under an order issued by then
President Fidel V. Ramos. According to these reports, PEA Director Nestor Kalaw, PEA
Chairman Arsenio Yulo and retired Navy Officer Sergio Cruz composed the negotiating panel
of PEA.

On April 13, 1998, Antonio M. Zulueta filed before the Court a Petition for Prohibition with
Application for the Issuance of a Temporary Restraining Order and Preliminary Injunction
docketed as G.R. No. 132994 seeking to nullify the JVA. The Court dismissed the petition
"for unwarranted disregard of judicial hierarchy, without prejudice to the refiling of the case
before the proper court."[12]

On April 27, 1998, petitioner Frank I. Chavez ("Petitioner" for brevity) as a taxpayer, filed
the instant Petition for Mandamus with Prayer for the Issuance of a Writ of Preliminary
Injunction and Temporary Restraining Order. Petitioner contends the government stands to
lose billions of pesos in the sale by PEA of the reclaimed lands to AMARI. Petitioner prays
that PEA publicly disclose the terms of any renegotiation of the JVA, invoking Section 28,
Article II, and Section 7, Article III, of the 1987 Constitution on the right of the people to
information on matters of public concern. Petitioner assails the sale to AMARI of lands of the
public domain as a blatant violation of Section 3, Article XII of the 1987 Constitution
prohibiting the sale of alienable lands of the public domain to private corporations. Finally,
petitioner asserts that he seeks to enjoin the loss of billions of pesos in properties of the
State that are of public dominion.

After several motions for extension of time,[13] PEA and AMARI filed their Comments on
October 19, 1998 and June 25, 1998, respectively. Meanwhile, on December 28, 1998,
petitioner filed an Omnibus Motion: (a) to require PEA to submit the terms of the
renegotiated PEA-AMARI contract; (b) for issuance of a temporary restraining order; and (c)
to set the case for hearing on oral argument. Petitioner filed a Reiterative Motion for
Issuance of a TRO dated May 26, 1999, which the Court denied in a Resolution dated June
22, 1999.

In a Resolution dated March 23, 1999, the Court gave due course to the petition and
required the parties to file their respective memoranda.

On March 30, 1999, PEA and AMARI signed the Amended Joint Venture Agreement
("Amended JVA," for brevity). On May 28, 1999, the Office of the President under the
administration of then President Joseph E. Estrada approved the Amended JVA.

Due to the approval of the Amended JVA by the Office of the President, petitioner now prays
that on "constitutional and statutory grounds the renegotiated contract be declared null and
void."[14]

The Issues

The issues raised by petitioner, PEA[15] and AMARI[16] are as follows:

I. WHETHER THE PRINCIPAL RELIEFS PRAYED FOR IN THE PETITION ARE MOOT AND
ACADEMIC BECAUSE OF SUBSEQUENT EVENTS;

II. WHETHER THE PETITION MERITS DISMISSAL FOR FAILING TO OBSERVE THE PRINCIPLE
GOVERNING THE HIERARCHY OF COURTS;

III. WHETHER THE PETITION MERITS DISMISSAL FOR NON-EXHAUSTION OF
ADMINISTRATIVE REMEDIES;

IV. WHETHER PETITIONER HAS LOCUS STANDI TO BRING THIS SUIT;

V. WHETHER THE CONSTITUTIONAL RIGHT TO INFORMATION INCLUDES OFFICIAL
INFORMATION ON ON-GOING NEGOTIATIONS BEFORE A FINAL AGREEMENT;

VI. WHETHER THE STIPULATIONS IN THE AMENDED JOINT VENTURE AGREEMENT FOR THE
TRANSFER TO AMARI OF CERTAIN LANDS, RECLAIMED AND STILL TO BE RECLAIMED,
VIOLATE THE 1987 CONSTITUTION; AND

VII. WHETHER THE COURT IS THE PROPER FORUM FOR RAISING THE ISSUE OF WHETHER
THE AMENDED JOINT VENTURE AGREEMENT IS GROSSLY DISADVANTAGEOUS TO THE
GOVERNMENT.

The Court's Ruling

First issue: whether the principal reliefs prayed for in the petition are moot and academic
because of subsequent events.

The petition prays that PEA publicly disclose the "terms and conditions of the on-going
negotiations for a new agreement." The petition also prays that the Court enjoin PEA from
"privately entering into, perfecting and/or executing any new agreement with AMARI."

PEA and AMARI claim the petition is now moot and academic because AMARI furnished
petitioner on June 21, 1999 a copy of the signed Amended JVA containing the terms and
conditions agreed upon in the renegotiations. Thus, PEA has satisfied petitioner's prayer for
a public disclosure of the renegotiations. Likewise, petitioner's prayer to enjoin the signing
of the Amended JVA is now moot because PEA and AMARI have already signed the Amended
JVA on March 30, 1999. Moreover, the Office of the President has approved the Amended
JVA on May 28, 1999.

Petitioner counters that PEA and AMARI cannot avoid the constitutional issue by simply fast-
tracking the signing and approval of the Amended JVA before the Court could act on the
issue. Presidential approval does not resolve the constitutional issue or remove it from the
ambit of judicial review.

We rule that the signing of the Amended JVA by PEA and AMARI and its approval by the
President cannot operate to moot the petition and divest the Court of its jurisdiction. PEA
and AMARI have still to implement the Amended JVA. The prayer to enjoin the signing of
the Amended JVA on constitutional grounds necessarily includes preventing its
implementation if in the meantime PEA and AMARI have signed one in violation of the
Constitution. Petitioner's principal basis in assailing the renegotiation of the JVA is its
violation of Section 3, Article XII of the Constitution, which prohibits the government from
alienating lands of the public domain to private corporations. If the Amended JVA indeed
violates the Constitution, it is the duty of the Court to enjoin its implementation, and if
already implemented, to annul the effects of such unconstitutional contract.

The Amended JVA is not an ordinary commercial contract but one which seeks to transfer
title and ownership to 367.5 hectares of reclaimed lands and submerged areas of Manila
Bay to a single private corporation. It now becomes more compelling for the Court to
resolve the issue to insure the government itself does not violate a provision of the
Constitution intended to safeguard the national patrimony. Supervening events, whether
intended or accidental, cannot prevent the Court from rendering a decision if there is a
grave violation of the Constitution. In the instant case, if the Amended JVA runs counter to
the Constitution, the Court can still prevent the transfer of title and ownership of alienable
lands of the public domain in the name of AMARI. Even in cases where supervening events
had made the cases moot, the Court did not hesitate to resolve the legal or constitutional
issues raised to formulate controlling principles to guide the bench, bar, and the public.[17]

Also, the instant petition is a case of first impression. All previous decisions of the Court
involving Section 3, Article XII of the 1987 Constitution, or its counterpart provision in the
1973 Constitution,[18] covered agricultural lands sold to private corporations which
acquired the lands from private parties. The transferors of the private corporations claimed
or could claim the right to judicial confirmation of their imperfect titles[19] under Title II of
Commonwealth Act. 141 ("CA No. 141" for brevity). In the instant case, AMARI seeks to
acquire from PEA, a public corporation, reclaimed lands and submerged areas for non-
agricultural purposes by purchase under PD No. 1084 (charter of PEA) and Title III of CA
No. 141. Certain undertakings by AMARI under the Amended JVA constitute the
consideration for the purchase. Neither AMARI nor PEA can claim judicial confirmation of
their titles because the lands covered by the Amended JVA are newly reclaimed or still to be
reclaimed. Judicial confirmation of imperfect title requires open, continuous, exclusive and
notorious occupation of agricultural lands of the public domain for at least thirty years since
June 12, 1945 or earlier. Besides, the deadline for filing applications for judicial confirmation
of imperfect title expired on December 31, 1987.[20]

Lastly, there is a need to resolve immediately the constitutional issue raised in this petition
because of the possible transfer at any time by PEA to AMARI of title and ownership to
portions of the reclaimed lands. Under the Amended JVA, PEA is obligated to transfer to
AMARI the latter's seventy percent proportionate share in the reclaimed areas as the
reclamation progresses. The Amended JVA even allows AMARI to mortgage at any time the
entire reclaimed area to raise financing for the reclamation project.[21]

Second issue: whether the petition merits dismissal for failing to observe the principle
governing the hierarchy of courts.

PEA and AMARI claim petitioner ignored the judicial hierarchy by seeking relief directly from
the Court. The principle of hierarchy of courts applies generally to cases involving factual
questions. As it is not a trier of facts, the Court cannot entertain cases involving factual
issues. The instant case, however, raises constitutional issues of transcendental importance
to the public.[22] The Court can resolve this case without determining any factual issue
related to the case. Also, the instant case is a petition for mandamus which falls under the
original jurisdiction of the Court under Section 5, Article VIII of the Constitution. We resolve
to exercise primary jurisdiction over the instant case.

Third issue: whether the petition merits dismissal for non-exhaustion of administrative
remedies.

PEA faults petitioner for seeking judicial intervention in compelling PEA to disclose publicly
certain information without first asking PEA the needed information. PEA claims petitioner's
direct resort to the Court violates the principle of exhaustion of administrative remedies. It
also violates the rule that mandamus may issue only if there is no other plain, speedy and
adequate remedy in the ordinary course of law.

PEA distinguishes the instant case from Taada v. Tuvera[23] where the Court granted the
petition for mandamus even if the petitioners there did not initially demand from the Office
of the President the publication of the presidential decrees. PEA points out that in Taada,
the Executive Department had an affirmative statutory duty under Article 2 of the Civil
Code[24] and Section 1 of Commonwealth Act No. 638[25] to publish the presidential
decrees. There was, therefore, no need for the petitioners in Taada to make an initial
demand from the Office of the President. In the instant case, PEA claims it has no
affirmative statutory duty to disclose publicly information about its renegotiation of the JVA.
Thus, PEA asserts that the Court must apply the principle of exhaustion of administrative
remedies to the instant case in view of the failure of petitioner here to demand initially from
PEA the needed information.

The original JVA sought to dispose to AMARI public lands held by PEA, a government
corporation. Under Section 79 of the Government Auditing Code,[26]2 the disposition of
government lands to private parties requires public bidding. PEA was under a positive legal
duty to disclose to the public the terms and conditions for the sale of its lands. The law
obligated PEA to make this public disclosure even without demand from petitioner or from
anyone. PEA failed to make this public disclosure because the original JVA, like the
Amended JVA, was the result of a negotiated contract, not of a public bidding. Considering
that PEA had an affirmative statutory duty to make the public disclosure, and was even in
breach of this legal duty, petitioner had the right to seek direct judicial intervention.

Moreover, and this alone is determinative of this issue, the principle of exhaustion of
administrative remedies does not apply when the issue involved is a purely legal or
constitutional question.[27] The principal issue in the instant case is the capacity of AMARI
to acquire lands held by PEA in view of the constitutional ban prohibiting the alienation of
lands of the public domain to private corporations. We rule that the principle of exhaustion
of administrative remedies does not apply in the instant case.

Fourth issue: whether petitioner has locus standi to bring this suit

PEA argues that petitioner has no standing to institute mandamus proceedings to enforce
his constitutional right to information without a showing that PEA refused to perform an
affirmative duty imposed on PEA by the Constitution. PEA also claims that petitioner has not
shown that he will suffer any concrete injury because of the signing or implementation of
the Amended JVA. Thus, there is no actual controversy requiring the exercise of the power
of judicial review.

The petitioner has standing to bring this taxpayer's suit because the petition seeks to
compel PEA to comply with its constitutional duties. There are two constitutional issues
involved here. First is the right of citizens to information on matters of public concern.
Second is the application of a constitutional provision intended to insure the equitable
distribution of alienable lands of the public domain among Filipino citizens. The thrust of the
first issue is to compel PEA to disclose publicly information on the sale of government lands
worth billions of pesos, information which the Constitution and statutory law mandate PEA
to disclose. The thrust of the second issue is to prevent PEA from alienating hundreds of
hectares of alienable lands of the public domain in violation of the Constitution, compelling
PEA to comply with a constitutional duty to the nation.

Moreover, the petition raises matters of transcendental importance to the public. In Chavez
v. PCGG,[28] the Court upheld the right of a citizen to bring a taxpayer's suit on matters of
transcendental importance to the public, thus -

"Besides, petitioner emphasizes, the matter of recovering the ill-gotten wealth of the
Marcoses is an issue of 'transcendental importance to the public.' He asserts that ordinary
taxpayers have a right to initiate and prosecute actions questioning the validity of acts or
orders of government agencies or instrumentalities, if the issues raised are of 'paramount
public interest,' and if they 'immediately affect the social, economic and moral well being of
the people.'

Moreover, the mere fact that he is a citizen satisfies the requirement of personal interest,
when the proceeding involves the assertion of a public right, such as in this case. He
invokes several decisions of this Court which have set aside the procedural matter of locus
standi, when the subject of the case involved public interest.

x x x

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the
object of mandamus is to obtain the enforcement of a public duty, the people are regarded
as the real parties in interest; and because it is sufficient that petitioner is a citizen and as
such is interested in the execution of the laws, he need not show that he has any legal or
special interest in the result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right then recognized in
Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order
to be valid and enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners' legal standing, the Court declared that the right
they sought to be enforced 'is a public right recognized by no less than the fundamental law
of the land.'

Legaspi v. Civil Service Commission, while reiterating Taada, further declared that 'when a
mandamus proceeding involves the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the
general 'public' which possesses the right.'

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have
been involved under the questioned contract for the development, management and
operation of the Manila International Container Terminal, 'public interest [was] definitely
involved considering the important role [of the subject contract] . . . in the economic
development of the country and the magnitude of the financial consideration involved.' We
concluded that, as a consequence, the disclosure provision in the Constitution would
constitute sufficient authority for upholding the petitioner's standing.

Similarly, the instant petition is anchored on the right of the people to information and
access to official records, documents and papers - a right guaranteed under Section 7,
Article III of the 1987 Constitution. Petitioner, a former solicitor general, is a Filipino citizen.
Because of the satisfaction of the two basic requisites laid down by decisional law to sustain
petitioner's legal standing, i.e. (1) the enforcement of a public right (2) espoused by a
Filipino citizen, we rule that the petition at bar should be allowed."

We rule that since the instant petition, brought by a citizen, involves the enforcement of
constitutional rights - to information and to the equitable diffusion of natural resources -
matters of transcendental public importance, the petitioner has the requisite locus standi.

Fifth issue: whether the constitutional right to information includes official information on
on-going negotiations before a final agreement.

Section 7, Article III of the Constitution explains the people's right to information on
matters of public concern in this manner:

"Sec. 7. The right of the people to information on matters of public concern shall be
recognized. Access to official records, and to documents, and papers pertaining to official
acts, transactions, or decisions, as well as to government research data used as basis for
policy development, shall be afforded the citizen, subject to such limitations as may be
provided by law." (Emphasis supplied)

The State policy of full transparency in all transactions involving public interest reinforces
the people's right to information on matters of public concern. This State policy is expressed
in Section 28, Article II of the Constitution, thus:

"Sec. 28. Subject to reasonable conditions prescribed by law, the State adopts and
implements a policy of full public disclosure of all its transactions involving public interest."
(Emphasis supplied)

These twin provisions of the Constitution seek to promote transparency in policy-making
and in the operations of the government, as well as provide the people sufficient
information to exercise effectively other constitutional rights. These twin provisions are
essential to the exercise of freedom of expression. If the government does not disclose its
official acts, transactions and decisions to citizens, whatever citizens say, even if expressed
without any restraint, will be speculative and amount to nothing. These twin provisions are
also essential to hold public officials "at all times x x x accountable to the people,"[29] for
unless citizens have the proper information, they cannot hold public officials accountable for
anything. Armed with the right information, citizens can participate in public discussions
leading to the formulation of government policies and their effective implementation. An
informed citizenry is essential to the existence and proper functioning of any democracy. As
explained by the Court in Valmonte v. Belmonte, Jr.[30]-

"An essential element of these freedoms is to keep open a continuing dialogue or process of
communication between the government and the people. It is in the interest of the State
that the channels for free political discussion be maintained to the end that the government
may perceive and be responsive to the people's will. Yet, this open dialogue can be effective
only to the extent that the citizenry is informed and thus able to formulate its will
intelligently. Only when the participants in the discussion are aware of the issues and have
access to information relating thereto can such bear fruit."

PEA asserts, citing Chavez v. PCGG,[31] that in cases of on-going negotiations the right to
information is limited to "definite propositions of the government." PEA maintains the right
does not include access to "intra-agency or inter-agency recommendations or
communications during the stage when common assertions are still in the process of being
formulated or are in the 'exploratory stage'."

Also, AMARI contends that petitioner cannot invoke the right at the pre-decisional stage or
before the closing of the transaction. To support its contention, AMARI cites the following
discussion in the 1986 Constitutional Commission:

"Mr. Suarez. And when we say 'transactions' which should be distinguished from contracts,
agreements, or treaties or whatever, does the Gentleman refer to the steps leading to the
consummation of the contract, or does he refer to the contract itself?

Mr. Ople: The 'transactions' used here, I suppose is generic and therefore, it can cover both
steps leading to a contract and already a consummated contract, Mr. Presiding Officer.

Mr. Suarez: This contemplates inclusion of negotiations leading to the consummation of the
transaction.

Mr. Ople: Yes, subject only to reasonable safeguards on the national interest.

Mr. Suarez: Thank you."[32] (Emphasis supplied)

AMARI argues there must first be a consummated contract before petitioner can invoke the
right. Requiring government officials to reveal their deliberations at the pre-decisional stage
will degrade the quality of decision-making in government agencies. Government officials
will hesitate to express their real sentiments during deliberations if there is immediate
public dissemination of their discussions, putting them under all kinds of pressure before
they decide.

We must first distinguish between information the law on public bidding requires PEA to
disclose publicly, and information the constitutional right to information requires PEA to
release to the public. Before the consummation of the contract, PEA must, on its own and
without demand from anyone, disclose to the public matters relating to the disposition of its
property. These include the size, location, technical description and nature of the property
being disposed of, the terms and conditions of the disposition, the parties qualified to bid,
the minimum price and similar information. PEA must prepare all these data and disclose
them to the public at the start of the disposition process, long before the consummation of
the contract, because the Government Auditing Code requires public bidding. If PEA fails to
make this disclosure, any citizen can demand from PEA this information at any time during
the bidding process.

Information, however, on on-going evaluation or review of bids or proposals being
undertaken by the bidding or review committee is not immediately accessible under the
right to information. While the evaluation or review is still on-going, there are no "official
acts, transactions, or decisions" on the bids or proposals. However, once the committee
makes its official recommendation, there arises a "definite proposition" on the part of the
government. From this moment, the public's right to information attaches, and any citizen
can access all the non-proprietary information leading to such definite proposition. In
Chavez v. PCGG,[33] the Court ruled as follows:

"Considering the intent of the framers of the Constitution, we believe that it is incumbent
upon the PCGG and its officers, as well as other government representatives, to disclose
sufficient public information on any proposed settlement they have decided to take up with
the ostensible owners and holders of ill-gotten wealth. Such information, though, must
pertain to definite propositions of the government, not necessarily to intra-agency or inter-
agency recommendations or communications during the stage when common assertions are
still in the process of being formulated or are in the "exploratory" stage. There is need, of
course, to observe the same restrictions on disclosure of information in general, as
discussed earlier - such as on matters involving national security, diplomatic or foreign
relations, intelligence and other classified information." (Emphasis supplied)

Contrary to AMARI's contention, the commissioners of the 1986 Constitutional Commission
understood that the right to information "contemplates inclusion of negotiations leading to
the consummation of the transaction." Certainly, a consummated contract is not a
requirement for the exercise of the right to information. Otherwise, the people can never
exercise the right if no contract is consummated, and if one is consummated, it may be too
late for the public to expose its defects.

Requiring a consummated contract will keep the public in the dark until the contract, which
may be grossly disadvantageous to the government or even illegal, becomes a fait
accompli. This negates the State policy of full transparency on matters of public concern, a
situation which the framers of the Constitution could not have intended. Such a requirement
will prevent the citizenry from participating in the public discussion of any proposed
contract, effectively truncating a basic right enshrined in the Bill of Rights. We can allow
neither an emasculation of a constitutional right, nor a retreat by the State of its avowed
"policy of full disclosure of all its transactions involving public interest."

The right covers three categories of information which are "matters of public concern,"
namely: (1) official records; (2) documents and papers pertaining to official acts,
transactions and decisions; and (3) government research data used in formulating policies.
The first category refers to any document that is part of the public records in the custody of
government agencies or officials. The second category refers to documents and papers
recording, evidencing, establishing, confirming, supporting, justifying or explaining official
acts, transactions or decisions of government agencies or officials. The third category refers
to research data, whether raw, collated or processed, owned by the government and used in
formulating government policies.

The information that petitioner may access on the renegotiation of the JVA includes
evaluation reports, recommendations, legal and expert opinions, minutes of meetings,
terms of reference and other documents attached to such reports or minutes, all relating to
the JVA. However, the right to information does not compel PEA to prepare lists, abstracts,
summaries and the like relating to the renegotiation of the JVA.[34] The right only affords
access to records, documents and papers, which means the opportunity to inspect and copy
them. One who exercises the right must copy the records, documents and papers at his
expense. The exercise of the right is also subject to reasonable regulations to protect the
integrity of the public records and to minimize disruption to government operations, like
rules specifying when and how to conduct the inspection and copying.[35]

The right to information, however, does not extend to matters recognized as privileged
information under the separation of powers.[36] The right does not also apply to
information on military and diplomatic secrets, information affecting national security, and
information on investigations of crimes by law enforcement agencies before the prosecution
of the accused, which courts have long recognized as confidential.[37] The right may also
be subject to other limitations that Congress may impose by law.

There is no claim by PEA that the information demanded by petitioner is privileged
information rooted in the separation of powers. The information does not cover Presidential
conversations, correspondences, or discussions during closed-door Cabinet meetings which,
like internal deliberations of the Supreme Court and other collegiate courts, or executive
sessions of either house of Congress,[38] are recognized as confidential. This kind of
information cannot be pried open by a co-equal branch of government. A frank exchange of
exploratory ideas and assessments, free from the glare of publicity and pressure by
interested parties, is essential to protect the independence of decision-making of those
tasked to exercise Presidential, Legislative and Judicial power.[39] This is not the situation
in the instant case.

We rule, therefore, that the constitutional right to information includes official information
on on-going negotiations before a final contract. The information, however, must constitute
definite propositions by the government and should not cover recognized exceptions like
privileged information, military and diplomatic secrets and similar matters affecting national
security and public order.[40] Congress has also prescribed other limitations on the right to
information in several legislations.[41]

Sixth issue: whether stipulations in the Amended JVA for the transfer to AMARI of lands,
reclaimed or to be reclaimed, violate the Constitution.

The Regalian Doctrine

The ownership of lands reclaimed from foreshore and submerged areas is rooted in the
Regalian doctrine which holds that the State owns all lands and waters of the public domain.
Upon the Spanish conquest of the Philippines, ownership of all "lands, territories and
possessions" in the Philippines passed to the Spanish Crown.[42] The King, as the sovereign
ruler and representative of the people, acquired and owned all lands and territories in the
Philippines except those he disposed of by grant or sale to private individuals.

The 1935, 1973 and 1987 Constitutions adopted the Regalian doctrine substituting,
however, the State, in lieu of the King, as the owner of all lands and waters of the public
domain. The Regalian doctrine is the foundation of the time-honored principle of land
ownership that "all lands that were not acquired from the Government, either by purchase
or by grant, belong to the public domain."[43] Article 339 of the Civil Code of 1889, which is
now Article 420 of the Civil Code of 1950, incorporated the Regalian doctrine.

Ownership and Disposition of Reclaimed Lands

The Spanish Law of Waters of 1866 was the first statutory law governing the ownership and
disposition of reclaimed lands in the Philippines. On May 18, 1907, the Philippine
Commission enacted Act No. 1654 which provided for the lease, but not the sale, of
reclaimed lands of the government to corporations and individuals. Later, on November 29,
1919, the Philippine Legislature approved Act No. 2874, the Public Land Act, which
authorized the lease, but not the sale, of reclaimed lands of the government to corporations
and individuals. On November 7, 1936, the National Assembly passed Commonwealth Act
No. 141, also known as the Public Land Act, which authorized the lease, but not the sale, of
reclaimed lands of the government to corporations and individuals. CA No. 141 continues to
this day as the general law governing the classification and disposition of lands of the public
domain.

The Spanish Law of Waters of 1866 and the Civil Code of 1889

Under the Spanish Law of Waters of 1866, the shores, bays, coves, inlets and all waters
within the maritime zone of the Spanish territory belonged to the public domain for public
use.[44] The Spanish Law of Waters of 1866 allowed the reclamation of the sea under
Article 5, which provided as follows:

"Article 5. Lands reclaimed from the sea in consequence of works constructed by the State,
or by the provinces, pueblos or private persons, with proper permission, shall become the
property of the party constructing such works, unless otherwise provided by the terms of
the grant of authority."

Under the Spanish Law of Waters, land reclaimed from the sea belonged to the party
undertaking the reclamation, provided the government issued the necessary permit and did
not reserve ownership of the reclaimed land to the State.

Article 339 of the Civil Code of 1889 defined property of public dominion as follows:

"Art. 339. Property of public dominion is -

1. That devoted to public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, riverbanks, shores, roadsteads, and that of a similar character;

2. That belonging exclusively to the State which, without being of general public use, is
employed in some public service, or in the development of the national wealth, such as
walls, fortresses, and other works for the defense of the territory, and mines, until granted
to private individuals."

Property devoted to public use referred to property open for use by the public. In contrast,
property devoted to public service referred to property used for some specific public service
and open only to those authorized to use the property.

Property of public dominion referred not only to property devoted to public use, but also to
property not so used but employed to develop the national wealth. This class of property
constituted property of public dominion although employed for some economic or
commercial activity to increase the national wealth.

Article 341 of the Civil Code of 1889 governed the re-classification of property of public
dominion into private property, to wit:

"Art. 341. Property of public dominion, when no longer devoted to public use or to the
defense of the territory, shall become a part of the private property of the State."

This provision, however, was not self-executing. The legislature, or the executive
department pursuant to law, must declare the property no longer needed for public use or
territorial defense before the government could lease or alienate the property to private
parties.[45]

Act No. 1654 of the Philippine Commission

On May 8, 1907, the Philippine Commission enacted Act No. 1654 which regulated the lease
of reclaimed and foreshore lands. The salient provisions of this law were as follows:

"Section 1. The control and disposition of the foreshore as defined in existing law, and the
title to all Government or public lands made or reclaimed by the Government by dredging or
filling or otherwise throughout the Philippine Islands, shall be retained by the Government
without prejudice to vested rights and without prejudice to rights conceded to the City of
Manila in the Luneta Extension.

Section 2. (a) The Secretary of the Interior shall cause all Government or public lands made
or reclaimed by the Government by dredging or filling or otherwise to be divided into lots or
blocks, with the necessary streets and alleyways located thereon, and shall cause plats and
plans of such surveys to be prepared and filed with the Bureau of Lands.

(b) Upon completion of such plats and plans the Governor-General shall give notice to the
public that such parts of the lands so made or reclaimed as are not needed for public
purposes will be leased for commercial and business purposes, x x x.

x x x

(e) The leases above provided for shall be disposed of to the highest and best bidder
therefore, subject to such regulations and safeguards as the Governor-General may by
executive order prescribe." (Emphasis supplied)

Act No. 1654 mandated that the government should retain title to all lands reclaimed by the
government. The Act also vested in the government control and disposition of foreshore
lands. Private parties could lease lands reclaimed by the government only if these lands
were no longer needed for public purpose. Act No. 1654 mandated public bidding in the
lease of government reclaimed lands. Act No. 1654 made government reclaimed lands sui
generis in that unlike other public lands which the government could sell to private parties,
these reclaimed lands were available only for lease to private parties.

Act No. 1654, however, did not repeal Section 5 of the Spanish Law of Waters of 1866. Act
No. 1654 did not prohibit private parties from reclaiming parts of the sea under Section 5 of
the Spanish Law of Waters. Lands reclaimed from the sea by private parties with
government permission remained private lands.

Act No. 2874 of the Philippine Legislature

On November 29, 1919, the Philippine Legislature enacted Act No. 2874, the Public Land
Act.[46] The salient provisions of Act No. 2874, on reclaimed lands, were as follows:

"Sec. 6. The Governor-General, upon the recommendation of the Secretary of Agriculture
and Natural Resources, shall from time to time classify the lands of the public domain into -

(a) Alienable or disposable,

(b) Timber, and

(c) Mineral lands, x x x.

Sec. 7. For the purposes of the government and disposition of alienable or disposable public
lands, the Governor-General, upon recommendation by the Secretary of Agriculture and
Natural Resources, shall from time to time declare what lands are open to disposition or
concession under this Act."

Sec. 8. Only those lands shall be declared open to disposition or concession which have
been officially delimited or classified x x x.

x x x

Sec. 55. Any tract of land of the public domain which, being neither timber nor mineral land,
shall be classified as suitable for residential purposes or for commercial, industrial, or other
productive purposes other than agricultural purposes, and shall be open to disposition or
concession, shall be disposed of under the provisions of this chapter, and not otherwise.

Sec. 56. The lands disposable under this title shall be classified as follows:

(a) Lands reclaimed by the Government by dredging, filling, or other means;

(b) Foreshore;

(c) Marshy lands or lands covered with water bordering upon the shores or banks of
navigable lakes or rivers;

(d) Lands not included in any of the foregoing classes.

x x x.

Sec. 58. The lands comprised in classes (a), (b), and (c) of section fifty-six shall be
disposed of to private parties by lease only and not otherwise, as soon as the Governor-
General, upon recommendation by the Secretary of Agriculture and Natural Resources, shall
declare that the same are not necessary for the public service and are open to disposition
under this chapter. The lands included in class (d) may be disposed of by sale or lease
under the provisions of this Act." (Emphasis supplied)

Section 6 of Act No. 2874 authorized the Governor-General to "classify lands of the public
domain into x x x alienable or disposable"[47] lands. Section 7 of the Act empowered the
Governor-General to "declare what lands are open to disposition or concession." Section 8
of the Act limited alienable or disposable lands only to those lands which have been
"officially delimited and classified."

Section 56 of Act No. 2874 stated that lands "disposable under this title[48] shall be
classified" as government reclaimed, foreshore and marshy lands, as well as other lands. All
these lands, however, must be suitable for residential, commercial, industrial or other
productive non-agricultural purposes. These provisions vested upon the Governor-General
the power to classify inalienable lands of the public domain into disposable lands of the
public domain. These provisions also empowered the Governor-General to classify further
such disposable lands of the public domain into government reclaimed, foreshore or marshy
lands of the public domain, as well as other non-agricultural lands.

Section 58 of Act No. 2874 categorically mandated that disposable lands of the public
domain classified as government reclaimed, foreshore and marshy lands "shall be disposed
of to private parties by lease only and not otherwise." The Governor-General, before
allowing the lease of these lands to private parties, must formally declare that the lands
were "not necessary for the public service." Act No. 2874 reiterated the State policy to lease
and not to sell government reclaimed, foreshore and marshy lands of the public domain, a
policy first enunciated in 1907 in Act No. 1654. Government reclaimed, foreshore and
marshy lands remained sui generis, as the only alienable or disposable lands of the public
domain that the government could not sell to private parties.

The rationale behind this State policy is obvious. Government reclaimed, foreshore and
marshy public lands for non-agricultural purposes retain their inherent potential as areas for
public service. This is the reason the government prohibited the sale, and only allowed the
lease, of these lands to private parties. The State always reserved these lands for some
future public service.

Act No. 2874 did not authorize the reclassification of government reclaimed, foreshore and
marshy lands into other non-agricultural lands under Section 56 (d). Lands falling under
Section 56 (d) were the only lands for non-agricultural purposes the government could sell
to private parties. Thus, under Act No. 2874, the government could not sell government
reclaimed, foreshore and marshy lands to private parties, unless the legislature passed a
law allowing their sale.[49]

Act No. 2874 did not prohibit private parties from reclaiming parts of the sea pursuant to
Section 5 of the Spanish Law of Waters of 1866. Lands reclaimed from the sea by private
parties with government permission remained private lands.

Dispositions under the 1935 Constitution

On May 14, 1935, the 1935 Constitution took effect upon its ratification by the Filipino
people. The 1935 Constitution, in adopting the Regalian doctrine, declared in Section 1,
Article XIII, that -

"Section 1. All agricultural, timber, and mineral lands of the public domain, waters,
minerals, coal, petroleum, and other mineral oils, all forces of potential energy and other
natural resources of the Philippines belong to the State, and their disposition, exploitation,
development, or utilization shall be limited to citizens of the Philippines or to corporations or
associations at least sixty per centum of the capital of which is owned by such citizens,
subject to any existing right, grant, lease, or concession at the time of the inauguration of
the Government established under this Constitution. Natural resources, with the exception
of public agricultural land, shall not be alienated, and no license, concession, or lease for the
exploitation, development, or utilization of any of the natural resources shall be granted for
a period exceeding twenty-five years, renewable for another twenty-five years, except as to
water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of water power, in which cases beneficial use may be the measure and limit of
the grant." (Emphasis supplied)

The 1935 Constitution barred the alienation of all natural resources except public
agricultural lands, which were the only natural resources the State could alienate. Thus,
foreshore lands, considered part of the State's natural resources, became inalienable by
constitutional fiat, available only for lease for 25 years, renewable for another 25 years. The
government could alienate foreshore lands only after these lands were reclaimed and
classified as alienable agricultural lands of the public domain. Government reclaimed and
marshy lands of the public domain, being neither timber nor mineral lands, fell under the
classification of public agricultural lands.[50] However, government reclaimed and marshy
lands, although subject to classification as disposable public agricultural lands, could only be
leased and not sold to private parties because of Act No. 2874.

The prohibition on private parties from acquiring ownership of government reclaimed and
marshy lands of the public domain was only a statutory prohibition and the legislature could
therefore remove such prohibition. The 1935 Constitution did not prohibit individuals and
corporations from acquiring government reclaimed and marshy lands of the public domain
that were classified as agricultural lands under existing public land laws. Section 2, Article
XIII of the 1935 Constitution provided as follows:

"Section 2. No private corporation or association may acquire, lease, or hold public
agricultural lands in excess of one thousand and twenty four hectares, nor may any
individual acquire such lands by purchase in excess of one hundred and forty hectares, or
by lease in excess of one thousand and twenty-four hectares, or by homestead in excess of
twenty-four hectares. Lands adapted to grazing, not exceeding two thousand hectares, may
be leased to an individual, private corporation, or association." (Emphasis supplied)

Still, after the effectivity of the 1935 Constitution, the legislature did not repeal Section 58
of Act No. 2874 to open for sale to private parties government reclaimed and marshy lands
of the public domain. On the contrary, the legislature continued the long established State
policy of retaining for the government title and ownership of government reclaimed and
marshy lands of the public domain.

Commonwealth Act No. 141 of the Philippine National Assembly

On November 7, 1936, the National Assembly approved Commonwealth Act No. 141, also
known as the Public Land Act, which compiled the then existing laws on lands of the public
domain. CA No. 141, as amended, remains to this day the existing general law governing
the classification and disposition of lands of the public domain other than timber and
mineral lands.[51]

Section 6 of CA No. 141 empowers the President to classify lands of the public domain into
"alienable or disposable"[52] lands of the public domain, which prior to such classification
are inalienable and outside the commerce of man. Section 7 of CA No. 141 authorizes the
President to "declare what lands are open to disposition or concession." Section 8 of CA No.
141 states that the government can declare open for disposition or concession only lands
that are "officially delimited and classified." Sections 6, 7 and 8 of CA No. 141 read as
follows:

"Sec. 6. The President, upon the recommendation of the Secretary of Agriculture and
Commerce, shall from time to time classify the lands of the public domain into -

(a) Alienable or disposable,

(b) Timber, and

(c) Mineral lands,

and may at any time and in like manner transfer such lands from one class to another,[53]
for the purpose of their administration and disposition.

Sec. 7. For the purposes of the administration and disposition of alienable or disposable
public lands, the President, upon recommendation by the Secretary of Agriculture and
Commerce, shall from time to time declare what lands are open to disposition or concession
under this Act.

Sec. 8. Only those lands shall be declared open to disposition or concession which have
been officially delimited and classified and, when practicable, surveyed, and which have not
been reserved for public or quasi-public uses, nor appropriated by the Government, nor in
any manner become private property, nor those on which a private right authorized and
recognized by this Act or any other valid law may be claimed, or which, having been
reserved or appropriated, have ceased to be so. x x x."

Thus, before the government could alienate or dispose of lands of the public domain, the
President must first officially classify these lands as alienable or disposable, and then
declare them open to disposition or concession. There must be no law reserving these lands
for public or quasi-public uses.

The salient provisions of CA No. 141, on government reclaimed, foreshore and marshy lands
of the public domain, are as follows:

"Sec. 58. Any tract of land of the public domain which, being neither timber nor mineral
land, is intended to be used for residential purposes or for commercial, industrial, or other
productive purposes other than agricultural, and is open to disposition or concession, shall
be disposed of under the provisions of this chapter and not otherwise.

Sec. 59. The lands disposable under this title shall be classified as follows:

(a) Lands reclaimed by the Government by dredging, filling, or other means;

(b) Foreshore;

(c) Marshy lands or lands covered with water bordering upon the shores or banks of
navigable lakes or rivers;

(d) Lands not included in any of the foregoing classes.

Sec. 60. Any tract of land comprised under this title may be leased or sold, as the case may
be, to any person, corporation, or association authorized to purchase or lease public lands
for agricultural purposes. x x x.

Sec. 61. The lands comprised in classes (a), (b), and (c) of section fifty-nine shall be
disposed of to private parties by lease only and not otherwise, as soon as the President,
upon recommendation by the Secretary of Agriculture, shall declare that the same are not
necessary for the public service and are open to disposition under this chapter. The lands
included in class (d) may be disposed of by sale or lease under the provisions of this Act."
(Emphasis supplied)

Section 61 of CA No. 141 readopted, after the effectivity of the 1935 Constitution, Section
58 of Act No. 2874 prohibiting the sale of government reclaimed, foreshore and marshy
disposable lands of the public domain. All these lands are intended for residential,
commercial, industrial or other non-agricultural purposes. As before, Section 61 allowed
only the lease of such lands to private parties. The government could sell to private parties
only lands falling under Section 59 (d) of CA No. 141, or those lands for non-agricultural
purposes not classified as government reclaimed, foreshore and marshy disposable lands of
the public domain. Foreshore lands, however, became inalienable under the 1935
Constitution which only allowed the lease of these lands to qualified private parties.

Section 58 of CA No. 141 expressly states that disposable lands of the public domain
intended for residential, commercial, industrial or other productive purposes other than
agricultural "shall be disposed of under the provisions of this chapter and not otherwise."
Under Section 10 of CA No. 141, the term "disposition" includes lease of the land. Any
disposition of government reclaimed, foreshore and marshy disposable lands for non-
agricultural purposes must comply with Chapter IX, Title III of CA No. 141,[54] unless a
subsequent law amended or repealed these provisions.

In his concurring opinion in the landmark case of Republic Real Estate Corporation v. Court
of Appeals,[55] Justice Reynato S. Puno summarized succinctly the law on this matter, as
follows:

"Foreshore lands are lands of public dominion intended for public use. So too are lands
reclaimed by the government by dredging, filling, or other means. Act 1654 mandated that
the control and disposition of the foreshore and lands under water remained in the national
government. Said law allowed only the 'leasing' of reclaimed land. The Public Land Acts of
1919 and 1936 also declared that the foreshore and lands reclaimed by the government
were to be "disposed of to private parties by lease only and not otherwise." Before leasing,
however, the Governor-General, upon recommendation of the Secretary of Agriculture and
Natural Resources, had first to determine that the land reclaimed was not necessary for the
public service. This requisite must have been met before the land could be disposed of. But
even then, the foreshore and lands under water were not to be alienated and sold to private
parties. The disposition of the reclaimed land was only by lease. The land remained property
of the State." (Emphasis supplied)

As observed by Justice Puno in his concurring opinion, "Commonwealth Act No. 141 has
remained in effect at present."

The State policy prohibiting the sale to private parties of government reclaimed, foreshore
and marshy alienable lands of the public domain, first implemented in 1907 was thus
reaffirmed in CA No. 141 after the 1935 Constitution took effect. The prohibition on the sale
of foreshore lands, however, became a constitutional edict under the 1935 Constitution.
Foreshore lands became inalienable as natural resources of the State, unless reclaimed by
the government and classified as agricultural lands of the public domain, in which case they
would fall under the classification of government reclaimed lands.

After the effectivity of the 1935 Constitution, government reclaimed and marshy disposable
lands of the public domain continued to be only leased and not sold to private parties.[56]
These lands remained sui generis, as the only alienable or disposable lands of the public
domain the government could not sell to private parties.

Since then and until now, the only way the government can sell to private parties
government reclaimed and marshy disposable lands of the public domain is for the
legislature to pass a law authorizing such sale. CA No. 141 does not authorize the President
to reclassify government reclaimed and marshy lands into other non-agricultural lands
under Section 59 (d). Lands classified under Section 59 (d) are the only alienable or
disposable lands for non-agricultural purposes that the government could sell to private
parties.

Moreover, Section 60 of CA No. 141 expressly requires congressional authority before lands
under Section 59 that the government previously transferred to government units or
entities could be sold to private parties. Section 60 of CA No. 141 declares that -

"Sec. 60. x x x The area so leased or sold shall be such as shall, in the judgment of the
Secretary of Agriculture and Natural Resources, be reasonably necessary for the purposes
for which such sale or lease is requested, and shall not exceed one hundred and forty-four
hectares: Provided, however, That this limitation shall not apply to grants, donations, or
transfers made to a province, municipality or branch or subdivision of the Government for
the purposes deemed by said entities conducive to the public interest; but the land so
granted, donated, or transferred to a province, municipality or branch or subdivision of the
Government shall not be alienated, encumbered, or otherwise disposed of in a manner
affecting its title, except when authorized by Congress: x x x." (Emphasis supplied)

The congressional authority required in Section 60 of CA No. 141 mirrors the legislative
authority required in Section 56 of Act No. 2874.

One reason for the congressional authority is that Section 60 of CA No. 141 exempted
government units and entities from the maximum area of public lands that could be
acquired from the State. These government units and entities should not just turn around
and sell these lands to private parties in violation of constitutional or statutory limitations.
Otherwise, the transfer of lands for non-agricultural purposes to government units and
entities could be used to circumvent constitutional limitations on ownership of alienable or
disposable lands of the public domain. In the same manner, such transfers could also be
used to evade the statutory prohibition in CA No. 141 on the sale of government reclaimed
and marshy lands of the public domain to private parties. Section 60 of CA No. 141
constitutes by operation of law a lien on these lands.[57]

In case of sale or lease of disposable lands of the public domain falling under Section 59 of
CA No. 141, Sections 63 and 67 require a public bidding. Sections 63 and 67 of CA No. 141
provide as follows:

"Sec. 63. Whenever it is decided that lands covered by this chapter are not needed for
public purposes, the Director of Lands shall ask the Secretary of Agriculture and Commerce
(now the Secretary of Natural Resources) for authority to dispose of the same. Upon receipt
of such authority, the Director of Lands shall give notice by public advertisement in the
same manner as in the case of leases or sales of agricultural public land, x x x.

Sec. 67. The lease or sale shall be made by oral bidding; and adjudication shall be made to
the highest bidder. x x x." (Emphasis supplied)

Thus, CA No. 141 mandates the Government to put to public auction all leases or sales of
alienable or disposable lands of the public domain.[58]

Like Act No. 1654 and Act No. 2874 before it, CA No. 141 did not repeal Section 5 of the
Spanish Law of Waters of 1866. Private parties could still reclaim portions of the sea with
government permission. However, the reclaimed land could become private land only if
classified as alienable agricultural land of the public domain open to disposition under CA
No. 141. The 1935 Constitution prohibited the alienation of all natural resources except
public agricultural lands.


The Civil Code of 1950

The Civil Code of 1950 readopted substantially the definition of property of public dominion
found in the Civil Code of 1889. Articles 420 and 422 of the Civil Code of 1950 state that -

"Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth.

x x x.

Art. 422. Property of public dominion, when no longer intended for public use or for public
service, shall form part of the patrimonial property of the State."

Again, the government must formally declare that the property of public dominion is no
longer needed for public use or public service, before the same could be classified as
patrimonial property of the State.[59] In the case of government reclaimed and marshy
lands of the public domain, the declaration of their being disposable, as well as the manner
of their disposition, is governed by the applicable provisions of CA No. 141.

Like the Civil Code of 1889, the Civil Code of 1950 included as property of public dominion
those properties of the State which, without being for public use, are intended for public
service or the "development of the national wealth." Thus, government reclaimed and
marshy lands of the State, even if not employed for public use or public service, if
developed to enhance the national wealth, are classified as property of public dominion.

Dispositions under the 1973 Constitution

The 1973 Constitution, which took effect on January 17, 1973, likewise adopted the
Regalian doctrine. Section 8, Article XIV of the 1973 Constitution stated that -

"Sec. 8. All lands of the public domain, waters, minerals, coal, petroleum and other mineral
oils, all forces of potential energy, fisheries, wildlife, and other natural resources of the
Philippines belong to the State. With the exception of agricultural, industrial or commercial,
residential, and resettlement lands of the public domain, natural resources shall not be
alienated, and no license, concession, or lease for the exploration, development,
exploitation, or utilization of any of the natural resources shall be granted for a period
exceeding twenty-five years, renewable for not more than twenty-five years, except as to
water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of water power, in which cases, beneficial use may be the measure and the
limit of the grant." (Emphasis supplied)

The 1973 Constitution prohibited the alienation of all natural resources with the exception of
"agricultural, industrial or commercial, residential, and resettlement lands of the public
domain." In contrast, the 1935 Constitution barred the alienation of all natural resources
except "public agricultural lands." However, the term "public agricultural lands" in the 1935
Constitution encompassed industrial, commercial, residential and resettlement lands of the
public domain.[60] If the land of public domain were neither timber nor mineral land, it
would fall under the classification of agricultural land of the public domain. Both the 1935
and 1973 Constitutions, therefore, prohibited the alienation of all natural resources except
agricultural lands of the public domain.

The 1973 Constitution, however, limited the alienation of lands of the public domain to
individuals who were citizens of the Philippines. Private corporations, even if wholly owned
by Philippine citizens, were no longer allowed to acquire alienable lands of the public domain
unlike in the 1935 Constitution. Section 11, Article XIV of the 1973 Constitution declared
that -

"Sec. 11. The Batasang Pambansa, taking into account conservation, ecological, and
development requirements of the natural resources, shall determine by law the size of land
of the public domain which may be developed, held or acquired by, or leased to, any
qualified individual, corporation, or association, and the conditions therefor. No private
corporation or association may hold alienable lands of the public domain except by lease not
to exceed one thousand hectares in area nor may any citizen hold such lands by lease in
excess of five hundred hectares or acquire by purchase, homestead or grant, in excess of
twenty-four hectares. No private corporation or association may hold by lease, concession,
license or permit, timber or forest lands and other timber or forest resources in excess of
one hundred thousand hectares. However, such area may be increased by the Batasang
Pambansa upon recommendation of the National Economic and Development Authority."
(Emphasis supplied)

Thus, under the 1973 Constitution, private corporations could hold alienable lands of the
public domain only through lease. Only individuals could now acquire alienable lands of the
public domain, and private corporations became absolutely barred from acquiring any kind
of alienable land of the public domain. The constitutional ban extended to all kinds of
alienable lands of the public domain, while the statutory ban under CA No. 141 applied only
to government reclaimed, foreshore and marshy alienable lands of the public domain.

PD No. 1084 Creating the Public Estates Authority

On February 4, 1977, then President Ferdinand Marcos issued Presidential Decree No. 1084
creating PEA, a wholly government owned and controlled corporation with a special charter.
Sections 4 and 8 of PD No. 1084, vests PEA with the following purposes and powers:

"Sec. 4. Purpose. The Authority is hereby created for the following purposes:

(a) To reclaim land, including foreshore and submerged areas, by dredging, filling or other
means, or to acquire reclaimed land;

(b) To develop, improve, acquire, administer, deal in, subdivide, dispose, lease and sell any
and all kinds of lands, buildings, estates and other forms of real property, owned, managed,
controlled and/or operated by the government;

(c) To provide for, operate or administer such service as may be necessary for the efficient,
economical and beneficial utilization of the above properties.

Sec. 5. Powers and functions of the Authority. The Authority shall, in carrying out the
purposes for which it is created, have the following powers and functions:

(a)To prescribe its by-laws.

x x x

(i) To hold lands of the public domain in excess of the area permitted to private corporations
by statute.

(j) To reclaim lands and to construct work across, or otherwise, any stream, watercourse,
canal, ditch, flume x x x.

x x x

(o) To perform such acts and exercise such functions as may be necessary for the
attainment of the purposes and objectives herein specified." (Emphasis supplied)

PD No. 1084 authorizes PEA to reclaim both foreshore and submerged areas of the public
domain. Foreshore areas are those covered and uncovered by the ebb and flow of the
tide.[61] Submerged areas are those permanently under water regardless of the ebb and
flow of the tide.[62] Foreshore and submerged areas indisputably belong to the public
domain[63] and are inalienable unless reclaimed, classified as alienable lands open to
disposition, and further declared no longer needed for public service.

The ban in the 1973 Constitution on private corporations from acquiring alienable lands of
the public domain did not apply to PEA since it was then, and until today, a fully owned
government corporation. The constitutional ban applied then, as it still applies now, only to
"private corporations and associations." PD No. 1084 expressly empowers PEA "to hold
lands of the public domain" even "in excess of the area permitted to private corporations by
statute." Thus, PEA can hold title to private lands, as well as title to lands of the public
domain.

In order for PEA to sell its reclaimed foreshore and submerged alienable lands of the public
domain, there must be legislative authority empowering PEA to sell these lands. This
legislative authority is necessary in view of Section 60 of CA No.141, which states -

"Sec. 60. x x x; but the land so granted, donated or transferred to a province, municipality,
or branch or subdivision of the Government shall not be alienated, encumbered or otherwise
disposed of in a manner affecting its title, except when authorized by Congress; x x x."
(Emphasis supplied)

Without such legislative authority, PEA could not sell but only lease its reclaimed foreshore
and submerged alienable lands of the public domain. Nevertheless, any legislative authority
granted to PEA to sell its reclaimed alienable lands of the public domain would be subject to
the constitutional ban on private corporations from acquiring alienable lands of the public
domain. Hence, such legislative authority could only benefit private individuals.

Dispositions under the 1987 Constitution

The 1987 Constitution, like the 1935 and 1973 Constitutions before it, has adopted the
Regalian doctrine. The 1987 Constitution declares that all natural resources are "owned by
the State," and except for alienable agricultural lands of the public domain, natural
resources cannot be alienated. Sections 2 and 3, Article XII of the 1987 Constitution state
that -

"Section 2. All lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and
fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control and
supervision of the State. x x x.

Section 3. Lands of the public domain are classified into agricultural, forest or timber,
mineral lands, and national parks. Agricultural lands of the public domain may be further
classified by law according to the uses which they may be devoted. Alienable lands of the
public domain shall be limited to agricultural lands. Private corporations or associations may
not hold such alienable lands of the public domain except by lease, for a period not
exceeding twenty-five years, renewable for not more than twenty-five years, and not to
exceed one thousand hectares in area. Citizens of the Philippines may lease not more than
five hundred hectares, or acquire not more than twelve hectares thereof by purchase,
homestead, or grant.

Taking into account the requirements of conservation, ecology, and development, and
subject to the requirements of agrarian reform, the Congress shall determine, by law, the
size of lands of the public domain which may be acquired, developed, held, or leased and
the conditions therefor." (Emphasis supplied)

The 1987 Constitution continues the State policy in the 1973 Constitution banning private
corporations from acquiring any kind of alienable land of the public domain. Like the 1973
Constitution, the 1987 Constitution allows private corporations to hold alienable lands of the
public domain only through lease. As in the 1935 and 1973 Constitutions, the general law
governing the lease to private corporations of reclaimed, foreshore and marshy alienable
lands of the public domain is still CA No. 141.

The Rationale behind the Constitutional Ban

The rationale behind the constitutional ban on corporations from acquiring, except through
lease, alienable lands of the public domain is not well understood. During the deliberations
of the 1986 Constitutional Commission, the commissioners probed the rationale behind this
ban, thus:

"FR. BERNAS: Mr. Vice-President, my questions have reference to page 3, line 5 which
says:

`No private corporation or association may hold alienable lands of the public domain except
by lease, not to exceed one thousand hectares in area.'

If we recall, this provision did not exist under the 1935 Constitution, but this was introduced
in the 1973 Constitution. In effect, it prohibits private corporations from acquiring alienable
public lands. But it has not been very clear in jurisprudence what the reason for this is. In
some of the cases decided in 1982 and 1983, it was indicated that the purpose of this is to
prevent large landholdings. Is that the intent of this provision?

MR. VILLEGAS: I think that is the spirit of the provision.

FR. BERNAS: In existing decisions involving the Iglesia ni Cristo, there were instances where
the Iglesia ni Cristo was not allowed to acquire a mere 313-square meter land where a
chapel stood because the Supreme Court said it would be in violation of this." (Emphasis
supplied)

In Ayog v. Cusi,[64] the Court explained the rationale behind this constitutional ban in this
way:

"Indeed, one purpose of the constitutional prohibition against purchases of public
agricultural lands by private corporations is to equitably diffuse land ownership or to
encourage 'owner-cultivatorship and the economic family-size farm' and to prevent a
recurrence of cases like the instant case. Huge landholdings by corporations or private
persons had spawned social unrest."

However, if the constitutional intent is to prevent huge landholdings, the Constitution could
have simply limited the size of alienable lands of the public domain that corporations could
acquire. The Constitution could have followed the limitations on individuals, who could
acquire not more than 24 hectares of alienable lands of the public domain under the 1973
Constitution, and not more than 12 hectares under the 1987 Constitution.

If the constitutional intent is to encourage economic family-size farms, placing the land in
the name of a corporation would be more effective in preventing the break-up of farmlands.
If the farmland is registered in the name of a corporation, upon the death of the owner, his
heirs would inherit shares in the corporation instead of subdivided parcels of the farmland.
This would prevent the continuing break-up of farmlands into smaller and smaller plots from
one generation to the next.

In actual practice, the constitutional ban strengthens the constitutional limitation on
individuals from acquiring more than the allowed area of alienable lands of the public
domain. Without the constitutional ban, individuals who already acquired the maximum area
of alienable lands of the public domain could easily set up corporations to acquire more
alienable public lands. An individual could own as many corporations as his means would
allow him. An individual could even hide his ownership of a corporation by putting his
nominees as stockholders of the corporation. The corporation is a convenient vehicle to
circumvent the constitutional limitation on acquisition by individuals of alienable lands of the
public domain.

The constitutional intent, under the 1973 and 1987 Constitutions, is to transfer ownership of
only a limited area of alienable land of the public domain to a qualified individual. This
constitutional intent is safeguarded by the provision prohibiting corporations from acquiring
alienable lands of the public domain, since the vehicle to circumvent the constitutional
intent is removed. The available alienable public lands are gradually decreasing in the face
of an ever-growing population. The most effective way to insure faithful adherence to this
constitutional intent is to grant or sell alienable lands of the public domain only to
individuals. This, it would seem, is the practical benefit arising from the constitutional ban.

The Amended Joint Venture Agreement

The subject matter of the Amended JVA, as stated in its second Whereas clause, consists of
three properties, namely:

1. "[T]hree partially reclaimed and substantially eroded islands along Emilio Aguinaldo
Boulevard in Paranaque and Las Pinas, Metro Manila, with a combined titled area of
1,578,441 square meters;"

2. "[A]nother area of 2,421,559 square meters contiguous to the three islands;" and

3. "[A]t AMARI's option as approved by PEA, an additional 350 hectares more or less to
regularize the configuration of the reclaimed area."[65]

PEA confirms that the Amended JVA involves "the development of the Freedom Islands and
further reclamation of about 250 hectares x x x," plus an option "granted to AMARI to
subsequently reclaim another 350 hectares x x x."[66]

In short, the Amended JVA covers a reclamation area of 750 hectares. Only 157.84 hectares
of the 750-hectare reclamation project have been reclaimed, and the rest of the 592.15
hectares are still submerged areas forming part of Manila Bay.

Under the Amended JVA, AMARI will reimburse PEA the sum of P1,894,129,200.00 for PEA's
"actual cost" in partially reclaiming the Freedom Islands. AMARI will also complete, at its
own expense, the reclamation of the Freedom Islands. AMARI will further shoulder all the
reclamation costs of all the other areas, totaling 592.15 hectares, still to be reclaimed.
AMARI and PEA will share, in the proportion of 70 percent and 30 percent, respectively, the
total net usable area which is defined in the Amended JVA as the total reclaimed area less
30 percent earmarked for common areas. Title to AMARI's share in the net usable area,
totaling 367.5 hectares, will be issued in the name of AMARI. Section 5.2 (c) of the
Amended JVA provides that -

"x x x, PEA shall have the duty to execute without delay the necessary deed of transfer or
conveyance of the title pertaining to AMARI's Land share based on the Land Allocation Plan.
PEA, when requested in writing by AMARI, shall then cause the issuance and delivery of the
proper certificates of title covering AMARI's Land Share in the name of AMARI, x x x;
provided, that if more than seventy percent (70%) of the titled area at any given time
pertains to AMARI, PEA shall deliver to AMARI only seventy percent (70%) of the titles
pertaining to AMARI, until such time when a corresponding proportionate area of additional
land pertaining to PEA has been titled." (Emphasis supplied)

Indisputably, under the Amended JVA AMARI will acquire and own a maximum of 367.5
hectares of reclaimed land which will be titled in its name.

To implement the Amended JVA, PEA delegated to the unincorporated PEA-AMARI joint
venture PEA's statutory authority, rights and privileges to reclaim foreshore and submerged
areas in Manila Bay. Section 3.2.a of the Amended JVA states that -

"PEA hereby contributes to the joint venture its rights and privileges to perform Rawland
Reclamation and Horizontal Development as well as own the Reclamation Area, thereby
granting the Joint Venture the full and exclusive right, authority and privilege to undertake
the Project in accordance with the Master Development Plan."

The Amended JVA is the product of a renegotiation of the original JVA dated April 25, 1995
and its supplemental agreement dated August 9, 1995.

The Threshold Issue

The threshold issue is whether AMARI, a private corporation, can acquire and own under the
Amended JVA 367.5 hectares of reclaimed foreshore and submerged areas in Manila Bay in
view of Sections 2 and 3, Article XII of the 1987 Constitution which state that:

"Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and
fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. x x x.

x x x

Section 3. x x x Alienable lands of the public domain shall be limited to agricultural lands.
Private corporations or associations may not hold such alienable lands of the public domain
except by lease, x x x."(Emphasis supplied)

Classification of Reclaimed Foreshore and Submerged Areas

PEA readily concedes that lands reclaimed from foreshore or submerged areas of Manila Bay
are alienable or disposable lands of the public domain. In its Memorandum,[67] PEA admits
that -

"Under the Public Land Act (CA 141, as amended), reclaimed lands are classified as
alienable and disposable lands of the public domain:

'Sec. 59. The lands disposable under this title shall be classified as follows:

(a) Lands reclaimed by the government by dredging, filling, or other means;

x x x.'" (Emphasis supplied)

Likewise, the Legal Task Force[68] constituted under Presidential Administrative Order No.
365 admitted in its Report and Recommendation to then President Fidel V. Ramos,
"[R]eclaimed lands are classified as alienable and disposable lands of the public
domain."[69] The Legal Task Force concluded that -

"D. Conclusion

Reclaimed lands are lands of the public domain. However, by statutory authority, the rights
of ownership and disposition over reclaimed lands have been transferred to PEA, by virtue
of which PEA, as owner, may validly convey the same to any qualified person without
violating the Constitution or any statute.

The constitutional provision prohibiting private corporations from holding public land, except
by lease (Sec. 3, Art. XVII,[70] 1987 Constitution), does not apply to reclaimed lands whose
ownership has passed on to PEA by statutory grant."

Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged areas of
Manila Bay are part of the "lands of the public domain, waters x x x and other natural
resources" and consequently "owned by the State." As such, foreshore and submerged
areas "shall not be alienated," unless they are classified as "agricultural lands" of the public
domain. The mere reclamation of these areas by PEA does not convert these inalienable
natural resources of the State into alienable or disposable lands of the public domain. There
must be a law or presidential proclamation officially classifying these reclaimed lands as
alienable or disposable and open to disposition or concession. Moreover, these reclaimed
lands cannot be classified as alienable or disposable if the law has reserved them for some
public or quasi-public use.[71]

Section 8 of CA No. 141 provides that "only those lands shall be declared open to disposition
or concession which have been officially delimited and classified."[72] The President has the
authority to classify inalienable lands of the public domain into alienable or disposable lands
of the public domain, pursuant to Section 6 of CA No. 141. In Laurel vs. Garcia,[73] the
Executive Department attempted to sell the Roppongi property in Tokyo, Japan, which was
acquired by the Philippine Government for use as the Chancery of the Philippine Embassy.
Although the Chancery had transferred to another location thirteen years earlier, the Court
still ruled that, under Article 422[74] of the Civil Code, a property of public dominion retains
such character until formally declared otherwise. The Court ruled that -

"The fact that the Roppongi site has not been used for a long time for actual Embassy
service does not automatically convert it to patrimonial property. Any such conversion
happens only if the property is withdrawn from public use (Cebu Oxygen and Acetylene Co.
v. Bercilles, 66 SCRA 481 [1975]. A property continues to be part of the public domain, not
available for private appropriation or ownership 'until there is a formal declaration on the
part of the government to withdraw it from being such' (Ignacio v. Director of Lands, 108
Phil. 335 [1960]." (Emphasis supplied)

PD No. 1085, issued on February 4, 1977, authorized the issuance of special land patents
for lands reclaimed by PEA from the foreshore or submerged areas of Manila Bay. On
January 19, 1988 then President Corazon C. Aquino issued Special Patent No. 3517 in the
name of PEA for the 157.84 hectares comprising the partially reclaimed Freedom Islands.
Subsequently, on April 9, 1999 the Register of Deeds of the Municipality of Paranaque
issued TCT Nos. 7309, 7311 and 7312 in the name of PEA pursuant to Section 103 of PD
No. 1529 authorizing the issuance of certificates of title corresponding to land patents. To
this day, these certificates of title are still in the name of PEA.

PD No. 1085, coupled with President Aquino's actual issuance of a special patent covering
the Freedom Islands, is equivalent to an official proclamation classifying the Freedom
Islands as alienable or disposable lands of the public domain. PD No. 1085 and President
Aquino's issuance of a land patent also constitute a declaration that the Freedom Islands are
no longer needed for public service. The Freedom Islands are thus alienable or disposable
lands of the public domain, open to disposition or concession to qualified parties.

At the time then President Aquino issued Special Patent No. 3517, PEA had already
reclaimed the Freedom Islands although subsequently there were partial erosions on some
areas. The government had also completed the necessary surveys on these islands. Thus,
the Freedom Islands were no longer part of Manila Bay but part of the land mass. Section 3,
Article XII of the 1987 Constitution classifies lands of the public domain into "agricultural,
forest or timber, mineral lands, and national parks." Being neither timber, mineral, nor
national park lands, the reclaimed Freedom Islands necessarily fall under the classification
of agricultural lands of the public domain. Under the 1987 Constitution, agricultural lands of
the public domain are the only natural resources that the State may alienate to qualified
private parties. All other natural resources, such as the seas or bays, are "waters x x x
owned by the State" forming part of the public domain, and are inalienable pursuant to
Section 2, Article XII of the 1987 Constitution.

AMARI claims that the Freedom Islands are private lands because CDCP, then a private
corporation, reclaimed the islands under a contract dated November 20, 1973 with the
Commissioner of Public Highways. AMARI, citing Article 5 of the Spanish Law of Waters of
1866, argues that "if the ownership of reclaimed lands may be given to the party
constructing the works, then it cannot be said that reclaimed lands are lands of the public
domain which the State may not alienate."[75] Article 5 of the Spanish Law of Waters reads
as follows:

"Article 5. Lands reclaimed from the sea in consequence of works constructed by the State,
or by the provinces, pueblos or private persons, with proper permission, shall become the
property of the party constructing such works, unless otherwise provided by the terms of
the grant of authority." (Emphasis supplied)

Under Article 5 of the Spanish Law of Waters of 1866, private parties could reclaim from the
sea only with "proper permission" from the State. Private parties could own the reclaimed
land only if not "otherwise provided by the terms of the grant of authority." This clearly
meant that no one could reclaim from the sea without permission from the State because
the sea is property of public dominion. It also meant that the State could grant or withhold
ownership of the reclaimed land because any reclaimed land, like the sea from which it
emerged, belonged to the State. Thus, a private person reclaiming from the sea without
permission from the State could not acquire ownership of the reclaimed land which would
remain property of public dominion like the sea it replaced.[76] Article 5 of the Spanish Law
of Waters of 1866 adopted the time-honored principle of land ownership that "all lands that
were not acquired from the government, either by purchase or by grant, belong to the
public domain."[77]

Article 5 of the Spanish Law of Waters must be read together with laws subsequently
enacted on the disposition of public lands. In particular, CA No. 141 requires that lands of
the public domain must first be classified as alienable or disposable before the government
can alienate them. These lands must not be reserved for public or quasi-public
purposes.[78] Moreover, the contract between CDCP and the government was executed
after the effectivity of the 1973 Constitution which barred private corporations from
acquiring any kind of alienable land of the public domain. This contract could not have
converted the Freedom Islands into private lands of a private corporation.

Presidential Decree No. 3-A, issued on January 11, 1973, revoked all laws authorizing the
reclamation of areas under water and revested solely in the National Government the power
to reclaim lands. Section 1 of PD No. 3-A declared that -

"The provisions of any law to the contrary notwithstanding, the reclamation of areas under
water, whether foreshore or inland, shall be limited to the National Government or any
person authorized by it under a proper contract. (Emphasis supplied)

x x x."

PD No. 3-A repealed Section 5 of the Spanish Law of Waters of 1866 because reclamation of
areas under water could now be undertaken only by the National Government or by a
person contracted by the National Government. Private parties may reclaim from the sea
only under a contract with the National Government, and no longer by grant or permission
as provided in Section 5 of the Spanish Law of Waters of 1866.

Executive Order No. 525, issued on February 14, 1979, designated PEA as the National
Government's implementing arm to undertake "all reclamation projects of the government,"
which "shall be undertaken by the PEA or through a proper contract executed by it with any
person or entity." Under such contract, a private party receives compensation for
reclamation services rendered to PEA. Payment to the contractor may be in cash, or in kind
consisting of portions of the reclaimed land, subject to the constitutional ban on private
corporations from acquiring alienable lands of the public domain. The reclaimed land can be
used as payment in kind only if the reclaimed land is first classified as alienable or
disposable land open to disposition, and then declared no longer needed for public service.

The Amended JVA covers not only the Freedom Islands, but also an additional 592.15
hectares which are still submerged and forming part of Manila Bay. There is no legislative or
Presidential act classifying these submerged areas as alienable or disposable lands of the
public domain open to disposition. These submerged areas are not covered by any patent or
certificate of title. There can be no dispute that these submerged areas form part of the
public domain, and in their present state are inalienable and outside the commerce of man.
Until reclaimed from the sea, these submerged areas are, under the Constitution, "waters x
x x owned by the State," forming part of the public domain and consequently inalienable.
Only when actually reclaimed from the sea can these submerged areas be classified as
public agricultural lands, which under the Constitution are the only natural resources that
the State may alienate. Once reclaimed and transformed into public agricultural lands, the
government may then officially classify these lands as alienable or disposable lands open to
disposition. Thereafter, the government may declare these lands no longer needed for
public service. Only then can these reclaimed lands be considered alienable or disposable
lands of the public domain and within the commerce of man.

The classification of PEA's reclaimed foreshore and submerged lands into alienable or
disposable lands open to disposition is necessary because PEA is tasked under its charter to
undertake public services that require the use of lands of the public domain. Under Section
5 of PD No. 1084, the functions of PEA include the following: "[T]o own or operate railroads,
tramways and other kinds of land transportation, x x x; [T]o construct, maintain and
operate such systems of sanitary sewers as may be necessary; [T]o construct, maintain and
operate such storm drains as may be necessary." PEA is empowered to issue "rules and
regulations as may be necessary for the proper use by private parties of any or all of the
highways, roads, utilities, buildings and/or any of its properties and to impose or collect fees
or tolls for their use." Thus, part of the reclaimed foreshore and submerged lands held by
the PEA would actually be needed for public use or service since many of the functions
imposed on PEA by its charter constitute essential public services.

Moreover, Section 1 of Executive Order No. 525 provides that PEA "shall be primarily
responsible for integrating, directing, and coordinating all reclamation projects for and on
behalf of the National Government." The same section also states that "[A]ll reclamation
projects shall be approved by the President upon recommendation of the PEA, and shall be
undertaken by the PEA or through a proper contract executed by it with any person or
entity; x x x." Thus, under EO No. 525, in relation to PD No. 3-A and PD No.1084, PEA
became the primary implementing agency of the National Government to reclaim foreshore
and submerged lands of the public domain. EO No. 525 recognized PEA as the government
entity "to undertake the reclamation of lands and ensure their maximum utilization in
promoting public welfare and interests."[79] Since large portions of these reclaimed lands
would obviously be needed for public service, there must be a formal declaration
segregating reclaimed lands no longer needed for public service from those still needed for
public service.

Section 3 of EO No. 525, by declaring that all lands reclaimed by PEA "shall belong to or be
owned by the PEA," could not automatically operate to classify inalienable lands into
alienable or disposable lands of the public domain. Otherwise, reclaimed foreshore and
submerged lands of the public domain would automatically become alienable once reclaimed
by PEA, whether or not classified as alienable or disposable.

The Revised Administrative Code of 1987, a later law than either PD No. 1084 or EO No.
525, vests in the Department of Environment and Natural Resources ("DENR" for brevity)
the following powers and functions:

"Sec. 4. Powers and Functions. The Department shall:

(1) x x x

x x x

(4) Exercise supervision and control over forest lands, alienable and disposable public lands,
mineral resources and, in the process of exercising such control, impose appropriate taxes,
fees, charges, rentals and any such form of levy and collect such revenues for the
exploration, development, utilization or gathering of such resources;

x x x

(14) Promulgate rules, regulations and guidelines on the issuance of licenses, permits,
concessions, lease agreements and such other privileges concerning the development,
exploration and utilization of the country's marine, freshwater, and brackish water and over
all aquatic resources of the country and shall continue to oversee, supervise and police our
natural resources; cancel or cause to cancel such privileges upon failure, non-compliance or
violations of any regulation, order, and for all other causes which are in furtherance of the
conservation of natural resources and supportive of the national interest;

(15) Exercise exclusive jurisdiction on the management and disposition of all lands of the
public domain and serve as the sole agency responsible for classification, sub-classification,
surveying and titling of lands in consultation with appropriate agencies."[80] (Emphasis
supplied)

As manager, conservator and overseer of the natural resources of the State, DENR
exercises "supervision and control over alienable and disposable public lands." DENR also
exercises "exclusive jurisdiction on the management and disposition of all lands of the public
domain." Thus, DENR decides whether areas under water, like foreshore or submerged
areas of Manila Bay, should be reclaimed or not. This means that PEA needs authorization
from DENR before PEA can undertake reclamation projects in Manila Bay, or in any part of
the country.

DENR also exercises exclusive jurisdiction over the disposition of all lands of the public
domain. Hence, DENR decides whether reclaimed lands of PEA should be classified as
alienable under Sections 6[81] and 7[82] of CA No. 141. Once DENR decides that the
reclaimed lands should be so classified, it then recommends to the President the issuance of
a proclamation classifying the lands as alienable or disposable lands of the public domain
open to disposition. We note that then DENR Secretary Fulgencio S. Factoran, Jr.
countersigned Special Patent No. 3517 in compliance with the Revised Administrative Code
and Sections 6 and 7 of CA No. 141.

In short, DENR is vested with the power to authorize the reclamation of areas under water,
while PEA is vested with the power to undertake the physical reclamation of areas under
water, whether directly or through private contractors. DENR is also empowered to classify
lands of the public domain into alienable or disposable lands subject to the approval of the
President. On the other hand, PEA is tasked to develop, sell or lease the reclaimed alienable
lands of the public domain.

Clearly, the mere physical act of reclamation by PEA of foreshore or submerged areas does
not make the reclaimed lands alienable or disposable lands of the public domain, much less
patrimonial lands of PEA. Likewise, the mere transfer by the National Government of lands
of the public domain to PEA does not make the lands alienable or disposable lands of the
public domain, much less patrimonial lands of PEA.

Absent two official acts - a classification that these lands are alienable or disposable and
open to disposition and a declaration that these lands are not needed for public service,
lands reclaimed by PEA remain inalienable lands of the public domain. Only such an official
classification and formal declaration can convert reclaimed lands into alienable or disposable
lands of the public domain, open to disposition under the Constitution, Title I and Title
III[83] of CA No. 141 and other applicable laws.[84]


PEA's Authority to Sell Reclaimed Lands

PEA, like the Legal Task Force, argues that as alienable or disposable lands of the public
domain, the reclaimed lands shall be disposed of in accordance with CA No. 141, the Public
Land Act. PEA, citing Section 60 of CA No. 141, admits that reclaimed lands transferred to a
branch or subdivision of the government "shall not be alienated, encumbered, or otherwise
disposed of in a manner affecting its title, except when authorized by Congress: x x x."[85]
(Emphasis by PEA)

In Laurel vs. Garcia,[86] the Court cited Section 48 of the Revised Administrative Code of
1987, which states that -

"Sec. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following: x x x."

Thus, the Court concluded that a law is needed to convey any real property belonging to the
Government. The Court declared that -

"It is not for the President to convey real property of the government on his or her own sole
will. Any such conveyance must be authorized and approved by a law enacted by the
Congress. It requires executive and legislative concurrence." (Emphasis supplied)

PEA contends that PD No. 1085 and EO No. 525 constitute the legislative authority allowing
PEA to sell its reclaimed lands. PD No. 1085, issued on February 4, 1977, provides that -

"The land reclaimed in the foreshore and offshore area of Manila Bay pursuant to the
contract for the reclamation and construction of the Manila-Cavite Coastal Road Project
between the Republic of the Philippines and the Construction and Development Corporation
of the Philippines dated November 20, 1973 and/or any other contract or reclamation
covering the same area is hereby transferred, conveyed and assigned to the ownership and
administration of the Public Estates Authority established pursuant to PD No. 1084;
Provided, however, That the rights and interests of the Construction and Development
Corporation of the Philippines pursuant to the aforesaid contract shall be recognized and
respected.

Henceforth, the Public Estates Authority shall exercise the rights and assume the obligations
of the Republic of the Philippines (Department of Public Highways) arising from, or incident
to, the aforesaid contract between the Republic of the Philippines and the Construction and
Development Corporation of the Philippines.

In consideration of the foregoing transfer and assignment, the Public Estates Authority shall
issue in favor of the Republic of the Philippines the corresponding shares of stock in said
entity with an issued value of said shares of stock (which) shall be deemed fully paid and
non-assessable.

The Secretary of Public Highways and the General Manager of the Public Estates Authority
shall execute such contracts or agreements, including appropriate agreements with the
Construction and Development Corporation of the Philippines, as may be necessary to
implement the above.

Special land patent/patents shall be issued by the Secretary of Natural Resources in favor of
the Public Estates Authority without prejudice to the subsequent transfer to the contractor
or his assignees of such portion or portions of the land reclaimed or to be reclaimed as
provided for in the above-mentioned contract. On the basis of such patents, the Land
Registration Commission shall issue the corresponding certificate of title." (Emphasis
supplied)

On the other hand, Section 3 of EO No. 525, issued on February 14, 1979, provides that -

"Sec. 3. All lands reclaimed by PEA shall belong to or be owned by the PEA which shall be
responsible for its administration, development, utilization or disposition in accordance with
the provisions of Presidential Decree No. 1084. Any and all income that the PEA may derive
from the sale, lease or use of reclaimed lands shall be used in accordance with the
provisions of Presidential Decree No. 1084."

There is no express authority under either PD No. 1085 or EO No. 525 for PEA to sell its
reclaimed lands. PD No. 1085 merely transferred "ownership and administration" of lands
reclaimed from Manila Bay to PEA, while EO No. 525 declared that lands reclaimed by PEA
"shall belong to or be owned by PEA." EO No. 525 expressly states that PEA should dispose
of its reclaimed lands "in accordance with the provisions of Presidential Decree No. 1084,"
the charter of PEA.

PEA's charter, however, expressly tasks PEA "to develop, improve, acquire, administer, deal
in, subdivide, dispose, lease and sell any and all kinds of lands x x x owned, managed,
controlled and/or operated by the government."[87] (Emphasis supplied) There is,
therefore, legislative authority granted to PEA to sell its lands, whether patrimonial or
alienable lands of the public domain. PEA may sell to private parties its patrimonial
properties in accordance with the PEA charter free from constitutional limitations. The
constitutional ban on private corporations from acquiring alienable lands of the public
domain does not apply to the sale of PEA's patrimonial lands.

PEA may also sell its alienable or disposable lands of the public domain to private individuals
since, with the legislative authority, there is no longer any statutory prohibition against such
sales and the constitutional ban does not apply to individuals. PEA, however, cannot sell any
of its alienable or disposable lands of the public domain to private corporations since Section
3, Article XII of the 1987 Constitution expressly prohibits such sales. The legislative
authority benefits only individuals. Private corporations remain barred from acquiring any
kind of alienable land of the public domain, including government reclaimed lands.

The provision in PD No. 1085 stating that portions of the reclaimed lands could be
transferred by PEA to the "contractor or his assignees" (Emphasis supplied) would not apply
to private corporations but only to individuals because of the constitutional ban. Otherwise,
the provisions of PD No. 1085 would violate both the 1973 and 1987 Constitutions.

The requirement of public auction in the sale of reclaimed lands

Assuming the reclaimed lands of PEA are classified as alienable or disposable lands open to
disposition, and further declared no longer needed for public service, PEA would have to
conduct a public bidding in selling or leasing these lands. PEA must observe the provisions
of Sections 63 and 67 of CA No. 141 requiring public auction, in the absence of a law
exempting PEA from holding a public auction.[88] Special Patent No. 3517 expressly states
that the patent is issued by authority of the Constitution and PD No. 1084, "supplemented
by Commonwealth Act No. 141, as amended." This is an acknowledgment that the
provisions of CA No. 141 apply to the disposition of reclaimed alienable lands of the public
domain unless otherwise provided by law. Executive Order No. 654,[89] which authorizes
PEA "to determine the kind and manner of payment for the transfer" of its assets and
properties, does not exempt PEA from the requirement of public auction. EO No. 654 merely
authorizes PEA to decide the mode of payment, whether in kind and in installment, but does
not authorize PEA to dispense with public auction.

Moreover, under Section 79 of PD No. 1445, otherwise known as the Government Auditing
Code, the government is required to sell valuable government property through public
bidding. Section 79 of PD No. 1445 mandates that -

"Section 79. When government property has become unserviceable for any cause, or is no
longer needed, it shall, upon application of the officer accountable therefor, be inspected by
the head of the agency or his duly authorized representative in the presence of the auditor
concerned and, if found to be valueless or unsaleable, it may be destroyed in their
presence. If found to be valuable, it may be sold at public auction to the highest bidder
under the supervision of the proper committee on award or similar body in the presence of
the auditor concerned or other authorized representative of the Commission, after
advertising by printed notice in the Official Gazette, or for not less than three consecutive
days in any newspaper of general circulation, or where the value of the property does not
warrant the expense of publication, by notices posted for a like period in at least three
public places in the locality where the property is to be sold. In the event that the public
auction fails, the property may be sold at a private sale at such price as may be fixed by the
same committee or body concerned and approved by the Commission."

It is only when the public auction fails that a negotiated sale is allowed, in which case the
Commission on Audit must approve the selling price.[90] The Commission on Audit
implements Section 79 of the Government Auditing Code through Circular No. 89-296[91]
dated January 27, 1989. This circular emphasizes that government assets must be disposed
of only through public auction, and a negotiated sale can be resorted to only in case of
"failure of public auction."

At the public auction sale, only Philippine citizens are qualified to bid for PEA's reclaimed
foreshore and submerged alienable lands of the public domain. Private corporations are
barred from bidding at the auction sale of any kind of alienable land of the public domain.

PEA originally scheduled a public bidding for the Freedom Islands on December 10, 1991.
PEA imposed a condition that the winning bidder should reclaim another 250 hectares of
submerged areas to regularize the shape of the Freedom Islands, under a 60-40 sharing of
the additional reclaimed areas in favor of the winning bidder.[92] No one, however,
submitted a bid. On December 23, 1994, the Government Corporate Counsel advised PEA it
could sell the Freedom Islands through negotiation, without need of another public bidding,
because of the failure of the public bidding on December 10, 1991.[93]

However, the original JVA dated April 25, 1995 covered not only the Freedom Islands and
the additional 250 hectares still to be reclaimed, it also granted an option to AMARI to
reclaim another 350 hectares. The original JVA, a negotiated contract, enlarged the
reclamation area to 750 hectares.[94] The failure of public bidding on December 10, 1991,
involving only 407.84 hectares,[95] is not a valid justification for a negotiated sale of 750
hectares, almost double the area publicly auctioned. Besides, the failure of public bidding
happened on December 10, 1991, more than three years before the signing of the original
JVA on April 25, 1995. The economic situation in the country had greatly improved during
the intervening period.

Reclamation under the BOT Law and the Local Government Code

The constitutional prohibition in Section 3, Article XII of the 1987 Constitution is absolute
and clear: "Private corporations or associations may not hold such alienable lands of the
public domain except by lease, x x x." Even Republic Act No. 6957 ("BOT Law," for brevity),
cited by PEA and AMARI as legislative authority to sell reclaimed lands to private parties,
recognizes the constitutional ban. Section 6 of RA No. 6957 states -

"Sec. 6. Repayment Scheme. - For the financing, construction, operation and maintenance
of any infrastructure projects undertaken through the build-operate-and-transfer
arrangement or any of its variations pursuant to the provisions of this Act, the project
proponent x x x may likewise be repaid in the form of a share in the revenue of the project
or other non-monetary payments, such as, but not limited to, the grant of a portion or
percentage of the reclaimed land, subject to the constitutional requirements with respect to
the ownership of the land: x x x." (Emphasis supplied)

A private corporation, even one that undertakes the physical reclamation of a government
BOT project, cannot acquire reclaimed alienable lands of the public domain in view of the
constitutional ban.

Section 302 of the Local Government Code, also mentioned by PEA and AMARI, authorizes
local governments in land reclamation projects to pay the contractor or developer in kind
consisting of a percentage of the reclaimed land, to wit:

"Section 302. Financing, Construction, Maintenance, Operation, and Management of
Infrastructure Projects by the Private Sector. x x x

x x x

In case of land reclamation or construction of industrial estates, the repayment plan may
consist of the grant of a portion or percentage of the reclaimed land or the industrial estate
constructed."

Although Section 302 of the Local Government Code does not contain a proviso similar to
that of the BOT Law, the constitutional restrictions on land ownership automatically apply
even though not expressly mentioned in the Local Government Code.

Thus, under either the BOT Law or the Local Government Code, the contractor or developer,
if a corporate entity, can only be paid with leaseholds on portions of the reclaimed land. If
the contractor or developer is an individual, portions of the reclaimed land, not exceeding
12 hectares[96] of non-agricultural lands, may be conveyed to him in ownership in view of
the legislative authority allowing such conveyance. This is the only way these provisions of
the BOT Law and the Local Government Code can avoid a direct collision with Section 3,
Article XII of the 1987 Constitution.

Registration of lands of the public domain

Finally, PEA theorizes that the "act of conveying the ownership of the reclaimed lands to
public respondent PEA transformed such lands of the public domain to private lands." This
theory is echoed by AMARI which maintains that the "issuance of the special patent leading
to the eventual issuance of title takes the subject land away from the land of public domain
and converts the property into patrimonial or private property." In short, PEA and AMARI
contend that with the issuance of Special Patent No. 3517 and the corresponding certificates
of titles, the 157.84 hectares comprising the Freedom Islands have become private lands of
PEA. In support of their theory, PEA and AMARI cite the following rulings of the Court:

1. Sumail v. Judge of CFI of Cotabato,[97] where the Court held -

"Once the patent was granted and the corresponding certificate of title was issued, the land
ceased to be part of the public domain and became private property over which the Director
of Lands has neither control nor jurisdiction."

2. Lee Hong Hok v. David,[98] where the Court declared -

"After the registration and issuance of the certificate and duplicate certificate of title based
on a public land patent, the land covered thereby automatically comes under the operation
of Republic Act 496 subject to all the safeguards provided therein."


3. Heirs of Gregorio Tengco v. Heirs of Jose Aliwalas,[99] where the Court ruled -

"While the Director of Lands has the power to review homestead patents, he may do so only
so long as the land remains part of the public domain and continues to be under his
exclusive control; but once the patent is registered and a certificate of title is issued, the
land ceases to be part of the public domain and becomes private property over which the
Director of Lands has neither control nor jurisdiction."

4. Manalo v. Intermediate Appellate Court,[100] where the Court held -

"When the lots in dispute were certified as disposable on May 19, 1971, and free patents
were issued covering the same in favor of the private respondents, the said lots ceased to
be part of the public domain and, therefore, the Director of Lands lost jurisdiction over the
same."

5.Republic v. Court of Appeals,[101] where the Court stated -

"Proclamation No. 350, dated October 9, 1956, of President Magsaysay legally effected a
land grant to the Mindanao Medical Center, Bureau of Medical Services, Department of
Health, of the whole lot, validly sufficient for initial registration under the Land Registration
Act. Such land grant is constitutive of a 'fee simple' title or absolute title in favor of
petitioner Mindanao Medical Center. Thus, Section 122 of the Act, which governs the
registration of grants or patents involving public lands, provides that 'Whenever public lands
in the Philippine Islands belonging to the Government of the United States or to the
Government of the Philippines are alienated, granted or conveyed to persons or to public or
private corporations, the same shall be brought forthwith under the operation of this Act
(Land Registration Act, Act 496) and shall become registered lands.'"

The first four cases cited involve petitions to cancel the land patents and the corresponding
certificates of titles issued to private parties. These four cases uniformly hold that the
Director of Lands has no jurisdiction over private lands or that upon issuance of the
certificate of title the land automatically comes under the Torrens System. The fifth case
cited involves the registration under the Torrens System of a 12.8-hectare public land
granted by the National Government to Mindanao Medical Center, a government unit under
the Department of Health. The National Government transferred the 12.8-hectare public
land to serve as the site for the hospital buildings and other facilities of Mindanao Medical
Center, which performed a public service. The Court affirmed the registration of the 12.8-
hectare public land in the name of Mindanao Medical Center under Section 122 of Act No.
496. This fifth case is an example of a public land being registered under Act No. 496
without the land losing its character as a property of public dominion.

In the instant case, the only patent and certificates of title issued are those in the name of
PEA, a wholly government owned corporation performing public as well as proprietary
functions. No patent or certificate of title has been issued to any private party. No one is
asking the Director of Lands to cancel PEA's patent or certificates of title. In fact, the thrust
of the instant petition is that PEA's certificates of title should remain with PEA, and the land
covered by these certificates, being alienable lands of the public domain, should not be sold
to a private corporation.

Registration of land under Act No. 496 or PD No. 1529 does not vest in the registrant
private or public ownership of the land. Registration is not a mode of acquiring ownership
but is merely evidence of ownership previously conferred by any of the recognized modes of
acquiring ownership. Registration does not give the registrant a better right than what the
registrant had prior to the registration.[102] The registration of lands of the public domain
under the Torrens system, by itself, cannot convert public lands into private lands.[103]

Jurisprudence holding that upon the grant of the patent or issuance of the certificate of title
the alienable land of the public domain automatically becomes private land cannot apply to
government units and entities like PEA. The transfer of the Freedom Islands to PEA was
made subject to the provisions of CA No. 141 as expressly stated in Special Patent No. 3517
issued by then President Aquino, to wit:

"NOW, THEREFORE, KNOW YE, that by authority of the Constitution of the Philippines and in
conformity with the provisions of Presidential Decree No. 1084, supplemented by
Commonwealth Act No. 141, as amended, there are hereby granted and conveyed unto the
Public Estates Authority the aforesaid tracts of land containing a total area of one million
nine hundred fifteen thousand eight hundred ninety four (1,915,894) square meters; the
technical description of which are hereto attached and made an integral part hereof."
(Emphasis supplied)

Thus, the provisions of CA No. 141 apply to the Freedom Islands on matters not covered by
PD No. 1084. Section 60 of CA No. 141 prohibits, "except when authorized by Congress,"
the sale of alienable lands of the public domain that are transferred to government units or
entities. Section 60 of CA No. 141 constitutes, under Section 44 of PD No. 1529, a
"statutory lien affecting title" of the registered land even if not annotated on the certificate
of title.[104] Alienable lands of the public domain held by government entities under
Section 60 of CA No. 141 remain public lands because they cannot be alienated or
encumbered unless Congress passes a law authorizing their disposition. Congress, however,
cannot authorize the sale to private corporations of reclaimed alienable lands of the public
domain because of the constitutional ban. Only individuals can benefit from such law.

The grant of legislative authority to sell public lands in accordance with Section 60 of CA No.
141 does not automatically convert alienable lands of the public domain into private or
patrimonial lands. The alienable lands of the public domain must be transferred to qualified
private parties, or to government entities not tasked to dispose of public lands, before these
lands can become private or patrimonial lands. Otherwise, the constitutional ban will
become illusory if Congress can declare lands of the public domain as private or patrimonial
lands in the hands of a government agency tasked to dispose of public lands. This will allow
private corporations to acquire directly from government agencies limitless areas of lands
which, prior to such law, are concededly public lands.

Under EO No. 525, PEA became the central implementing agency of the National
Government to reclaim foreshore and submerged areas of the public domain. Thus, EO No.
525 declares that -

"EXECUTIVE ORDER NO. 525

Designating the Public Estates Authority as the Agency Primarily Responsible for all
Reclamation Projects

Whereas, there are several reclamation projects which are ongoing or being proposed to be
undertaken in various parts of the country which need to be evaluated for consistency with
national programs;

Whereas, there is a need to give further institutional support to the Government's declared
policy to provide for a coordinated, economical and efficient reclamation of lands;

Whereas, Presidential Decree No. 3-A requires that all reclamation of areas shall be limited
to the National Government or any person authorized by it under proper contract;

Whereas, a central authority is needed to act on behalf of the National Government which
shall ensure a coordinated and integrated approach in the reclamation of lands;

Whereas, Presidential Decree No. 1084 creates the Public Estates Authority as a
government corporation to undertake reclamation of lands and ensure their maximum
utilization in promoting public welfare and interests; and

Whereas, Presidential Decree No. 1416 provides the President with continuing authority to
reorganize the national government including the transfer, abolition, or merger of functions
and offices.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the
powers vested in me by the Constitution and pursuant to Presidential Decree No. 1416, do
hereby order and direct the following:

Section 1. The Public Estates Authority (PEA) shall be primarily responsible for integrating,
directing, and coordinating all reclamation projects for and on behalf of the National
Government. All reclamation projects shall be approved by the President upon
recommendation of the PEA, and shall be undertaken by the PEA or through a proper
contract executed by it with any person or entity; Provided, that, reclamation projects of
any national government agency or entity authorized under its charter shall be undertaken
in consultation with the PEA upon approval of the President.

x x x ."

As the central implementing agency tasked to undertake reclamation projects nationwide,
with authority to sell reclaimed lands, PEA took the place of DENR as the government
agency charged with leasing or selling reclaimed lands of the public domain. The reclaimed
lands being leased or sold by PEA are not private lands, in the same manner that DENR,
when it disposes of other alienable lands, does not dispose of private lands but alienable
lands of the public domain. Only when qualified private parties acquire these lands will the
lands become private lands. In the hands of the government agency tasked and authorized
to dispose of alienable of disposable lands of the public domain, these lands are still public,
not private lands.

Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public domain"
as well as "any and all kinds of lands." PEA can hold both lands of the public domain and
private lands. Thus, the mere fact that alienable lands of the public domain like the Freedom
Islands are transferred to PEA and issued land patents or certificates of title in PEA's name
does not automatically make such lands private.

To allow vast areas of reclaimed lands of the public domain to be transferred to PEA as
private lands will sanction a gross violation of the constitutional ban on private corporations
from acquiring any kind of alienable land of the public domain. PEA will simply turn around,
as PEA has now done under the Amended JVA, and transfer several hundreds of hectares of
these reclaimed and still to be reclaimed lands to a single private corporation in only one
transaction. This scheme will effectively nullify the constitutional ban in Section 3, Article XII
of the 1987 Constitution which was intended to diffuse equitably the ownership of alienable
lands of the public domain among Filipinos, now numbering over 80 million strong.

This scheme, if allowed, can even be applied to alienable agricultural lands of the public
domain since PEA can "acquire x x x any and all kinds of lands." This will open the
floodgates to corporations and even individuals acquiring hundreds of hectares of alienable
lands of the public domain under the guise that in the hands of PEA these lands are private
lands. This will result in corporations amassing huge landholdings never before seen in this
country - creating the very evil that the constitutional ban was designed to prevent. This will
completely reverse the clear direction of constitutional development in this country. The
1935 Constitution allowed private corporations to acquire not more than 1,024 hectares of
public lands.[105] The 1973 Constitution prohibited private corporations from acquiring any
kind of public land, and the 1987 Constitution has unequivocally reiterated this prohibition.

The contention of PEA and AMARI that public lands, once registered under Act No. 496 or PD
No. 1529, automatically become private lands is contrary to existing laws. Several laws
authorize lands of the public domain to be registered under the Torrens System or Act No.
496, now PD No. 1529, without losing their character as public lands. Section 122 of Act No.
496, and Section 103 of PD No. 1529, respectively, provide as follows:

Act No. 496

"Sec. 122. Whenever public lands in the Philippine Islands belonging to the x x x
Government of the Philippine Islands are alienated, granted, or conveyed to persons or the
public or private corporations, the same shall be brought forthwith under the operation of
this Act and shall become registered lands."

PD No. 1529

"Sec. 103. Certificate of Title to Patents. Whenever public land is by the Government
alienated, granted or conveyed to any person, the same shall be brought forthwith under
the operation of this Decree." (Emphasis supplied)

Based on its legislative history, the phrase "conveyed to any person" in Section 103 of PD
No. 1529 includes conveyances of public lands to public corporations.

Alienable lands of the public domain "granted, donated, or transferred to a province,
municipality, or branch or subdivision of the Government," as provided in Section 60 of CA
No. 141, may be registered under the Torrens System pursuant to Section 103 of PD No.
1529. Such registration, however, is expressly subject to the condition in Section 60 of CA
No. 141 that the land "shall not be alienated, encumbered or otherwise disposed of in a
manner affecting its title, except when authorized by Congress." This provision refers to
government reclaimed, foreshore and marshy lands of the public domain that have been
titled but still cannot be alienated or encumbered unless expressly authorized by Congress.
The need for legislative authority prevents the registered land of the public domain from
becoming private land that can be disposed of to qualified private parties.

The Revised Administrative Code of 1987 also recognizes that lands of the public domain
may be registered under the Torrens System. Section 48, Chapter 12, Book I of the Code
states -

"Sec. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following:

(1) x x x

(2) For property belonging to the Republic of the Philippines, but titled in the name of any
political subdivision or of any corporate agency or instrumentality, by the executive head of
the agency or instrumentality." (Emphasis supplied)

Thus, private property purchased by the National Government for expansion of a public
wharf may be titled in the name of a government corporation regulating port operations in
the country. Private property purchased by the National Government for expansion of an
airport may also be titled in the name of the government agency tasked to administer the
airport. Private property donated to a municipality for use as a town plaza or public school
site may likewise be titled in the name of the municipality.[106] All these properties become
properties of the public domain, and if already registered under Act No. 496 or PD No. 1529,
remain registered land. There is no requirement or provision in any existing law for the de-
registration of land from the Torrens System.

Private lands taken by the Government for public use under its power of eminent domain
become unquestionably part of the public domain. Nevertheless, Section 85 of PD No. 1529
authorizes the Register of Deeds to issue in the name of the National Government new
certificates of title covering such expropriated lands. Section 85 of PD No. 1529 states -

"Sec. 85. Land taken by eminent domain. Whenever any registered land, or interest therein,
is expropriated or taken by eminent domain, the National Government, province, city or
municipality, or any other agency or instrumentality exercising such right shall file for
registration in the proper Registry a certified copy of the judgment which shall state
definitely by an adequate description, the particular property or interest expropriated, the
number of the certificate of title, and the nature of the public use. A memorandum of the
right or interest taken shall be made on each certificate of title by the Register of Deeds,
and where the fee simple is taken, a new certificate shall be issued in favor of the National
Government, province, city, municipality, or any other agency or instrumentality exercising
such right for the land so taken. The legal expenses incident to the memorandum of
registration or issuance of a new certificate of title shall be for the account of the authority
taking the land or interest therein." (Emphasis supplied)

Consequently, lands registered under Act No. 496 or PD No. 1529 are not exclusively
private or patrimonial lands. Lands of the public domain may also be registered pursuant to
existing laws.

AMARI makes a parting shot that the Amended JVA is not a sale to AMARI of the Freedom
Islands or of the lands to be reclaimed from submerged areas of Manila Bay. In the words of
AMARI, the Amended JVA "is not a sale but a joint venture with a stipulation for
reimbursement of the original cost incurred by PEA for the earlier reclamation and
construction works performed by the CDCP under its 1973 contract with the Republic."
Whether the Amended JVA is a sale or a joint venture, the fact remains that the Amended
JVA requires PEA to "cause the issuance and delivery of the certificates of title conveying
AMARI's Land Share in the name of AMARI."[107]

This stipulation still contravenes Section 3, Article XII of the 1987 Constitution which
provides that private corporations "shall not hold such alienable lands of the public domain
except by lease." The transfer of title and ownership to AMARI clearly means that AMARI
will "hold" the reclaimed lands other than by lease. The transfer of title and ownership is a
"disposition" of the reclaimed lands, a transaction considered a sale or alienation under CA
No. 141,[108] the Government Auditing Code,[109] and Section 3, Article XII of the 1987
Constitution.

The Regalian doctrine is deeply implanted in our legal system. Foreshore and submerged
areas form part of the public domain and are inalienable. Lands reclaimed from foreshore
and submerged areas also form part of the public domain and are also inalienable, unless
converted pursuant to law into alienable or disposable lands of the public domain.
Historically, lands reclaimed by the government are sui generis, not available for sale to
private parties unlike other alienable public lands. Reclaimed lands retain their inherent
potential as areas for public use or public service. Alienable lands of the public domain,
increasingly becoming scarce natural resources, are to be distributed equitably among our
ever-growing population. To insure such equitable distribution, the 1973 and 1987
Constitutions have barred private corporations from acquiring any kind of alienable land of
the public domain. Those who attempt to dispose of inalienable natural resources of the
State, or seek to circumvent the constitutional ban on alienation of lands of the public
domain to private corporations, do so at their own risk.

We can now summarize our conclusions as follows:

1. The 157.84 hectares of reclaimed lands comprising the Freedom Islands, now covered by
certificates of title in the name of PEA, are alienable lands of the public domain. PEA may
lease these lands to private corporations but may not sell or transfer ownership of these
lands to private corporations. PEA may only sell these lands to Philippine citizens, subject to
the ownership limitations in the 1987 Constitution and existing laws.

2. The 592.15 hectares of submerged areas of Manila Bay remain inalienable natural
resources of the public domain until classified as alienable or disposable lands open to
disposition and declared no longer needed for public service. The government can make
such classification and declaration only after PEA has reclaimed these submerged areas.
Only then can these lands qualify as agricultural lands of the public domain, which are the
only natural resources the government can alienate. In their present state, the 592.15
hectares of submerged areas are inalienable and outside the commerce of man.

3. Since the Amended JVA seeks to transfer to AMARI, a private corporation, ownership of
77.34 hectares[110] of the Freedom Islands, such transfer is void for being contrary to
Section 3, Article XII of the 1987 Constitution which prohibits private corporations from
acquiring any kind of alienable land of the public domain.

4. Since the Amended JVA also seeks to transfer to AMARI ownership of 290.156
hectares[111] of still submerged areas of Manila Bay, such transfer is void for being
contrary to Section 2, Article XII of the 1987 Constitution which prohibits the alienation of
natural resources other than agricultural lands of the public domain. PEA may reclaim these
submerged areas. Thereafter, the government can classify the reclaimed lands as alienable
or disposable, and further declare them no longer needed for public service. Still, the
transfer of such reclaimed alienable lands of the public domain to AMARI will be void in view
of Section 3, Article XII of the 1987 Constitution which prohibits private corporations from
acquiring any kind of alienable land of the public domain.

Clearly, the Amended JVA violates glaringly Sections 2 and 3, Article XII of the 1987
Constitution. Under Article 1409[112] of the Civil Code, contracts whose "object or purpose
is contrary to law," or whose "object is outside the commerce of men," are "inexistent and
void from the beginning." The Court must perform its duty to defend and uphold the
Constitution, and therefore declares the Amended JVA null and void ab initio.

Seventh issue: whether the Court is the proper forum to raise the issue of whether the
Amended JVA is grossly disadvantageous to the government.

Considering that the Amended JVA is null and void ab initio, there is no necessity to rule on
this last issue. Besides, the Court is not a trier of facts, and this last issue involves a
determination of factual matters.

WHEREFORE, the petition is GRANTED. The Public Estates Authority and Amari Coastal
Bay Development Corporation are PERMANENTLY ENJOINED from implementing the
Amended Joint Venture Agreement which is hereby declared NULL and VOID ab initio.

SO ORDERED.

LAND BANK OF THE PHILIPPINES,
Petitioner,
vs.
EMMANUEL ONATE, Respondent.
G.R. No. 192371 | 2014-01-15

SECOND DIVISION

DECISION

DEL CASTILLO, J.:

This Petition for Review on Certiorari1 assails the December 18, 2009 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 89346, which affirmed with modification the May 31, 2006
Decision3 of the Regional Trial Court (RTC), Branch 141, Makati City. The RTC dismissed the
Complaint4 for Sum of Money, which petitioner Land Bank of the Philippines (Land Bank) filed
against respondent Emmanuel C. Ofiate (Ofiate), and ordered Land Bank to return the amount of
111,471,416.52 it unilaterally debited from his accounts. On separate appeals by both parties, the
CA affirmed the RTC Decision with modification that Land Bank was further ordered to pay Ofiate
the sums of 1!60,663,488.11 and US$3,210,222.85 representing the undocumented withdrawals and
drawings from his trust accounts with 12% per annum interest compounded annually from June 21,
1991 until fully paid.

Also assailed is the CAs May 27, 2010 Resolution5 denying Land Banks Motion for
Reconsideration.6

Factual Antecedents

Land Bank is a government financial institution created under Republic Act No. 3844.7 From 1978 to
1980, Oate opened and maintained seven trust accounts with Land Bank, more particularly
described as follows:



Each trust account was covered by an Investment Management Account (IMA) with Full
Discretion15 and has a corresponding passbook where deposits and withdrawals were recorded.
Pertinent portions common to the IMAs read:

You [Land Bank] are appointed as my agent with full powers and discretion, subject only to the
following provisions:

1. You are authorized to hold, invest and reinvest the Fund and keep the same invested, in your sole
discretion, without distinction between principal and income, in any assets which you deem
advisable, without being restricted to those of the character authorized for fiduciaries under any
present or future law.

2. You shall have full power and authority:

(a) to treat all the Fund as one aggregate amount for purposes of investment, and to deposit all or
any part thereof with a reputable bank including your own commercial banking department;

(b) to pay all costs, expenses and charges incurred in connection with the administration,
preservation, maintenance and protection of the Fund and to charge the same to the Fund;

(c) to vote in person or by proxy on any stocks, bonds or other securities held by you, for my/our
account;

(d) to borrow money for the Fund (from your banking department or from others) with or without
giving securities from the Fund;

(e) to cause any asset of the Fund to be issued, held or registered in your name or in the name of
your nominee, or in such form that title will pass by delivery, provided your records shall indicate the
true ownership of such assets;

(f) to hold the Fund in cash and to invest the same in fixed income placements traded and sold by
your ownMoney Market Division; and

(g) to sign all documents pertinent to the transaction which you will make in behalf of this Account.

3. All actions taken by you hereunder shall be for my account and risk. Except for willful default or
gross misconduct, you shall not be liable for any loss or depreciation in the value of the assets of the
Fund arising from any cause whatsoever.

4. You shall maintain accurate records of all investments, receipts, disbursements and other
transactions of the Account. Records relating thereto shall be open at all reasonable times to
inspection and audit by me either personally or through duly authorized representatives. Statements
consisting of a balance sheet, portfolio analysis, statement of income and expenses, and summary
of investment changes are to be sent to me/us quarterly.

I/We shall approve such accounting by delivering in writing to you a statement to that effect or by
failure to express objection to such accounting in writing delivered to you within thirty (30) days from
my receipt of the accounting.

Upon your receipt of a written approval of the accounting, or upon the passage of said period of time
within which objections may be filed, without written objections having been delivered to you, such
accounting shall be deemed to be approved, and you shall be released and discharged as to all
items, matters and things set forth in such accounting as if such accounting had been settled and
allowed by a decree of a court of competent jurisdiction, in an action or proceeding in which you and
I were parties.16 (Emphasis supplied)

In a letter17 dated October 8, 1981, however, Land Bank demanded from Oate the return of P4
million it claimed to have been inadvertently deposited to Trust Account No. 01-125 as his additional
funds but actually represents the total amount of the checks issued to Land Bank by its corporate
borrowers as payment for their pre-terminated loans. Oate refused. To settle the matter, a meeting
was held, but the parties failed to reach an agreement. Since then, the issue of miscrediting
remained unsettled. Then on June 21, 1991, Land Bank unilaterally applied the outstanding balance
in all of Oates trust accounts against his resulting indebtedness by reason of the miscrediting of
funds. Although it exhausted the funds in all of Oates trust accounts, Land Bank was able to debit
the amount of P1,528,583.48 only.18

Proceedings before the Regional Trial Court

To recoup the remaining balance of Oates indebtedness, Land Bank filed a Complaint19 for Sum
of Money seeking to recover the amount of
P8,222,687.8920 plus interest at the legal rate of 12% per annum computed from May 15, 1992 until
fully paid. Pertinent portions of Land Banks Complaint reads:

5. By virtue of the Deeds of Revocable Trust executed on January 9, 198921 [sic] and February 5,
198922 [sic] by Philippine Virginia Tobacco Administration (PVTA) and Philippine Virginia Tobacco
Board (PVTB), LANDBANK likewise became a Trustee of certain funds belonging to PVTA and
PVTB.

6. As authorized under the [Deeds] of Revocable Trust, on October 10, 1980, LANDBANK invested
P4 Million of the trust accounts of PVTA and PVTB, through a direct lending scheme to the following
companies:

(a) Republic Telephone Company, Inc. (RETELCO), under Promissory Note No. 1145 dated October
10, 1980, for P1,021,250.00
with maturity date on November 24, 1980, subject to automatic roll-over up to October 10, 1981 at
17% interest per annum.

(b) Philippine Blooming Mills Company, Inc. (PBM), under Promissory Note (unnumbered) dated
October 10, 1980, for P1,021,250.00, with maturity date on November 24, 1980, subject to automatic
roll-over up to October 10, 1981, at 17% interest per annum;

(c) Cheng Ban Yek (CBY), under Promissory Note (unnumbered) dated October 10, 1980, for
P1,023,138.89, with maturity date on November 28, 1980, subject to automatic roll-over up to
October 10, 1981, at 17% interest per annum;

(d) Philippine Tobacco Filters Corporation (PHILTOFIL), under Promissory Note (unnumbered)
dated October 10, 1980, for P1,021,250.00, with maturity date on November 24, 1980, subject to
automatic roll-over up to October 10, 1981, at 17% interest per annum.

x x x x

7. Pursuant to such direct loan transactions granted to the aforementioned companies, LANDBANK
issued four (4) cashiers checks for P1 Million each payable to RETELCO, PBM, CBY, and
PHILTOFIL x x x

8. On or about November 24 and 28, 1980, the aforesaid borrowers (RETELCO, PBM, CBY, AND
PHILTOFIL), pre-terminated their corresponding loans and paid their respective obligations in the
form of checks payable to LANDBANK and delivered by [Oates] representative, Mr.
Eduardo Polonio.

9. When the checks were delivered, [Oate] fraudulently misrepresented to LANDBANK that they
were [Oates] additional capital contribution to his personal trust account. On the basis of this
misrepresentation, LANDBANK credited the payments made by the aforementioned
corporate borrowers to [Oates] Trust Account No. 01-125.

10. After the payments were credited to his personal trust account, Oate proceeded to withdraw the
same, to the damage and prejudice of LANDBANK as the owner thereof.23

In his Answer (With Compulsory Counterclaim),24 Oate asserted that the setoff was without legal
and factual bases. He specifically denied any knowledge or involvement in the transaction between
Land Bank and its clients Philippine Virginia Tobacco Administration (PVTA) and Philippine Virginia
Tobacco Board (PVTB). He also denied that he made fraudulent misrepresentation to induce the
bank to deposit to his Trust Account No. 01-125 as his additional capital the payments allegedly
tendered by the banks corporate borrowers. He maintained that all the funds in his accounts came
from legitimate sources and that he was totally unaware of and had nothing to do with the alleged
miscrediting. While Oate admitted having received the October 8, 1981 demand letter, he argued
that he did not acquiesce thereto and, in fact, disputed the same during a meeting with an officer of
Land Bank. He also refuted Land Banks claim that it formally demanded for the return of the
disputed amount as the September 3, 1991 letter25 it alluded to is not a demand letter. It was sent in
response to his counsels letter requesting for an accounting of his trust accounts.

By way of compulsory counterclaim, Oate pointed out that per Balance Sheets26 as of June 30,
1982 the funds in his trust accounts already totaled P35,555,464.78. And as of January 1993, the
accumulated balance of his accounts reached P229,222,160.25 and $3,472,683.94 computed as
follows:

With interest at the rate of eighteen percent (18%) compounded every ninety (90) days from the third
quarter of 1982 to January, 1993, the trustors equity of P35,555,464.78 has earned interest in the
amount of P193,666,695.47. Adding the trustors equity to the aforesaid accrued interest thereon,
[Oates] peso deposits [in] his trust accounts with plaintiff bank have an accumulated balance of
P229,222,160.25 as of January 1993.

But that is not all. [Oates] dollar deposits to Trust Account No. 01-014 (which is for an Undisclosed
Principal) from the period July-September, 1980 alone, already amounted to $1,690,943.78. x x x

With interest at the rate of six percent (6%) compounded every ninety (90) days from the first
quarter of 1981, the said dollar deposits have earned interest of $1,781,740.16 up to January, 1993.
Thus, [Oates] dollar deposits [in] Trust Account No. 01-014 have an aggregate balance of
$3,472,683.94 as of January 1993.27

Hence, even if the amount of P8,222,687.89 as of May 15, 1992 is deducted from the outstanding
balance of his trust accounts as of January 1993, the bank still owes him P220,999,472.36 on top of
his dollar deposits amounting to $3,472,683.94.

Oate prayed that a judgment be issued dismissing the Complaint and ordering Land Bank to pay
him:

i) The sum of P220,999,472.36, representing the outstanding balance on the peso deposits [of
Oates] various trust accounts as of January 1993, with interest thereon from said date at the rate
of eighteen percent (18%) compounded every ninety (90) days, until the said amount is fully paid;

ii) The sum of $3,472,683.94, representing the aggregate balance as of January 1993 on [Oates]
dollar deposits [in] Trust Account No. 01-014, with interest thereon from said date at the rate of six
percent (6%) compounded every ninety (90) days, until the said amount is fully paid;

iii) The sum of P100,000,000.00 as and by way of moral damages;

iv) The sum of P50,000,000.00 as and by way of exemplary damages;

and

v) The sum of P15,000,000.00, or 20% of all sums collected, whichever is higher, as and for
attorney's fees, the further sum of P3,000.00 as appearance fee for each hearing attended, and such
other sums that may be proved during the trial as litigation expenses.28

Upon Oates motion, the RTC issued an Order29 dated May 27, 1994, creating a Board of
Commissioners (the Board) for the purpose of examining the records of Oates seven trust
accounts, as well as to determine the total amount of deposits, withdrawals, funds invested,
earnings, and expenses incurred. It was composed of Atty. Engracio M. Escasinas, the Clerk of
Court of the RTC of Makati City, as the Chairman; and, Atty. Ma. Cristina C. Malab and Ms. Adeliza
M. Jaranilla representing Land Bank and Oate, respectively, as members.

Initially, the Board submitted three reports.30 But for clarity, the trial court ordered31 the Board to
reconvene and to submit a consolidated report furnishing copies of the same to both parties, who
were given 10 days from receipt thereof to file their respective comments thereto. The Board
complied and on August 16, 2004 submitted its consolidated report.32 As summarized by the RTC,
the said consolidated report revealed that there were undocumented and over withdrawals and
drawings33 from Oates trust accounts:

Thus, the Commissioners Report showed that the total amount of drawings and withdrawals from
each account without withdrawal slips are as follows:

In Trust Account No. 01-014, there was a total withdrawals [sic] without withdrawal slips but reflected
in the passbook in the amount of P45,103,297.33 and this account showed a negative balance of
P40,367,342.34. On the dollar deposit under the same trust account, there was a total [withdrawal]
without withdrawal slips but reflected in the passbook in the amount of $3,210,222.85.

In Trust Account No. 01-017, there was a total withdrawal without withdrawal slips in the amount of
P2,682,088.58 and there was an over
withdrawal of P11,738,470.53 and $30,000.00.

In Trust Account No. 01-024, there was a total withdrawal without withdrawal slips of P900,000.00
and over withdrawal of P13,310,328.01.

In Trust Account No. 01-075, there was a total withdrawal of P500,000.00 without withdrawal slips
and there was a negative balance of P33,342,132.64 and $286,399.34 on the dollar account.

In Trust Account No. 01-082, the total amount of withdrawal without withdrawal slips but reflected in
the passbook was P1,782,741.86 and there was an over withdrawal of P14,031.63.

In Trust Account No. 01-089, there was a total withdrawal without withdrawal slips in the amount of
P5,054,809.00 but the report indicated that there was a negative balance of P1,296,441.92.

In Trust Account No. 01-125, there was a total withdrawal without withdrawal slips in the amount of
P4,640,551.34 and there was a negative balance of P58,327,459.23.34

On even date, the Board also submitted a Manifestation35 informing the RTC that its findings as to
the outstanding balance of each trust account may not be accurate considering that it was not given
ample opportunity to collate and sort out the documents related to each trust account and that there
may have been double take up of accounts since the documents previously reviewed may have
been considered again in subsequent reports.

In his Comment,36 Oate asserted that the undocumented withdrawals mentioned in the
consolidated report should not be considered as cash outflows. Rather, they should be treated as
unauthorized transactions and the amounts subject thereof must be credited back to his accounts.

Land Bank did not file any comment or objection to the Boards consolidated comment.

During the pre-trial conference, the parties agreed that they would submit the case for decision
based on the reports of the Board after they have submitted their respective memoranda. They also
stipulated on the following issues for resolution of the RTC:

1. Whether x x x Oate could claim on Trust Account Nos. 01-014 and 01-017 which were opened
for an undisclosed principal;

2. Whether x x x the undocumented withdrawals and drawings are considered valid and regular
and, conversely, if in the negative, whether x x x such amounts shall be credited [back] to the
accounts.37

In his Memorandum38 filed on July 12, 2005, Oate reiterated that Land Bank should be held liable
for the undocumented withdrawals and drawings. For its part, Land Bank posited, inter alia, that
Trust Account Nos. 01-014 and 01-017 should be excluded from the computation of Oates
counterclaim considering his allegation that said accounts are owned by an undisclosed principal
whom/which he failed to join as indispensable party. Land Bank further theorized that Oate must
answer for the negative balances as revealed by the Boards reports.39

Thereafter, the case was submitted for decision.

Ruling of the Regional Trial Court

On May 31, 2006, the RTC rendered a Decision40 dismissing Land Banks Complaint for its failure
to establish that the amount of P4,086,888.89 allegedly miscredited to Oates Trust Account No.
01-125 actually came from the investments of PVTA and PVTB. Hence, the RTC ordered Land Bank
to restore the total amount of P1,471,416.52 which the bank unilaterally debited from Oates five
trust accounts.41

With regard to Oates counterclaim for the recovery of P220,999,472.36, as well as the alleged
US$3,472,683.94 balance of his dollar deposits in Trust Account No. 01-014, the RTC ruled that
under the IMAs, Land Bank had the authority to withdraw funds (as in fact it was at all times in
possession of the passbooks) from Oates accounts even without a letter of instruction or
withdrawal slip coming from Oate. It thus gave weight to the entries in the passbooks since the
same were made in the ordinary course of business. The RTC also ruled that Oate is deemed to
have approved the entries in the statements of account that were sent to him as he never interposed
any objection thereto within the period given him to do so.

Anent Land Banks claim for the negative balances, the RTC likewise denied the same for Land
Bank never sought them in its Complaint. Moreover, being the manager of the funds and keeper of
the records, the RTC held that Land Bank should not have allowed further withdrawals if there were
no more funds.

The RTC likewise debunked Land Banks argument that Oates counterclaim with respect to Trust
Account Nos. 01-014 and 01-017 should be
dismissed for his failure to join his undisclosed principal. According to the RTC, Land Bank should
have earlier invoked such defense when it filed its answer to the counterclaim. Also, if it is true that
said accounts are not owned by Oate, then the bank had no right to apply the funds in said
accounts as payment for the alleged personal indebtedness of Oate.

The dispositive portion of the RTCs Decision reads:

WHEREFORE, in view of all the foregoing, decision is hereby rendered dismissing the complaint
and ordering [Land Bank] to pay [Oate] the total amount of P1,471,416.52 representing the total
amount of funds debited from the five (5) trust accounts of the defendant with legal rate of interest of
12% per annum, compounded yearly, effective on 21 June 1991 until fully paid.

No pronouncement as to costs.

SO ORDERED.42

Land Bank filed a Motion for Reconsideration.43 In an Order44 dated July
11, 2006, however, the RTC denied the same.

Both parties appealed to the CA.

Ruling of the Court of Appeals

In its December 18, 2009 Decision,45 the CA denied Land Banks appeal and granted that of Oate.
The CA affirmed the RTCs ruling that Land Bank failed to establish the source of the funds it
claimed to have been erroneously credited to Oates account. With respect to Oates appeal, the
CA agreed that he is entitled to the unaccounted withdrawals which, as found by the Board, stood at
P60,663,488.11 and $3,210,222.85.46 The CAs ruling is anchored on the banks failure to observe
Sections X401 and X425 of the Bangko Sentral ng Pilipinas Manual of Regulation for Banks (MORB)
requiring it to give full disclosure of the services it offered and conduct its dealings with transparency,
as well as to render reports that would sufficiently apprise its clients of the significant developments
in the administration of their accounts. Aside from allowing undocumented withdrawals, the CA
likewise noted that Land Bank failed to keep an accurate record and render an accounting of
Oates accounts. For the CA, the entries in the passbooks are not sufficient because they do not
specify where the funds withdrawn from Oates accounts were invested.

The dispositive portion of the CAs Decision reads:

WHEREFORE, the appeal of plaintiff-appellant Land Bank is DENIED.

The appeal of defendant-appellant Emmanuel Oate is hereby partially GRANTED. Accordingly, the
May 31, 2006 Decision of the Regional Trial Court, Branch 141, Makati City is hereby MODIFIED in
that, in addition to the previous grant of P1,471,416.52 representing the total amount of funds
debited from defendant-appellant Oates trust accounts, plaintiff-appellant Land Bank is hereby
ordered to pay defendant-appellant Oate the sum of P60,663,488.11 and $3,210,222.85
representing the undocumented withdrawals it debited from the latters trust account with interest at
the rate of 12% per annum, compounded yearly from June 21, 1991 until fully paid.

SO ORDERED.47

Land Bank filed a Motion for Reconsideration.48 In a Resolution49 dated May 27, 2010, however,
the CA denied its motion. Hence, Land Bank filed the instant Petition for Review on Certiorari based
on the following issues:

Issues

1. WHETHER X X X THE ENTRIES IN THE PASSBOOK ISSUED BY LBP IN OATES TRUST
ACCOUNT (EXPRESS TRUST) COVERED BY AN INVESTMENT MANAGEMENT AGREEMENT
(IMA) WITH FULL DISCRETION ARE SUFFICIENT TO MEET THE RULE ON PRESUMPTION OF
REGULARITY OF ENTRIES IN THE COURSE OF BUSINESS PROVIDED FOR UNDER SECTION
43, RULE 130 OF THE RULES OF COURT
.
2. WHETHER X X X OATE IS ENTITLED TO CLAIM FOR P1,471,416.52 WHICH IS NOT
PLEADED AS COUNTERCLAIM IN HIS ANSWER PURSUANT TO SECTION 2, RULE 9 OF THE
RULES OF COURT.

3. WHETHER X X X OATE IS ENTITLED TO THE AWARD OF P60,663,488.11 AND
$3,210,222.85 REPRESENTING THE ALLEGED UNDOCUMENTED WITHDRAWALS DEBITED
FROM HIS TRUST ACCOUNTS ON THE GROUND OF LBPS ALLEGED FAILURE TO MEET THE
STANDARDS SET FORTH UNDER THE 2008 MANUAL ON REGULATIONS FOR BANKS (MORB)
ISSUED BY BSP.

4. WHETHER X X X OATE MAY SUE [ON] TRUST ACCOUNT NOS. 01-014 AND 01-017
OPENED FOR AN UNDISCLOSED PRINCIPAL WITHOUT JOINING HIS UNDISCLOSED
PRINCIPAL
.
5. WHETHER X X X THE AWARD OF INTEREST TO OATE AT THE RATE OF TWELVE
PERCENT (12%) PER ANNUM, COMPOUNDED YEARLY FROM JUNE 21, 1991 UNTIL FULLY
PAID, IS VIOLATIVE OF ARTICLE 1959 OF THE CIVIL CODE.50

Land Banks Arguments

Land Bank disputes the ruling of both lower courts that it failed to prove the fact of miscrediting the
amount of P4,086,888.89 to Oates Trust Account No. 01-125 as the deposit slips pertaining
thereto were not presented. Land Bank maintains that in trust accounts the passbooks are always in
the banks possession so that it can record the cash inflows and outflows even without the
corresponding deposit or withdrawal slips. Citing Section 43, Rule 130 of the Rules of Court, it
asserts that the entries in the passbooks must be accepted as proof of the regularity of the
transactions reflected in the trust accounts, including the miscrediting of P4,086,888.89, for they
were made in the regular course of business. In addition, said entries are supported by demand
letters dated October 8, 198151 and September 3, 1991,52 as well as a Statement of Account53 as
of May 15, 1992. Land Bank avers that Oate never questioned the statements of account and the
reports it presented to him and, hence, he is deemed to have approved all of them.

Land Bank also imputes error on the lower courts in ordering the restoration of the amount of
P1,471,416.52 it debited from Oates five trust accounts because he never sought it in his Answer.

Petitioner bank vigorously argues that Oate is not entitled to the undocumented withdrawals
amounting to P60,663,488.11 and $3,210,222.85. According to Land Bank, in holding it liable for the
said amounts, the CA erroneously relied on the 2008 MORB which was not yet in existence at the
time the transactions subject of this case were made or even at the time when Land Bank filed its
Complaint. In any case, Land Bank insists that it made proper accounting and apprised Oate of the
status of his investments in accordance with the terms of the IMAs. In its demand letter54 dated
September 3, 1991 Land Bank made a full disclosure that the total outstanding balance of all the
trust accounts amounted to P1,471,416.52, but that the same was setoff to recoup the miscredited
funds. It faults Oate for not interposing any objection as his silence constitutes as his approval after
30 days from receipt thereof. Land Bank asseverates that Oate could have also inspected and
audited the records of his accounts at any reasonable time. But he never did.

Land Bank likewise faults the CA in treating the undocumented withdrawals as unauthorized
transactions as the Boards reports do not state anything to that effect. It claims that the CAs
reliance on the consolidated report in awarding the extremely huge amounts of P60,663,488.11 and
$3,210,222.85 is a grievous mistake because the Board itself already manifested that said report
may not be accurate. Consequently too, Land Bank asserts that the reports of the Board cannot
prevail over the entries in the passbooks which were made in the regular course of business.

Land Bank further states that as computed by the Board, the amount of negative balances in
Oates accounts reached P131,747,487.02 and $818,674.71.55 It thus proposes that if the CA
awarded to Oate the undocumented withdrawals on the basis of the Boards reports, then it should
have also awarded to Land Bank said negative balances or over withdrawals as reflected in the
same reports. After all, Oate admitted in his Answer that all withdrawals from his trust accounts
were done in the ordinary course of business.

Furthermore, Land Bank claims that it argued before the CA that Oate cannot sue on Trust Account
Nos. 01-014 and 01-017. While Oate alleged that said accounts were opened for an undisclosed
principal, he did not, however, join as an indispensable party said principal in violation of Section 3,
Rule 3 of the Rules of Court.56 Unfortunately, the CA sidestepped the issue and proceeded to grant
Oate the unaccounted withdrawals from said accounts in the aggregate amounts of
P47,785,385.91 and $3,210,222.85. Following Quilatan v. Heirs of Lorenzo Quilatan,57 Land Bank
insists that this case should be remanded to the trial court even if the issue of failure to implead an
indispensable party was raised for the first time in a Motion for Reconsideration of the trial courts
Decision.

Finally, Land Bank questions the ruling of the CA imposing 12% per annum rate of interest. It
contends that trust accounts are in the nature of Express Trust and not in the nature of a regular
deposit account where a debtor-creditor relationship exists between the bank and its depositor. It
was not indebted to Oate but merely held and managed his funds. There being no loan or
forbearance of money involved, in the absence of stipulation, the applicable rate of interest is only
6% per annum. Land Bank claims that the CA further erred when it compounded the 12% interest
even in the absence of any such stipulation.

Oates Arguments

In opposing the Petition, Oate argues that the issues raised by Land Bank involve factual matters
not proper in a petition for review on certiorari. He posits that the Petition does not fall under any of
the exceptions where this Court could review factual issues.

As to Land Banks allegation that he cannot claim the funds without divulging and impleading as an
indispensable party his undisclosed principal, Oate points out that in his Answer (With Compulsory
Counterclaim) he alleged that Trust Account Nos. 01-014 and 01-017 were opened for an
undisclosed principal. Yet Land Bank did not controvert his allegation. It is, therefore, too late in the
day for Land Bank to invoke non-joinder of principal as an indispensable party. Besides, when he
executed the IMAs, he was acting for himself and on behalf of an undisclosed principal. Hence, he
could claim and recover the amounts owing not only to himself but also to his undisclosed principal.

Oate likewise asserts that Land Bank, as uniformly found by both lower courts, failed to prove by
preponderance of evidence the fact of miscrediting. As to the demand letters adverted to by Land
Bank, Oate asserts that the lower courts did not consider the same because they were not formally
offered. Land Bank also failed to present competent and sufficient evidence that he admitted his
indebtedness on account of the miscrediting of funds. Since Land Bank failed to prove the fact of
miscrediting it had no right to debit any amount from his accounts and must restore whatever funds
it had debited therefrom. Oate also denies having failed to seek the return of the funds debited from
his account.

Oate further claims that in 1982 his peso trust accounts had a total balance of P35,555,464.78
while the dollar trust accounts had a balance of US$1,690,943.78. Since then, however, he never
received any report or update regarding his accounts until the bank sent him financial reports dated
June 30, 1991 indicating that the balances of his trust accounts had been unilaterally setoff.
According to Oate, Land Banks failure to keep an accurate record of his accounts and to make
proper accounting violate several circulars of the Central Bank.58 Hence, it is only proper to require
the bank to return the undocumented withdrawals which, as found by the Board, amount to
P60,663,488.11 and $3,210,222.82. In addition, Oate points out Land Banks failure to keep an
accurate record of his accounts as shown by the huge amounts of unsupported withdrawals and
drawings which constitutes willful default if not gross misconduct in violation of the IMAs which, in
turn, makes the bank liable for its actions.

Anent Land Banks invocation that the entries in the passbook made in the ordinary course of
business are presumed correct and regular, Oate argues that such presumption does not relieve
the trustee, Land Bank in this case, from presenting evidence that the undocumented withdrawals
and drawings were authorized. In any case, the presumption invoked by Land Bank does not lie as
one of its elements that the entrant must be deceased or unable to testify is lacking. Land Bank
cannot also excuse itself for failing to regularly submit to him accounting reports as, anyway, he was
free to inspect the records at any reasonable day. Oate emphasizes that it is the duty of the bank to
keep him updated with significant developments in his accounts.

In refutation of Land Banks claim to negative balances and over withdrawals, Oate posits that the
bank cannot benefit from its own negligence in mismanaging the trust accounts.

Lastly, Oate defends the CAs grant of 12% per annum rate of interest as under BSP Circular No.
416, said rate shall be applied in cases where money is transferred from one person to another and
the obligation to return the same or a portion thereof is adjudged. In any event, Land Bank is
estopped from disputing said rate for Land Bank itself applied the same 12% per annum rate of
interest when it sought to recover the amount allegedly miscredited to his account. As to the
compounding of interest, Oate claims that the parties intended that interest income shall be
capitalized and shall form part of the principal.

Our Ruling

We deny the Petition.

The issues raised are factual and do not
involve questions of law.

From the very start the issues involved in this case are factual the very reason why the RTC
created a Board of Commissioners to assist it in examining the records pertaining to Oates
accounts and determine the respective cash inflows and outflows in said accounts. Thereafter, the
parties agreed to submit the case based on the Boards reports. And when the controversy reached
the CA, the appellate court basically conducted an assiduous assessment of the evidentiary
records.59 No question of law was ever raised for determination of the lower courts. Now, Land
Bank practically beseeches us to assess the probative weight of the documentary evidence on
record to resolve the same basic issues of (i) whether Land Bank miscredited P4,086,888.89 to
Trust Account No. 01-125 and (ii) whether x x x the undocumented withdrawals and drawings are
considered valid and regular and, conversely, if in the negative, whether x x x such amounts shall be
credited to the accounts.60

These issues could be resolved by consulting the evidence extant on records, such as the IMAs, the
passbooks, the letters of instructions, withdrawal and deposit slips, statements of account, and the
Boards reports. Land Banks heavy reliance on Section 43, Rule 130 of the Rules of Court61 also
attests to the factual nature of the issues involved in this case. Well-settled is the rule that in
petitions for review on certiorari under Rule 45, only questions of law can be raised.62 In Velayo-
Fong v. Spouses Velayo,63 we defined a question of law as distinguished from a question of fact:

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. Thus, the test of whether a
question is one of law or of fact is not the appellation given to such question by the party raising the
same; rather, it is whether the appellate court can determine the issue raised without reviewing or
evaluating the evidence, in which case, it is a question of law; otherwise, it is a question of fact.
(Italics supplied)

While there are recognized exceptions64 to this rule, none exists in this case.

Anent Land Banks contention that the determination of whether the CA erred in retroactively
applying the 2008 MORB poses a legal question, the same deserves scant consideration. True, the
CA included in its ratio decidendi a discussion on the 2008 MORB to give emphasis to the duties of
banks to keep an accurate record and regularly apprise their clients of the status of their accounts.
But the issue of whether Land Bank failed to comply with those duties can be resolved even without
the MORB as the same duties are also imposed on Land Bank by the IMAs, the contract that
primarily governs the parties in this case. As a general rule, a contract is the law between the
parties. Thus, from the moment the contract is perfected, the parties are bound not only to the
fulfilment of what has been expressly stipulated but also to all consequences which, according to
their nature, may be in keeping with good faith, usage and law. Also, the stipulations of the contract
being the law between the parties, courts have no alternative but to enforce them as they were
agreed [upon] and written x x x.65

Based on the factual milieu of this case even without touching on the MORB, we found that Land
Bank still failed to perform its bounden duties to keep accurate records and render regular
accounting. We also found no cogent reason to disturb the other factual findings of the CA.

Land Bank failed to prove that the
miscredited funds came from the
proceeds of the pre-terminated loans of
its corporate borrowers.

Land Bank argues that the entries in the passbooks were made in the regular course of business
and should be accepted as prima facie evidence of the facts stated therein. But before entries made
in the course of business may qualify under the exception to the hearsay rule and given weight, the
party offering them must establish that: (1) the person who made those entries is dead, outside the
country, or unable to testify; (2) the entries were made at, or near the time of the transaction to which
they refer; (3) the entrant was in a position to know the facts stated therein; (4) the entries were
made in the professional capacity or in the course of duty of the entrant; and, (5) the entries were
made in the ordinary or regular course of business or duty.66

Here, Land Bank has neither identified the persons who made the entries in the passbooks nor
established that they are already dead or unable to testify as required by Section 43,67 Rule 130 of
the Rules of Court. Also, and as correctly opined by the CA, [w]hile the deposit entries in the banks
passbook enjoy a certain degree of presumption of regularity x x x, the same do not indicate or
explain the source of the funds being deposited or withdrawn from an individual account.68 They
are mere prima facie proof of what are stated therein the dates of the transactions, the amounts
deposited or withdrawn, and the outstanding balances. They do not establish that the total amount of
P4,086,888.89 deposited in Oates Trust Account No. 01-125 in November 1980 came from the
proceeds of the pre-terminated loans of Land Banks corporate borrowers. It would be too
presumptuous to immediately conclude that said amount came from the checks paid to Land Bank
by its corporate borrowers just because the maturity dates of the loans coincided with the dates said
total amount was deposited. There must be proof showing an unbroken link between the proceeds of
the pre-terminated loans and the amount allegedly miscredited to Oates Trust Account No. 01-
125. As a bank and custodian of records, Land Bank could have easily produced documents
showing that its borrowers pre-terminated their loans, the checks they issued as payment for such
loans, and the deposit slips used in depositing those checks. But it did not.

Land Bank did not also bother to explain how Oate or his representative, Eduardo Polonio
(Polonio), obtained possession of the checks when, according to it, the corporate borrowers issued
the checks in its name as payment for their loans.69 Under paragraph 8 of its Complaint, Land Bank
alleged that its corporate borrowers paid their respective obligations in the form of checks payable
to LANDBANK x x x.70 If it is true, then why were the checks credited to Oates account? Unless
subsequently endorsed to Oate, said checks can only be deposited in the account of the payee
appearing therein. We cannot thus lend credence to Land Banks excuse that the proximate cause of
the alleged miscrediting was the fraudulent representation of Polonio, for assuming that the latter
indeed employed fraudulent machinations, with the degree of prudence expected of banks, Land
Bank and its tellers could have easily detected that Oate was not the intended payee. In Traders
Royal Bank v. Radio Philippines Network, Inc.,71 we held that petitioner bank was remiss in its duty
and obligation for accepting and paying a check to a person other than the payee appearing on the
face of the check sans valid endorsement. Consequently, it was made liable for its own negligence
and in disregarding established banking rules and procedures.

We are also groping in the dark as to the number of checks allegedly deposited by Polonio to
Oates Trust Account No. 01-125. According to Land Bank, the entire amount of P4,086,888.89
represents the proceeds of the preterminated loans of four of its clients, namely, RETELCO, PBM,
CBY and PHILTOFIL. But it could only point to two entries made on two separate dates in the
passbook as reproduced below:



Were there only two checks issued as payment for the separate loans of these four different
entities? These hanging questions only confirm the correctness of the lower courts uniform
conclusion that Land Bank failed to prove that the amount allegedly miscredited to Oates account
came from the proceeds of the pre-terminated loans of its clients. It is worth emphasizing that in civil
cases, the party making the allegations has the burden of proving them by preponderance of
evidence. Mere allegation is not sufficient.73

As a consequence of its failure to prove
the source of the claimed miscredited
funds, Land Bank had no right to debit
the total amount of P1,471,416.52 and
must, therefore, restore the same.

In view of the above, Land Banks argument that the lower courts erred in ordering the return of the
amount of P1,471,416.52 it debited from Oates five trust accounts since he did not seek such relief
in his Answer as a counterclaim, falls flat on its face. The order to restore the debited amount is
consistent with the lower courts ruling that Land Bank failed to prove that the amount of
P4,086,888.89 was miscredited to Oates account and, hence, it had no right to seek
reimbursement or debit any amount from his accounts in payment therefor.

Without such right, Land Bank should return the amount of P1,471,416.52 it debited from Oates
accounts in its attempt to recoup what it allegedly lost due to miscrediting. Moreover, contrary to
Land Banks assertion, Oate contested the banks application of the balance of his trust accounts in
payment for the allegedly miscredited amount in his Answer (With Compulsory Counterclaim) for
being without any factual and legal [bases].74

Land Bank was remiss in performing
its duties under the IMAs and as a
banking institution.

The contractual relation between Land Bank and Oate in this case is primarily governed by the
IMAs. Paragraph 4 thereof expressly imposed on Land Bank the duty to maintain accurate records
of all his investments, receipts, disbursements and other transactions relating to his accounts. It also
obliged Land Bank to provide Oate with quarterly balance sheets, statements of income and
expenses, summary of investments, etc. Thus:

4. You shall maintain accurate records of all investments, receipts, disbursements and other
transactions of the Account. Records relating thereto shall be open at all reasonable times to
inspection and audit by me either personally or through duly authorized representatives. Statements
consisting of a balance sheet, portfolio analysis, statement of income and expenses, and summary
of investment changes are to be sent to me/us quarterly.

I/We shall approve such accounting by delivering in writing to you a statement to that effect or by
failure to express objections to such accounting in writing delivered to you within thirty (30) days
from my receipt of the accounting.

Upon your receipt of a written approval of the accounting, or upon the passage of said period of time
within which objections may be filed, without written objections having been delivered to you, such
accounting shall be deemed to be approved, and you shall be released and discharged as to all
items, matters and things set forth in such accounting as if such accounting had been settled and
allowed by a decree of a court of competent jurisdiction, in an action or proceeding in which you and
I were parties.75 (Emphasis supplied)

These are the obligations of Land Bank which it should have faithfully complied with in good faith.76
Unfortunately, Land Bank failed in its contractual duties to maintain accurate records of all
investments and to regularly furnish Oate with financial statements relating to his accounts. Had
Land Bank kept an accurate record there would have been no need for the creation of a Board of
Commissioners or at least the latters work would have been a lot easier and more accurate. But
because of Land Banks inefficient record keeping, the Board performed the tedious task of trying to
reconcile messy and incomplete records. The lackadaisical attitude of Land Bank in keeping an
updated record of Oates accounts is aggravated by its reluctance to accord the Board full and
unrestricted access to the records when it was conducting a review of the accounts upon the orders
of the trial court. Thus, in its Manifestation77 dated August 16, 2004, the Board informed the trial
court that its report pertaining to outstanding balances may not be accurate because the documents
were then in the custody of Land Bank and the documents to be reviewed by the Board at a
designated hearing depended on what was released by the then handling lawyer of Land Bank.
They were not given the opportunity to collate/sort-out the documents related to each trust
account78 and the folders being reviewed contained documents related to different trust
accounts.79 As a result, [t]here may have been double take up of accounts since the documents
previously reviewed may have been repeatedly considered in the reports.80

For its failure to faithfully comply with
its obligations under the IMAs and for
having agreed to submit the case on the
basis of the reports of the Board of
Commissioners, the latters findings are
binding on Land Bank.

Because of Land Banks failure to keep an updated and accurate record of Oates account, it would
have been difficult, if not impossible, to determine with some degree of accuracy the outstanding
balances in Oates accounts. Indeed, the creation of a Board of Commissioners was a significant
development in this case as it facilitated the examination of the records and helped in the
determination of the balances in each of Oates accounts. In a span of four years, the Board held
60 meetings and scoured the voluminous and scattered records of subject accounts. In the course
thereof, it found several undocumented withdrawals and over withdrawals. Thereafter, the Board
submitted its consolidated report, to which Land Bank did not file its comment despite having been
given the opportunity to do so. It did not question the result of the examinations conducted by the
Board, particularly the Boards computation of the outstanding balance in each account, the
existence of undocumented and over withdrawals, and how often the bank sent Oate statements of
account. In fact, during the pre-trial conference, Land Bank agreed to submit the case based on the
reports of the Board.

Consequently, we found no cogent reason to deviate from the same course taken by the CA give
weight to the consolidated report of the Board and treat it as competent and sufficient evidence of
what are stated therein. After all, the dearth of evidentiary documents that could have shed light on
the alleged unintended crediting and unexplained withdrawals was brought about by Land Banks
failure to maintain accurate records as required by the IMAs. In Simex International (Manila), Inc. v.
Court of Appeals,81 we elucidated on the nature of banking business and the responsibility of banks:

The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to
entrust his lifes savings to the bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with equal faith, usually maintains a
modest checking account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and
active associate that can help in the running of their affairs, not only in the form of loans when
needed but more often in the conduct of their day-today transactions like the issuance or
encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo and as promptly as possible. This has to be done if
the account is to reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever he directs. x x x

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligations to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. x x x (Emphasis supplied)

As to the conceded inaccuracies in the reports, we cannot allow Land Bank to benefit therefrom.
Time and again, we have cautioned banks to spare no effort in ensuring the integrity of the records
of its clients.82 And in Philippine National Bank v. Court of Appeals,83 we held that as between
parties where negligence is imputable to one and not to the other, the former must perforce bear the
consequences of its neglect. In this case, the Board could have submitted a more accurate report
had Land Bank faithfully complied with its duty of maintaining a complete and accurate record of
Oates accounts. But the Board could not find and present the corresponding slips for the
withdrawals reflected in the passbooks. In addition, and as earlier mentioned, Land Bank was less
than cooperative when the Board was examining the records of Oates accounts. It did not give the
Board enough leeway to go over the records systematically or in orderly fashion. Hence, we cannot
allow Land Bank to benefit from possible inaccuracies in the reports.

Neither does Oates failure to exercise his rights to inspect the records and audit his accounts
excuse the bank from sending the required notices, for under the IMAs it behooved upon Land Bank
to keep him fully informed of the status of his investments by sending him regular reports and
statements. Oates failure to inspect the record of his accounts should neither be construed as his
waiver to be furnished with updates on his accounts nor authority for the bank to make
undocumented withdrawals. As aptly opined by the CA:

x x x The least that Land Bank could have done was to keep a detailed quarterly report on [its] file. In
this case, Land Bank did away with this procedure that made [its] records a complete mess of
voluminous and meaningless records of numerous folders containing more than 7,600 leaves/pages
and some 90 passbooks, with 1,355 leaves/pages of entries, corresponding to the seven (7) Trust
Accounts.

The passbook entries alone are insufficient compliance with Land Banks duty to keep accurate
records of all investments, receipts, disbursements and other transactions of the Account. These
passbooks do not inform what investments were made on the funds withdrawn. Moreover, these
passbook entries do not show if the amounts purported to have been invested were indeed received
by the concerned entity, facility, or borrower. From these entries alone, Oate would have no way of
knowing where his money went.84

But Land Bank next postulates that if Oate is entitled to the undocumented withdrawals on the
basis of the reports of the Board, then it should also be entitled to the negative balances or over
withdrawals as reflected in the same reports.

We cannot agree for a number of reasons. First, as earlier discussed, Land Bank is guilty of
negligence while Oate (at least insofar as over withdrawals are concerned) is not. Had Land Bank
maintained an accurate record, it would have readily detected and prevented over withdrawals. But
without any qualms, Land Bank asks for the negative balances, unmindful that such claim is actually
detrimental to its cause because it amounts to an admission that it allowed over withdrawals. As
aptly observed by the CA:

Corollarily, the Court cannot allow Land Bank to recover the negative balances from Oates trust
accounts. Examining the Commissioners Report, the Court notes that the funds of Oates trust
accounts became seriously depleted due to the unaccounted withdrawals that Land Bank charged
against his accounts. At any rate, those negative balances on Oates accounts show Land Banks
inefficient performance in managing his trust accounts. Reasonable bank practice and prudence
[dictate] that Land Bank should not have authorized the withdrawal of various sums from Oates
accounts if it would result to overwithdrawals. x x x85

Second, Land Bank never prayed for the recovery of the negative balances in its Complaint.

It is settled that courts cannot grant a relief not prayed for in the pleadings or in excess of what is
being sought by the party. x x x Due process considerations require that judgments must conform to
and be supported by the pleadings and evidence presented in court. In Development Bank of the
Philippines v. Teston,86 this Court expounded that:

Due process considerations justify this requirement. It is improper to enter an order which exceeds
the scope of relief sought by the pleadings, absent notice which affords the opposing party an
opportunity to be heard with respect to the proposed relief. The fundamental purpose of the
requirement that allegations of a complaint must provide the measure of recovery is to prevent
surprise to the defendant.87

Last, during the pre-trial conference, the issue of the validity of undocumented withdrawals was
properly put into issue. The parties also agreed, as a collateral issue, that should it appear that the
bank was not authorized to make the undocumented withdrawals, the next issue for consideration
would be whether the amount subject thereof should be credited back to Oates accounts.88 The
case of negative balances as alluded to by Land Bank, however, is different. It was never put into
issue during the pre-trial conference. In Caltex (Philippines), Inc. v. Court of Appeals,89 we held that
to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such as may involve privileged or
impeaching matters. The determination of issues at a pre-trial conference bars the consideration of
other questions on appeal. Land Bank interposed its claim to the negative balances for the first time
only when it filed its Memorandum with the RTC.

Land Bank knew from the start and
admitted during trial that Trust
Account Nos. 01-014 and 01-017 do not
belong to Oate; hence, it should not
have debited any amount therefrom to
compensate for the alleged personal
indebtedness of Oate.

Land Bank claims that Oate cannot sue on Trust Account Nos. 01-014 and 01-017 without joining
as an indispensable party his undisclosed principal.

But if anyone in this case is guilty of failing to join an indispensable party, it is Land Bank that first
committed a violation. The IMAs covering Trust Account Nos. 01-014 and 01-017 attached as
Annexes A90 and B,91 respectively, of Land Banks Complaint clearly state that Oate signed the
same FOR: UNDISCLOSED PRINCIPAL. As party to the said IMAs, Land Bank knew and ought
not to forget that Oate is merely an agent and not the owner of the funds in said accounts. Yet Land
Bank garnished the total amount of P792,595.25 from Trust Account Nos. 01-014 and 01-017 to
answer for the alleged personal indebtedness of Oate. Worse, when Land Bank filed its Complaint
for Sum of Money, it did not implead said undisclosed principal or inform the trial court thereof. Now
that Oate is seeking the restoration of the amounts debited and withdrawn without withdrawal slips
from said accounts, Land Bank is invoking the defense of failure to implead an indispensable party.
We cannot allow Land Bank to do this. As aptly observed by the trial court:

Under the circumstances obtaining, it is highly unfair, unjust and iniquitous, to dismiss the suit with
respect to the two Trust Accounts after [Land Bank] had garnished the balances of said accounts to
pay the alleged indebtedness of [Oate] allegedly incurred by the erroneous crediting of P4 million to
x x x Trust Account No. 01-125 which does not appear to be owned by an undisclosed principal.
Trust Account No. 01-125 is [Oates] personal trust account with plaintiff. Stated differently, [Land
Bank] having now recognized and admitted that Trust Account Nos. 01-014 and 01-017 were not
owned by [Oate], it has perforce no right, nay unlawful for it, to apply the funds in said accounts to
pay the alleged indebtedness of [Oates] personal account. Equity and justice so demand that the
funds be restored to Trust Account Nos. 01-014 and 01-017.92

Oate protested the contents of the
statements of account at the earliest
opportunity.

As to Land Banks insistence that Oate is deemed to have accepted the contents of the statements
of account for his failure to manifest his objection thereto within 30 days from receipt thereof, it
should be recalled that from the time the alleged miscrediting occurred in November 1980, the first
communication coming from Land Bank was its letter dated October 8, 1981.93 This, however, was
the subject of a failed negotiation between the parties. Besides, said letter can hardly be considered
as an statement that would apprise Oate of the status of his investments. It is not a balance sheet,
portfolio analysis, statement of income and expenses or a summary of investment changes as
contemplated in paragraph 4 of the IMAs. It is a demand letter seeking the return of the alleged
miscredited amount. The same goes true with Land Banks letter dated September 3, 1991. As can
be readily seen from its opening paragraph, said letter is in response to Oates demand for
information regarding the offsetting,94 which Oate protested and is now one of the issues involved
in this case. In fine, it cannot be said that Oate approved and adopted the outstanding balances in
his accounts for his failure to object to the contents of those letters within the 30-day period allotted
to him under the IMAs.

From what is available on the voluminous records of this case and as borne out by the Boards
consolidated report dated August 16, 2004, the statements which Land Bank sent to Oate are only
the following:

Based on the Annexes95 attached to Oates Answer (With Compulsory Counterclaim)





The patent wide gap between the time Land Bank furnished Oate with Balance Sheets as of June
30, 1982 and the date it sent him an Statement of Income and Expenses, as well as a Balance
Sheet, on March 31, 1990 is a clear and gross violation of the IMAs requiring it to furnish him with
balance sheet, portfolio analysis, statement of income and expenses and the like, quarterly. As to
the reports dated June 30, 1991 and letters subsequent thereto, it should be noted that during those
times Oate had already interposed his objections to the outstanding balances of his accounts.96

The proper rate of legal
interest.

Land Banks argument that the lower courts erred in imposing 12% per annum rate of interest is
likewise devoid of merit. The unilateral offsetting of funds without legal justification and the
undocumented withdrawals are tantamount to forbearance of money. In the analogous case of
Estores v. Supangan,97 we held that [the] unwarranted withholding of the money which rightfully
pertains to [another] amounts to forbearance of money which can be considered as an involuntary
loan. Following Eastern Shipping Lines, Inc. v. Court of Appeals,98 therefore, the applicable rate of
interest in this case is 12% per annum. Besides, Land Bank is estopped from assailing the award of
12% per annum rate of interest. In its Complaint, Land Bank arrived at P8,222,687.89 as the
outstanding indebtedness of Oate by using the same 12% per annum rate of interest. It was only
after the lower courts rendered unfavorable decisions that Land Bank started to insist that the
applicable rate of interest is 6% per annum.

Of equal importance is the determination of when the said 12% per annum rate of interest should
commence. Recall that both the RTC and the CA reckoned the running of the 12% per annum rate
of interest from June 21, 1991, or the day Land Bank unilaterally applied the outstanding balance in
all of Oates trust accounts, until fully paid. The compounding of interest, on the other hand, was
based on the provision of the IMAs granting Land Bank to hold, invest and reinvest the Fund and
keep the same invested, in your sole discretion, without distinction between principal and income.

While we find sufficient basis for the compounding of interest, we find it necessary however to
modify the commencement date. In Eastern Shipping,99 it was observed that the commencement of
when the legal interest should start to run varies depending on the factual circumstances obtaining in
each case.100 As a rule of thumb, it was suggested that where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run only from the date the judgment of the
court is made101 (at which time the quantification of damages may be deemed to have been
reasonably ascertained).102

In the case at bench, while Oate protested the setting off, no proof was presented that he formally
demanded for the return of the amount so debited prior to the filing of the Complaint. Quite
understandably so because at that time he could not determine with some degree of certainty the
outstanding balances of his accounts as Land Bank neglected on its duty to keep him updated on
the status of his accounts. Land Bank even undertook to furnish him with the exact computation103
of what remains in his accounts after the set off. But this never happened until Land Bank initiated
the Complaint on September 7, 1992. Oate, on the other hand, filed his Answer (With Compulsory
Counterclaim) on May 26, 1993. In other words, we cannot reckon the running of the interest prior to
the filing of the Complaint or Oates Counterclaim as no demand prior thereto was made. Neither
could the interest commence to run at the time of filing of any of aforesaid pleadings (as to constitute
judicial demand) since the undocumented withdrawals in the sums of P60,663,488.11 and
US$3,210,222.85, as well as the amount actually debited from all of Oates accounts, were
determined only after the Board submitted its consolidated report on August 16, 2004 or more than
10 years after Land Bank and Oate filed their Complaint and Answer, respectively. Note too that
while Oate sought to recover the amount of undocumented withdrawals before the RTC,104 the
same was denied in the latters May 31, 2006 Decision. The RTC granted Oate only the total
amount of funds debited from his trust accounts. It was only when the CA rendered its December 18,
2009 Decision that Oate was awarded the undocumented withdrawals. Hence, we find it just and
proper to reckon the running of the interest of 12% per annum, compounded yearly, for the debited
amount and undocumented withdrawals on different dates. The debited amount of P1,471,416.52,
shall earn interest beginning May 31, 2006 or the day the RTC rendered its Decision granting said
amount to Oate. As to the undocumented withdrawals of P60,663,488.11 and US$3,210,222.85,
the legal rate of interest should start to run the day the CA promulgated its Decision on December
18, 2009.

During the pendency of this case, however, the Monetary Board issued Resolution No. 796 dated
May 16, 2013, stating that in the absence of express stipulation between the parties, the rate of
interest in loan or forbearance of any money, goods or credits and the rate allowed in judgments
shall be 6% per annum. Said Resolution is embodied in Bangko Sentral ng Pilipinas Circular No.
799, Series of 2013, which took effect on July 1, 2013. Hence, the 12% annual interest mentioned
above shall apply only up to June 30, 2013. Thereafter, or starting July 1, 2013, the applicable rate
of interest for both the debited amount and undocumented withdrawals shall be 6% per annum,
compounded annually, until fully paid.

WHEREFORE, the Petition is hereby DENIED and the December 18, 2009 Decision of the Court of
Appeals in CA-G.R. CV No. 89346 is AFFIRMED with modification in that the interest of 12% per
annum, compounded annually, for the debited amount of Pl,471,416.52 shall commence to run on
May 31, 2006, while the same rate of interest shall apply to the undocumented withdrawals in the
amounts of P60,663,488.11 and US$3,210,222.85 starting December 18, 2009. Beginning July 1,
2013, however, the applicable rate of interest on all amounts awarded shall earn interest at the rate
of 6% per annum, compounded yearly, until fully paid.

SO ORDERED.

PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. PEDRING CALIXTRO,
CELSO FERRER and LOUIE FERRER, accused, PEDRING CALIXTRO,
accused-appellant.

The Solicitor General for plaintiff-appellee.
Eliseo A. Mendoza for accused-appellant.
G.R. No. 92355 | 1991-01-24

D E C I S I O N


PARAS, J.:

This is an appeal from the decision of the Regional Trial Court, Branch 33, Guimba, Nueva Ecija, in
Criminal Case No. 536-G1 entitled "People of the Philippines v. Pedring Calixtro, Celso Ferrer and
Louie Ferrer", convicting the accused-appellant, Pedring Calixtro, of the crime of rape (Rollo, pp. 22-
26).

The accused Pedring Calixtro, Celso Ferrer and Louie Ferrer were charged with the crime of
Robbery with Rape under the following information:

"That on or about the 24th day of April, 1989 in Barangay Faigal, Municipality of Guimba, Province of
Nueva Ecija, Philippines, and within the jurisdiction of this Honorable Court, the above-named
accused being then armed with sharp-pointed instrument (patalim), conspiring, confederating and
helping one another, and with intent to gain and by means of force and violence and intimidation
upon person, did then and there willfully, unlawfully and feloniously take, steal and carry away one
(1) gold ring with three (3) stones of diamond and one (1) pair of earrings with one stone diamond
with a total value of TEN THOUSAND PESOS (P10,000.00) Philippine Currency, more or less,
belonging to EDELIZA ASTELERO to the damage and prejudice of the latter in the said amount; and
that during or on the occasion of the robbery, the said three (3) accused conspiring, confederating
and helping one another did then and there willfully, unlawfully and feloniously have sexual
intercourse one after the other with said EDELIZA ASTELERO against her will.

"That the crime was committed with the aggravating circumstance of nighttime which was taken
advantage of by the said accused; and as a consequence of which the complaining witness suffered
actual, moral and consequential damageswhich could be estimated in the total sum of P100,000.00.

"CONTRARY TO LAW." (p. 7, Rollo)

The pertinent facts of the case as gathered from the records are as follows:

Edeliza Astelero, her husband Gonzalo Astelero, and an 11-year old son are residents of Barangay
Faigal, Guimba, Nueva Ecija. Pedring Calixtro had been a resident of the same barangay for a year
before the incident occurred.

At about 10:00 o'clock in the night of April 24, 1989, while the Astelero family were peacefully resting
in their abode, Edeliza heard the barking of dogs; she peeped thru the hole of their window and she
saw three male persons. She went to her husband on the bed and awakened him. Both peeped
through the hole of the window where they saw three men calling from outside, "Manang, Manang,
buksan mo ang pintuan." She went near the door of their hut. One of the three persons threatened
her that if she would not open the door, they would blast the house with a hand grenade. She was
about to open the door but they continued kicking the door to open the same (p. 8, TSN, Oct. 10,
1989). Then they hacked the wall of their house and the same fell down. She was afraid that her
family would be killed, so she decided to open the door. As she was opening the door, Celso Ferrer
pulled her outside of the house and threatened her not to ask for help. Then they dragged her out to
the middle of the fields (pp. 9-10, TSN, Ibid.).

In the middle of the field, Celso Ferrer and Louie Ferrer took hold of her arms and pointed a bladed
weapon at her neck. At that very moment, accused Pedring Calixtro told her that if she would not
give her womanhood she would be killed. She pleaded for mercy but accused Pedring Calixtro
succeeded in removing her duster and short pants. She struggled but the accused started hurting
her thighs (p. 11, TSN, Ibid.). Pedring Calixtro succeeded in having sexual intercourse with the
victim, while Celso Ferrer took off her ring and earrings. Celso Ferrer and Louie Ferrer took turns in
abusing her. After the heinous acts, the three accused debated whether to kill Edeliza Astelero or
not. Edeliza took the opportunity to flee while the three were discussing. She ran as fast as she
could until she saw a jeep, which she later found to be carrying her husband. Thereafter she was
brought to the hacienda of Bebang Adriano (pp. 12-14, TSN, Ibid.).

The testimony of complainant witness is corroborated by Rogelio de la Cruz, a barangay tanod and
neighbor of the Asteleros. He testified that in the evening of April 24, 1989 at around 10:00 o'clock,
more or less, the accused Pedring Calixtro, Celso Ferrer and Louie Ferrer arrived in his house, and
asked him for chicken, which they told him to cook and prepare as "pulutan" but he refused.

The three consumed a bottle of wine in his house. When the three left, he followed them secretly
towards the house of complainant. He saw them kicking the house and ordering the occupants to
open the door. Moments later, he saw them dragging the complainant away from her house towards
the field. He reported the incident to the Barangay Captain (pp. 3-8, TSN, Nov. 14, 1989).

Police Corporal Juanito Villaba testified that in the evening of April 24, 1989, while in the office of the
Integrated National Police, (Guimba, Nueva Ecija, Barangay Captain Marina Quitallas and
companions arrived and reported that a certain Edeliza Astelero had forcibly been taken from her
house by three male persons. Officer-in-charge, Lt. Soriano, dispatched Sgt. Mendoza and other
policemen to respond to the call (pp. 5-6, TSN, Nov. 21, 1989).

Dr. Diosdado Barawid testified that the victim was brought to him for examination sometime on April
25, 1989 and he made the following observation: "light blackish discoloration right hip lower portion,
inner aspect; several abrasion upper portion and inner aspect, and laboratory examination of vaginal
smear-positive (+) for sperm cell, 3 counted." He further testified that the abrasions or injuries
sustained by Edeliza Astelero were caused by a blow and there were signs of struggle (pp. 3-7,
TSN, Nov. 27, 1989).

Pedro Calixtro testified on his behald that at 5:00 p.m. on April 24, 1989 he was tendering water in
his ricefield. And about 5:30 of the same afternoon he was invited by Celso Ferrer and Louie Ferrer
to the house of Rogelio de la Cruz tobuy chicken. He proceeded back to the ranch after 30 minutes
and attended to the water pump. That during the hours of 10:00 and 11:00 p.m. of the same night he
heard shouts. He proceeded to the direction of the shouts and saw a naked woman being forced and
brought away by Celso Ferrer and Louie Ferrer. Then he heard from Celso Ferrer the words
"papatayin kita", being addressed to Edeliza. Witness gave to Edeliza the dress which he noticed
behind her. A fist fight ensued between him and Celso. After the fight, he noticed that Edeliza ran
away, whereas, he went to the watering pump.

At about 6:00 o'clock the following morning, he was apprehended by Sgt. Soriano (pp. 3-11, TSN,
November 28, 1989; pp. 7-9, Brief for the Accused-Appellant; Rollo, pp. 43-45).

Of the three accused, only Pedring Calixtro was apprehended. Pedring Calixtro pleaded "not guilty"
to the crime charged, thereafter, trial on the merits ensued. After trial, the court a quo rendered a
decision, the dispositive portion of which reads as follows:

"WHEREFORE, the Court finds the accused Pedring Calixtro guilty beyond reasonable doubt of the
crime of Rape as described under Art. 335 of the Revised Penal Code, as amended, and hereby
sentences him to suffer the penalty of reclusion perpetua; and to indemnify the complainant in the
amount of P30,000.00, without subsidiary imprisonment in case of insolvency.

"SO ORDERED." (pp. 26, Rollo)

Dissatisfied, Pedring Calixtro appealed and assigned the following errors, to wit:

"I
THE LOWER COURT ERRED IN CATEGORICALLY PRONOUNCING THAT THE TESTIMONIES
OF THE COMPLAINANT EDELIZA ASTELERO DURING THE TRIAL OF THE CASE CLEARLY
ESTABLISHED THE GUILT OF ACCUSED-APPELLANT BEYOND REASONABLE DOUBT, AS
NARRATED BY SAID COURT IN THE THIRD AND LONGEST PARAGRAPH OF PAGE 2 OF THE
DECISION IN QUESTION.

"II
THE LOWER COURT ERRED IN: STATING THAT THE ACCUSED-APPELLANT'S DEFENSE
CONSISTED OF MERE DENIALS OF THE CRIME CHARGED AND ALIBI; AND IN RE-STATING
THE TESTIMONIES OF SAID ACCUSED-APPELLANT IN SHORT FIRST PARAGRAPH OF PAGE
4 OF SAID DECISION.

"III
THE LOWER COURT ERRED IN FINDING THAT THE COMPLAINANT HAD POSITIVELY
IDENTIFIED ACCUSED-APPELLANT AS ONE OF THE PERSONS WHO SEXUALLY MOLESTED
HER.

"IV
THE LOWER COURT ERRED IN DISCREDITING THE TESTIMONIES OF THE ACCUSED-
APPELLANT AS THE SAME WERE NOT CORROBORATED BY OTHER EVIDENCE.

"V
THE LOWER COURT ERRED IN NOT FINDING COGENT REASON WHY THE COMPLAINANT
SHOULD FALSELY CHARGE THE ACCUSED-APPELLANT OF THE SERIOUS CRIME OR
ROBBERY WITH RAPE.

"VI
THE LOWER COURT ERRED IN NOT DISCREDITING THE TESTIMONIES OF ROGELIO DE LA
CRUZ.

"VII
THE LOWER COURT ERRED IN ALLOWING THE COMPLAINANT TO TESTIFY IN STORY-
TELLING MANNER OVER THE OBJECTION OF THE UNDERSIGNED COUNSEL; and

"VIII
THE LOWER COURT ERRED IN NOT TAKING INTO CONSIDERATION IN MAKING ITS
DECISION, THE ACCUSED-APPELLANT'S MEMORANDUM FILED ON JANUARY 2, 1990,
PURSUANT TO THE VERBAL ORDER DATED DECEMBER 11, 1989 AND IN NOT INCLUDING
SAID MEMORANDUM AND THE NOTICE OF APPEAL IN THE RECORDS OF THE CASE
REMANDED TO THIS HONORABLE SUPREME COURT." (pp. 37-38, Rollo)

Under Article 335 of the Revised Penal Code, rape is committed if the accused had carnal
knowledge of a woman and such act is accomplished under the following circumstances: (1) by
using force or intimidation; (2) when the woman is deprived of reason or otherwise unconscious; and
(3) when the woman is under twelve years of age, even though neither of the circumstances
mentioned in the two next preceding paragraphs is present.

There are three settled principles to guide an appellate court in reviewing the evidence in
rape cases: (1) an accusation for rape can be made with facility; it is difficult to prove it but more
difficult for the person accused, though innocent, to disprove it (People v. Aldana, G.R. No. 81817,
July 27, 1989); (2) in view of the intrinsic nature of the crime of rape where two persons are usually
involved, the testimony of the complainant must be scrutinized with extreme caution; and (3) the
evidence for the prosecution must stand or fall on its own merits, and cannot be allowed to draw
strength from the weakness of the evidence for the defense (People v. Villapana, 161 SCRA 72).
What is decisive in the rape charged is complainant's positive identification of the accused-appellant
as the malefactor (People v. Mustacisa, 159 SCRA 227; People v. Ramilo, 146 SCRA 258).

In the case at bar, the defense depended heavily on supposed inconsistencies pervading
complainant's testimony at the trial court below.
Appellant pointed out alleged inconsistencies and improbabilities in the testimony of the rape victim
Edeliza Astelero which allegedly cast reasonable doubt on his guilt. The most notable of these were:
(a) although she testified on direct that she was alone when she peeped through the hole of their
window and saw three (3) male persons, on cross, she claimed that it was she and her husband who
peeped through the hole of their window; (b) while, on direct, she testified that she heard the barking
of the dogs at around 10:00 p.m., on cross, she stated that she heard the barking of the dogs at
around 7:00 p.m.; (c) on direct, she did not state that her assailants wore masks and that she herself
was blindfolded which she mentioned only on cross; (d) she could not have recognized her
assailants because they wore masks and she was blindfolded.

We find the alleged inconsistencies as too trivial, insignificant and inconsequential to merit the
reversal of the trial court's decision. The inconsistencies pointed out by appellant can hardly affect
the complainant's credibility. They refer to minor details or to the precise sequence of events that do
not detract from the central fact of rape, on which complainant had consistently and candidly
testified. A witness who is in a state of fright cannot be expected to recall with accuracy or uniformity
matters connected with the main overt act (People v. Ramilo, supra). The testimonial discrepancies
could have also been caused by the natural fickleness of memory, which tend to strengthen, rather
than weaken, credibility as they erase any suspicion of rehearsed testimony (People v. Cayago; 158
SCRA 586). These discrepancies on minor details serve to add credence and veracity to her
categorical, straightforward, and spontaneous testimony (People v. Ramilo, supra).

Minor discrepancies indicate that the witness was not previously rehearsed, and consequently
strengthen her credibility. It would, perhaps, have been more suspicious if complainant had been
able to pinpoint with clarity or described with precision the exact sequence of events (People v.
Cayago, supra; People v. Alfonso, 153 SCRA 487). The rape victim should not be expected to keep
an accurate account of the traumatic and horrifying experience she went through.

Needless to say, when the issue is one of credibility of witnesses, the findings of the trial court are
generally accorded a high degree of respect, the court having observed the demeanor and
deportment of witness. We find no compelling reason to deviate from this settled rule.

Appellant alleged that it was improbable for Edeliza to have recognized him when she herself was
blindfolded and her assailants wore masks. Such contention is devoid of merit.

Although Edeliza was blindfolded and her assailants wore masks, she was positive in her testimony
that she recognized the appellant as one of her attackers through the latter's voice. Edeliza could
recognize appellant through his voice inasmuch as they are barriomates. In fact, appellant even
admitted that they were friends, thus:

Q Mr. Witness, how long have you been in Faigal, Guimba, Nueva Ecija, in the ranch of Mrs.
Bebang Adriano prior to April 24, 1989?

A About one (1) year, sir, that I had been staying there.

Q And during that length of time you came to know Edeliza Astelero and her husband who are also
from Faigal, Guimba, Nueva Ecija, is it not?

A Yes, sir.

Q And they used to go to that ranch. In fact considering the length of time that you have known
Edeliza Astelero and her husband you alleged that you are their friend and the same way that they
also were your friends?

A Yes, sir. (p. 16, TSN, Nov. 18, 1989)

In People vs. Inot, 150 SCRA 322 (1987), We ruled:

". . . complainant's identification of the appellant was not based solely on the latter's physical defect,
but by his voice as well, when he warned complainant, 'Flor, keep quiet.' Although complainant did
not see appellant's face during the sexual act because the house was dark, nevertheless, no error
could have been committed by the complainant in identifying the voice of the accused, inasmuch as
complainant and appellant were neighbors . . ."

This is corroborated by the testimony of Rogelio de la Cruz who saw Pedring Calixtro, Celso Ferrer
and Louie Ferrer dragged Edeliza Astelero out of her house.

Appellant put up the defense of alibi that he was looking after his irrigation task when he heard
shouts, and went back after having a fist fight with Celso Ferrer.

Defense of alibi is inherently weak and cannot prevail over the positive identification of the accused
(People v. Cayago, 158 SCRA 586). For the defense of alibi to succeed, the accused must establish
physical impossibility and improper motive of the prosecution witnesses, which matters the accused
failed to prove (People v. Alfonso, 153 SCRA 487).

Edeliza Astelero had positively identified the accused Pedring Calixtro as one of the persons who
had raped her in the middle of the fields. His alibi, that he was at the ranch during the hours of 10:00
and 11:00 p.m. of April 24, 1989 and while he was looking after his farm he heard shouts, and he
was the one who saved and rescued Edeliza Astelero, can only be taken with a grain of salt. Such a
statement could easily be fabricated, more so when it is not corroborated by testimonies of other
impartial witnesses. The accused was the lone witness for his defense. The accused could have had
his testimony corroborated by presenting other persons who could well testify on what he had been
doing in the evening of April 24, 1989. Mere denial of the commission of a crime cannot prevail over
the positive identification made by the complaining witness.

Appellant stresses the prosecution's failure to present the husband and son of Edeliza. The
expected testimony of husband and son had already been dealt upon by Edeliza Astelero and
Rogelio de la Cruz. There is no cogent reason for them to corroborate what had been testified on.
Besides it is the prerogative of the prosecution to choose its witnesses (People v. Quebral, 134
SCRA 425; People v. Martinez, 127 SCRA 260).

In rape, the prosecution need not present testimonies of people other than the offended party herself
if the same is accurate and credible (People v. Robles, G.R. No. 53569, February 23, 1989).

Appellant questions the credibility of Rogelio de la Cruz as a witness. The former argues that being a
barangay tanod, de la Cruz should have apprehended the malefactors and should have prevented
the heinous crime.

De la Cruz reasoned out that he was afraid that they might kill him; the malefactors were, then,
armed with deadly bladed weapons. His only weapon was a stick, which was not a match against
bladed weapons. He feared for his life, such is not contrary to human nature. Thus, de la Cruz
should not foolhardily attempt to stop the malefactors in his state of physical disadvantage and stake
his life in the process.

The allegation that Pedring Calixtro was implicated because the real perpetrators were not arrested
defies human reason.

It is hard to believe that a woman, a simple housewife and mother, would fabricate a rape charge
and subject herself and family to shame, humiliation and embarrassment of a public trial. We have
oftentimes ruled that a woman would not undergo the expense, trouble and inconvenience of a
public trial, not to mention the scandal, embarrassment and humiliation such action inevitably invites,
as well as allow an examination of her private parts, if her motive is not to bring to justice the
persons who had abused her (People v. Muoz, 163 SCRA 730; People v. Cayago, 158 SCRA 586;
People v. Viray 164 SCRA 135; People v. Magdaraog, 160 SCRA 153; People v. Bulosan, 160
SCRA 492; People v. Hacbang, 164 SCRA 441).

Appellant further contends that the trial court erred in allowing the complainant-witness to testify in
narrative form.

This contention is likewise devoid of merit.

Usually in criminal cases, the material facts within the knowledge of a witness are elicited by
questions put to him by the counsel calling him. By this means, the evidence is readily limited and
confined within the issue for the reason that the relevancy of the answer can in most cases be
ascertained from the character of the question (Underhill's Criminal Evidence, Sec. 387, p. 742).

While this is the general rule, it still rests within the sound discretion of the trial judge to determine
whether a witness will be required to testify by question and answer, or will be permitted to testify in
a narrative form (98 C.J.S., Sec. 325, p. 26). There is no legal principle which prevents a witness
from giving his testimony in a narrative form if he is requested to do so by counsel. A witness may be
allowed to testify by narration if it would be the best way of getting at what he knew or could state
concerning the matter at issue. It would expedite the trial and would perhaps furnish the court a
clearer understanding of the matters related as they occurred. Moreover, narrative testimony may be
allowed if material parts of his evidence cannot be easily obtained through piecemeal testimonies.
But if, in giving such testimony, the witness states matters irrelevant or immaterial or incompetent, it
is the right and duty of counsel objecting to such testimony to interpose and arrest the narration by
calling the attention of the court particularly to the objectionable matter and, by a motion to strike it
out, obtain a ruling of the court excluding such testimony from the case (98 C.J.S., Ibid.). While a
witness may be permitted in the discretion of the court to narrate his knowledge of material facts
bearing upon the case without specifically being interrogated in detail, it is also within the discretion
of the court to prohibit a witness from volunteering unsought information in connection with the case
(5 Jones on Evidence, Sec. 2312).

Appellant takes notice of the fact that the trial court did not consider his memorandum. We find that
the contents of the memorandum were passed upon in the judgment of the trial court. The
arguments therein were discussed by it. The arguments presented did not raise new issues; hence,
the memorandum deserves scant consideration.

We find, as the trial court found, that appellant successively raped the offended party while the other
two accused held down the victim, showing that conspiracy existed. Said other two also took turns in
raping. In a conspiracy, the act of one is the act of all. There are three (3) crimes of rape, appellant,
having conspired with the two others, should be convicted on three counts of rape. Thus, Pedring
Calixtro is also responsible for the acts of Celso Ferrer and Louie Ferrer. The case of People v.
Cayago, (158 SCRA 586) is applicable in the case at bar:

"The trial court found as a fact that appellant and others, having conspired with each other,
successively raped the offended party while the other held down the victim. This is adequate basis
for convicting appellant Cayago of three (3) crimes of rape. The judgment of the trial court does not
purport to convict Macaraeg and Capitle and would not, of course, bind them should they ever be
arrested and brought to trial; they may plead any defense to which they might feel entitled, such as
insanity or mistaken identity, etc."

We find the accused's guilt to have been proved beyond reasonable doubt.

ACCORDINGLY, the judgment of conviction is hereby AFFIRMED, INCREASING the penalty
imposed on the appellant to three (3) penalties of RECLUSION PERPETUA, and for him to
indemnify the offended party in the sum of P30,000.00 in each case for a total of P90,000.00 and to
pay the costs.

SO ORDERED.


Spouses Nilo Ramos and Eliadora Ramos, Petitioners, Vs. Raul Obispo and
Far East Bank and Trust Co., Respondents.
G.R. No. 193804 | 2013-02-27


A discussion citing this case is available.
Accommodation mortgagor


FIRST DIVISION

DECISION

VILLARAMA, JR, J.:

Assailed in this petition for review on certiorari under Rule 45 is the Decision1 dated January 27,
2010 of the Court of Appeals (CA) in CA-G.R. CV No. 82378 which reversed and set aside the
Decision2 dated January 29, 2004 of the Regional Trial Court (RTC) of Quezon City, Branch 82 in
Civil Case No. Q-99-38988.

The facts follow:

Petitioner Nilo Ramos and respondent Raul Obispo met each other and became best friends while
they were working in Saudi Arabia as contract workers. After both had returned to the Philippines,
Ramos continued to visit Obispo who has a hardware store. Sometime in August 1996, petitioners
executed a Real Estate Mortgage (REM) in favor of respondent Far East Bank and Trust Company
(FEBTC)-Fairview Branch, over their property covered by Transfer Certificate of Title (TCT) No. RT-
64422 (369370) of the Registry of Deeds of Quezon City. The notarized REM secured
credit accommodations extended to Obispo in the amount of P1,159,096.00. On even date, the
REM was registered and annotated on the aforesaid title.3

On September 17, 1999, FEBTC received a letter from petitioners informing that Obispo, to whom
they entrusted their property to be used as collateral for a P250,000.00 loan in their behalf, had
instead secured a loan for P1,159,096.00, and had failed to return their title despite full payment
by petitioners of P250,000.00. Petitioners likewise demanded that FEBTC furnish them with
documents and papers pertinent to the mortgage failing which they will be constrained to refer the
matter to their lawyer for the filing of appropriate legal action against Obispo and FEBTC.4

There being no action taken by FEBTC, petitioners filed on October 12, 1999 a complaint for
annulment of real estate mortgage with damages against FEBTC and Obispo. Petitioners alleged
that they signed the blank REM form given by Obispo who facilitated the loan with FEBTC, and
that they subsequently received the loan proceeds of P250,000.00 which they paid in full through
Obispo. With their loan fully settled, they demanded the release of their title but Obispo refused to
talk or see them, as he is now hiding from them. Upon verification with the Registry of Deeds of
Quezon City, petitioners said they were surprised to learn that their property was in fact mortgaged
for P1,159,096.00. Petitioners thus prayed that the REM be declared void and cancelled; that
FEBTC be ordered to deliver to them all documents pertaining to the loan and mortgage of Obispo;
and that FEBTC and Obispo be ordered to pay moral damages and attorney's fees.5

In its Answer With Compulsory Counterclaim and Cross-claim, FEBTC averred that petitioners
agreed to execute the REM over their property as partial security for the loans obtained by Obispo
with a total principal balance of P2,500,000.00. Since the obligation secured by the REM remains
unpaid, FEBTC contended that it should not be compelled to release the mortgage on the subject
property. FEBTC further asserted that petitioners are guilty of laches and their claim already barred
by estoppel. Under its cross-claim, FEBTC prayed that in the event of judgment rendered in favor of
petitioners, Obispo should be made liable to answer for all the claims that may be adjudged against
it plus all damages it suffered.6

On motion of petitioners, Obispo was declared in default for failure to file any responsive pleading
despite due receipt of summons which he personally received.

After trial, the RTC rendered its Decision in favor of the petitioners and against the respondents, as
follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against defendants Raul J. Obispo and Far East Banking Trust Company (now Bank of the
Philippine Islands) as follows:

a) Declaring the real estate mortgage in favor of defendant Far East Bank & Trust Company (now
Bank of Philippine Islands) null and void;

b) Ordering defendant FEBTC (now BPI) to cancel the encumbrance on Transfer Certificate of Title
No. RT-64422 [369370] and release and surrender the Owners Duplicate copy thereof to the
herein plaintiffs;

c) Ordering defendants Obispo and FEBTC (BPI) to pay the plaintiffs jointly and severally the sum of
P200,000.00 as and by way of moral damages;

d) Ordering defendants Obispo and FEBTC (BPI) to pay the plaintiffs, jointly and severally the sum
of P50,000.00 as and by way of attorney's fees, and the cost of suit.

The cross-claim set forth by defendant FEBTC (BPI) against its co-defendant Obispo is hereby
ordered dismissed for lack of merit.

SO ORDERED.7

FEBTC appealed to the CA which reversed the trial court's decision and dismissed the complaint,
holding that petitioners were third-party mortgagors under Article 2085 of the Civil Code and that
they failed to present any evidence to prove their allegations. The appellate court thus decreed:

WHEREFORE, the assailed January 29, 2004 Decision of the Regional Trial Court of Quezon City,
Branch 82 in Civil Case No. Q-99-38988 is hereby REVERSED and SET ASIDE and a new one is
entered DISMISSING the Complaint of plaintiffs-appellees in Civil Case No. Q-99-38988.

SO ORDERED.8

Petitioners filed a motion for reconsideration but it was denied by the CA.

Hence, this petition raising the following errors allegedly committed by the appellate court when:

I
IT SET ASIDE THE DECISION DATED JANUARY 29, 2004 RENDERED BY BRANCH 82 OF THE
REGIONAL TRIAL COURT OF QU[E]ZON CITY BY UPHOLDING THE VALIDITY OF THE REAL
ESTATE MORTGAGE AND RULING THAT THE PETITIONERS WERE ACCOMMODATION
MORTGAGORS OF RESPONDENT RAUL OBISPO DESPITE THE FACT THAT NO CONSENT TO
SUCH EFFECT WAS GIVEN BY THEM AND THE PREPARATION THEREOF WAS ATTENDED
BY FRAUDULENT ACTS OR MISREPRESENTATIONS;

II
IT DISREGARDED EXISTING LAWS AND CURRENT JURISPRUDENCE IN NOT DECLARING
THE RESPONDENT BANK AS NOT A MORTGAGEE IN GOOD FAITH DESPITE THE CONTRARY
FINDING OF THE TRIAL COURT; and

III
IT DISREGARDED EXISTING LAWS AND SETTLED JURISPRUDENCE WHEN IT LIKEWISE
DELETED IN ITS DISPUTED DECISION THE AWARD OF DAMAGES, ATTORNEY'S FEES AND
COST OF SUIT IN FAVOR OF THE PETITIONERS.9

The petition has no merit.

The validity of an accommodation mortgage is allowed under Article 2085 of the Civil Code which
provides that "[t]hird persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property." An accommodation mortgagor, ordinarily, is not himself
a recipient of the loan, otherwise that would be contrary to his designation as such.10

In this case, petitioners denied having executed an accommodation mortgage and claimed to have
executed the REM to secure only their P250,000.00 loan and not the P1,159,096.00 personal
indebtedness of Obispo. They claimed it was Obispo who filled up the REM form contrary to their
instructions and faulted FEBTC for being negligent in not ascertaining the authority of Obispo and
failing to furnish petitioners with copies of mortgage documents. Obispo initially gave them
P100,000.00 and the balance was given a few months later. After supposedly completing payment
of the amount of P250,000.00 to Obispo, petitioners discovered that the REM secured a bigger
amount. Because of the alleged fraud committed upon them by Obispo who made them sign the
REM form in blank, petitioners sought to have the REM annulled and their title over the mortgaged
property released by FEBTC. In other words, since their consent to the REM was vitiated, judicial
declaration of its nullity is in order. The RTC granted relief to petitioners while the CA found the
subject REM as a valid third-party or accommodation mortgage due to petitioners' failure
to substantiate their allegations with the requisite quantum of evidence.

We sustain the decision of the CA.

In civil cases, basic is the rule that the party making allegations has the burden of proving them by a
preponderance of evidence. Moreover, parties must rely on the strength of their own evidence, not
upon the weakness of the defense offered by their opponent. This principle equally holds true, even
if the defendant had not been given the opportunity to present evidence because of a default order.
The extent of the relief that may be granted can only be as much as has been alleged and proved
with preponderant evidence required under Section 1 of Rule 133 of the Revised Rules on
Evidence.11

Preponderance of evidence is the weight, credit, and value of the aggregate evidence on either side
and is usually considered to be synonymous with the term "greater weight of the evidence" or
"greater weight of the credible evidence." Preponderance of evidence is a phrase which, in the last
analysis, means probability of the truth. It is evidence which is more convincing to the court as
worthier of belief than that which is offered in opposition thereto.12

As to fraud, the rule is that he who alleges fraud or mistake affecting a transaction must substantiate
his allegation, since it is presumed that a person takes ordinary care of his concerns and that private
transactions have been fair and regular.13 The Court has stressed time and again that allegations
must be proven by sufficient evidence because mere allegation
is definitely not evidence.14 Moreover, fraud is not presumed - it must be proved by clear and
convincing evidence.15

In this case, petitioners' testimonial evidence failed to convince that Obispo deceived them as to the
debt secured by the REM. Petitioners' factual allegations are not firmly supported by the evidence on
record and even inconsistent with ordinary experience and common sense.

While petitioners admitted they knew it was from FEBTC they will secure a loan, it was unbelievable
for them to simply accept the P250,000.00 loan proceeds without seeing any document or voucher
evidencing release of such amount by the bank containing the details of the transaction such
as monthly amortization, interest rate and added charges. It is difficult to believe petitioners'
simplistic explanation that they requested documents from Obispo but the latter would not give them
any. Such failure of Obispo to produce any receipt or document at all coming from the bank should
have, at the first instance, alerted the petitioners that something was amiss in the loan transaction
for which they voluntarily executed the REM with their own property as collateral. Not only that,
despite being aware of the absence of any document to ascertain if Obispo indeed filled up the REM
contract form in accordance with their instructions, petitioners accepted the supposed loan proceeds
in the form of personal checks issued by Obispo who claimed to have an account with FEBTC,
instead of checks issued by the bank itself. These alleged checks were not submitted in evidence by
the petitioners who could have easily obtained copies or record proving their issuance and
encashment.

Another disturbing fact is why, despite having signed the REM contract in their name as mortgagors,
petitioners did not go directly to the bank to pay their loan. One is also tempted to ask how
petitioners could have possibly arrived at the amount of amortization payments without having seen
any document from FEBTC pertaining to their loan account. Such conduct of petitioners in not
bothering to appear before the bank or directly dealing with it regarding their outstanding obligation
strongly suggests that there was no such loan account in their name and it was really Obispo who
was the borrower and petitioners were merely accommodation mortgagors.

But assuming for the moment that petitioners really entrusted to Obispo the remittance of their
payments to FEBTC, it is difficult to comprehend that they continued making payments to him
despite the latter's not having complied at all with their repeated demands for the corresponding
receipt from the bank. These demands for bank documents apparently had gone unheeded by
Obispo for about one year and three months - the same period before petitioners were able to make
full payment.16 Such considerably long period that petitioners remained indifferent and took no
prompt action against their alleged defrauder, Obispo, truly defies the normal reaction of ordinary
individuals giving rise to the inference that it was indeed Obispo who was the borrower/debtor
and petitioners were just accommodation mortgagors.

Assuming arguendo that the REM was invalid on the ground of vitiated consent and
misrepresentation by Obispo, petitioners' unjustified failure to act within a reasonable time after
Obispo repeatedly failed to turn over the mortgage documents, constitutes estoppel and waiver to
question its defect or invalidity. Corollarily, mortgagors desiring to attack a mortgage as invalid
should act with reasonable promptness, and unreasonable delay may amount to ratification.17

As to petitioners' assertion that they have settled their loan obligation by paying P250,000.00 to
Obispo, we note that said amount represents only the principal loan. Does this mean petitioners
assumed that FEBTC granted their loan free of interest? Or was there any special arrangement with
Obispo in consideration of the mortgage for the latter's benefit? Again, why was there no evidence of
such check payments allegedly made by petitioners to Obispo, presented in court? This hiatus in
petitioners' evidence raises serious doubt on their principal allegation that they never consented to
the third-party mortgage approved by FEBTC, leading to the conclusion that there was, in fact, an
agreement between Obispo and petitioners to use the latter's property as collateral for the former's
credit line with said bank.

It bears stressing that an accommodation mortgagor, ordinarily, is not himself a recipient of the loan,
otherwise that would be contrary to his designation as such. We have held that it is not always
necessary that the accommodation mortgagor be apprised beforehand of the entire amount of the
loan nor should it first be determined before the execution of the Special Power of Attorney in favor
of the debtor.18 This is especially true when the words used by the parties indicate that the
mortgage serves as a continuing security for credit obtained as well as future loan availments.

Here, petitioners as owners signed the REM as mortgagors and there is no evidence adduced that
suggests fraud or irregularity in its execution. Petitioners are not contracting parties whom the law
considers ignorant or disadvantaged but former overseas workers with sufficient education as to be
well-aware of the consequences of their personal decisions, consistent with the legal presumption
that a person takes ordinary care of his concerns. Hence, it can be reasonably inferred from the
facts on record that it was more probable that petitioners allowed Obispo to use their property
as additional collateral so as to avail of his existing credit line with FEBTC instead of petitioners
directly applying for a separate loan.

With the dearth of evidence to back up petitioners' story, the CA found implausible the alleged legal
infirmities in the execution of the REM. The appellate court thus aptly observed:

x x x it was defendant Obispo who obtained credit accommodation from defendant FEBTC which he
secured with the mortgage of the subject property. The property mortgaged was owned by plaintiffs-
appellees, considered a third party to the loan obligations of defendant Obispo with defendant-
appellant FEBTC. It was, thus, a situation recognized by the last paragraph of Article 2085 of the
Civil Code x x x. The Real Estate Mortgage admittedly signed by plaintiffs-appellees, on its face,
explicitly states that it is for the security of "credit accommodations obtained by Raul De Jesus
Obispo," the principal of which is fixed at P1,159,096.00.

While plaintiffs-appellees claim that they sought the help of defendant Obispo in securing the loan
from defendant-appellant FEBTC, and not to secure the loans obtained by defendant Obispo
himself, they failed to present any evidence, except for their bare assertion, that they indeed gave
their title to defendant Obispo purportedly to facilitate their loan with defendant-appellant FEBTC. It
is axiomatic that under the Rules on Evidence a party who alleges a fact has the burden of proving
it. A mere allegation is not evidence, and he who alleges has the burden of proving his allegation
with the requisite quantum of evidence.

It may be argued that having received the amount of P250,000.00, plaintiffs-appellees became
parties to the principal obligation and as such, the provision of the last paragraph of Article 2085 no
longer applies. While it is undisputed that plaintiffs-appellees received the amount of P250,000.00,
the record, however, reveals that they received the said amount not from defendant FEBTC but from
defendant Obispo. It could be inferred that the P250,000.00 given by defendant Obispo to
plaintiffsappellees was some form of remuneration in lending their title to him as security for his
credit line with defendant-appellant FEBTC.

x x x x

From all indications, the failure of defendant Obispo to pay his loan resulted to the prejudice of
plaintiffs-appellee[s] which may have led them to disown the Real Estate Mortgage they executed in
favor of defendant-appellant FEBTC to accommodate the loan of defendant Obispo.19 (Emphasis
supplied)

At this juncture, we underscore anew that the Court has always maintained its impartiality as early
as in the case of Vales v. Villa,20 and has warned litigants that:

x x x The law furnishes no protection to the inferior simply because he is inferior any more than it
protects the strong because he is strong. The law furnishes protection to both alike - to one no more
or less than the other. It makes no distinction between the wise and the foolish, the great and the
small, the strong and the weak. The foolish may lose all they have to the wise; but that does not
mean that the law will give it back to them again. Courts cannot follow one every step of his life and
extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. x x x21

There being valid consent on the part of petitioners as accommodation mortgagors, no reversible
error was committed by the CA in reversing the trial court's decision which declared the REM as void
and awarded damages to petitioners.

A preponderance of the evidence is essential to establish the invalidity of a mortgage, and it has
been said that clear and convincing proof is necessary to show fraud, duress, or undue influence.22
Any relevant and material evidence otherwise competent is admissible on the issue of the validity of
a mortgage.23 Petitioners utterly failed to present relevant evidence to support their factual claims
and offered no explanation whatsoever. Such omission is fatal to their cause.

WHEREFORE, the petition for review on certiorari is DENIED for lack of merit. The Decision dated
January 27, 2010 of the Court of Appeals in CA-G.R. CV No. 82378 is hereby AFFIRMED and
UPHELD.

With costs against the petitioners.

SO ORDERED.