Set I

Set I Corporation Code * Bosycouts to Bache v Ruz*Page 1 of 84
G.R. No. 177131
SUPREME COURT
Manila
Research Sector under the Corporate Audit Office I, to be audited, similar to the subsidiary corporations, by
employing the team audit approach.8 (Emphases supplied.)
EN BANC
The BSP sought reconsideration of the COA Resolution in a letter 9 dated November 26, 1999 signed by the BSP
National President Jejomar C. Binay, who is now the Vice President of the Republic, wherein he wrote:
June 7, 2011
BOY SCOUTS OF THE PHILIPPINES, Petitioner,

vs.
COMMISSION ON AUDIT, Respondent.
It is the position of the BSP, with all due respect, that it is not subject to the Commissions jurisdiction on the
following grounds:
1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs. National Labor Relations
Commission, et al. (G.R. No. 80767) classifying the BSP as a government-controlled corporation is
anchored on the "substantial Government participation" in the National Executive Board of the BSP. It
is to be noted that the case was decided when the BSP Charter is defined by Commonwealth Act No.
111 as amended by Presidential Decree 460.
DECISION
LEONARDO-DE CASTRO, J.:
The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the Philippines (BSP) is the subject
matter of this controversy that reached us via petition for prohibition 1 filed by the BSP under Rule 65 of the
1997 Rules of Court. In this petition, the BSP seeks that the COA be prohibited from implementing its June 18,
2002 Decision,2 its February 21, 2007 Resolution, 3 as well as all other issuances arising therefrom, and that all
of the foregoing be rendered null and void. 4
Antecedent Facts and Background of the Case
This case arose when the COA issued Resolution No. 99-011 5 on August 19, 1999 ("the COA Resolution"), with
the subject "Defining the Commissions policy with respect to the audit of the Boy Scouts of the Philippines." In
its whereas clauses, the COA Resolution stated that the BSP was created as a public corporation under
Commonwealth Act No. 111, as amended by Presidential Decree No. 460 and Republic Act No. 7278; that in Boy
Scouts of the Philippines v. National Labor Relations Commission, 6 the Supreme Court ruled that the BSP, as
constituted under its charter, was a "government-controlled corporation within the meaning of Article IX(B)(2)
(1) of the Constitution"; and that "the BSP is appropriately regarded as a government instrumentality under the
1987 Administrative Code." 7 The COA Resolution also cited its constitutional mandate under Section 2(1),
Article IX (D). Finally, the COA Resolution reads:
NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION PROPER HAS RESOLVED, AS IT
DOES HEREBY RESOLVE, to conduct an annual financial audit of the Boy Scouts of the Philippines in accordance
with generally accepted auditing standards, and express an opinion on whether the financial statements which
include the Balance Sheet, the Income Statement and the Statement of Cash Flows present fairly its financial
position and results of operations.
xxxx
BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy Scouts of the Philippines shall
be classified among the government corporations belonging to the Educational, Social, Scientific, Civic and
However, may we humbly refer you to Republic Act No. 7278 which amended the BSPs charter after the cited
case was decided. The most salient of all amendments in RA No. 7278 is the alteration of the composition of
the National Executive Board of the BSP.
The said RA virtually eliminated the "substantial government participation" in the National Executive Board by
removing: (i) the President of the Philippines and executive secretaries, with the exception of the Secretary of
Education, as members thereof; and (ii) the appointment and confirmation power of the President of the
Philippines, as Chief Scout, over the members of the said Board.
The BSP believes that the cited case has been superseded by RA 7278. Thereby weakening the cases
conclusion that the BSP is a government-controlled corporation (sic). The 1987 Administrative Code itself, of
which the BSP vs. NLRC relied on for some terms, defines government-owned and controlled corporations as
agencies organized as stock or non-stock corporations which the BSP, under its present charter, is not.
Also, the Government, like in other GOCCs, does not have funds invested in the BSP. What RA 7278 only
provides is that the Government or any of its subdivisions, branches, offices, agencies and instrumentalities
can from time to time donate and contribute funds to the BSP.
xxxx
Also the BSP respectfully believes that the BSP is not "appropriately regarded as a government instrumentality
under the 1987 Administrative Code" as stated in the COA resolution. As defined by Section 2(10) of the said
code, instrumentality refers to "any agency of the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually through a charter."
The BSP is not an entity administering special funds. It is not even included in the DECS National Budget. x x x

It may be argued also that the BSP is not an "agency" of the Government. The 1987 Administrative Code,
merely referred the BSP as an "attached agency" of the DECS as distinguished from an actual line agency of
departments that are included in the National Budget. The BSP believes that an "attached agency" is different
from an "agency." Agency, as defined in Section 2(4) of the Administrative Code, is defined as any of the
various units of the Government including a department, bureau, office, instrumentality, government-owned or
controlled corporation or local government or distinct unit therein.
Under the above definition, the BSP is neither a unit of the Government; a department which refers to an
executive department as created by law (Section 2[7] of the Administrative Code); nor a bureau which refers to
any principal subdivision or unit of any department (Section 2[8], Administrative Code). 10
Subsequently, requests for reconsideration of the COA Resolution were also made separately by Robert P.
Valdellon, Regional Scout Director, Western Visayas Region, Iloilo City and Eugenio F. Capreso, Council Scout
Executive of Calbayog City.11
In a letter12 dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit Officer (CAO) I of the COA,
furnished the BSP with a copy of the Memorandum 13 dated June 20, 2000 of Atty. Santos M. Alquizalas, the COA
General Counsel. In said Memorandum, the COA General Counsel opined that Republic Act No. 7278 did not
supersede the Courts ruling in Boy Scouts of the Philippines v. National Labor Relations Commission, even
though said law eliminated the substantial government participation in the selection of members of the
National Executive Board of the BSP. The Memorandum further provides:
Analysis of the said case disclosed that the substantial government participation is only one (1) of the three (3)
grounds relied upon by the Court in the resolution of the case. Other considerations include the character of the
BSPs purposes and functions which has a public aspect and the statutory designation of the BSP as a "public
corporation". These grounds have not been deleted by R.A. No. 7278. On the contrary, these were
strengthened as evidenced by the amendment made relative to BSPs purposes stated in Section 3 of R.A. No.
7278.
On the argument that BSP is not appropriately regarded as "a government instrumentality" and "agency" of the
government, such has already been answered and clarified. The Supreme Court has elucidated this matter in
the BSP case when it declared that BSP is regarded as, both a "government-controlled corporation with an
original charter" and as an "instrumentality" of the Government. Likewise, it is not disputed that the
Administrative Code of 1987 designated the BSP as one of the attached agencies of DECS. Being an attached
agency, however, it does not change its nature as a government-controlled corporation with original charter
and, necessarily, subject to COA audit jurisdiction. Besides, Section 2(1), Article IX-D of the Constitution
provides that COA shall have the power, authority, and duty to examine, audit and settle all accounts
pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its subdivisions, agencies or instrumentalities, including
government-owned or controlled corporations with original charters. 14
Based on the Memorandum of the COA General Counsel, Director Sunico wrote:
In view of the points clarified by said Memorandum upholding COA Resolution No. 99-011, we have to comply
with the provisions of the latter, among which is to conduct an annual financial audit of the Boy Scouts of the
Philippines.15
In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda, CAO I, the COA informed the
BSP that a preliminary survey of its organizational structure, operations and accounting system/records shall be
conducted on November 21 to 22, 2000.16
Upon the BSPs request, the audit was deferred for thirty (30) days. The BSP then filed a Petition for Review
with Prayer for Preliminary Injunction and/or Temporary Restraining Order before the COA. This was denied by
the COA in its questioned Decision, which held that the BSP is under its audit jurisdiction. The BSP moved for
reconsideration but this was likewise denied under its questioned Resolution. 17
This led to the filing by the BSP of this petition for prohibition with preliminary injunction and temporary
restraining order against the COA.
The Issue
As stated earlier, the sole issue to be resolved in this case is whether the BSP falls under the COAs audit
jurisdiction.
The Parties Respective Arguments
The BSP contends that Boy Scouts of the Philippines v. National Labor Relations Commission is inapplicable for
purposes of determining the audit jurisdiction of the COA as the issue therein was the jurisdiction of the
National Labor Relations Commission over a case for illegal dismissal and unfair labor practice filed by certain
BSP employees.18
While the BSP concedes that its functions do relate to those that the government might otherwise completely
assume on its own, it avers that this alone was not determinative of the COAs audit jurisdiction over it. The
BSP further avers that the Court in Boy Scouts of the Philippines v. National Labor Relations Commission
"simply stated x x x that in respect of functions, the BSP is akin to a public corporation" but this was not
synonymous to holding that the BSP is a government corporation or entity subject to audit by the COA. 19
The BSP contends that Republic Act No. 7278 introduced crucial amendments to its charter; hence, the findings
of the Court in Boy Scouts of the Philippines v. National Labor Relations Commission are no longer valid as the
government has ceased to play a controlling influence in it. The BSP claims that the pronouncements of the
Court therein must be taken only within the context of that case; that the Court had categorically found that its
assets were acquired from the Boy Scouts of America and not from the Philippine government, and that its
operations are financed chiefly from membership dues of the Boy Scouts themselves as well as from property
rentals; and that "the BSP may correctly be characterized as non-governmental, and hence, beyond the audit
jurisdiction of the COA." It further claims that the designation by the Court of the BSP as a government agency
or instrumentality is mere obiter dictum.20

The BSP maintains that the provisions of Republic Act No. 7278 suggest that "governance of BSP has come to
be overwhelmingly a private affair or nature, with government participation restricted to the seat of the
Secretary of Education, Culture and Sports." 21 It cites Philippine Airlines Inc. v. Commission on Audit 22 wherein
the Court declared that, "PAL, having ceased to be a government-owned or controlled corporation is no longer
under the audit jurisdiction of the COA." 23 Claiming that the amendments introduced by Republic Act No. 7278
constituted a supervening event that changed the BSPs corporate identity in the same way that the
governments privatization program changed PALs, the BSP makes the case that the government no longer has
control over it; thus, the COA cannot use the Boy Scouts of the Philippines v. National Labor Relations
Commission as its basis for the exercise of its jurisdiction and the issuance of COA Resolution No. 99-011. 24 The
BSP further claims as follows:
It is not far-fetched, in fact, to concede that BSPs funds and assets are private in character. Unlike ordinary
public corporations, such as provinces, cities, and municipalities, or government-owned and controlled
corporations, such as Land Bank of the Philippines and the Development Bank of the Philippines, the assets and
funds of BSP are not derived from any government grant. For its operations, BSP is not dependent in any way
on any government appropriation; as a matter of fact, it has not even been included in any appropriations for
the government. To be sure, COA has not alleged, in its Resolution No. 99-011 or in the Memorandum of its
General Counsel, that BSP received, receives or continues to receive assets and funds from any agency of the
government. The foregoing simply point to the private nature of the funds and assets of petitioner BSP.
xxxx
As stated in petitioners third argument, BSPs assets and funds were never acquired from the government. Its
operations are not in any way financed by the government, as BSP has never been included in any
appropriations act for the government. Neither has the government invested funds with BSP. BSP, has not been,
at any time, a user of government property or funds; nor have properties of the government been held in trust
by BSP. This is precisely the reason why, until this time, the COA has not attempted to subject BSP to its audit
jurisdiction. x x x.25
To summarize its other arguments, the BSP contends that it is not a government-owned or controlled
corporation; neither is it an instrumentality, agency, or subdivision of the government.
In its Comment,26 the COA argues as follows:
1. The BSP is a public corporation created under Commonwealth Act No. 111 dated October 31, 1936,
and whose functions relate to the fostering of public virtues of citizenship and patriotism and the
general improvement of the moral spirit and fiber of the youth. The manner of creation and the
purpose for which the BSP was created indubitably prove that it is a government agency.
2. Being a government agency, the funds and property owned or held in trust by the BSP are subject
to the audit authority of respondent Commission on Audit pursuant to Section 2 (1), Article IX-D of the
1987 Constitution.
3. Republic Act No. 7278 did not change the character of the BSP as a government-owned or
controlled corporation and government instrumentality. 27
The COA maintains that the functions of the BSP that include, among others, the teaching to the youth of
patriotism, courage, self-reliance, and kindred virtues, are undeniably sovereign functions enshrined under the
Constitution and discussed by the Court in Boy Scouts of the Philippines v. National Labor Relations
Commission. The COA contends that any attempt to classify the BSP as a private corporation would be
incomprehensible since no less than the law which created it had designated it as a public corporation and its
statutory mandate embraces performance of sovereign functions. 28
The COA claims that the only reason why the BSP employees fell within the scope of the Civil Service
Commission even before the 1987 Constitution was the fact that it was a government-owned or controlled
corporation; that as an attached agency of the Department of Education, Culture and Sports (DECS), the BSP is
an agency of the government; and that the BSP is a chartered institution under Section 1(12) of the Revised
Administrative Code of 1987, embraced under the term government instrumentality. 29
The COA concludes that being a government agency, the funds and property owned or held by the BSP are
subject to the audit authority of the COA pursuant to Section 2(1), Article IX (D) of the 1987 Constitution.
In support of its arguments, the COA cites The Veterans Federation of the Philippines (VFP) v. Reyes, 30 wherein
the Court held that among the reasons why the VFP is a public corporation is that its charter, Republic Act No.
2640, designates it as one. Furthermore, the COA quotes the Court as saying in that case:
In several cases, we have dealt with the issue of whether certain specific activities can be classified as
sovereign functions. These cases, which deal with activities not immediately apparent to be sovereign
functions, upheld the public sovereign nature of operations needed either to promote social justice or to
stimulate patriotic sentiments and love of country.
xxxx
Petitioner claims that its funds are not public funds because no budgetary appropriations or government funds
have been released to the VFP directly or indirectly from the DBM, and because VFP funds come from
membership dues and lease rentals earned from administering government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not prove that it is a private
corporation. The DBM indeed did not see it fit to propose budgetary appropriations to the VFP, having itself
believed that the VFP is a private corporation. If the DBM, however, is mistaken as to its conclusion regarding
the nature of VFP's incorporation, its previous assertions will not prevent future budgetary appropriations to the
VFP. The erroneous application of the law by public officers does not bar a subsequent correct application of the
law.31(Citations omitted.)
The COA points out that the government is not precluded by law from extending financial support to the BSP
and adding to its funds, and that "as a government instrumentality which continues to perform a vital function
imbued with public interest and reflective of the governments policy to stimulate patriotic sentiments and love
of country, the BSPs funds from whatever source are public funds, and can be used solely for public purpose in
pursuance of the provisions of Republic Act No. [7278]." 32

The COA claims that the fact that it has not yet audited the BSPs funds may not bar the subsequent exercise of
its audit jurisdiction.
The BSP filed its Reply33 on August 29, 2007 maintaining that its statutory designation as a "public corporation"
and the public character of its purpose and functions are not determinative of the COAs audit jurisdiction;
reiterating its stand that Boy Scouts of the Philippines v. National Labor Relations Commission is not applicable
anymore because the aspect of government ownership and control has been removed by Republic Act No.
7278; and concluding that the funds and property that it either owned or held in trust are not public funds and
are not subject to the COAs audit jurisdiction.
Thereafter, considering the BSPs claim that it is a private corporation, this Court, in a Resolution 34 dated July
20, 2010, required the parties to file, within a period of twenty (20) days from receipt of said Resolution, their
respective comments on the issue of whether Commonwealth Act No. 111, as amended by Republic Act No.
7278, is constitutional.
In compliance with the Courts resolution, the parties filed their respective Comments.
In its Comment35 dated October 22, 2010, the COA argues that the constitutionality of Commonwealth Act No.
111, as amended, is not determinative of the resolution of the present controversy on the COAs audit
jurisdiction over petitioner, and in fact, the controversy may be resolved on other grounds; thus, the requisites
before a judicial inquiry may be made, as set forth in Commissioner of Internal Revenue v. Court of Tax
Appeals,36 have not been fully met.37 Moreover, the COA maintains that behind every law lies the presumption
of constitutionality.38 The COA likewise argues that contrary to the BSPs position, repeal of a law by implication
is not favored.39 Lastly, the COA claims that there was no violation of Section 16, Article XII of the 1987
Constitution with the creation or declaration of the BSP as a government corporation. Citing Philippine Society
for the Prevention of Cruelty to Animals v. Commission on Audit, 40 the COA further alleges:
The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of
the relation of the corporation to the State. If the corporation is created by the State as the latters own agency
or instrumentality to help it in carrying out its governmental functions, then that corporation is considered
public; otherwise, it is private. x x x.41
For its part, in its Comment 42 filed on December 3, 2010, the BSP submits that its charter, Commonwealth Act
No. 111, as amended by Republic Act No. 7278, is constitutional as it does not violate Section 16, Article XII of
the Constitution. The BSP alleges that "while [it] is not a public corporation within the purview of COAs audit
jurisdiction, neither is it a private corporation created by special law falling within the ambit of the
constitutional prohibition x x x."43 The BSP further alleges:
Petitioners purpose is embodied in Section 3 of C.A. No. 111, as amended by Section 1 of R.A. No. 7278, thus:
xxxx
A reading of the foregoing provision shows that petitioner was created to advance the interest of the youth,
specifically of young boys, and to mold them into becoming good citizens. Ultimately, the creation of petitioner
redounds to the benefit, not only of those boys, but of the public good or welfare. Hence, it can be said that
petitioners purpose and functions are more of a public rather than a private character. Petitioner caters to all
boys who wish to join the organization without any distinction. It does not limit its membership to a particular
class of boys. Petitioners members are trained in scoutcraft and taught patriotism, civic consciousness and
responsibility, courage, self-reliance, discipline and kindred virtues, and moral values, preparing them to
become model citizens and outstanding leaders of the country. 44
The BSP reiterates its stand that the public character of its purpose and functions do not place it within the
ambit of the audit jurisdiction of the COA as it lacks the government ownership or control that the Constitution
requires before an entity may be subject of said jurisdiction. 45 It avers that it merely stated in its Reply that the
withdrawal of government control is akin to privatization, but it does not necessarily mean that petitioner is a
private corporation.46 The BSP claims that it has a unique characteristic which "neither classifies it as a purely
public nor a purely private corporation"; 47 that it is not a quasi-public corporation; and that it may belong to a
different class altogether.48
The BSP claims that assuming arguendo that it is a private corporation, its creation is not contrary to the
purpose of Section 16, Article XII of the Constitution; and that the evil sought to be avoided by said provision is
inexistent in the enactment of the BSPs charter, 49 as, (i) it was not created for any pecuniary purpose; (ii) those
who will primarily benefit from its creation are not its officers but its entire membership consisting of boys
being trained in scoutcraft all over the country; (iii) it caters to all boys who wish to join the organization
without any distinction; and (iv) it does not limit its membership to a particular class or group of boys. Thus, the
enactment of its charter confers no special privilege to particular individuals, families, or groups; nor does it
bring about the danger of granting undue favors to certain groups to the prejudice of others or of the interest of
the country, which are the evils sought to be prevented by the constitutional provision involved. 50
Finally, the BSP states that the presumption of constitutionality of a legislative enactment prevails absent any
clear showing of its repugnancy to the Constitution.51
The Ruling of the Court
After looking at the legislative history of its amended charter and carefully studying the applicable laws and the
arguments of both parties, we find that the BSP is a public corporation and its funds are subject to the COAs
audit jurisdiction.
The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936), entitled "An Act to Create a
Public Corporation to be Known as the Boy Scouts of the Philippines, and to Define its Powers and Purposes"
created the BSP as a "public corporation" to serve the following public interest or purpose:
Sec. 3. The purpose of this corporation shall be to promote through organization and cooperation with other
agencies, the ability of boys to do useful things for themselves and others, to train them in scoutcraft, and to
inculcate in them patriotism, civic consciousness and responsibility, courage, self-reliance, discipline and
kindred virtues, and moral values, using the method which are in common use by boy scouts.
Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth Act No. 111 and provided
substantial changes in the BSP organizational structure. Pertinent provisions are quoted below:

Section II. Section 5 of the said Act is also amended to read as follows:
The governing body of the said corporation shall consist of a National Executive Board composed of (a) the
President of the Philippines or his representative; (b) the charter and life members of the Boy Scouts of the
Philippines; (c) the Chairman of the Board of Trustees of the Philippine Scouting Foundation; (d) the Regional
Chairman of the Scout Regions of the Philippines; (e) the Secretary of Education and Culture, the Secretary of
Social Welfare, the Secretary of National Defense, the Secretary of Labor, the Secretary of Finance, the
Secretary of Youth and Sports, and the Secretary of Local Government and Community Development; (f) an
equal number of individuals from the private sector; (g) the National President of the Girl Scouts of the
Philippines; (h) one Scout of Senior age from each Scout Region to represent the boy membership; and (i) three
representatives of the cultural minorities. Except for the Regional Chairman who shall be elected by the
Regional Scout Councils during their annual meetings, and the Scouts of their respective regions, all members
of the National Executive Board shall be either by appointment or cooption, subject to ratification and
confirmation by the Chief Scout, who shall be the Head of State. Vacancies in the Executive Board shall be filled
by a majority vote of the remaining members, subject to ratification and confirmation by the Chief Scout. The
by-laws may prescribe the number of members of the National Executive Board necessary to constitute a
quorum of the board, which number may be less than a majority of the whole number of the board. The
National Executive Board shall have power to make and to amend the by-laws, and, by a two-thirds vote of the
whole board at a meeting called for this purpose, may authorize and cause to be executed mortgages and liens
upon the property of the corporation.
Subsequently, on March 24, 1992, Republic Act No. 7278 further amended Commonwealth Act No. 111 "by
strengthening the volunteer and democratic character" of the BSP and reducing government representation in
its governing body, as follows:
Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby amended to read as follows:
"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue and be sued; to enter into
contracts; to acquire, own, lease, convey and dispose of such real and personal estate, land grants, rights and
choses in action as shall be necessary for corporate purposes, and to accept and receive funds, real and
personal property by gift, devise, bequest or other means, to conduct fund-raising activities; to adopt and use a
seal, and the same to alter and destroy; to have offices and conduct its business and affairs in Metropolitan
Manila and in the regions, provinces, cities, municipalities, and barangays of the Philippines, to make and adopt
by-laws, rules and regulations not inconsistent with this Act and the laws of the Philippines, and generally to do
all such acts and things, including the establishment of regulations for the election of associates and
successors, as may be necessary to carry into effect the provisions of this Act and promote the purposes of said
corporation: Provided, That said corporation shall have no power to issue certificates of stock or to declare or
pay dividends, its objectives and purposes being solely of benevolent character and not for pecuniary profit of
its members.
"Sec. 3. The purpose of this corporation shall be to promote through organization and cooperation with other
agencies, the ability of boys to do useful things for themselves and others, to train them in scoutcraft, and to
inculcate in them patriotism, civic consciousness and responsibility, courage, self-reliance, discipline and
kindred virtues, and moral values, using the method which are in common use by boy scouts."
Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed and in lieu thereof, Section 4
shall read as follows:
"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts of the Philippines."
Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are hereby amended to read as
follows:
"Sec. 5. The governing body of the said corporation shall consist of a National Executive Board, the members of
which shall be Filipino citizens of good moral character. The Board shall be composed of the following:
"(a) One (1) charter member of the Boy Scouts of the Philippines who shall be elected by the members
of the National Council at its meeting called for this purpose;
"(b) The regional chairmen of the scout regions who shall be elected by the representatives of all the
local scout councils of the region during its meeting called for this purpose: Provided, That a candidate
for regional chairman need not be the chairman of a local scout council;
"(c) The Secretary of Education, Culture and Sports;
"(d) The National President of the Girl Scouts of the Philippines;
"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas, to be elected by the senior
scout delegates of the local scout councils to the scout youth forums in their respective areas, in its
meeting called for this purpose, to represent the boy scout membership;
"(f) Twelve (12) regular members to be elected by the members of the National Council in its meeting
called for this purpose;
"(g) At least ten (10) but not more than fifteen (15) additional members from the private sector who
shall be elected by the members of the National Executive Board referred to in the immediately
preceding paragraphs (a), (b), (c), (d), (e) and (f) at the organizational meeting of the newly
reconstituted National Executive Board which shall be held immediately after the meeting of the
National Council wherein the twelve (12) regular members and the one (1) charter member were
elected.
xxxx
"Sec. 8. Any donation or contribution which from time to time may be made to the Boy Scouts of the Philippines
by the Government or any of its subdivisions, branches, offices, agencies or instrumentalities or by a foreign
government or by private, entities and individuals shall be expended by the National Executive Board in
pursuance of this Act.

The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code
There are three classes of juridical persons under Article 44 of the Civil Code and the BSP, as presently
constituted under Republic Act No. 7278, falls under the second classification. Article 44 reads:
The public, rather than private, character of the BSP is recognized by the fact that, along with the Girl Scouts of
the Philippines, it is classified as an attached agency of the DECS under Executive Order No. 292, or the
Administrative Code of 1987, which states:
TITLE VI EDUCATION, CULTURE AND SPORTS
Art. 44. The following are juridical persons:

Chapter 8 Attached Agencies
(1) The State and its political subdivisions;
SEC. 20. Attached Agencies. The following agencies are hereby attached to the Department:
(2) Other corporations, institutions and entities for public interest or purpose created by
law; their personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or member.
(Emphases supplied.)
The BSP, which is a corporation created for a public interest or purpose, is subject to the law creating it under
Article 45 of the Civil Code, which provides:
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the
laws creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
xxxx
(12) Boy Scouts of the Philippines;
(13) Girl Scouts of the Philippines.
The administrative relationship of an attached agency to the department is defined in the Administrative Code
of 1987 as follows:
BOOK IV
THE EXECUTIVE BRANCH
Chapter 7 ADMINISTRATIVE RELATIONSHIP
Partnerships and associations for private interest or purpose are governed by the provisions of this Code
concerning partnerships. (Emphasis and underscoring supplied.)
The purpose of the BSP as stated in its amended charter shows that it was created in order to implement a
State policy declared in Article II, Section 13 of the Constitution, which reads:
ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES
Section 13. The State recognizes the vital role of the youth in nation-building and shall promote and protect
their physical, moral, spiritual, intellectual, and social well-being. It shall inculcate in the youth patriotism and
nationalism, and encourage their involvement in public and civic affairs.
Evidently, the BSP, which was created by a special law to serve a public purpose in pursuit of a constitutional
mandate, comes within the class of "public corporations" defined by paragraph 2, Article 44 of the Civil Code
and governed by the law which creates it, pursuant to Article 45 of the same Code.
SEC. 38. Definition of Administrative Relationship. Unless otherwise expressly stated in the Code or in other
laws defining the special relationships of particular agencies, administrative relationships shall be categorized
and defined as follows:
xxxx
(3) Attachment. (a) This refers to the lateral relationship between the department or its equivalent and the
attached agency or corporation for purposes of policy and program coordination. The coordination may be
accomplished by having the department represented in the governing board of the attached agency or
corporation, either as chairman or as a member, with or without voting rights, if this is permitted by the
charter; having the attached corporation or agency comply with a system of periodic reporting which shall
reflect the progress of programs and projects; and having the department or its equivalent provide general
policies through its representative in the board, which shall serve as the framework for the internal policies of
the attached corporation or agency. (Emphasis ours.)
The BSPs Classification Under the Administrative Code of 1987

As an attached agency, the BSP enjoys operational autonomy, as long as policy and program coordination is
achieved by having at least one representative of government in its governing board, which in the case of the

BSP is the DECS Secretary. In this sense, the BSP is not under government control or "supervision and control."
Still this characteristic does not make the attached chartered agency a private corporation covered by the
constitutional proscription in question.
Art. XII, Sec. 16 of the Constitution refers to "private corporations" created by government for
proprietary or economic/business purposes
At the outset, it should be noted that the provision of Section 16 in issue is found in Article XII of the
Constitution, entitled "National Economy and Patrimony." Section 1 of Article XII is quoted as follows:
SECTION 1. The goals of the national economy are a more equitable distribution of opportunities, income, and
wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the
people; and an expanding productivity as the key to raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and full employment based on sound agricultural development and
agrarian reform, through industries that make full and efficient use of human and natural resources, and which
are competitive in both domestic and foreign markets. However, the State shall protect Filipino enterprises
against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given optimum
opportunity to develop. Private enterprises, including corporations, cooperatives, and similar collective
organizations, shall be encouraged to broaden the base of their ownership.
The scope and coverage of Section 16, Article XII of the Constitution can be seen from the aforementioned
declaration of state policies and goals which pertains to national economy and patrimony and the interests of
the people in economic development.
Section 16, Article XII deals with "the formation, organization, or regulation of private corporations," 52 which
should be done through a general law enacted by Congress, provides for an exception, that is: if the
corporation is government owned or controlled; its creation is in the interest of the common good; and it meets
the test of economic viability. The rationale behind Article XII, Section 16 of the 1987 Constitution was
explained in Feliciano v. Commission on Audit,53 in the following manner:
The BSP is a Public Corporation Not Subject to the Test of Government Ownership or Control and Economic
Viability
The BSP is a public corporation or a government agency or instrumentality with juridical personality, which
does not fall within the constitutional prohibition in Article XII, Section 16, notwithstanding the amendments to
its charter. Not all corporations, which are not government owned or controlled, are ipso facto to be considered
private corporations as there exists another distinct class of corporations or chartered institutions which are
otherwise known as "public corporations." These corporations are treated by law as agencies or
instrumentalities of the government which are not subject to the tests of ownership or control and economic
viability but to different criteria relating to their public purposes/interests or constitutional policies and
objectives and their administrative relationship to the government or any of its Departments or Offices.
Classification of Corporations Under Section 16, Article XII of the Constitution on National Economy and
Patrimony
The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases, insists that the Constitution
recognizes only two classes of corporations: private corporations under a general law, and government-owned
or controlled corporations created by special charters.
We strongly disagree. Section 16, Article XII should not be construed so as to prohibit Congress from creating
public corporations. In fact, Congress has enacted numerous laws creating public corporations or government
agencies or instrumentalities vested with corporate powers. Moreover, Section 16, Article XII, which relates to
National Economy and Patrimony, could not have tied the hands of Congress in creating public corporations to
serve any of the constitutional policies or objectives.
In his dissent, Justice Carpio contends that this ponente introduces "a totally different species of corporation,
which is neither a private corporation nor a government owned or controlled corporation" and, in so doing, is
missing the fact that the BSP, "which was created as a non-stock, non-profit corporation, can only be either a
private corporation or a government owned or controlled corporation."
Note that in Boy Scouts of the Philippines v. National Labor Relations Commission, the BSP, under its former
charter, was regarded as both a government owned or controlled corporation with original charter and a
"public corporation." The said case pertinently stated:
The Constitution emphatically prohibits the creation of private corporations except by a general law applicable
to all citizens. The purpose of this constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups special privileges denied to other
citizens.54(Emphasis added.)
While the BSP may be seen to be a mixed type of entity, combining aspects of both public and private entities,
we believe that considering the character of its purposes and its functions, the statutory designation of the BSP
as "a public corporation" and the substantial participation of the Government in the selection of members of
the National Executive Board of the BSP, the BSP, as presently constituted under its charter, is a governmentcontrolled corporation within the meaning of Article IX (B) (2) (1) of the Constitution.
It may be gleaned from the above discussion that Article XII, Section 16 bans the creation of "private
corporations" by special law. The said constitutional provision should not be construed so as to prohibit the
creation of public corporations or a corporate agency or instrumentality of the government intended to serve
a public interest or purpose, which should not be measured on the basis of economic viability, but according to
the public interest or purpose it serves as envisioned by paragraph (2), of Article 44 of the Civil Code and the
pertinent provisions of the Administrative Code of 1987.
We are fortified in this conclusion when we note that the Administrative Code of 1987 designates the BSP as
one of the attached agencies of the Department of Education, Culture and Sports ("DECS"). An "agency of the
Government" is defined as referring to any of the various units of the Government including a department,
bureau, office, instrumentality, government-owned or -controlled corporation, or local government or distinct

unit therein. "Government instrumentality" is in turn defined in the 1987 Administrative Code in the following
manner:
Instrumentality - refers to any agency of the National Government, not integrated within the department
administering special funds, and enjoying operational autonomy usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned or controlled corporations.
The same Code describes a "chartered institution" in the following terms:
Chartered institution - refers to any agency organized or operating under a special charter, and vested by law
with functions relating to specific constitutional policies or objectives. This term includes the state universities
and colleges, and the monetary authority of the State.
We believe that the BSP is appropriately regarded as "a government instrumentality" under the 1987
Administrative Code.
It thus appears that the BSP may be regarded as both a "government controlled corporation with an original
charter" and as an "instrumentality" of the Government within the meaning of Article IX (B) (2) (1) of the
Constitution. x x x.55 (Emphases supplied.)
The existence of public or government corporate or juridical entities or chartered institutions by legislative fiat
distinct from private corporations and government owned or controlled corporation is best exemplified by the
1987 Administrative Code cited above, which we quote in part:
Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a particular
statute, shall require a different meaning:
xxxx
(10) "Instrumentality" refers to any agency of the National Government, not integrated within the department
administering special funds, and enjoying operational autonomy, usually through a charter. This term includes
xxxx
(12) "Chartered institution" refers to any agency organized or operating under a special charter, and vested by
law with functions relating to specific constitutional policies or objectives. This term includes the state
universities and colleges and the monetary authority of the State.
(13) "Government-owned or controlled corporation" refers to any agency organized as a stock or non-stock
corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and
owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the
case of stock corporations, to the extent of at least fifty-one (51) per cent of its capital stock: Provided, That
government-owned or controlled corporations may be further categorized by the Department of the Budget,
the Civil Service Commission, and the Commission on Audit for purposes of the exercise and discharge of their
respective powers, functions and responsibilities with respect to such corporations.
Assuming for the sake of argument that the BSP ceases to be owned or controlled by the government because
of reduction of the number of representatives of the government in the BSP Board, it does not follow that it also
ceases to be a government instrumentality as it still retains all the characteristics of the latter as an attached
agency of the DECS under the Administrative Code. Vesting corporate powers to an attached agency or
instrumentality of the government is not constitutionally prohibited and is allowed by the above-mentioned
provisions of the Civil Code and the 1987 Administrative Code.
Economic Viability and Ownership and Control Tests Inapplicable to Public Corporations
As presently constituted, the BSP still remains an instrumentality of the national government. It is a public
corporation created by law for a public purpose, attached to the DECS pursuant to its Charter and the
Administrative Code of 1987. It is not a private corporation which is required to be owned or controlled by the
government and be economically viable to justify its existence under a special law.
The dissent of Justice Carpio also submits that by recognizing "a new class of public corporation(s)" created by
special charter that will not be subject to the test of economic viability, the constitutional provision will be
circumvented.
However, a review of the Record of the 1986 Constitutional Convention reveals the intent of the framers of the
highest law of our land to distinguish between government corporations performing governmental functions
and corporations involved in business or proprietary functions:
THE PRESIDENT. Commissioner Foz is recognized.
MR. FOZ. Madam President, I support the proposal to insert "ECONOMIC VIABILITY" as one of the grounds for
organizing government corporations. x x x.
MR. OPLE. Madam President, the reason for this concern is really that when the government creates a
corporation, there is a sense in which this corporation becomes exempt from the test of economic performance.
We know what happened in the past. If a government corporation loses, then it makes its claim upon the
taxpayers money through new equity infusions from the government and what is always invoked is the
common good. x x x
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good," this becomes a
restraint on future enthusiasts for state capitalism to excuse themselves from the responsibility of meeting the
market test so that they become viable. x x x.
xxxx

THE PRESIDENT. Commissioner Quesada is recognized.
MS. QUESADA. Madam President, may we be clarified by the committee on what is meant by economic
viability?
THE PRESIDENT. Please proceed.
MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that takes into consideration all
benefits, including economic external as well as internal benefits. These are what they call externalities in
economics, so that these are not strictly financial criteria. Economic viability involves what we call economic
returns or benefits of the country that are not quantifiable in financial terms. x x x.
MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit more if these governmentcontrolled corporations were given to private hands, and that there will be more goods and services that will be
affordable and within the reach of the ordinary citizens?
MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the formation of a government
corporation in accordance with a special charter given by Congress. However, we are raising the standard a
little bit so that, in the future, corporations established by the government will meet the test of the common
good but within that framework we should also build a certain standard of economic viability.
xxxx
THE PRESIDENT. Commissioner Padilla is recognized.
xxxx
MS. QUESADA. So, would this particular formulation now really limit the entry of government corporations into
activities engaged in by corporations?
MR. MONSOD. Yes, because it is also consistent with the economic philosophy that this Commission approved
that there should be minimum government participation and intervention in the economy.
MS. QUESDA. Sometimes this Commission would just refer to Congress to provide the particular requirements
when the government would get into corporations. But this time around, we specifically mentioned economic
viability. x x x.
MR. PADILLA. This is an inquiry to the committee. With regard to corporations created by a special charter for
government-owned or controlled corporations, will these be in the pioneer fields or in places where the private
enterprise does not or cannot enter? Or is this so general that these government corporations can compete
with private corporations organized under a general law?
MR. MONSOD. Madam President, x x x. There are two types of government corporations those that are
involved in performing governmental functions, like garbage disposal, Manila waterworks, and so on; and those
government corporations that are involved in business functions. As we said earlier, there are two criteria that
should be followed for corporations that want to go into business. First is for government corporations to first
prove that they can be efficient in the areas of their proper functions. This is one of the problems now because
they go into all kinds of activities but are not even efficient in their proper functions. Secondly, they should not
go into activities that the private sector can do better.
MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that amendment.
MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular amendment jointly with
Commissioner Foz. During the past three decades, there had been a proliferation of government corporations,
very few of which have succeeded, and many of which are now earmarked by the Presidential Reorganization
Commission for liquidation because they failed the economic test. x x x.
xxxx
MS. QUESADA. But would not the Commissioner say that the reason why many of the government-owned or
controlled corporations failed to come up with the economic test is due to the management of these
corporations, and not the idea itself of government corporations? It is a problem of efficiency and effectiveness
of management of these corporations which could be remedied, not by eliminating government corporations or
the idea of getting into state-owned corporations, but improving management which our technocrats should be
able to do, given the training and the experience.
MR. OPLE. That is part of the economic viability, Madam President.
MR. PADILLA. There is no question about corporations performing governmental functions or functions that are
impressed with public interest. But the question is with regard to matters that are covered, perhaps not
exhaustively, by private enterprise. It seems that under this provision the only qualification is economic
viability and common good, but shall government, through government-controlled corporations, compete with
private enterprise?
MR. MONSOD. No, Madam President. As we said, the government should not engage in activities that private
enterprise is engaged in and can do better. x x x. 56 (Emphases supplied.)
Thus, the test of economic viability clearly does not apply to public corporations dealing with governmental
functions, to which category the BSP belongs. The discussion above conveys the constitutional intent not to
apply this constitutional ban on the creation of public corporations where the economic viability test would be
irrelevant. The said test would only apply if the corporation is engaged in some economic activity or business
function for the government.
It is undisputed that the BSP performs functions that are impressed with public interest. In fact, during the
consideration of the Senate Bill that eventually became Republic Act No. 7278, which amended the BSP
Charter, one of the bills sponsors, Senator Joey Lina, described the BSP as follows:

Senator Lina. Yes, I can only think of two organizations involving the masses of our youth, Mr. President, that
should be given this kind of a privilege the Boy Scouts of the Philippines and the Girl Scouts of the Philippines.
Outside of these two groups, I do not think there are other groups similarly situated.
The Boy Scouts of the Philippines has a long history of providing value formation to our young, and considering
how huge the population of the young people is, at this point in time, and also considering the importance of
having an organization such as this that will inculcate moral uprightness among the young people, and further
considering that the development of these young people at that tender age of seven to sixteen is vital in the
development of the country producing good citizens, I believe that we can make an exception of the Boy
Scouting movement of the Philippines from this general prohibition against providing tax exemption and
privileges.57
Furthermore, this Court cannot agree with the dissenting opinion which equates the changes introduced by
Republic Act No. 7278 to the BSP Charter as clear manifestation of the intent of Congress "to return the BSP to
the private sector." It was not the intent of Congress in enacting Republic Act No. 7278 to give up all interests
in this basic youth organization, which has been its partner in forming responsible citizens for decades.
In fact, as may be seen in the deliberation of the House Bills that eventually resulted to Republic Act No. 7278,
Congress worked closely with the BSP to rejuvenate the organization, to bring it back to its former glory
reached under its original charter, Commonwealth Act No. 111, and to correct the perceived ills introduced by
the amendments to its Charter under Presidential Decree No. 460. The BSP suffered from low morale and
decrease in number because the Secretaries of the different departments in government who were too busy to
attend the meetings of the BSPs National Executive Board ("the Board") sent representatives who, as it turned
out, changed from meeting to meeting. Thus, the Scouting Councils established in the provinces and cities
were not in touch with what was happening on the national level, but they were left to implement what was
decided by the Board.58
Representatives in coming out with a measure that will put back the vigor and enthusiasm of the Boy Scout
Movement. x x x.59 (Emphasis ours.)
The following is another excerpt from the discussion on the House version of the bill, in the Committee on
Government Enterprises:
HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that have created the Boy Scouts
of the Philippines did not provide for any direct government support by way of appropriation from the national
budget to support the activities of this organization. The point here is, and at the same time they have been
subjected to a governmental intervention, which to their mind has been inimical to the objectives and to the
institution per se, that is why they are seeking legislative fiat to restore back the original mandate that they
had under Commonwealth Act 111. Such having been the experience in the hands of government, meaning,
there has been negative interference on their part and inasmuch as their mandate is coming from a legislative
fiat, then shouldnt it be, this rhetorical question, shouldnt it be better for this organization to seek a mandate
from, lets say, the government the Corporation Code of the Philippines and register with the SEC as non-profit
non-stock corporation so that government intervention could be very very minimal. Maybe thats a rhetorical
question, they may or they may not answer, ano. I dont know what would be the benefit of a charter or a
mandate being provided for by way of legislation versus a registration with the SEC under the Corporation Code
of the Philippines inasmuch as they dont get anything from the government anyway insofar as direct funding.
In fact, the only thing that they got from government was intervention in their affairs. Maybe we can solicit
some commentary comments from the resource persons. Incidentally, dont take that as an objection, Im not
objecting. Im all for the objectives of these two bills. It just occurred to me that since you have had very bad
experience in the hands of government and you will always be open to such possible intervention even in the
future as long as you have a legislative mandate or your mandate or your charter coming from legislative
action.
xxxx
A portion of the legislators discussion is quoted below to clearly show their intent:
HON. DEL MAR. x x x I need not mention to you the value and the tremendous good that the Boy Scout
Movement has done not only for the youth in particular but for the country in general. And that is why, if we
look around, our past and present national leaders, prominent men in the various fields of endeavor, public
servants in government offices, and civic leaders in the communities all over the land, and not only in our
country but all over the world many if not most of them have at one time or another been beneficiaries of the
Scouting Movement. And so, it is along this line, Mr. Chairman, that we would like to have the early approval of
this measure if only to pay back what we owe much to the Scouting Movement. Now, going to the meat of the
matter, Mr. Chairman, if I may just the Scouting Movement was enacted into law in October 31, 1936 under
Commonwealth Act No. 111. x x x [W]e were acknowledged as the third biggest scouting organization in the
world x x x. And to our mind, Mr. Chairman, this erratic growth and this decrease in membership [number] is
because of the bad policy measures that were enunciated with the enactment or promulgation by the President
before of Presidential Decree No. 460 which we feel is the culprit of the ills that is flagging the Boy Scout
Movement today. And so, this is specifically what we are attacking, Mr. Chairman, the disenfranchisement of
the National Council in the election of the national board. x x x. And so, this is what we would like to be
appraised of by the officers of the Boy [Scouts] of the Philippines whom we are also confident, have the best
interest of the Boy Scout Movement at heart and it is in this spirit, Mr. Chairman, that we see no impediment
towards working together, the Boy Scout of the Philippines officers working together with the House of
MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of the Philippines will be required
to register with the SEC. If we are registered with the SEC, there could be a danger of proliferation of scout
organization. Anybody can organize and then register with the SEC. If there will be a proliferation of this, then
the organization will lose control of the entire organization. Another disadvantage, Mr. Chairman, anybody can
file a complaint in the SEC against the Boy Scouts of the Philippines and the SEC may suspend the operation or
freeze the assets of the organization and hamper the operation of the organization. I dont know, Mr. Chairman,
how you look at it but there could be a danger for anybody filing a complaint against the organization in the
SEC and the SEC might suspend the registration permit of the organization and we will not be able to operate.
HON. AQUINO: Well, that I think would be a problem that will not be exclusive to corporations registered with
the SEC because even if you are government corporation, court action may be taken against you in other
judicial bodies because the SEC is simply another quasi-judicial body. But, I think, the first point would be very
interesting, the first point that you raised. In effect, what you are saying is that with the legislative mandate
creating your charter, in effect, you have been given some sort of a franchise with this movement.
MR. ESCUDERO: Yes.

HON. AQUINO: Exclusive franchise of that movement?
MR. ESCUDERO: Yes.
Section 8. Any donation or contribution which from time to time may be made to the Boy Scouts of the
Philippines by the Government or any of its subdivisions, branches, offices, agencies or instrumentalities shall
be expended by the Executive Board in pursuance of this Act.lawph!1
HON. AQUINO: Well, thats very well taken so I will proceed with other issues, Mr. Chairman. x x x. 60 (Emphases
added.)
The sources of funds to maintain the BSP were identified before the House Committee on Government
Enterprises while the bill was being deliberated, and the pertinent portion of the discussion is quoted below:
Therefore, even though the amended BSP charter did away with most of the governmental presence in the BSP
Board, this was done to more strongly promote the BSPs objectives, which were not supported under
Presidential Decree No. 460. The BSP objectives, as pointed out earlier, are consistent with the public purpose
of the promotion of the well-being of the youth, the future leaders of the country. The amendments were not
done with the view of changing the character of the BSP into a privatized corporation. The BSP remains an
agency attached to a department of the government, the DECS, and it was not at all stripped of its public
character.
MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the organization. First, Mr. Chairman,
the Boy Scouts of the Philippines do not receive annual allotment from the government. The organization has to
raise its own funds through fund drives and fund campaigns or fund raising activities. Aside from this, we have
some revenue producing projects in the organization that gives us funds to support the operation. x x x From
time to time, Mr. Chairman, when we have special activities we request for assistance or financial assistance
from government agencies, from private business and corporations, but this is only during special activities
that the Boy Scouts of the Philippines would conduct during the year. Otherwise, we have to raise our own
funds to support the organization.62
The ownership and control test is likewise irrelevant for a public corporation like the BSP. To reiterate, the
relationship of the BSP, an attached agency, to the government, through the DECS, is defined in the Revised
Administrative Code of 1987. The BSP meets the minimum statutory requirement of an attached government
agency as the DECS Secretary sits at the BSP Board ex officio, thus facilitating the policy and program
coordination between the BSP and the DECS.
The nature of the funds of the BSP and the COAs audit jurisdiction were likewise brought up in said
congressional deliberations, to wit:
HON. AQUINO: x x x Insofar as this organization being a government created organization, in fact, a
government corporation classified as such, are your funds or your finances subjected to the COA audit?
Requisites for Declaration of Unconstitutionality Not Met in this Case

The dissenting opinion of Justice Carpio improperly raised the issue of unconstitutionality of certain provisions
of the BSP Charter. Even if the parties were asked to Comment on the validity of the BSP charter by the Court,
this alone does not comply with the requisites for judicial review, which were clearly set forth in a recent case:
When questions of constitutional significance are raised, the Court can exercise its power of judicial review only
if the following requisites are present: (1) the existence of an actual and appropriate case; (2) the existence of
personal and substantial interest on the part of the party raising the constitutional question; (3) recourse to
judicial review is made at the earliest opportunity; and (4) the constitutional question is the lis mota of the
case.61(Emphasis added.)
Thus, when it comes to the exercise of the power of judicial review, the constitutional issue should be the very
lis mota, or threshold issue, of the case, and that it should be raised by either of the parties. These
requirements would be ignored under the dissents rather overreaching view of how this case should have been
decided. True, it was the Court that asked the parties to comment, but the Court cannot be the one to raise a
constitutional issue. Thus, the Court chooses to once more exhibit restraint in the exercise of its power to pass
upon the validity of a law.
Re: the COAs Jurisdiction
Regarding the COAs jurisdiction over the BSP, Section 8 of its amended charter allows the BSP to receive
contributions or donations from the government. Section 8 reads:
MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We dont fall under the jurisdiction of the
COA.
HON. AQUINO: All right, but before were you?
MR. ESCUDERO: No, Mr. Chairman.
MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was written by then Secretary Jorge
Vargas and before and up to the middle of the Martial Law years, the BSP was receiving a subsidy in the form of
an annual a one draw from the Sweepstakes. And, this was the case also with the Girl Scouts at the Anti-TB,
but then this was and the Boy Scouts then because of this funding partly from government was being
subjected to audit in the contributions being made in the part of the Sweepstakes. But this was removed later
during the Martial Law years with the creation of the Human Settlements Commission. So the situation right
now is that the Boy Scouts does not receive any funding from government, but then in the case of the local
councils and this legislative charter, so to speak, enables the local councils even the national headquarters in
view of the provisions in the existing law to receive donations from the government or any of its
instrumentalities, which would be difficult if the Boy Scouts is registered as a private corporation with the
Securities and Exchange Commission. Government bodies would be estopped from making donations to the
Boy Scouts, which at present is not the case because there is the Boy Scouts charter, this Commonwealth Act
111 as amended by PD 463.
xxxx

HON. AMATONG: Mr. Chairman, in connection with that.
THE CHAIRMAN: Yeah, Gentleman from Zamboanga.
HON. AMATONG: There is no auditing being made because theres no money put in the organization, but how
about donated funds to this organization? What are the remedies of the donors of how will they know how their
money are being spent?
Constitution"; and that "the BSP is appropriately regarded as a government instrumentality under the 1987
Administrative Code." The COA Resolution also cited its constitutional mandate under Section 2(1), Article IX
(D).
COA General Counsel, Director Sunico wrote BSP that latter have to comply with COA Resolution No. 99-011,
among which is to conduct an annual financial audit therein.
MR. ESCUDERO: May I answer, Mr. Chairman?
Upon the BSPs request, the audit was deferred for thirty (30) days. The BSP then filed a Petition for Review with
Prayer for Preliminary Injunction and/or Temporary Restraining Order before the COA. This was denied by the
COA in its questioned Decision, which held that the BSP is under its audit jurisdiction. The BSP moved for
reconsideration but this was likewise denied under its questioned Resolution.
THE CHAIRMAN: Yes, gentleman.
This led to the filing by the BSP of this petition for prohibition with preliminary injunction and temporary
restraining order against the COA.
MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by the charter we are required to
submit a financial report at the end of each year to the National Executive Board. So all the funds donated or
otherwise is accounted for at the end of the year by our external auditor. In this case the SGV. 63
ISSUE: Whether the BSP falls under the COAs audit jurisdiction.
HELD: The BSP is under the COAs audit jurisdiction.
POLITICAL LAW personality of BSP
Historically, therefore, the BSP had been subjected to government audit in so far as public funds had been
infused thereto. However, this practice should not preclude the exercise of the audit jurisdiction of COA, clearly
set forth under the Constitution, which pertinently provides:
Section 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle
all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned
or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution;
(b) autonomous state colleges and universities; (c) other government-owned or controlled corporations with
original charters and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the Government, which are required by law of the granting institution to
submit to such audit as a condition of subsidy or equity. x x x. 64
Since the BSP, under its amended charter, continues to be a public corporation or a government
instrumentality, we come to the inevitable conclusion that it is subject to the exercise by the COA of its audit
jurisdiction in the manner consistent with the provisions of the BSP Charter.
WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED.SO ORDERED.
BOY SCOUTS OF THE PHILIPPINES, Petitioner, v. COMMISSION ON AUDIT, Respondent.
FACTS:
COA issued Resolution No. 99-0115 on August 19, 1999 with the subject "Defining the Commissions policy with
respect to the audit of the Boy Scouts of the Philippines." In its whereas clauses, the COA Resolution stated that
the BSP was created as a public corporation under CA No. 111, as amended by PD No. 460 and Republic Act No.
7278; that in Boy Scouts of the Philippines v. NLRC, the Supreme Court ruled that the BSP, as constituted under
its charter, was a "government-controlled corporation within the meaning of Article IX(B)(2)(1) of the
We believe that the BSP is appropriately regarded as "a government instrumentality" under the 1987
Administrative Code.
It thus appears that the BSP may be regarded as both a "government controlled corporation with an original
charter" and as an "instrumentality" of the Government within the meaning of Article IX (B) (2) (1) of the
Constitution.
The existence of public or government corporate or juridical entities or chartered institutions by legislative fiat
distinct from private corporations and government owned or controlled corporation is best exemplified by the
1987 Administrative Code cited above, which we quote in part:
Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a particular
statute, shall require a different meaning:
(10) "Instrumentality" refers to any agency of the National Government, not integrated within the department
administering special funds, and enjoying operational autonomy, usually through a charter. This term includes
(12) "Chartered institution" refers to any agency organized or operating under a special charter, and vested by
law with functions relating to specific constitutional policies or objectives. This term includes the state
universities and colleges and the monetary authority of the State.
(13) "Government-owned or controlled corporation" refers to any agency organized as a stock or non-stock
case of stock corporations, to the extent of at least fifty-one (51) per cent of its capital stock: Provided, That
respective powers, functions and responsibilities with respect to such corporations.
Assuming for the sake of argument that the BSP ceases to be owned or controlled by the government because
of reduction of the number of representatives of the government in the BSP Board, it does not follow that it also

ceases to be a government instrumentality as it still retains all the characteristics of the latter as an attached
agency of the DECS under the Administrative Code. Vesting corporate powers to an attached agency or
instrumentality of the government is not constitutionally prohibited and is allowed by the above-mentioned
provisions of the Civil Code and the 1987 Administrative Code.
Historically, therefore, the BSP had been subjected to government audit in so far as public funds had been
infused thereto. However, this practice should not preclude the exercise of the audit jurisdiction of COA, clearly
set forth under the Constitution, which pertinently provides:
Section 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle
all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned
or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution;
(b) autonomous state colleges and universities; (c) other government-owned or controlled corporations with
original charters and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the Government, which are required by law of the granting institution to
submit to such audit as a condition of subsidy or equity.
Since the BSP, under its amended charter, continues to be a public corporation or a government
instrumentality, we come to the inevitable conclusion that it is subject to the exercise by the COA of its audit
jurisdiction in the manner consistent with the provisions of the BSP Charter.
The Petition for prohibition is dismissed
EN BANC
G.R. No. 175352
DANTE V. LIBAN, REYNALDO M. BERNARDO, and SALVADOR M. VIARI, Petitioners,
vs.
RICHARD J. GORDON, Respondent.
DECISION
CARPIO, J.:
The Case
This is a petition to declare Senator Richard J. Gordon (respondent) as having forfeited his seat in the Senate.
The Facts
Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari (petitioners) filed with this Court a
Petition to Declare Richard J. Gordon as Having Forfeited His Seat in the Senate. Petitioners are officers of the
Board of Directors of the Quezon City Red Cross Chapter while respondent is Chairman of the Philippine
National Red Cross (PNRC) Board of Governors.
During respondents incumbency as a member of the Senate of the Philippines, 1 he was elected Chairman of
the PNRC during the 23 February 2006 meeting of the PNRC Board of Governors. Petitioners allege that by
accepting the chairmanship of the PNRC Board of Governors, respondent has ceased to be a member of the
Senate as provided in Section 13, Article VI of the Constitution, which reads:
SEC. 13. No Senator or Member of the House of Representatives may hold any other office or employment in
the Government, or any subdivision, agency, or instrumentality thereof, including government-owned or
controlled corporations or their subsidiaries, during his term without forfeiting his seat. Neither shall he be
appointed to any office which may have been created or the emoluments thereof increased during the term for
which he was elected.
Petitioners cite Camporedondo v. NLRC,2 which held that the PNRC is a government-owned or controlled
corporation. Petitioners claim that in accepting and holding the position of Chairman of the PNRC Board of
Governors, respondent has automatically forfeited his seat in the Senate, pursuant to Flores v. Drilon,3 which
held that incumbent national legislators lose their elective posts upon their appointment to another
government office.
In his Comment, respondent asserts that petitioners have no standing to file this petition which appears to be
an action for quo warranto, since the petition alleges that respondent committed an act which, by provision of
law, constitutes a ground for forfeiture of his public office. Petitioners do not claim to be entitled to the Senate
office of respondent. Under Section 5, Rule 66 of the Rules of Civil Procedure, only a person claiming to be
entitled to a public office usurped or unlawfully held by another may bring an action for quo warranto in his
own name. If the petition is one for quo warranto, it is already barred by prescription since under Section 11,
Rule 66 of the Rules of Civil Procedure, the action should be commenced within one year after the cause of the
public officers forfeiture of office. In this case, respondent has been working as a Red Cross volunteer for the
past 40 years. Respondent was already Chairman of the PNRC Board of Governors when he was elected Senator
in May 2004, having been elected Chairman in 2003 and re-elected in 2005.
Respondent contends that even if the present petition is treated as a taxpayers suit, petitioners cannot be
allowed to raise a constitutional question in the absence of any claim that they suffered some actual damage or
threatened injury as a result of the allegedly illegal act of respondent. Furthermore, taxpayers are allowed to
sue only when there is a claim of illegal disbursement of public funds, or that public money is being diverted to
any improper purpose, or where petitioners seek to restrain respondent from enforcing an invalid law that
results in wastage of public funds.
Respondent also maintains that if the petition is treated as one for declaratory relief, this Court would have no
jurisdiction since original jurisdiction for declaratory relief lies with the Regional Trial Court.
Respondent further insists that the PNRC is not a government-owned or controlled corporation and that the
prohibition under Section 13, Article VI of the Constitution does not apply in the present case since volunteer
service to the PNRC is neither an office nor an employment.
In their Reply, petitioners claim that their petition is neither an action for quo warranto nor an action for
declaratory relief. Petitioners maintain that the present petition is a taxpayers suit questioning the unlawful
disbursement of funds, considering that respondent has been drawing his salaries and other compensation as a

Senator even if he is no longer entitled to his office. Petitioners point out that this Court has jurisdiction over
this petition since it involves a legal or constitutional issue which is of transcendental importance.
Petitioners allege in their petition that:

4. Respondent became the Chairman of the PNRC when he was elected as such during the First Regular
Luncheon-Meeting of the Board of Governors of the PNRC held on February 23, 2006, the minutes of which is
hereto attached and made integral part hereof as Annex "A."
The Issues
Petitioners raise the following issues:
1. Whether the Philippine National Red Cross (PNRC) is a government- owned or controlled corporation;
2. Whether Section 13, Article VI of the Philippine Constitution applies to the case of respondent who is
Chairman of the PNRC and at the same time a Member of the Senate;
3. Whether respondent should be automatically removed as a Senator pursuant to Section 13, Article VI of the
Philippine Constitution; and
4. Whether petitioners may legally institute this petition against respondent.
The substantial issue boils down to whether the office of the PNRC Chairman is a government office or an office
in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the
Constitution.
The Courts Ruling
5. Respondent was elected as Chairman of the PNRC Board of Governors, during his incumbency as a Member
of the House of Senate of the Congress of the Philippines, having been elected as such during the national
elections last May 2004.
6. Since his election as Chairman of the PNRC Board of Governors, which position he duly accepted, respondent
has been exercising the powers and discharging the functions and duties of said office, despite the fact that he
is still a senator.
7. It is the respectful submission of the petitioner[s] that by accepting the chairmanship of the Board of
Governors of the PNRC, respondent has ceased to be a Member of the House of Senate as provided in Section
13, Article VI of the Philippine Constitution, x x x
xxxx
10. It is respectfully submitted that in accepting the position of Chairman of the Board of Governors of the PNRC
on February 23, 2006, respondent has automatically forfeited his seat in the House of Senate and, therefore,
has long ceased to be a Senator, pursuant to the ruling of this Honorable Court in the case of FLORES, ET AL.
VS. DRILON AND GORDON, G.R. No. 104732, x x x
We find the petition without merit.

Petitioners Have No Standing to File this Petition
A careful reading of the petition reveals that it is an action for quo warranto. Section 1, Rule 66 of the Rules of
Court provides:
Section 1. Action by Government against individuals. An action for the usurpation of a public office, position
or franchise may be commenced by a verified petition brought in the name of the Republic of the Philippines
against:
(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office, position or
franchise;
(b) A public officer who does or suffers an act which by provision of law, constitutes a ground for the
forfeiture of his office; or
(c) An association which acts as a corporation within the Philippines without being legally incorporated
or without lawful authority so to act. (Emphasis supplied)
11. Despite the fact that he is no longer a senator, respondent continues to act as such and still performs the
powers, functions and duties of a senator, contrary to the constitution, law and jurisprudence.
12. Unless restrained, therefore, respondent will continue to falsely act and represent himself as a senator or
member of the House of Senate, collecting the salaries, emoluments and other compensations, benefits and
privileges appertaining and due only to the legitimate senators, to the damage, great and irreparable injury of
the Government and the Filipino people.5 (Emphasis supplied)
Thus, petitioners are alleging that by accepting the position of Chairman of the PNRC Board of Governors,
respondent has automatically forfeited his seat in the Senate. In short, petitioners filed an action for usurpation
of public office against respondent, a public officer who allegedly committed an act which constitutes a ground
for the forfeiture of his public office. Clearly, such an action is for quo warranto, specifically under Section 1(b),
Rule 66 of the Rules of Court.
Quo warranto is generally commenced by the Government as the proper party plaintiff. However, under Section
5, Rule 66 of the Rules of Court, an individual may commence such an action if he claims to be entitled to the
public office allegedly usurped by another, in which case he can bring the action in his own name. The person
instituting quo warranto proceedings in his own behalf must claim and be able to show that he is entitled to the
office in dispute, otherwise the action may be dismissed at any stage. 6 In the present case, petitioners do not

claim to be entitled to the Senate office of respondent. Clearly, petitioners have no standing to file the present
petition.
Even if the Court disregards the infirmities of the petition and treats it as a taxpayers suit, the petition would
still fail on the merits.
PNRC is a Private Organization Performing Public Functions
On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95, 7 otherwise known as the PNRC
Charter. The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose mission is to
bring timely, effective, and compassionate humanitarian assistance for the most vulnerable without
consideration of nationality, race, religion, gender, social status, or political affiliation. 8 The PNRC provides six
major services: Blood Services, Disaster Management, Safety Services, Community Health and Nursing, Social
Services and Voluntary Service.9
The PNRC is a member National Society of the International Red Cross and Red Crescent Movement
(Movement), which is composed of the International Committee of the Red Cross (ICRC), the International
Federation of Red Cross and Red Crescent Societies (International Federation), and the National Red Cross and
Red Crescent Societies (National Societies). The Movement is united and guided by its seven Fundamental
Principles:
1. HUMANITY The International Red Cross and Red Crescent Movement, born of a desire to bring
assistance without discrimination to the wounded on the battlefield, endeavors, in its international and
national capacity, to prevent and alleviate human suffering wherever it may be found. Its purpose is to
protect life and health and to ensure respect for the human being. It promotes mutual understanding,
friendship, cooperation and lasting peace amongst all peoples.
2. IMPARTIALITY It makes no discrimination as to nationality, race, religious beliefs, class or political
opinions. It endeavors to relieve the suffering of individuals, being guided solely by their needs, and to
give priority to the most urgent cases of distress.
The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as a voluntary
organization for the purpose contemplated in the Geneva Convention of 27 July 1929. 10 The Whereas clauses of
the PNRC Charter read:
3. NEUTRALITY In order to continue to enjoy the confidence of all, the Movement may not take sides
in hostilities or engage at any time in controversies of a political, racial, religious or ideological nature.
WHEREAS, there was developed at Geneva, Switzerland, on August 22, 1864, a convention by which the
nations of the world were invited to join together in diminishing, so far lies within their power, the evils inherent
in war;
4. INDEPENDENCE The Movement is independent. The National Societies, while auxiliaries in the
humanitarian services of their governments and subject to the laws of their respective countries, must
always maintain their autonomy so that they may be able at all times to act in accordance with the
principles of the Movement.
WHEREAS, more than sixty nations of the world have ratified or adhered to the subsequent revision of said
convention, namely the "Convention of Geneva of July 29 [sic], 1929 for the Amelioration of the Condition of
the Wounded and Sick of Armies in the Field" (referred to in this Charter as the Geneva Red Cross Convention);
5. VOLUNTARY SERVICE It is a voluntary relief movement not prompted in any manner by desire for
gain.
WHEREAS, the Geneva Red Cross Convention envisages the establishment in each country of a voluntary
organization to assist in caring for the wounded and sick of the armed forces and to furnish supplies for that
purpose;
WHEREAS, the Republic of the Philippines became an independent nation on July 4, 1946 and proclaimed its
adherence to the Geneva Red Cross Convention on February 14, 1947, and by that action indicated its desire to
participate with the nations of the world in mitigating the suffering caused by war and to establish in the
Philippines a voluntary organization for that purpose as contemplated by the Geneva Red Cross Convention;
WHEREAS, there existed in the Philippines since 1917 a Charter of the American National Red Cross which must
be terminated in view of the independence of the Philippines; and
WHEREAS, the volunteer organizations established in the other countries which have ratified or adhered to the
Geneva Red Cross Convention assist in promoting the health and welfare of their people in peace and in war,
and through their mutual assistance and cooperation directly and through their international organizations
promote better understanding and sympathy among the peoples of the world. (Emphasis supplied)
6. UNITY There can be only one Red Cross or one Red Crescent Society in any one country. It must be
open to all. It must carry on its humanitarian work throughout its territory.
7. UNIVERSALITY The International Red Cross and Red Crescent Movement, in which all Societies
have equal status and share equal responsibilities and duties in helping each other, is worldwide.
(Emphasis supplied)
The Fundamental Principles provide a universal standard of reference for all members of the Movement. The
PNRC, as a member National Society of the Movement, has the duty to uphold the Fundamental Principles and
ideals of the Movement. In order to be recognized as a National Society, the PNRC has to be autonomous and
must operate in conformity with the Fundamental Principles of the Movement. 11
The reason for this autonomy is fundamental. To be accepted by warring belligerents as neutral workers during
international or internal armed conflicts, the PNRC volunteers must not be seen as belonging to any side of the
armed conflict. In the Philippines where there is a communist insurgency and a Muslim separatist rebellion, the
PNRC cannot be seen as government-owned or controlled, and neither can the PNRC volunteers be identified as
government personnel or as instruments of government policy. Otherwise, the insurgents or separatists will

treat PNRC volunteers as enemies when the volunteers tend to the wounded in the battlefield or the displaced
civilians in conflict areas.
than such heads of departments, agencies, commissions or boards. 15 In Rufino v. Endriga,16 the Court explained
appointments under Section 16 in this wise:
Thus, the PNRC must not only be, but must also be seen to be, autonomous, neutral and independent in order
to conduct its activities in accordance with the Fundamental Principles. The PNRC must not appear to be an
instrument or agency that implements government policy; otherwise, it cannot merit the trust of all and cannot
effectively carry out its mission as a National Red Cross Society. 12 It is imperative that the PNRC must be
autonomous, neutral, and independent in relation to the State.
Under Section 16, Article VII of the 1987 Constitution, the President appoints three groups of officers. The first
group refers to the heads of the Executive departments, ambassadors, other public ministers and consuls,
officers of the armed forces from the rank of colonel or naval captain, and other officers whose appointments
are vested in the President by the Constitution. The second group refers to those whom the President may be
authorized by law to appoint. The third group refers to all other officers of the Government whose
appointments are not otherwise provided by law.
To ensure and maintain its autonomy, neutrality, and independence, the PNRC cannot be owned or controlled
by the government. Indeed, the Philippine government does not own the PNRC. The PNRC does not have
government assets and does not receive any appropriation from the Philippine Congress. 13 The PNRC is
financed primarily by contributions from private individuals and private entities obtained through solicitation
campaigns organized by its Board of Governors, as provided under Section 11 of the PNRC Charter:
SECTION 11. As a national voluntary organization, the Philippine National Red Cross shall be financed primarily
by contributions obtained through solicitation campaigns throughout the year which shall be organized by the
Board of Governors and conducted by the Chapters in their respective jurisdictions. These fund raising
campaigns shall be conducted independently of other fund drives by other organizations. (Emphasis supplied)
The government does not control the PNRC. Under the PNRC Charter, as amended, only six of the thirty
members of the PNRC Board of Governors are appointed by the President of the Philippines. Thus, twenty-four
members, or four-fifths (4/5), of the PNRC Board of Governors are not appointed by the President. Section 6 of
the PNRC Charter, as amended, provides:
SECTION 6. The governing powers and authority shall be vested in a Board of Governors composed of thirty
members, six of whom shall be appointed by the President of the Philippines, eighteen shall be elected by
chapter delegates in biennial conventions and the remaining six shall be selected by the twenty-four members
of the Board already chosen. x x x.
Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the chapter delegates of the
PNRC, and six are elected by the twenty-four members already chosen a select group where the private
sector members have three-fourths majority. Clearly, an overwhelming majority of four-fifths of the PNRC Board
are elected or chosen by the private sector members of the PNRC.
The PNRC Board of Governors, which exercises all corporate powers of the PNRC, elects the PNRC Chairman and
all other officers of the PNRC. The incumbent Chairman of PNRC, respondent Senator Gordon, was elected, as
all PNRC Chairmen are elected, by a private sector-controlled PNRC Board four-fifths of whom are private sector
members of the PNRC. The PNRC Chairman is not appointed by the President or by any subordinate
government official.
Under Section 16, Article VII of the Constitution, 14 the President appoints all officials and employees in the
Executive branch whose appointments are vested in the President by the Constitution or by law. The President
also appoints those whose appointments are not otherwise provided by law. Under this Section 16, the law may
also authorize the "heads of departments, agencies, commissions, or boards" to appoint officers lower in rank
Under the same Section 16, there is a fourth group of lower-ranked officers whose appointments Congress may
by law vest in the heads of departments, agencies, commissions, or boards. x x x
xxx
In a department in the Executive branch, the head is the Secretary. The law may not authorize the
Undersecretary, acting as such Undersecretary, to appoint lower-ranked officers in the Executive department.
In an agency, the power is vested in the head of the agency for it would be preposterous to vest it in the
agency itself. In a commission, the head is the chairperson of the commission. In a board, the head is also the
chairperson of the board. In the last three situations, the law may not also authorize officers other than the
heads of the agency, commission, or board to appoint lower-ranked officers.
xxx
The Constitution authorizes Congress to vest the power to appoint lower-ranked officers specifically in the
"heads" of the specified offices, and in no other person. The word "heads" refers to the chairpersons of the
commissions or boards and not to their members, for several reasons.
The President does not appoint the Chairman of the PNRC. Neither does the head of any department, agency,
commission or board appoint the PNRC Chairman. Thus, the PNRC Chairman is not an official or employee of
the Executive branch since his appointment does not fall under Section 16, Article VII of the Constitution.
Certainly, the PNRC Chairman is not an official or employee of the Judiciary or Legislature. This leads us to the
obvious conclusion that the PNRC Chairman is not an official or employee of the Philippine Government. Not
being a government official or employee, the PNRC Chairman, as such, does not hold a government office or
employment.
Under Section 17, Article VII of the Constitution, 17 the President exercises control over all government offices in
the Executive branch. If an office is legally not under the control of the President, then such office is
not part of the Executive branch. In Rufino v. Endriga,18 the Court explained the Presidents power of
control over all government offices as follows:

Every government office, entity, or agency must fall under the Executive, Legislative, or Judicial branches, or
must belong to one of the independent constitutional bodies, or must be a quasi-judicial body or local
government unit. Otherwise, such government office, entity, or agency has no legal and constitutional basis for
its existence.
The CCP does not fall under the Legislative or Judicial branches of government. The CCP is also not one of the
independent constitutional bodies. Neither is the CCP a quasi-judicial body nor a local government unit. Thus,
the CCP must fall under the Executive branch. Under the Revised Administrative Code of 1987, any agency "not
placed by law or order creating them under any specific department" falls "under the Office of the President."
Since the President exercises control over "all the executive departments, bureaus, and offices," the President
necessarily exercises control over the CCP which is an office in the Executive branch. In mandating that the
President "shall have control of all executive . . . offices," Section 17, Article VII of the 1987 Constitution does
not exempt any executive office one performing executive functions outside of the independent
constitutional bodies from the Presidents power of control. There is no dispute that the CCP performs
executive, and not legislative, judicial, or quasi-judicial functions.
The Presidents power of control applies to the acts or decisions of all officers in the Executive branch. This is
true whether such officers are appointed by the President or by heads of departments, agencies, commissions,
or boards. The power of control means the power to revise or reverse the acts or decisions of a subordinate
officer involving the exercise of discretion.
In short, the President sits at the apex of the Executive branch, and exercises "control of all the executive
departments, bureaus, and offices." There can be no instance under the Constitution where an officer of the
Executive branch is outside the control of the President. The Executive branch is unitary since there is only one
President vested with executive power exercising control over the entire Executive branch. Any office in the
Executive branch that is not under the control of the President is a lost command whose existence is without
any legal or constitutional basis. (Emphasis supplied)
An overwhelming four-fifths majority of the PNRC Board are private sector individuals elected to the PNRC
Board by the private sector members of the PNRC. The PNRC Board exercises all corporate powers of the PNRC.
The PNRC is controlled by private sector individuals. Decisions or actions of the PNRC Board are not reviewable
by the President. The President cannot reverse or modify the decisions or actions of the PNRC Board. Neither
can the President reverse or modify the decisions or actions of the PNRC Chairman. It is the PNRC Board that
can review, reverse or modify the decisions or actions of the PNRC Chairman. This proves again that the office
of the PNRC Chairman is a private office, not a government office.1avvphi1
Although the State is often represented in the governing bodies of a National Society, this can be justified by
the need for proper coordination with the public authorities, and the government representatives may take part
in decision-making within a National Society. However, the freely-elected representatives of a National Societys
active members must remain in a large majority in a National Societys governing bodies. 19
The PNRC is not government-owned but privately owned. The vast majority of the thousands of PNRC members
are private individuals, including students. Under the PNRC Charter, those who contribute to the annual fund
campaign of the PNRC are entitled to membership in the PNRC for one year. Thus, any one between 6 and 65
years of age can be a PNRC member for one year upon contributing P35, P100, P300, P500 or P1,000 for the
year.20 Even foreigners, whether residents or not, can be members of the PNRC. Section 5 of the PNRC Charter,
as amended by Presidential Decree No. 1264,21 reads:
SEC. 5. Membership in the Philippine National Red Cross shall be open to the entire population in the
Philippines regardless of citizenship. Any contribution to the Philippine National Red Cross Annual Fund
Campaign shall entitle the contributor to membership for one year and said contribution shall be deductible in
full for taxation purposes.
Thus, the PNRC is a privately owned, privately funded, and privately run charitable organization. The PNRC is
not a government-owned or controlled corporation.
Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC, 22 which ruled that the PNRC is a
government-owned or controlled corporation. In ruling that the PNRC is a government-owned or controlled
corporation, the simple test used was whether the corporation was created by its own special charter for the
exercise of a public function or by incorporation under the general corporation law. Since the PNRC was created
under a special charter, the Court then ruled that it is a government corporation. However,
the Camporedondoruling failed to consider the definition of a government-owned or controlled corporation as
provided under Section 2(13) of the Introductory Provisions of the Administrative Code of 1987:
SEC. 2. General Terms Defined. x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock
owned by the Government directly or through its instrumentalities either wholly, or where applicable as in the
case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock : Provided, That
respective powers, functions and responsibilities with respect to such corporations.(Boldfacing and
underscoring supplied)
A government-owned or controlled corporation must be owned by the government, and in the case of a stock
corporation, at least a majority of its capital stock must be owned by the government. In the case of a nonstock corporation, by analogy at least a majority of the members must be government officials holding such
membership by appointment or designation by the government. Under this criterion, and as discussed earlier,
the government does not own or control PNRC.
The PNRC Charter is Violative of the Constitutional Proscription against the Creation of Private Corporations by
Special Law
The 1935 Constitution, as amended, was in force when the PNRC was created by special charter on 22 March
1947. Section 7, Article XIV of the 1935 Constitution, as amended, reads:

SEC. 7. The Congress shall not, except by general law, provide for the formation, organization, or regulation of
private corporations, unless such corporations are owned or controlled by the Government or any subdivision
or instrumentality thereof.
The subsequent 1973 and 1987 Constitutions contain similar provisions prohibiting Congress from creating
private corporations except by general law. Section 1 of the PNRC Charter, as amended, creates the PNRC as a
"body corporate and politic," thus:
SECTION 1. There is hereby created in the Republic of the Philippines a body corporate and politic to be the
voluntary organization officially designated to assist the Republic of the Philippines in discharging the
obligations set forth in the Geneva Conventions and to perform such other duties as are inherent upon a
National Red Cross Society. The national headquarters of this Corporation shall be located in Metropolitan
Manila. (Emphasis supplied)
In Feliciano v. Commission on Audit,23 the Court explained the constitutional provision prohibiting Congress from
creating private corporations in this wise:
We begin by explaining the general framework under the fundamental law. The Constitution recognizes two
classes of corporations. The first refers to private corporations created under a general law. The second refers
to government-owned or controlled corporations created by special charters. Section 16, Article XII of the
Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by general law applicable to
all citizens. The purpose of this constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups special privileges denied to other
citizens.
In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation
would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private,
it must necessarily exist under a general law. Stated differently, only corporations created under a general law
can qualify as private corporations. Under existing laws, the general law is the Corporation Code, except that
the Cooperative Code governs the incorporation of cooperatives.
The Constitution authorizes Congress to create government-owned or controlled corporations through special
charters. Since private corporations cannot have special charters, it follows that Congress can create
corporations with special charters only if such corporations are government-owned or controlled. 24 (Emphasis
supplied)
In Feliciano, the Court held that the Local Water Districts are government-owned or controlled corporations
since they exist by virtue of Presidential Decree No. 198, which constitutes their special charter. The seed
capital assets of the Local Water Districts, such as waterworks and sewerage facilities, were public property
which were managed, operated by or under the control of the city, municipality or province before the assets
were transferred to the Local Water Districts. The Local Water Districts also receive subsidies and loans from
the Local Water Utilities Administration (LWUA). In fact, under the 2009 General Appropriations Act, 25 the LWUA
has a budget amounting to P400,000,000 for its subsidy requirements. 26 There is no private capital
invested in the Local Water Districts. The capital assets and operating funds of the Local Water Districts all
come from the government, either through transfer of assets, loans, subsidies or the income from such assets
or funds.
The government also controls the Local Water Districts because the municipal or city mayor, or the provincial
governor, appoints all the board directors of the Local Water Districts. Furthermore, the board directors and
other personnel of the Local Water Districts are government employees subject to civil service laws and antigraft laws. Clearly, the Local Water Districts are considered government-owned or controlled corporations not
only because of their creation by special charter but also because the government in fact owns and controls the
Local Water Districts.
Just like the Local Water Districts, the PNRC was created through a special charter. However, unlike the Local
Water Districts, the elements of government ownership and control are clearly lacking in the PNRC. Thus,
although the PNRC is created by a special charter, it cannot be considered a government-owned or controlled
corporation in the absence of the essential elements of ownership and control by the government. In creating
the PNRC as a corporate entity, Congress was in fact creating a private corporation. However, the constitutional
prohibition against the creation of private corporations by special charters provides no exception even for nonprofit or charitable corporations. Consequently, the PNRC Charter, insofar as it creates the PNRC as a private
corporation and grants it corporate powers, 27 is void for being unconstitutional. Thus, Sections
1,28 2,29 3,304(a),31 5,32 6,33 7,34 8,35 9,36 10,37 11,38 12,39 and 1340 of the PNRC Charter, as amended, are void.
The other provisions41 of the PNRC Charter remain valid as they can be considered as a recognition by the State
that the unincorporated PNRC is the local National Society of the International Red Cross and Red Crescent
Movement, and thus entitled to the benefits, exemptions and privileges set forth in the PNRC Charter. The other
provisions of the PNRC Charter implement the Philippine Governments treaty obligations under Article 4(5) of
the Statutes of the International Red Cross and Red Crescent Movement, which provides that to be recognized
as a National Society, the Society must be "duly recognized by the legal government of its country on the basis
of the Geneva Conventions and of the national legislation as a voluntary aid society, auxiliary to the public
authorities in the humanitarian field."
In sum, we hold that the office of the PNRC Chairman is not a government office or an office in a governmentowned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution. However, since the PNRC Charter is void insofar as it creates the PNRC as a private corporation,
the PNRC should incorporate under the Corporation Code and register with the Securities and Exchange
Commission if it wants to be a private corporation.
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red Cross is not a
government office or an office in a government-owned or controlled corporation for purposes of the prohibition
in Section 13, Article VI of the 1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10,
11, 12, and 13 of the Charter of the Philippine National Red Cross, or Republic Act No. 95, as amended by
Presidential Decree Nos. 1264 and 1643, are VOID because they create the PNRC as a private corporation or

grant
it
corporate
powers.SO
ORDERED.
EN BANC
G. R. No. 175352
January 18, 2011
DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR M. VIARI, Petitioners,

vs.
RICHARD J. GORDON, Respondent.
PHILIPPINE NATIONAL RED CROSS, Intervenor.
RESOLUTION
This resolves the Motion for Clarification and/or for Reconsideration 1 filed on August 10, 2009 by respondent
Richard J. Gordon (respondent) of the Decision promulgated by this Court on July 15, 2009 (the Decision), the
Motion for Partial Reconsideration2 filed on August 27, 2009 by movant-intervenor Philippine National Red Cross
(PNRC), and the latters Manifestation and Motion to Admit Attached Position Paper 3 filed on December 23,
2009.
In the Decision,4 the Court held that respondent did not forfeit his seat in the Senate when he accepted the
chairmanship of the PNRC Board of Governors, as "the office of the PNRC Chairman is not a government office
or an office in a government-owned or controlled corporation for purposes of the prohibition in Section 13,
Article VI of the 1987 Constitution." 5 The Decision, however, further declared void the PNRC Charter "insofar as
it creates the PNRC as a private corporation" and consequently ruled that "the PNRC should incorporate under
the Corporation Code and register with the Securities and Exchange Commission if it wants to be a private
corporation."6 The dispositive portion of the Decision reads as follows:
grant it corporate powers.7
In his Motion for Clarification and/or for Reconsideration, respondent raises the following grounds: (1) as the
issue of constitutionality of Republic Act (R.A.) No. 95 was not raised by the parties, the Court went beyond the
case in deciding such issue; and (2) as the Court decided that Petitioners did not have standing to file the
instant Petition, the pronouncement of the Court on the validity of R.A. No. 95 should be considered obiter. 8
Respondent argues that the validity of R.A. No. 95 was a non-issue; therefore, it was unnecessary for the Court
to decide on that question. Respondent cites Laurel v. Garcia, 9 wherein the Court said that it "will not pass upon
a constitutional question although properly presented by the record if the case can be disposed of on some
other ground" and goes on to claim that since this Court, in the Decision, disposed of the petition on some
other ground, i.e., lack of standing of petitioners, there was no need for it to delve into the validity of R.A. No.
95, and the rest of the judgment should be deemed obiter.
In its Motion for Partial Reconsideration, PNRC prays that the Court sustain the constitutionality of its Charter on
the following grounds:
A. THE ASSAILED DECISION DECLARING UNCONSTITUTIONAL REPUBLIC ACT NO. 95 AS AMENDED DEPRIVED
INTERVENOR PNRC OF ITS CONSTITUTIONAL RIGHT TO DUE PROCESS.
1. INTERVENOR PNRC WAS NEVER A PARTY TO THE INSTANT CONTROVERSY.
2. THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95, AS AMENDED WAS NEVER AN ISSUE IN THIS
CASE.
B. THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL DECREE NO. 1264 AND NOT REPUBLIC ACT NO. 95.
PRESIDENTIAL DECREE NO. 1264 WAS NOT A CREATION OF CONGRESS.
C. PNRCS STRUCTURE IS SUI GENERIS; IT IS A CLASS OF ITS OWN. WHILE IT IS PERFORMING HUMANITARIAN
FUNCTIONS AS AN AUXILIARY TO GOVERNMENT, IT IS A NEUTRAL ENTITY SEPARATE AND INDEPENDENT OF
GOVERNMENT CONTROL, YET IT DOES NOT QUALIFY AS STRICTLY PRIVATE IN CHARACTER.
In his Comment and Manifestation 10 filed on November 9, 2009, respondent manifests: (1) that he agrees with
the position taken by the PNRC in its Motion for Partial Reconsideration dated August 27, 2009; and (2) as of
the writing of said Comment and Manifestation, there was pending before the Congress of the Philippines a
proposed bill entitled "An Act Recognizing the PNRC as an Independent, Autonomous, Non-Governmental
Organization Auxiliary to the Authorities of the Republic of the Philippines in the Humanitarian Field, to be
Known as The Philippine Red Cross." 11
After a thorough study of the arguments and points raised by the respondent as well as those of movantintervenor in their respective motions, we have reconsidered our pronouncements in our Decision dated July
15, 2009 with regard to the nature of the PNRC and the constitutionality of some provisions of the PNRC
Charter, R.A. No. 95, as amended.
As correctly pointed out in respondents Motion, the issue of constitutionality of R.A. No. 95 was not raised by
the parties, and was not among the issues defined in the body of the Decision; thus, it was not the very lis
mota of the case. We have reiterated the rule as to when the Court will consider the issue of constitutionality in
Alvarez v. PICOP Resources, Inc.,12 thus:
This Court will not touch the issue of unconstitutionality unless it is the very lis mota. It is a well-established
rule that a court should not pass upon a constitutional question and decide a law to be unconstitutional or
invalid, unless such question is raised by the parties and that when it is raised, if the record also presents some

other ground upon which the court may [rest] its judgment, that course will be adopted and the constitutional
question will be left for consideration until such question will be unavoidable. 13
that purpose and like other volunteer organizations established in other countries which have ratified the
Geneva Conventions, to promote the health and welfare of the people in peace and in war. 14
Under the rule quoted above, therefore, this Court should not have declared void certain sections of R.A. No.
95, as amended by Presidential Decree (P.D.) Nos. 1264 and 1643, the PNRC Charter. Instead, the Court should
have exercised judicial restraint on this matter, especially since there was some other ground upon which the
Court could have based its judgment. Furthermore, the PNRC, the entity most adversely affected by this
declaration of unconstitutionality, which was not even originally a party to this case, was being compelled, as a
consequence of the Decision, to suddenly reorganize and incorporate under the Corporation Code, after more
than sixty (60) years of existence in this country.
The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373, and further amended by P.D. Nos. 1264
and 1643, show the historical background and legal basis of the creation of the PNRC by legislative fiat, as a
voluntary organization impressed with public interest. Pertinently R.A. No. 95, as amended by P.D. 1264,
provides:
Its existence as a chartered corporation remained unchallenged on ground of unconstitutionality

notwithstanding that R.A. No. 95 was enacted on March 22, 1947 during the effectivity of the 1935
Constitution, which provided for a proscription against the creation of private corporations by special law, to
wit:
WHEREAS, more than one hundred forty nations of the world have ratified or adhered to the Geneva
Conventions of August 12, 1949 for the Amelioration of the Condition of the Wounded and Sick of Armed Forces
in the Field and at Sea, The Prisoners of War, and The Civilian Population in Time of War referred to in this
Charter as the Geneva Conventions;
SEC. 7. The Congress shall not, except by general law, provide for the formation, organization, or regulation of
private corporations, unless such corporations are owned and controlled by the Government or any subdivision
or instrumentality thereof. (Art. XIV, 1935 Constitution.)
WHEREAS, the Republic of the Philippines became an independent nation on July 4, 1946, and proclaimed on
February 14, 1947 its adherence to the Geneva Conventions of 1929, and by the action, indicated its desire to
participate with the nations of the world in mitigating the suffering caused by war and to establish in the
Philippines a voluntary organization for that purpose as contemplated by the Geneva Conventions;
Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution and Article XII, Section 16 of the
1987 Constitution. The latter reads:
SECTION 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created or established
by special charters in the interest of the common good and subject to the test of economic viability.
Since its enactment, the PNRC Charter was amended several times, particularly on June 11, 1953, August 16,
1971, December 15, 1977, and October 1, 1979, by virtue of R.A. No. 855, R.A. No. 6373, P.D. No. 1264, and
P.D. No. 1643, respectively. The passage of several laws relating to the PNRCs corporate existence
notwithstanding the effectivity of the constitutional proscription on the creation of private corporations by law,
is a recognition that the PNRC is not strictly in the nature of a private corporation contemplated by the
aforesaid constitutional ban.
A closer look at the nature of the PNRC would show that there is none like it not just in terms of structure, but
also in terms of history, public service and official status accorded to it by the State and the international
community. There is merit in PNRCs contention that its structure is sui generis.
The PNRC succeeded the chapter of the American Red Cross which was in existence in the Philippines since
1917. It was created by an Act of Congress after the Republic of the Philippines became an independent nation
on July 6, 1946 and proclaimed on February 14, 1947 its adherence to the Convention of Geneva of July 29,
1929 for the Amelioration of the Condition of the Wounded and Sick of Armies in the Field (the "Geneva Red
Cross Convention"). By that action the Philippines indicated its desire to participate with the nations of the
world in mitigating the suffering caused by war and to establish in the Philippines a voluntary organization for
WHEREAS, during the meeting in Geneva, Switzerland, on 22 August 1894, the nations of the world
unanimously agreed to diminish within their power the evils inherent in war;
WHEREAS, there existed in the Philippines since 1917 a chapter of the American National Red Cross which was
terminated in view of the independence of the Philippines; and
WHEREAS, the volunteer organizations established in other countries which have ratified or adhered to the
Geneva Conventions assist in promoting the health and welfare of their people in peace and in war, and
through their mutual assistance and cooperation directly and through their international organizations promote
better understanding and sympathy among the people of the world;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me
by the Constitution as Commander-in-Chief of all the Armed Forces of the Philippines and pursuant to
Proclamation No. 1081 dated September 21, 1972, and General Order No. 1 dated September 22, 1972, do
hereby decree and order that Republic Act No. 95, Charter of the Philippine National Red Cross (PNRC) as
amended by Republic Acts No. 855 and 6373, be further amended as follows:
Section 1. There is hereby created in the Republic of the Philippines a body corporate and politic to be the
voluntary organization officially designated to assist the Republic of the Philippines in discharging the
obligations set forth in the Geneva Conventions and to perform such other duties as are inherent upon a
national Red Cross Society. The national headquarters of this Corporation shall be located in Metropolitan
Manila. (Emphasis supplied.)
The significant public service rendered by the PNRC can be gleaned from Section 3 of its Charter, which
provides:

Section 3. That the purposes of this Corporation shall be as follows:
(a) To provide volunteer aid to the sick and wounded of armed forces in time of war, in accordance
with the spirit of and under the conditions prescribed by the Geneva Conventions to which the
Republic of the Philippines proclaimed its adherence;
(b) For the purposes mentioned in the preceding sub-section, to perform all duties devolving upon the
Corporation as a result of the adherence of the Republic of the Philippines to the said Convention;
(c) To act in matters of voluntary relief and in accordance with the authorities of the armed forces as a
medium of communication between people of the Republic of the Philippines and their Armed Forces,
in time of peace and in time of war, and to act in such matters between similar national societies of
other governments and the Governments and people and the Armed Forces of the Republic of the
Philippines;
(d) To establish and maintain a system of national and international relief in time of peace and in time
of war and apply the same in meeting and emergency needs caused by typhoons, flood, fires,
earthquakes, and other natural disasters and to devise and carry on measures for minimizing the
suffering caused by such disasters;
(e) To devise and promote such other services in time of peace and in time of war as may be found
desirable in improving the health, safety and welfare of the Filipino people;
(f) To devise such means as to make every citizen and/or resident of the Philippines a member of the
Red Cross.
The PNRC is one of the National Red Cross and Red Crescent Societies, which, together with the International
Committee of the Red Cross (ICRC) and the IFRC and RCS, make up the International Red Cross and Red
Crescent Movement (the Movement). They constitute a worldwide humanitarian movement, whose mission is:
[T]o prevent and alleviate human suffering wherever it may be found, to protect life and health and ensure
respect for the human being, in particular in times of armed conflict and other emergencies, to work for the
prevention of disease and for the promotion of health and social welfare, to encourage voluntary service and a
constant readiness to give help by the members of the Movement, and a universal sense of solidarity towards
all those in need of its protection and assistance. 15
The PNRC works closely with the ICRC and has been involved in humanitarian activities in the Philippines since
1982. Among others, these activities in the country include:
1. Giving protection and assistance to civilians displaced or otherwise affected by armed clashes
between the government and armed opposition groups, primarily in Mindanao;
2. Working to minimize the effects of armed hostilities and violence on the population;
3. Visiting detainees; and

4. Promoting awareness of international humanitarian law in the public and private sectors. 16
National Societies such as the PNRC act as auxiliaries to the public authorities of their own countries in the
humanitarian field and provide a range of services including disaster relief and health and social programmes.
The International Federation of Red Cross (IFRC) and Red Crescent Societies (RCS) Position Paper, 17 submitted
by the PNRC, is instructive with regard to the elements of the specific nature of the National Societies such as
the PNRC, to wit:
National Societies, such as the Philippine National Red Cross and its sister Red Cross and Red Crescent
Societies, have certain specificities deriving from the 1949 Geneva Convention and the Statutes of the
International Red Cross and Red Crescent Movement (the Movement). They are also guided by the seven
Fundamental Principles of the Red Cross and Red Crescent Movement: Humanity, Impartiality, Neutrality,
Independence, Voluntary Service, Unity and Universality.
A National Society partakes of a sui generis character. It is a protected component of the Red Cross movement
under Articles 24 and 26 of the First Geneva Convention, especially in times of armed conflict. These provisions
require that the staff of a National Society shall be respected and protected in all circumstances. Such
protection is not ordinarily afforded by an international treaty to ordinary private entities or even nongovernmental organisations (NGOs). This sui generis character is also emphasized by the Fourth Geneva
Convention which holds that an Occupying Power cannot require any change in the personnel or structure of a
National Society.National societies are therefore organizations that are directly regulated by
international humanitarian law, in contrast to other ordinary private entities, including NGOs.
xxxx
In addition, National Societies are not only officially recognized by their public authorities as voluntary aid
societies, auxiliary to the public authorities in the humanitarian field, but also benefit from recognition at the
International level. This is considered to be an element distinguishing National Societies from other
organisations (mainly NGOs) and other forms of humanitarian response.
x x x. No other organisation belongs to a world-wide Movement in which all Societies have equal status and
share equal responsibilities and duties in helping each other. This is considered to be the essence of the
Fundamental Principle of Universality.
Furthermore, the National Societies are considered to be auxiliaries to the public authorities in the
humanitarian field. x x x.
The auxiliary status of [a] Red Cross Society means that it is at one and the same time a private
institution and a public service organization because the very nature of its work implies
cooperation with the authorities, a link with the State. In carrying out their major functions, Red Cross

Societies give their humanitarian support to official bodies, in general having larger resources than the
Societies, working towards comparable ends in a given sector.
x x x No other organization has a duty to be its governments humanitarian partner while remaining
independent.18(Emphases ours.)
It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has remained valid and effective
from the time of its enactment in March 22, 1947 under the 1935 Constitution and during the effectivity of the
1973 Constitution and the 1987 Constitution.
The PNRC Charter and its amendatory laws have not been questioned or challenged on constitutional grounds,
not even in this case before the Court now.
In the Decision, the Court, citing Feliciano v. Commission on Audit, 19 explained that the purpose of the
constitutional provision prohibiting Congress from creating private corporations was to prevent the granting of
special privileges to certain individuals, families, or groups, which were denied to other groups. Based on the
above discussion, it can be seen that the PNRC Charter does not come within the spirit of this constitutional
provision, as it does not grant special privileges to a particular individual, family, or group, but creates an entity
that strives to serve the common good.
Furthermore, a strict and mechanical interpretation of Article XII, Section 16 of the 1987 Constitution will hinder
the State in adopting measures that will serve the public good or national interest. It should be noted that a
special law, R.A. No. 9520, the Philippine Cooperative Code of 2008, and not the general corporation code,
vests corporate power and capacities upon cooperatives which are private corporations, in order to implement
the States avowed policy.
In the Decision of July 15, 2009, the Court recognized the public service rendered by the PNRC as the
governments partner in the observance of its international commitments, to wit:
The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose mission is to bring timely,
effective, and compassionate humanitarian assistance for the most vulnerable without consideration of
nationality, race, religion, gender, social status, or political affiliation. The PNRC provides six major services:
Blood Services, Disaster Management, Safety Services, Community Health and Nursing, Social Services and
Voluntary Service.
The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as a voluntary
organization for the purpose contemplated in the Geneva Convention of 27 July 1929. x x x. 20 (Citations
omitted.)
So must this Court recognize too the countrys adherence to the Geneva Convention and respect
the unique status of the PNRC in consonance with its treaty obligations. The Geneva Convention has
the force and effect of law. 21 Under the Constitution, the Philippines adopts the generally accepted principles of
international law as part of the law of the land. 22 This constitutional provision must be reconciled and
harmonized with Article XII, Section 16 of the Constitution, instead of using the latter to negate the former.
By requiring the PNRC to organize under the Corporation Code just like any other private corporation, the
Decision of July 15, 2009 lost sight of the PNRCs special status under international humanitarian law and as an
auxiliary of the State, designated to assist it in discharging its obligations under the Geneva Conventions.
Although the PNRC is called to be independent under its Fundamental Principles, it interprets such
independence as inclusive of its duty to be the governments humanitarian partner. To be recognized in the
International Committee, the PNRC must have an autonomous status, and carry out its humanitarian mission in
a neutral and impartial manner.
However, in accordance with the Fundamental Principle of Voluntary Service of National Societies of the
Movement, the PNRC must be distinguished from private and profit-making entities. It is the main characteristic
of National Societies that they "are not inspired by the desire for financial gain but by individual commitment
and devotion to a humanitarian purpose freely chosen or accepted as part of the service that National Societies
through its volunteers and/or members render to the Community." 23
The PNRC, as a National Society of the International Red Cross and Red Crescent Movement, can neither "be
classified as an instrumentality of the State, so as not to lose its character of neutrality" as well as its
independence, nor strictly as a private corporation since it is regulated by international humanitarian law and is
treated as an auxiliary of the State.24
Based on the above, the sui generis status of the PNRC is now sufficiently established. 1wphi1 Although it is
neither a subdivision, agency, or instrumentality of the government, nor a government-owned or -controlled
corporation or a subsidiary thereof, as succinctly explained in the Decision of July 15, 2009, so much so that
respondent, under the Decision, was correctly allowed to hold his position as Chairman thereof concurrently
while he served as a Senator, such a conclusion does not ipso facto imply that the PNRC is a "private
corporation" within the contemplation of the provision of the Constitution, that must be organized under the
Corporation Code. As correctly mentioned by Justice Roberto A. Abad, the sui generis character of PNRC
requires us to approach controversies involving the PNRC on a case-to-case basis.
In sum, the PNRC enjoys a special status as an important ally and auxiliary of the government in the
humanitarian field in accordance with its commitments under international law. This Court cannot all of a
sudden refuse to recognize its existence, especially since the issue of the constitutionality of the PNRC Charter
was never raised by the parties. It bears emphasizing that the PNRC has responded to almost all national
disasters since 1947, and is widely known to provide a substantial portion of the countrys blood requirements.
Its humanitarian work is unparalleled. The Court should not shake its existence to the core in an untimely and
drastic manner that would not only have negative consequences to those who depend on it in times of disaster
and armed hostilities but also have adverse effects on the image of the Philippines in the international
community. The sections of the PNRC Charter that were declared void must therefore stay.
WHEREFORE, premises considered, respondent Richard J. Gordons Motion for Clarification and/or for
Reconsideration and movant-intervenor PNRCs Motion for Partial Reconsideration of the Decision in G.R. No.
175352 dated July 15, 2009 are GRANTED. The constitutionality of R.A. No. 95, as amended, the charter of the
Philippine National Red Cross, was not raised by the parties as an issue and should not have been passed upon
by this Court. The structure of the PNRC is sui generis being neither strictly private nor public in nature. R.A.
No. 95 remains valid and constitutional in its entirety. The dispositive portion of the Decision should therefore
be MODIFIED by deleting the second sentence, to now read as follows:

in Section 13, Article VI of the 1987 Constitution.SO ORDERED.
subdivision or instrumentality thereof. The Court thus directed the PNRC to incorporate under the Corporation
Code and register with the Securities and Exchange Commission if it wants to be a private corporation.
Incompatible Offices and the Corporate Nature of the Philippine National Red Cross (PNRC) : The Case of [Ex]
Senator Richard Gordon as Chairman of the PNRC Board
Last January 18, 2011, the Supreme Court en banc promulgated itsResolution in the case of Liban,
et al. vs. Gordon, G.R. No. 175352. The Court GRANTED partial reconsideration and MODIFIED the
dispositive portion of its July 15, 2009 Decision. Thus, the High Tribunal MAINTAINED its holding that
respondent Gordon did not forfeit his legislative seat when he was elected as PNRC Chairman during his
incumbency as Senator but DELETED the pronouncement in the Decision that the PNRC Charter, R.A. 95, as
amended, is void insofar as it creates the PNRC as a private corporation. It ruled that the constitutional issue
regarding the PNRC charter was not the lis mota of the case; hence, the Court should not have passed upon it.
It also declared that the PNRC is sui generis in nature; it is neither strictly a GOCC nor a private corporation.
Thus, R.A. No. 95, as amended, remains valid and constitutional in its entirety.
grant it corporate powers.
[To read a digest of the Court's Resolution, please click here.]

The facts of the case
Petitioners Dante V. Liban, et al. were officers of the Board of Directors of the Quezon City Red Cross
Chapter. They filed with the Supreme Court what they styled as Petition to Declare Richard J. Gordon as
Having Forfeited His Seat in the Senate against respondent Richard J. Gordon, who was elected Chairman of
the PNRC Board of Governors during his incumbency as Senator of the Philippines.
Petitioners alleged that by accepting the chairmanship of the PNRC Board of Governors, respondent
Gordon ceased to be a member of the Senate pursuant to Sec. 13, Article VI of the Constitution, which provides
that [n]o Senator . . . may hold any other office or employment in the Government, or any subdivision,
agency, or instrumentality thereof, including government-owned or controlled corporations or their
subsidiaries, during his term without forfeiting his seat. Petitioners cited the case of Camporedondo vs.
NLRC, which held that the PNRC is a GOCC, in supporting their argument that respondent Gordon automatically
forfeited his seat in the Senate when he accepted and held the position of Chairman of the PNRC Board of
Governors.
The July 15, 2009 decision
In its Decision, the Court declared that the substantial issue boils down to whether the office of the
PNRC Chairman is a government office or an office in a GOCC for purposes of the prohibition in
Section 13, Article VI of the Constitution.
Voting 7-5, the Court held that the office of the PNRC Chairman is NOT a government office or an office
in a GOCC. The PNRC Chairman is elected by the PNRC Board of Governors; he is not appointed by the
President or by any subordinate government official. The PNRC in itself is NOT a GOCC because it is a privatelyowned, privately-funded, and privately-run charitable organization controlled by a Board of Governors fourfifths of which are private sector individuals. Thus, respondent Gordon did not forfeit his legislative seat when
he was elected as PNRC Chairman during his incumbency as Senator [as there is no incompatibility between
the two positions].
The Court however held further that the PNRC Charter, R.A. 95, as amended, is void insofar as it
creates the PNRC as a private corporation since Section 7, Article XIV of the 1935 Constitution
stated that [t]he Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned or controlled by the Government or any
The dispositive portion of the Decision read:
Justice Antonio Carpio wrote the Decision for the Court. Fully concurring with him were then-Chief
Justice Puno and Associate Justices Quisumbing, Carpio Morales, ChicoNazario, Velasco, and Leonardo-de
Castro.
Associate Justice Nachura wrote a Dissenting Opinion. Joining him were Associate Justices YnaresSantiago, Brion, Peralta, and Bersamin. Then-Justice [now Chief Justice] Corona took no part in the deliberation.
According to Justice Nachura, since no private corporation can have a special charter under the
Constitution, it follows that the PNRC is a GOCC. Citing jurisprudence, he argued that the test for determining
whether a corporation is a GOCC is simply whether it was created with its own charter for the exercise of a
public function [and not] by incorporation under the general corporation law. The definition of a GOCC under
the 1987 Administrative Code, on the other hand, is broad enough to admit of other distinctions as to the kinds
of GOCCs. The more crucial factor to consider, said Justice Nachura, is the definitions reference to the
corporation being vested with functions relating to public needs. In this regard, the PNRC Charter states that it
is created as a voluntary organization officially designated to assist the Republic of the Philippines in
discharging the obligations set forth in the Geneva Convention. These obligations are undoubtedly public or
governmental in character. Hence, the PNRC is engaged in the performance of the governments public
functions.
Justice Nachura added that, at the very least, the PNRC should be regarded as a government
instrumentality under the 1987 Administrative Code. An instrumentality refers to any agency of the National
Government not integrated within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. The PNRCs organizational attributes, said Justice Nachura, are
consistent with this definition.
The dissent then cites the unsettling ripple effect which the main ruling could create on numerous
Court decisions, such as those dealing with the jurisdiction of the Civil Service Commission (CSC) and the
authority of the Commission on Audit (COA). It also noted the absurdity of partially invalidating the PNRC
Charter as this would have the consequence of imposing obligations and providing an operational framework
for a legally non-existing entity. Justice Nachura finally warns against the PNRCs ultimate demise if it were
regarded as a private corporation. Because of possible violations of the equal protection clause and penal
statutes, the PNRC may no longer be extended tax exemptions and official immunity or be given any form of
support by the National Government, local government units, and the Philippine Charity Sweepstakes Office
(PCSO). If the PNRC is consequently obliterated, Philippines will be shirking its obligations under the Geneva
Conventions.
As a consequence of the premise that PNRC is a GOCC, or at least a government instrumentality, the
dissent finally concluded that Sen. Gordon forfeited his Senate seat for holding two incompatible offices.
Gordons and PNRCs motions for reconsideration

Though he prevailed, respondent Gordon nevertheless filed a Motion for Clarification and/or for
Reconsideration of the Decision. The PNRC, which was not a party in the case until the Decision came out,
moved to intervene and filed its own Motion for Partial Reconsideration. Both movants basically questioned the
second part of the Decision with regard to the pronouncement on the nature of the PNRC and the
resultant unconstitutionality of some provisions of the PNRC Charter. They raised the following
issue: What is the nature of the PNRC? Corollarily, as it correct for the Court to have passed upon and decided
on the issue of the constitutionality of the PNRC charter?
Changes in the voting in the Court Resolution
As written at the outset, the Court, voting 9-5, GRANTEDreconsideration and MODIFIED the
dispositive portion of the Decision by deleting the second sentence thereof. Thus, the fallo should now read as
follows:
in Section 13, Article VI of the 1987 Constitution.
Associate Justice Teresita Leonardo-De Castro, with whom Justices Velasco, Nachura, Peralta,
Bersamin, Del Castillo, Villarama, and Perez fully concurred, penned the Resolution for the Court en banc. Of
those constituting the new majority, Justices Leonardo-De Castro and Velascopreviously concurred without
qualification to the ponencia of Justice Carpio, while Justices Nachura, Peralta and Bersamin dissented
therefrom. Justice Del Castillo, who joined the Court on July 29, 2009, voted with the new majority. Another
newcomer, Justice Abad, who joined the Court on on August 7, 2009, wrote a Separate Concurring Opinion.
Justice Carpio, the ponente of the July 15, 2009 Decision, was reduced to writing a Dissenting
Opinion. Concurring with him were Justices Carpio-Morales, Brion, Mendoza and Sereno. Justice
Brion previously concurred with the dissent of Justice Nachura. Two newcomers, Justices Mendoza (joined the
Court on January 4, 2010) and Sereno (joined on August 13, 2010), also concurred with Justice Carpio.
The majority opinion
The majority held that the issue of constitutionality of R.A. No. 95 was not raised by the parties, and
was not among the issues defined in the body of the Decision; thus, it was not the lis mota of the case. The
Court quoted the well-established rule that a court should not pass upon a constitutional question and decide a
law to be unconstitutional or invalid, unless such question is raised by the parties; and that [even] when it is
raised, if the record also presents some other ground upon which the court may [rest] its judgment, that course
will be adopted and the constitutional question will be left for consideration until such question will be
unavoidable.
Thus, the majority opined that the Court should not have declared void certain sections of the PNRC
Charter in its July 15, 2009 Decision. Instead, the Court should have exercised judicial restraint on this matter,
especially since there was some other ground upon which the Court could have based its
judgment. Furthermore, the PNRC, the entity most adversely affected by this declaration of unconstitutionality,
which was not even originally a party to this case, was being compelled, as a consequence of the Decision, to
suddenly reorganize and incorporate under the Corporation Code, after more than sixty (60) years of existence
in this country.
The majority also noted that since its enactment, the PNRC Charter was amended several times,
particularly on June 11, 1953, August 16, 1971, December 15, 1977, and October 1, 1979, by virtue of R.A. No.
855, R.A. No. 6373, P.D. No. 1264, and P.D. No. 1643, respectively. The passage of several laws relating to the
PNRCs corporate existence notwithstanding the effectivity of the constitutional proscription on the creation of
private corporations by law is a recognition that the PNRC is not strictly in the nature of a private corporation
contemplated by the aforesaid constitutional ban. It found merit in PNRCs contention that its structure is sui
generis [since a] closer look at the nature of the PNRC would show that there is none like it, not just in terms
of structure, but also in terms of history, public service and official status accorded by the State and
the international community. It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has
remained valid and effective from the time of its enactment in March 22, 1947 under the 1935 Constitution and
during the effectivity of the 1973 Constitution and the 1987 Constitution.
Justice Leonardo-De Castro argued that Court [must] recognize the countrys adherence to the Geneva
Convention and respect the unique status of the PNRC in consonance with its treaty obligations. The Geneva
Convention has the force and effect of law. Under the Constitution, the Philippines adopts the generally
accepted principles of international law as part of the law of the land. This constitutional provision must be
reconciled and harmonized with Article XII, Section 16 of the Constitution [which provides that [t]he Congress
shall not, except by general law, provide for the formation, organization, or regulation of private
corporations.], instead of using the latter to negate the former. By requiring the PNRC to organize under the
Corporation Code just like any other private corporation, the Decision of July 15, 2009 lost sight of the PNRCs
special status under international humanitarian law and as an auxiliary of the State, designated to assist it in
discharging its obligations under the Geneva Conventions.
Echoing the thesis of Justice Carpio in the Decision, Justice Leonardo-De Castro reiterated that the
PNRC, as a National Society of the International Red Cross and Red Crescent Movement, can neither be
classified as an instrumentality of the State, so as not to lose its character of neutrality as well as its
independence, nor strictly as a private corporation since it is regulated by international humanitarian law and is
treated as an auxiliary of the State.
[But] although [the PNRC] is neither a subdivision, agency, or instrumentality of the government, nor a
GOCC or a subsidiary thereof . . . so much so that respondent, under the Decision, was correctly allowed to hold
his position as Chairman thereof concurrently while he served as a Senator, such a conclusion does not ipso
facto imply that the PNRC is a private corporation within the contemplation of the provision of the
Constitution, that must be organized under the Corporation Code. [T]he sui generis character of PNRC requires
us to approach controversies involving the PNRC on a case-to-case basis.
In sum, the PNRC enjoys a special status as an important ally and auxiliary of the government in the
humanitarian field in accordance with its commitments under international law. This Court cannot all of a
sudden refuse to recognize its existence, especially since the issue of the constitutionality of the PNRC Charter
was never raised by the parties. It bears emphasizing that the PNRC has responded to almost all national
disasters since 1947, and is widely known to provide a substantial portion of the countrys blood
requirements. Its humanitarian work is unparalleled. The Court should not shake its existence to the core in an
untimely and drastic manner that would not only have negative consequences to those who depend on it in
times of disaster and armed hostilities but also have adverse effects on the image of the Philippines in the
international community. The sections of the PNRC Charter that were declared void must therefore stay.
Thus, the Court MODIFIED the dispositive portion of the Decision by deleting the second sentence, to
now read as follows:
in Section 13, Article VI of the 1987 Constitution.
The concurrence of Justice Abad
Justice Abad noted that the PNRC is imbued with characteristics that ordinary private or government
organizations do not possess. Its charters direct reference to the Geneva Conventions gives the PNRC a
special status in relation to governments of any form, as well as a unique place in international humanitarian
law. Thus, the PNRC cannot be classified as either a purely private or government entity. It is a hybrid
organization that derives certain peculiarities from international humanitarian law. For this reason, its

organizational character does not fit the parameters provided by either the Corporation Code or Administrative
Code. It is a sui generis entity that draws its nature from the Geneva Conventions, the Statutes of the
Movement and the law creating it.
National Society is officially recognized by the government as auxiliary to the public authorities in the
humanitarian services of the government. This the Philippine government can accomplish even without
creating the PNRC through a special charter.
He further averred that the Constitution does not preclude the creation of corporations that may
neither be classified as private nor governmental. Sec. 7, Article XIV of the 1935 Constitution, which was
carried over in subsequent versions of the fundamental law, does not prohibit Congress from creating other
types of organizations that may not fall strictly within the terms of what is deemed a private or government
corporation. The Constitution simply provides that Congress cannot create private corporations, except by
general law, unless such corporations are owned or controlled by the government. It does not forbid Congress
from creating organizations that do not belong to these two general types. The special status of the PNRC
under international humanitarian law justifies the special manner of its creation. The State itself committed the
PNRCs formation to the community of nations, and no less than an act of Congress should be deemed
sufficient compliance with such an obligation. To require the PNRC to incorporate under the general law is to
disregard its unique standing under international conventions. It also ignores the very basic premise for the
PNRCs creation.
Justice Carpio agreed with the PNRC that it is a private organization performing public functions.
Precisely because it is a private organization, the PNRC charter is violative of the constitutional proscription
against the creation of private corporations by special law. Nevertheless, keeping in mind the treaty obligations
of the Philippines under the Geneva Conventions, the assailed Decision only held void those provisions of the
PNRC charter which create PNRC as a private corporation or grant it corporate powers. The other provisions
respecting the governments treaty obligations [were not struck down and] remain valid. Since the
constitutional prohibition admits of no exception, this Court has no recourse but to apply the prohibition to the
present case. The Court, he said, has no power to make PNRC an exception to Section 16, Article XII of the 1987
Constitution.
Finally, Justice Abad held that the main issue in this case is whether the office of PNRC Chairman is a
government office or an office in a GOCC for purposes of the prohibition in Section 13, Article VI of the
Constitution. The resolution of this question, he said, lies in the determination of whether or not the PNRC is in
fact a GOCC. [Since] the PNRC is not a GOCC, but a sui generis entity that has no legal equivalent under any of
our statutes, [respondent] Senator Gordon did not forfeit his Senate seat under the constitutional prohibition. In
view of the PNRCs sui generis character, the Court need not even dwell on the issue of whether or not the
PNRC Charter was validly enacted. Congress is proscribed only from creating private corporations which, as
demonstrated, the PNRC is not. The issue of constitutionality was not raised by any of the original parties and
could have been avoided in the first place. Neither was the PNRC a party to the case, despite being the entity
whose creation was declared void under the main decision.
G.R. No. 136374
The minority opinion

In resolving the motions for reconsideration, Justice Carpio agreed that generally, the Court will not
pass upon a constitutional question unless such question is raised by the parties. Citing jurisprudence,
however, he noted that his rule is not inflexible. In this case, the constitutional issue was inevitably thrust upon
the Court upon its finding that the PNRC is a private corporation, whose creation by a special charter is
proscribed by the Constitution. In view of the Courts finding that the PNRC is a private corporation, it was
imperative for the Court to address the issue of the [validity of the] creation of the PNRC through a special
charter. To declare the PNRC, a creation of RA 95, a private corporation without declaring RA 95 unconstitutional
would mean that Congress can create a private corporation through a special law. Moreover, the fact that the
constitutionality of RA 95 has not been questioned for more than 60 years does not mean that it could no
longer be declared unconstitutional. One is not estopped from assailing the validity of a law just because such
law has been relied upon in the past and all that time has not been attacked as unconstitutional.
SECOND DIVISION
February 9, 2000
FRANCISCA S. BALUYOT, petitioner,

vs.
PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS) represented by its Deputy
Ombudsman for the Visayas ARTURO C. MOJICA, Director VIRGINIA PALANCA-SANTIAGO, and Graft
Investigation Officer I ANNA MARIE P. MILITANTE, respondents.
DE LEON, JR., J.:
Before us is a special civil action for certiorari, seeking the reversal of the Orders dated August 21, 1998 and
October 28, 1998 issued by the Office of the Ombudsman, which denied petitioner's motion to dismiss and
motion for reconsideration, respectively.1wphi1.nt
The facts are:
Hence, the PNRC cannot claim that it is sui generis just because it is a private organization performing
certain public or governmental functions since all private charitable organizations are doing public service or
activities that also constitute governmental functions. That the PNRC is rendering public service does not
exempt it from the constitutional prohibition against the creation of a private corporation through a special law
since the PNRC is, admittedly, still a private organization. The express prohibition against the creation of
private corporations by special charter cannot be disregarded just because a private corporation claims to
be sui generis. The constitutional prohibition admits of no exception.
During a spot audit conducted on March 21, 1977 by a team of auditors from the Philippine National Red Cross
(PNRC) headquarters, a cash shortage of P154,350.13 was discovered in the funds of its Bohol chapter. The
chapter administrator, petitioner Francisca S. Baluyot, was held accountable for the shortage. Thereafter, on
January 8, 1998, private respondent Paul E. Holganza, in his capacity as a member of the board of directors of
the Bohol chapter, filed an affidavit-complaint1 before the Office of the Ombudsman charging petitioner of
malversation under Article 217 of the Revised Penal Code. The complaint was docketed as OMB-VIS-CRIM-980022. However, upon recommendation by respondent Anna Marie P. Militante, Graft Investigation Officer I, an
administrative docket for dishonesty was also opened against petitioner; hence, OMB-VIS-ADM-98-0063. 2
The conditions for recognition of National Societies do not require that the State itself create the
National Society [the PNRC in this case] through a special charter. The absence of such requirement is proper
and necessary considering the Movements emphasis on the importance of maintaining the independence of
the National Society, free from any form of intervention from the government. What is important is that the
On February 6, 1998, public respondent issued an Order 3 requiring petitioner to file her counter-affidavit to the
charges of malversation and dishonesty within ten days from notice, with a warning that her failure to comply
would be construed as a waiver on her part to refute the charges, and that the case would be resolved based

on the evidence on record. On March 14, 1998, petitioner filed her counter-affidavit, 4 raising principally the
defense that public respondent had no jurisdiction over the controversy. She argued that the Ombudsman had
authority only over government-owned or controlled corporations, which the PNRC was not, or so she claimed.
On August 21, 1998, public respondent issued the first assailed Order 5 denying petitioner's motion to dismiss. It
further scheduled a clarificatory hearing on the criminal aspect of the complaint and a preliminary conference
on its administrative aspect on September 2, 1998. Petitioner received the order on August 26, 1998 and she
filed a motion for reconsideration 6 the next day.
On October 28, 1998, public respondent issued the second assailed Order 7 denying petitioner's motion for
reconsideration. Hence, this recourse.
We dismiss the petition.
Petitioner contends that the Ombudsman has no jurisdiction over the subject matter of the controversy since
the PNRC is allegedly a private voluntary organization. The following circumstances, she insists, are indicative
of the private character of the organization: (1) the PNRC does not receive any budgetary support from the
government, and that all money given to it by the latter and its instrumentalities become private funds of the
organization; (2) funds for the payment of personnel's salaries and other emoluments come from yearly fund
campaigns, private contributions and rentals from its properties; and (3) it is not audited by the Commission on
Audit. Petitioner states that the PNRC falls under the International Federation of Red Cross, a Switzerland-based
organization, and that the power to discipline employees accused of misconduct, malfeasance, or immorality
belongs to the PNRC Secretary General by virtue of Section "G", Article IX of its by-laws. 8 She threatens that "to
classify the PNRC as a government-owned or controlled corporation would create a dangerous precedent as it
would lose its neutrality, independence and impartiality . . . .9
Practically
the
same
issue
was
addressed
in Camporedondo
v. National
Labor
Relations
Commission, et. al.,10where an almost identical set of facts obtained. Petitioner therein was the administrator of
the Surigao del Norte chapter of the PNRC. An audit conducted by a field auditor revealed a shortage in the
chapter funds in the sum of P109,000.00. When required to restitute the amount of P135,927.78, petitioner
therein instead applied for early retirement, which was denied by the Secretary General of the PNRC.
Subsequently, the petitioner filed a complaint for illegal dismissal and damages against PNRC before the
National Labor Relations Commission. In turn, PNRC moved to dismiss the complaint on the ground of lack of
jurisdiction, averring that PNRC was a government corporation whose employees are embraced by civil service
regulation. The labor arbiter dismissed the complaint, and the Commission sustained his order. The petitioner
assailed the dismissal of his complaint via a petition for certiorari, contending that the PNRC is a private
organization and not a government-owned or controlled corporation. In dismissing the petition, we ruled thus:
Resolving the issue set out in the opening paragraph of this opinion, we rule that the Philippine
National Red Cross (PNRC) is a government owned and controlled corporation, with an original charter
under Republic Act No. 95, as amended. The test to determine whether a corporation is government
owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a
public function, or by incorporation under the general corporation law? Those with special charters are
government corporations subject to its provisions, and its employees are under the jurisdiction of the
Civil Service Commission, and are compulsory members of the Government Service Insurance System.
The PNRC was not "impliedly converted to a private corporation" simply because its charter was
amended to vest in it the authority to secure loans, be exempted from payment of all duties, taxes,
fees and other charges of all kinds on all importations and purchases for its exclusive use, on
donations for its disaster relief work and other services and in its benefits and fund raising drives, and
be allotted one lottery draw a year by the Philippine Charity Sweepstakes Office for the support of its
disaster relief operation in addition to its existing lottery draws for blood program.
Clearly then, public respondent has jurisdiction over the matter, pursuant to Section 13, of Republic Act No.
6770, otherwise known as "The Ombudsman Act of 1989", to wit:
Sec. 13. Mandate. The Ombudsman and his Deputies, as protectors of the people, shall act
promptly on complaints filed in any form or manner against officers or employees of the Government,
or of any subdivision, agency or instrumentality thereof, including government-owned or controlled
corporations, and enforce their administrative, civil and criminal liability in ever case where the
evidence warrants in order to promote efficient service by the Government to the people. 11
WHEREFORE,
the
petition
ORDERED.1wphi1.nt
for certiorari is
hereby
DISMISSED.
Costs
against
petitioner.SO
EN BANC
G. R. No. 155027
February 28, 2006
THE VETERANS FEDERATION OF THE PHILIPPINES represented by Esmeraldo R. Acorda, Petitioner,

vs.
Hon. ANGELO T. REYES in his capacity as Secretary of National Defense; and Hon. EDGARDO E.
BATENGA in his capacity as Undersecretary for Civil Relations and Administration of the
Department of National Defense, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of Civil Procedure, with a prayer
to declare as void Department Circular No. 04 of the Department of National Defense (DND), dated 10 June
2002.
Petitioner in this case is the Veterans Federation of the Philippines (VFP), a corporate body organized under
Republic Act No. 2640, dated 18 June 1960, as amended, and duly registered with the Securities and Exchange
Commission. Respondent Angelo T. Reyes was the Secretary of National Defense (DND Secretary) who issued
the assailed Department Circular No. 04, dated 10 June 2002. Respondent Edgardo E. Batenga was the DND

Undersecretary for Civil Relations and Administration who was tasked by the respondent DND Secretary to
conduct an extensive management audit of the records of petitioner.
Therefore it may become necessary that a conference with your staffs in these two bodies be set.
Thank you and anticipating your action on this request.
The factual and procedural antecedents of this case are as follows:

Very truly yours,
Petitioner VFP was created under Rep. Act No. 2640,1 a statute approved on 18 June 1960.
(SGD) ANGELO T. REYES
On 15 April 2002, petitioners incumbent president received a letter dated 13 April 2002 which reads:
[DND] Secretary
Col. Emmanuel V. De Ocampo (Ret.)
President
Veterans Federation of the Philippines Makati, Metro Manila
On 10 June 2002, respondent DND Secretary issued the assailed DND Department Circular No. 04 entitled,
"Further Implementing the Provisions of Sections 12 and 23 of Republic Act No. 2640," the full text of which
appears as follows:
Dear Col. De Ocampo:

Department of National Defense
Please be informed that during the preparation of my briefing before the Cabinet and the President last March
9, 2002, we came across some legal bases which tended to show that there is an organizational and
management relationship between Veterans Federation of the Philippines and the Philippine Veterans Bank
which for many years have been inadvertently overlooked.
I refer to Republic Act 2640 creating the body corporate known as the VFP and Republic Act 3518 creating the
Phil. Vets [sic] Bank.
1. RA 2640 dated 18 June 60 Section 1 ... "hereby created a body corporate, under the control and
supervision of the Secretary of National Defense."
2. RA 2640 Section 12 ... "On or before the last day of the month following the end of each fiscal year,
the Federation shall make and transmit to the President of the Philippines or to the Secretary of
National Defense, a report of its proceedings for the past year, including a full, complete and itemized
report of receipts and expenditures of whatever kind."
3. Republic Act 3518 dated 18 June 1963 (An Act Creating the Philippine Veterans Bank, and for Other
Purposes) provides in Section 6 that ... "the affairs and business of the Philippine Veterans Bank shall
be directed and its property managed, controlled and preserved, unless otherwise provided in this Act,
by a Board of Directors consisting of eleven (11) members to be composed of three ex officio
members to wit: the Philippine Veterans Administrator, the President of the Veterans Federation of the
Philippines and the Secretary of National Defense x x x.
It is therefore in the context of clarification and rectification of what should have been done by the DND
(Department of National Defense) for and about the VFP and PVB that I am requesting appropriate information
and report about these two corporate bodies.
Department Circular No. 04

Subject: Further Implementing the Provisions of Sections 1 & 2 of
Republic Act No. 2640
Authority: Republic Act No. 2640
Executive Order No. 292 dated July 25, 1987
Section 1
These rules shall govern and apply to the management and operations of the Veterans Federation of the
Philippines (VFP) within the context provided by EO 292 s-1987.
Section 2 DEFINITION OF TERMS for the purpose of these rules, the terms, phrases or words used herein
shall, unless the context indicates otherwise, mean or be understood as follows:
Supervision and Control it shall include authority to act directly whenever a specific function is entrusted by
law or regulation to a subordinate; direct the performance of a duty; restrain the commission of acts; approve,
reverse or modify acts and decisions of subordinate officials or units; determine priorities in the execution of
plans and programs; and prescribe standards, guidelines, plans and programs.

Power of Control power to alter, modify, nullify or set aside what a subordinate officer had done in the
performance of his duties and to substitute the judgment of the former to that of the latter.
ensuring the judicious and effective implementation of veterans assistance, benefits, and utilization of VFP
assets.
Supervision means overseeing or the power of an officer to see to it that their subordinate officers perform
their duties; it does not allow the superior to annul the acts of the subordinate.
3.2 To effectively supervise and control the corporate affairs of the Federation and to safeguard the interests
and welfare of the veterans who are also wards of the State entrusted under the protection of the DND, the
Secretary may personally or through a designated representative, require the submission of reports,
documents and other papers regarding any or all of the Federations business transactions particularly those
relating to the VFP functions under Section 2 of RA 2640.
Administrative Process embraces matter concerning the procedure in the disposition of both routine and
contested matters, and the matter in which determinations are made, enforced or reviewed.
Government Agency as defined under PD 1445, a government agency or agency of government or "agency"
refers to any department, bureau or office of the national government, or any of its branches or
instrumentalities, of any political subdivision, as well as any government owned or controlled corporation,
including its subsidiaries, or other self-governing board or commission of the government.
Government Owned and Controlled Corporation (GOCC) refer to any agency organized as a stock or non-stock
owned by the government directly or through its instrumentalities wholly or, where applicable as in the case of
stock corporations, to the extent of at least 50% of its capital stock.
Fund sum of money or other resources set aside for the purpose of carrying out specific activities or attaining
certain objectives in accordance with special regulations, restrictions or limitations and constitutes an
independent, fiscal and accounting entity.
Government Fund includes public monies of every sort and other resources pertaining to any agency of the
government.
Veteran any person who rendered military service in the land, sea or air forces of the Philippines during the
revolution against Spain, the Philippine American War, World War II, including Filipino citizens who served in
Allied Forces in the Philippine territory and foreign nationals who served in Philippine forces; the Korean
campaign, the Vietnam campaign, the Anti-dissidence campaign, or other wars or military campaigns; or who
rendered military service in the Armed Forces of the Philippines and has been honorably discharged or
separated after at least six (6) years total cumulative active service or sooner separated due to the death or
disability arising from a wound or injury received or sickness or disease incurred in line of duty while in the
active service.
Section 3 Relationship Between the DND and the VFP
3.1 Sec 1 of RA 3140 provides "... the following persons (heads of various veterans associations and
organizations in the Philippines) and their associates and successors are hereby created a body corporate,
under the control and supervision of the Secretary of National Defense, under the name, style and title of
"Veterans Federation of the Philippines ..."
The Secretary of National Defense shall be charged with the duty of supervising the veterans and allied
program under the jurisdiction of the Department. It shall also have the responsibility of overseeing and
The Secretary or his representative may attend conferences of the supreme council of the VFP and such other
activities he may deem relevant.
3.3 The Secretary shall from time to time issue guidelines, directives and other orders governing vital
government activities including, but not limited to, the conduct of elections; the acquisition, management and
dispositions of properties, the accounting of funds, financial interests, stocks and bonds, corporate
investments, etc. and such other transactions which may affect the interests of the veterans.
3.4 Financial transactions of the Federation shall follow the provisions of the government auditing code (PD
1445) i.e. government funds shall be spent or used for public purposes; trust funds shall be available and may
be spent only for the specific purpose for which the trust was created or the funds received; fiscal responsibility
shall, to the greatest extent, be shared by all those exercising authority over the financial affairs, transactions,
and operations of the federation; disbursements or dispositions of government funds or property shall
invariably bear the approval of the proper officials.
Section 4 Records of the FEDERATION
As a corporate body and in accordance with appropriate laws, it shall keep and carefully preserve records of all
business transactions, minutes of meetings of stockholders/members of the board of directors reflecting all
details about such activity.
All such records and minutes shall be open to directors, trustees, stockholders, and other members for
inspection and copies of which may be requested.
As a body corporate, it shall submit the following: annual report; proceedings of council meetings; report of
operations together with financial statement of its assets and liabilities and fund balance per year; statement
of revenues and expenses per year; statement of cash flows per year as certified by the accountant; and other
documents/reports as may be necessary or required by the SND.
Section 5 Submission of Annual and Periodic Report
As mandated under appropriate laws, the following reports shall be submitted to the SND, to wit:
a. Annual Report to be submitted not later than every January 31 of the following year. Said report
shall consist of the following:

1. Financial Report of the Federation, signed by the Treasurer General and Auditor General;
2. Roster of Members of the Supreme Council;
3. Roster of Members of the Executive Board and National Officers; and
4. Current listing of officers and management of VFP.
b. Report on the proceedings of each Supreme Council Meeting to be submitted not later than one
month after the meeting;
c. Report of the VFP President as may be required by SND or as may be found necessary by the
President of the Federation;
d. Resolutions passed by the Executive Board and the Supreme Council for confirmation to be
submitted not later than one month after the approval of the resolution;
e. After Operation/Activity Reports to be submitted not later than one month after such operation or
activity;
A letter dated 28 August 2003 informed petitioners President that the Management Audit Group headed by the
Undersecretary would be paying petitioner a visit on 30 August 2002 for an update on VFPs different affiliates
and the financial statement of the Federation.
Subsequently, the Secretary General of the VFP sent an undated letter to respondent DND Secretary, with
notice to respondent Undersecretary for Civil Relations and Administration, complaining about the alleged
broadness of the scope of the management audit and requesting the suspension thereof until such time that
specific areas of the audit shall have been agreed upon.
The request was, however, denied by the Undersecretary in a letter dated 4 September 2002 on the ground
that a specific timeframe had been set for the activity.
Petitioner thus filed this Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of Civil
Procedure, praying for the following reliefs:
1. For this Court to issue a temporary restraining order and a writ of preliminary prohibitory and
mandatory injunction to enjoin respondent Secretary and all those acting under his discretion and
authority from: (a) implementing DND Department Circular No. 04; and (b) continuing with the
ongoing management audit of petitioners books of account;
2. After hearing the issues on notice
Section 6 Penal Sanctions

a. Declare DND Department Circular No. 04 as null and void for being ultra vires;
As an attached agency to a regular department of the government, the VFP and all its instrumentalities,
officials and personnel shall be subject to the penal provisions of such laws, rules and regulations applicable to
the attached agencies of the government.
In a letter dated 6 August 2002 addressed to the President of petitioner, respondent DND Secretary reiterated
his instructions in his earlier letter of 13 April 2002.
Thereafter, petitioners President received a letter dated 23 August 2002 from respondent Undersecretary,
informing him that Department Order No. 129 dated 23 August 2002 directed "the conduct of a Management
Audit of the Veterans Federation of the Philippines." 4 The letter went on to state that respondent DND Secretary
"believes that the mandate given by said law can be meaningfully exercised if this department can better
appreciate the functions, responsibilities and situation on the ground and this can be done by undertaking a
thorough study of the organization." 5
Respondent Undersecretary also requested both for a briefing and for documents on personnel, ongoing
projects and petitioners financial condition. The letter ended by stating that, after the briefing, the support
staff of the Audit Committee would begin their work to meet the one-month target within which to submit a
report.
b. Convert the writ of prohibition, preliminary prohibitory and mandatory injunction into a permanent
one.6
GIVING DUE COURSE TO THE PETITION
Petitioner asserts that, although cases which question the constitutionality or validity of administrative
issuances are ordinarily filed with the lower courts, the urgency and substantive importance of the question on
hand and the public interest attendant to the subject matter of the petition justify its being filed with this Court
directly as an original action.7
It is settled that the Regional Trial Court and the Court of Appeals also exercise original jurisdiction over
petitions for certiorari and prohibition. As we have held in numerous occasions, however, such concurrence of
original jurisdiction does not mean that the party seeking extraordinary writs has the absolute freedom to file
his petition in the court of his choice.8 Thus, in Commissioner of Internal Revenue v. Leal,9 we held that:
Such concurrence of original jurisdiction among the Regional Trial Court, the Court of Appeals and this Court,
however, does not mean that the party seeking any of the extraordinary writs has the absolute freedom to file
his petition in the court of his choice. The hierarchy of courts in our judicial system determines the appropriate
forum for these petitions. Thus, petitions for the issuance of the said writs against the first level (inferior) courts
must be filed with the Regional Trial Court and those against the latter, with the Court of Appeals. A direct

invocation of this Courts original jurisdiction to issue these writs should be allowed only where there are
special and important reasons therefor, specifically and sufficiently set forth in the petition. This is the
established policy to prevent inordinate demands upon the Courts time and attention, which are better
devoted to matters within its exclusive jurisdiction, and to prevent further over-crowding of the Courts docket.
Thus, it was proper for petitioner to institute the special civil action for certiorari with the Court of Appeals
assailing the RTC order denying his motion to dismiss based on lack of jurisdiction.
The petition itself, in this case, does not specifically and sufficiently set forth the special and important reasons
why the Court should give due course to this petition in the first instance, hereby failing to fulfill the conditions
set forth in Commissioner of Internal Revenue v. Leal. 10 While we reiterate the policies set forth in Leal and
allied cases and continue to abhor the propensity of a number of litigants to disregard the principle of hierarchy
of courts in our judicial system, we, however, resolve to take judicial notice of the fact that the persons who
stand to lose in a possible protracted litigation in this case are war veterans, many of whom have precious little
time left to enjoy the benefits that can be conferred by petitioner corporation. This bickering for the power over
petitioner corporation, an entity created to represent and defend the interests of Filipino veterans, should be
resolved as soon as possible in order for it to once and for all direct its resources to its rightful beneficiaries all
over the country. All these said, we hereby resolve to give due course to this petition.
ISSUES
Petitioner mainly alleges that the rules and guidelines laid down in the assailed Department Circular No. 04
expanded the scope of "control and supervision" beyond what has been laid down in Rep. Act No.
2640.11Petitioner further submits the following issues to this Court:
1. Was the challenged department circular passed in the valid exercise of the respondent Secretarys
"control and supervision"?
2. Could the challenged department circular validly lay standards classifying the VFP, an essentially
civilian organization, within the ambit of statutes only applying to government entities?
3. Does the department circular, which grants respondent direct management control on the VFP,
unduly encroach on the prerogatives of VFPs governing body?
At the heart of all these issues and all of petitioners prayers and assertions in this case is petitioners claim
that it is a private non-government corporation.
CENTRAL ISSUE:
IS THE VFP A PRIVATE CORPORATION?
Petitioner claims that it is not a public nor a governmental entity but a private organization, and advances this
claim to prove that the issuance of DND Department Circular No. 04 is an invalid exercise of respondent
Secretarys control and supervision.12
This Court has defined the power of control as "the power of an officer to alter or modify or nullify or set aside
what a subordinate has done in the performance of his duties and to substitute the judgment of the former to
that of the latter."13 The power of supervision, on the other hand, means "overseeing, or the power or authority
of an officer to see that subordinate officers perform their duties. If the latter fail or neglect to fulfill them, the
former may take such action or step as prescribed by law to make them perform their duties." 14 These
definitions are synonymous with the definitions in the assailed Department Circular No. 04, while the other
provisions of the assailed department circular are mere consequences of control and supervision as defined.
Thus, in order for petitioners premise to be able to support its conclusion, petitioners should be deemed to
imply either of the following: (1) that it is unconstitutional/impermissible for the law (Rep. Act No. 2640) to
grant control and/or supervision to the Secretary of National Defense over a private organization, or (2) that the
control and/or supervision that can be granted to the Secretary of National Defense over a private organization
is limited, and is not as strong as they are defined above.
The following provision of the 1935 Constitution, the organic act controlling at the time of the creation of the
VFP in 1960, is relevant:
Section 7. The Congress shall not, except by general law, provide for the formation, organization, or regulation
of private corporations, unless such corporations are owned and controlled by the Government or any
subdivision or instrumentality thereof.15
On the other hand, its counterparts in the 1973 and 1987 constitutions are the following:
Section 4. The National Assembly shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned or controlled by the government or any
subdivision or instrumentality thereof.16
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of
private corporations. Government-owned and controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of economic viability. 17
From the foregoing, it is crystal clear that our constitutions explicitly prohibit the regulation by special laws of
private corporations, with the exception of government-owned or controlled corporations (GOCCs). Hence, it
would be impermissible for the law to grant control of the VFP to a public official if it were neither a public
corporation, an unincorporated governmental entity, nor a GOCC. 18 Said constitutional provisions can even be
read to prohibit the creation itself of the VFP if it were neither of the three mentioned above, but we cannot go
into that in this case since there is no challenge to the creation of the VFP in the petition as to permit this Court
from considering its nullity.
Petitioner vigorously argues that the VFP is a private non-government organization, pressing on the following
contentions:
1. The VFP does not possess the elements which would qualify it as a public office, particularly the
possession/delegation of a portion of sovereign power of government to be exercised for the benefit of
the public;

2. VFP funds are not public funds because
a) No budgetary appropriations or government funds have been released to the VFP directly
or indirectly from the Department of Budget and Management (DBM);
b) VFP funds come from membership dues;
c) The lease rentals raised from the use of government lands reserved for the VFP are private
in character and do not belong to the government. Said rentals are fruits of VFPs labor and
efforts in managing and administering the lands for VFP purposes and objectives. A close
analogy would be any Filipino citizen settling on government land and who tills the land for
his livelihood and sustenance. The fruits of his labor belong to him and not to the owner of
the land. Such fruits are not public funds.
3. Although the juridical personality of the VFP emanates from a statutory charter, the VFP retains its
essential character as a private, civilian federation of veterans voluntarily formed by the veterans
themselves to attain a unity of effort, purpose and objectives, e.g.
a. The members of the VFP are individual members and retirees from the public and military
service;
b. Membership in the VFP is voluntary, not compulsory;
c. The VFP is governed, not by the Civil Service Law, the Articles of War nor the GSIS Law, but
by the Labor Code and the SSS Law;
d. The VFP has its own Constitution and By-Laws and is governed by a Supreme Council who
are elected from and by the members themselves;
4. The Administrative Code of 1987 does not provide that the VFP is an attached agency, nor does it
provide that it is an entity under the control and supervision of the DND in the context of the
provisions of said code.
5. The DBM declared that the VFP is a non-government organization and issued a certificate that the
VFP has not been a direct recipient of any funds released by the DBM.
These arguments of petitioner notwithstanding, we are constrained to rule that petitioner is in fact a public
corporation. Before responding to petitioners allegations one by one, here are the more evident reasons why
the VFP is a public corporation:
(1) Rep. Act No. 2640 is entitled "An Act to Create a Public Corporation to be Known as the Veterans
Federation of the Philippines, Defining its Powers, and for Other Purposes."
(2) Any action or decision of the Federation or of the Supreme Council shall be subject to the approval
of the Secretary of Defense.19
(3) The VFP is required to submit annual reports of its proceedings for the past year, including a full,
complete and itemized report of receipts and expenditures of whatever kind, to the President of the
Philippines or to the Secretary of National Defense.20
(4) Under Executive Order No. 37 dated 2 December 1992, the VFP was listed as among the
government-owned and controlled corporations that will not be privatized.
(5) In Ang Bagong Bayani OFW Labor Party v. COMELEC,21 this Court held in a minute resolution that
the "VFP [Veterans Federation Party] is an adjunct of the government, as it is merely an incarnation of
the Veterans Federation of the Philippines.
And now to answer petitioners reasons for insisting that it is a private corporation:
1. Petitioner claims that the VFP does not possess the elements which would qualify it as a public office,
particularly the possession/delegation of a portion of sovereign power of government to be exercised for the
benefit of the public;
In Laurel v. Desierto,22 we adopted the definition of Mechem of a public office, that it is "the right, authority and
duty, created and conferred by law, by which, for a given period, either fixed by law or enduring at the pleasure
of the creating power, an individual is invested with some portion of the sovereign functions of the government,
to be exercised by him for the benefit of the public."
In the same case, we went on to adopt Mechems view that the delegation to the individual of some of the
sovereign functions of government is "[t]he most important characteristic" in determining whether a position is
a public office or not.23 Such portion of the sovereignty of the country, either legislative, executive or judicial,
must attach to the office for the time being, to be exercised for the public benefit. Unless the powers conferred
are of this nature, the individual is not a public officer. The most important characteristic which distinguishes an
office from an employment or contract is that the creation and conferring of an office involves a delegation to
the individual of some of the sovereign functions of government, to be exercised by him for the benefit of the
public; that some portion of the sovereignty of the country, either legislative, executive or judicial, attaches,
for the time being, to be exercised for the public benefit. Unless the powers conferred are of this nature, the
individual is not a public officer.24 The issue, therefore, is whether the VFAs officers have been delegated some
portion of the sovereignty of the country, to be exercised for the public benefit.
In several cases, we have dealt with the issue of whether certain specific activities can be classified as
sovereign functions. These cases, which deal with activities not immediately apparent to be sovereign
functions, upheld the public sovereign nature of operations needed either to promote social justice 25 or to
stimulate patriotic sentiments and love of country.26
As regards the promotion of social justice as a sovereign function, we held in Agricultural Credit and
Cooperative Financing Administration (ACCFA) v. Confederation of Unions in Government Corporations and
Offices (CUGCO),27 that the compelling urgency with which the Constitution speaks of social justice does not

leave any doubt that land reform is not an optional but a compulsory function of sovereignty. The same reason
was used in our declaration that socialized housing is likewise a sovereign function. 28 Highly significant here is
the observation of former Chief Justice Querube Makalintal:
The growing complexities of modern society, however, have rendered this traditional classification of the
functions of government [into constituent and ministrant functions] quite unrealistic, not to say obsolete. The
areas which used to be left to private enterprise and initiative and which the government was called upon to
enter optionally, and only "because it was better equipped to administer for the public welfare than is any
private individual or group of individuals," continue to lose their well-defined boundaries and to be absorbed
within activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times. Here[,] as almost everywhere else[,] the tendency is undoubtedly towards a
greater socialization of economic forces. Here, of course, this development was envisioned, indeed adopted as
a national policy, by the Constitution itself in its declaration of principle concerning the promotion of social
justice.29 (Emphasis supplied.)
It was, on the other hand, the fact that the National Centennial Celebrations was calculated to arouse and
stimulate patriotic sentiments and love of country that it was considered as a sovereign function in Laurel v.
Desierto.30 In Laurel, the Court then took its cue from a similar case in the United States involving a Fourth of
July fireworks display. The holding of the Centennial Celebrations was held to be an executive function, as it
was intended to enforce Article XIV of the Constitution which provides for the conservation, promotion and
popularization of the nations historical and cultural heritage and resources, and artistic relations.
In the case at bar, the functions of petitioner corporation enshrined in Section 4 of Rep. Act No. 2640 31 should
most certainly fall within the category of sovereign functions. The protection of the interests of war veterans is
not only meant to promote social justice, but is also intended to reward patriotism. All of the functions in
Section 4 concern the well-being of war veterans, our countrymen who risked their lives and lost their limbs in
fighting for and defending our nation. It would be injustice of catastrophic proportions to say that it is beyond
sovereigntys power to reward the people who defended her.
Like the holding of the National Centennial Celebrations, the functions of the VFP are executive functions,
designed to implement not just the provisions of Rep. Act No. 2640, but also, and more importantly, the
Constitutional mandate for the State to provide immediate and adequate care, benefits and other forms of
assistance to war veterans and veterans of military campaigns, their surviving spouses and orphans. 32
2. Petitioner claims that VFP funds are not public funds.
Petitioner claims that its funds are not public funds because no budgetary appropriations or government funds
have been released to the VFP directly or indirectly from the DBM, and because VFP funds come from
membership dues and lease rentals earned from administering government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not prove that it is a private
corporation. The DBM indeed did not see it fit to propose budgetary appropriations to the VFP, having itself
believed that the VFP is a private corporation. 33 If the DBM, however, is mistaken as to its conclusion regarding
the nature of VFPs incorporation, its previous assertions will not prevent future budgetary appropriations to the
VFP. The erroneous application of the law by public officers does not bar a subsequent correct application of the
law.34
Nevertheless, funds in the hands of the VFP from whatever source are public funds, and can be used only for
public purposes. This is mandated by the following provisions of Rep. Act No. 2640:
(1) Section 2 provides that the VFP can only "invest its funds for the exclusive benefit of the Veterans
of the Philippines;"
(2) Section 2 likewise provides that "(a)ny action or decision of the Federation or of the Supreme
Council shall be subject to the approval of the Secretary of National Defense." Hence, all activities of
the VFP to which the Supreme Council can apply its funds are subject to the approval of the Secretary
of National Defense;
(3) Section 4 provides that "the Federation shall exist solely for the purposes of a benevolent
character, and not for the pecuniary benefit of its members;"1avvphil.net
(4) Section 6 provides that all funds of the VFP in excess of operating expenses are "reserved for
disbursement, as the Supreme Council may authorize, for the purposes stated in Section two of this
Act;"
(5) Section 10 provides that "(a)ny donation or contribution which from time to time may be made to
the Federation by the Government of the Philippines or any of its subdivisions, branches, offices,
agencies or instrumentalities shall be expended by the Supreme Council only for the purposes
mentioned in this Act."; and finally,
(6) Section 12 requires the submission of annual reports of VFP proceedings for the past year,
including a full, complete and itemized report of receipts and expenditures of whatever kind, to the
President of the Philippines or to the Secretary of National Defense.
It is important to note here that the membership dues collected from the individual members of VFPs affiliate
organizations do not become public funds while they are still funds of the affiliate organizations. A close
reading of Section 135 of Rep. Act No. 2640 reveals that what has been created as a body corporate is not the
individual membership of the affiliate organizations, but merely the aggregation of the heads of the affiliate
organizations. Thus, only the money remitted by the affiliate organizations to the VFP partake in the public
nature of the VFP funds.
In Republic v. COCOFED,36 we held that the Coconut Levy Funds are public funds because, inter alia, (1) they
were meant to be for the benefit of the coconut industry, one of the major industries supporting the national
economy, and its farmers; and (2) the very laws governing coconut levies recognize their public character. The
same is true with regard to the VFP funds. No less public is the use for the VFP funds, as such use is limited to
the purposes of the VFP which we have ruled to be sovereign functions. Likewise, the law governing VFP funds
(Rep. Act No. 2640) recognizes the public character of the funds as shown in the enumerated provisions above.

We also observed in the same COCOFED case that "(e)ven if the money is allocated for a special purpose and
raised by special means, it is still public in character." 37 In the case at bar, some of the funds were raised by
even more special means, as the contributions from affiliate organizations of the VFP can hardly be regarded as
enforced contributions as to be considered taxes. They are more in the nature of donations which have always
been recognized as a source of public funding. Affiliate organizations of the VFP cannot complain of their
contributions becoming public funds upon the receipt by the VFP, since they are presumed aware of the
provisions of Rep. Act No. 2640 which not only specifies the exclusive purposes for which VFP funds can be
used, but also provides for the regulation of such funds by the national government through the Secretary of
National Defense. There is nothing wrong, whether legally or morally, from raising revenues through nontraditional methods. As remarked by Justice Florentino Feliciano in his concurring opinion in Kilosbayan,
Incorporated v. Guingona, Jr.38where he explained that the funds raised by the On-line Lottery System were also
public in nature, thus:
x x x [T]he more successful the government is in raising revenues by non-traditional methods such as PAGCOR
operations and privatization measures, the lesser will be the pressure upon the traditional sources of public
revenues, i.e., the pocket books of individual taxpayers and importers.
Petitioner additionally harps on the inapplicability of the case of Laurel v. Desierto 39 which was cited by
Respondents. Petitioner claims that among the reasons National Centennial Commission Chair Salvador Laurel
was considered a public officer was the fact that his compensation was derived from public funds. Having ruled
that VFP funds from whatever source are public funds, we can safely conclude that the Supreme Councils
compensation, taken as they are from VFP funds under the term "operating expenses" in Section 6 of Rep. Act
No. 2640, are derived from public funds. The particular nomenclature of the compensation taken from VFP
funds is not even of relevance here. As we said in Laurel concerning compensation as an element of public
office:
Under particular circumstances, "compensation" has been held to include allowance for personal expenses,
commissions, expenses, fees, an honorarium, mileage or traveling expenses, payments for services, restitution
or a balancing of accounts, salary, and wages. 40
3. Petitioner argues that it is a civilian federation where membership is voluntary.
Petitioner claims that the Secretary of National Defense "historically did not indulge in the direct or
micromanagement of the VFP precisely because it is essentially a civilian organization where membership is
voluntary."41 This reliance of petitioner on what has "historically" been done is erroneous, since laws are not
repealed by disuse, custom, or practice to the contrary. 42 Furthermore, as earlier stated, the erroneous
application of the law by public officers does not bar a subsequent correct application of the law. 43
Neither is the civilian nature of VFP relevant in this case. The Constitution does not contain any prohibition,
express or implied, against the grant of control and/or supervision to the Secretary of National Defense over a
civilian organization. The Office of the Secretary of National Defense is itself a civilian office, its occupant being
an alter ego of the civilian Commander-in-Chief. This set-up is the manifestation of the constitutional principle
that civilian authority is, at all times, supreme over the military. 44 There being no such constitutional
prohibition, the creation of a civilian public organization by Rep. Act No. 2640 is not rendered invalid by its
being placed under the control and supervision of the Secretary of National Defense.
Petitioners stand that the VFP is a private corporation because membership thereto is voluntary is likewise
erroneous. As stated above, the membership of the VFP is not the individual membership of the affiliate
organizations, but merely the aggregation of the heads of such affiliate organizations. These heads forming the
VFP then elect the Supreme Council and the other officers, 45 of this public corporation.
4. Petitioner claims that the Administrative Code of 1987 does not provide that the VFP is an attached agency,
and nor does it provide that it is an entity under the control and supervision of the DND in the context of the
provisions of said code.
The Administrative Code, by giving definitions of the various entities covered by it, acknowledges that its
enumeration is not exclusive. The Administrative Code could not be said to have repealed nor enormously
modified Rep. Act No. 2640 by implication, as such repeal or enormous modification by implication is not
favored in statutory construction.46
5. Petitioner offers as evidence the DBM opinion that the VFP is a non-government organization in its
certification that the VFP "has not been a direct recipient of any funds released by the DBM."
Respondents claim that the supposed declaration of the DBM that petitioner is a non-government organization
is not persuasive, since DBM is not a quasi-judicial agency. They aver that what we have said of the Bureau of
Local Government Finance (BLGF) in Philippine Long Distance Telephone Company (PLDT) v. City of Davao 47 can
be applied to DBM:
In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that petitioners
exemption from local taxes has been restored is a contemporaneous construction of Section 23 [of R.A. No.
7925 and, as such, is entitled to great weight.
The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, which is a special
court created for the purpose of reviewing tax cases, the BLGF was created merely to provide consultative
services and technical assistance to local governments and the general public on local taxation and other
related matters. Thus, the rule that the "Court will not set aside conclusions rendered by the CTA, which is, by
the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority" cannot apply in the case of the BLGF.
On this score, though, we disagree with respondents and hold that the DBMs appraisal is considered
persuasive. Respondents misread the PLDT case in asserting that only quasi-judicial agencies determination
can be considered persuasive. What the PLDT case points out is that, for an administrative agencys opinion to
be persuasive, the administrative agency involved (whether it has quasi-judicial powers or not) must be an
expert in the field they are giving their opinion on.
The DBM is indeed an expert on determining what the various government agencies and corporations are. This
determination is necessary for the DBM to fulfill its mandate:
Sec. 2. Mandate. - The Department shall be responsible for the formulation and implementation of the National
Budget with the goal of attaining our national socio-economic plans and objectives.

The Department shall be responsible for the efficient and sound utilization of government funds and revenues
to effectively achieve our country's development objectives.48
must not override, but must remain consistent and in harmony with the law they seek to apply or implement.
Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law." 56
The persuasiveness of the DBM opinion has, however, been overcome by all the previous explanations we have
laid so far. It has also been eclipsed by another similarly persuasive opinion, that of the Department of National
Defense embodied in Department Circular No. 04. The DND is clearly more of an expert with respect to the
determination of the entities under it, and its Administrative Rules and Regulations are entitled to great respect
and have in their favor the presumption of legality. 49
Section 3.2 of the assailed department circular, which authorizes the Secretary of National Defense to "x x x
personally or through a designated representative, require the submission of reports, documents and other
papers regarding any or all of the Federations business functions, x x x."
The DBM opinion furthermore suffers from its lack of explanation and justification in the "certification of nonreceipt" where said opinion was given. The DBM has not furnished, in said certification or elsewhere, an
explanation for its opinion that VFP is a non-government organization.
x x x [F]rom time to time issue guidelines, directives and other orders governing vital government activities
including, but not limited to, the conduct of elections, the acquisition, management and dispositions of
properties, the accounting of funds, financial interests, stocks and bonds, corporate investments, etc. and such
other transactions which may affect the interests of the veterans.
as well as Section 3.3 which allows the Secretary of DND to
THE FATE OF DEPARTMENT CIRCULAR NO. 04

Our ruling that petitioner is a public corporation is determinative of whether or not we should grant petitioners
prayer to declare Department Circular No. 04 void.
Petitioner assails Department Circular No. 04 on the ground that it expanded the scope of control and
supervision beyond what has been laid down in Rep. Act No. 2640. Petitioner alleges that "(t)he equation of the
meaning of `control and `supervision of the Administrative Code of 1987 as the same `control and
supervision under Rep. Act No. 2640, takes out the context of the original legislative intent from the peculiar
surrounding circumstances and conditions that brought about the creation of the VFP." 50 Petitioner claims that
the VFP "was intended as a self-governing autonomous body with a Supreme Council as governing authority,"
and that the assailed circular "pre-empts VFPs original self-governance and autonomy (in) representing
veterans organizations, and substitutes government discretion and decisions to that of the veterans own
determination."51 Petitioner says that the circulars provisions practically render the Supreme Council inutile,
despite its being the statutory governing body of the VFP.52
As previously mentioned, this Court has defined the power of control as "the power of an officer to alter or
modify or nullify or set aside what a subordinate has done in the performance of his duties and to substitute
the judgment of the former to that of the latter." 53 The power of supervision, on the other hand, means
"overseeing, or the power or authority of an officer to see that subordinate officers perform their
duties."54 Under the Administrative Code of 1987:55
Supervision and control shall include the authority to act directly whenever a specific function is entrusted by
law or regulation to a subordinate; direct the performance of duty; restrain the commission of acts; review,
approve, reverse or modify acts and decisions of subordinate officials or units; determine priorities in the
execution of plans and programs; and prescribe standards, guidelines, plans and programs. x x x
The definition of the power of control and supervision under Section 2 of the assailed Department Circular are
synonymous with the foregoing definitions. Consequently, and considering that petitioner is a public
corporation, the provisions of the assailed Department Circular No. 04 did not supplant nor modify the
provisions of Republic Act No. 2640, thus not violating the settled rule that "all such (administrative) issuances
are merely consequences of both the power of control and supervision granted by Rep. Act No. 2640. The
power to alter or modify or nullify or set aside what a subordinate has done in the performance of his duties, or
to see to it that subordinate officers perform their duties in accordance with law, necessarily requires the ability
of the superior officer to monitor, as closely as it desires, the acts of the subordinate.
The same is true with respect to Sections 4 and 5 of the assailed Department Circular No. 04, which requires
the preservation of the records of the Federation and the submission to the Secretary of National Defense of
annual and periodic reports.
Petitioner likewise claims that the assailed DND Department Circular No. 04 was never published, and hence
void.57 Respondents deny such non-publication.58
We have put forth both the rule and the exception on the publication of administrative rules and regulations in
the case of Taada v. Tuvera:59
x x x Administrative rules and regulations must also be published if their purpose is to enforce or implement
existing law pursuant also to a valid delegation.
Interpretative regulations and those merely internal in nature, that is, regulating only the personnel of the
administrative agency and not the public, need not be published. Neither is publication required of the socalled letters of instructions issued by administrative superiors concerning the rules on guidelines to be
followed by their subordinates in the performance of their duties.
Even assuming that the assailed circular was not published, its validity is not affected by such non-publication
for the reason that its provisions fall under two of the exceptions enumerated in Taada.
Department Circular No. 04 is an internal regulation. As we have ruled, they are meant to regulate a public
corporation under the control of DND, and not the public in general. As likewise discussed above, what has
been created as a body corporate by Rep. Act No. 2640 is not the individual membership of the affiliate
organizations of the VFP, but merely the aggregation of the heads of the affiliate organizations. Consequently,

the individual members of the affiliate organizations, who are not public officers, are beyond the regulation of
the circular.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit. The validity of the Department of National
Defense Department Circular No. 04 is AFFIRMED.SO ORDERED
Sections 2, 3 and 6 of the assailed circular are additionally merely interpretative in nature. They add nothing to
the law. They do not affect the substantial rights of any person, whether party to the case at bar or not. In
Sections 2 and 3, control and supervision are defined, mentioning actions that can be performed as
consequences of such control and supervision, but without specifying the particular actions that shall be
rendered to control and supervise the VFP. Section 6, in the same vein, merely state what the drafters of the
circular perceived to be consequences of being an attached agency to a regular department of the
government, enumerating sanctions and remedies provided by law that may be availed of whenever desired.
1. Nature of Power to Create a Corporation (Sec. 16 Art, XII 1987 Constitution)
Petitioner then objects to the implementation of Sec. 3.4 of the assailed Department Circular, which provides
that
3.4 Financial transactions of the Federation shall follow the provisions of the government auditing code (PD
1445) i.e. government funds shall be spent or used for public purposes; trust funds shall be available and may
be spent only for the specific purpose for which the trust was created or the funds received; fiscal responsibility
shall, to the greatest extent, be shared by all those exercising authority over the financial affairs, transactions,
and operations of the federation; disbursements or dispositions of government funds or property shall
invariably bear the approval of the proper officials.
Since we have also previously determined that VFP funds are public funds, there is likewise no reason to
declare this provision invalid. Section 3.4 is correct in requiring the VFP funds to be used for public purposes,
but only insofar the term "public purposes" is construed to mean "public purposes enumerated in Rep. Act No.
2640."
Having in their possession public funds, the officers of the VFP, especially its fiscal officers, must indeed share
in the fiscal responsibility to the greatest extent.
As to petitioners allegation that VFP was intended as a self-governing autonomous body with a Supreme
Council as governing authority, we find that the provisions of Rep. Act No. 2640 concerning the control and
supervision of the Secretary of National Defense clearly withholds from the VFP complete autonomy. To say,
however, that such provisions render the VFP inutile is an exaggeration. An office is not rendered inutile by the
fact that it is placed under the control of a higher office. These subordinate offices, such as the executive
offices under the control of the President, exercise discretion at the first instance. While their acts can be
altered or even set aside by the superior, these acts are effective and are deemed the acts of the superior until
they are modified. Surely, we cannot say that the offices of all the Department Secretaries are worthless
positions.
In sum, the assailed DND Department Circular No. 04 does not supplant nor modify and is, on the contrary,
perfectly in consonance with Rep. Act No. 2640. Petitioner VFP is a public corporation. As such, it can be placed
under the control and supervision of the Secretary of National Defense, who consequently has the power to
conduct an extensive management audit of petitioner corporation.
GR: The Constitution explicitly prohibits the regulation by special laws of private corporation
EX: government-owned or controlled corporations (GOCCs)
(Veterans Federation of the Philippines v. Reyes (2006))
Case: P.D. 1717 creating New Agrix, Inc violates the Constitution prohibits the formation of a private
corporation by special legislative act which is NOT a GOCC, since NDC was merely required to extend a
loan to the new corp, and the new stocks of the corp. were to be issued to the old investors and
stockholders of the insolvent Agrix upon proof of their claims against the abolished corp. (NDC v. Veterans
Bank (1990))
EN BANC
G.R. No. 155650
July 20, 2006
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
COURT OF APPEALS, CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE, SANGGUNIANG
PANGLUNGSOD NG PARAAQUE, CITY ASSESSOR OF PARAAQUE, and CITY TREASURER OF
PARAAQUE, respondents.
DECISION
CARPIO, J.:
The Antecedents
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International Airport (NAIA)
Complex in Paraaque City under Executive Order No. 903, otherwise known as the Revised Charter of the
Manila International Airport Authority ("MIAA Charter"). Executive Order No. 903 was issued on 21 July 1983 by
then President Ferdinand E. Marcos. Subsequently, Executive Order Nos. 909 1 and 2982 amended the MIAA
Charter.
As operator of the international airport, MIAA administers the land, improvements and equipment within the
NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of land, 3 including the
runways and buildings ("Airport Lands and Buildings") then under the Bureau of Air Transportation. 4 The MIAA
Charter further provides that no portion of the land transferred to MIAA shall be disposed of through sale or any
other mode unless specifically approved by the President of the Philippines. 5
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061. The OGCC
opined that the Local Government Code of 1991 withdrew the exemption from real estate tax granted to MIAA
under Section 21 of the MIAA Charter. Thus, MIAA negotiated with respondent City of Paraaque to pay the real
estate tax imposed by the City. MIAA then paid some of the real estate tax already due.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of Paraaque for the
taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as follows:

1992-1997 RPT was paid on Dec. 24, 1997 as per
O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.006
On 17 July 2001, the City of Paraaque, through its City
Treasurer, issued notices of levy and warrants of levy on the
Airport Lands and Buildings. The Mayor of the City of
Paraaque threatened to sell at public auction the Airport
Lands and Buildings should MIAA fail to pay the real estate tax
delinquency. MIAA thus sought a clarification of OGCC Opinion
No. 061.
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying
OGCC Opinion No. 061. The OGCC pointed out that Section
206 of the Local Government Code requires persons exempt
from real estate tax to show proof of exemption. The OGCC
opined that Section 21 of the MIAA Charter is the proof that
MIAA is exempt from real estate tax.
the City Assessor of Paraaque ("respondents") from

auctioning the Airport Lands and Buildings.
TAX DECLARATION
TAXABLE YEAR
TAX DUE
PENALTY
TOTAL
E-016-01370
1992-2001
19,558,160.00
11,201,083.20
30,789,243.20
E-016-01374
1992-2001
111,689,424.90
68,149,479.59
179,838,904.49
On 10 February 2003, this Court issued a Resolution

confirming nunc pro tunc the TRO.
E-016-01375
1992-2001
20,276,058.00
12,371,832.00
32,647,890.00
On 1 October 2001, MIAA filed with the Court of Appeals an

original petition for prohibition and injunction, with prayer for
preliminary injunction or temporary restraining order. The
petition sought to restrain the City of Paraaque from
imposing real estate tax on, levying against, and auctioning
for public sale the Airport Lands and Buildings. The petition
was docketed as CA-G.R. SP No. 66878.
E-016-01376
1992-2001
58,144,028.00
35,477,712.00
93,621,740.00
E-016-01377
1992-2001
18,134,614.65
11,065,188.59
29,199,803.24
On 5 October 2001, the Court of Appeals dismissed the

petition because MIAA filed it beyond the 60-day reglementary
period. The Court of Appeals also denied on 27 September
2002 MIAA's motion for reconsideration and supplemental
motion for reconsideration. Hence, MIAA filed on 5 December
2002 the present petition for review.7
E-016-01378
1992-2001
111,107,950.40
67,794,681.59
178,902,631.99
E-016-01379
1992-2001
4,322,340.00
2,637,360.00
6,959,700.00
E-016-01380
1992-2001
7,776,436.00
4,744,944.00
12,521,380.00
*E-016-013-85
1998-2001
6,444,810.00
2,900,164.50
9,344,974.50
*E-016-01387
1998-2001
34,876,800.00
5,694,560.00
50,571,360.00
*E-016-01396
1998-2001
75,240.00
33,858.00
109,098.00
P392,435,861.95
P232,070,863.47
P 624,506,725.42
Meanwhile, in January 2003, the City of Paraaque posted

notices of auction sale at the Barangay Halls of Barangays
Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public
market of Barangay La Huerta; and in the main lobby of the
Paraaque City Hall. The City of Paraaque published the
notices in the 3 and 10 January 2003 issues of the Philippine
Daily Inquirer, a newspaper of general circulation in the
Philippines. The notices announced the public auction sale of
the Airport Lands and Buildings to the highest bidder on 7
February 2003, 10:00 a.m., at the Legislative Session Hall
Building of Paraaque City.
A day before the public auction, or on 6 February 2003, at
5:10 p.m., MIAA filed before this Court an Urgent Ex-Parte and
Reiteratory Motion for the Issuance of a Temporary Restraining
Order. The motion sought to restrain respondents the City
of Paraaque, City Mayor of Paraaque, Sangguniang
Panglungsod ng Paraaque, City Treasurer of Paraaque, and
On 7 February 2003, this Court issued a temporary

restraining order (TRO) effective immediately. The Court
ordered respondents to cease and desist from selling at
public auction the Airport Lands and Buildings.
Respondents received the TRO on the same day that the
Court issued it. However, respondents received the TRO
only at 1:25 p.m. or three hours after the conclusion of
the public auction.
GRAND TOTAL
On 29 March 2005, the Court heard the parties in oral

arguments. In compliance with the directive issued
during the hearing, MIAA, respondent City of Paraaque,
and the Solicitor General subsequently submitted their
respective Memoranda.
MIAA admits that the MIAA Charter has placed the title
to the Airport Lands and Buildings in the name of MIAA.
However, MIAA points out that it cannot claim ownership
over these properties since the real owner of the Airport
Lands and Buildings is the Republic of the Philippines.
The MIAA Charter mandates MIAA to devote the Airport
Lands and Buildings for the benefit of the general public.
Since the Airport Lands and Buildings are devoted to
public use and public service, the ownership of these
properties remains with the State. The Airport Lands and
Buildings are thus inalienable and are not subject to real
estate tax by local governments.
MIAA also points out that Section 21 of the MIAA Charter
specifically exempts MIAA from the payment of real
estate tax. MIAA insists that it is also exempt from real
estate tax under Section 234 of the Local Government
Code because the Airport Lands and Buildings are owned
by the Republic. To justify the exemption, MIAA invokes
the principle that the government cannot tax itself. MIAA
points out that the reason for tax exemption of public
property is that its taxation would not inure to any public
advantage, since in such a case the tax debtor is also
the tax creditor.
Respondents invoke Section 193 of the Local
Government Code, which expressly withdrew the tax
exemption privileges of "government-owned andcontrolled corporations" upon the effectivity of the
Local Government Code. Respondents also argue that a

basic rule of statutory construction is that the express mention of one person, thing, or act excludes all others.
An international airport is not among the exceptions mentioned in Section 193 of the Local Government Code.
Thus, respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from real
estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we held
that the Local Government Code has withdrawn the exemption from real estate tax granted to international
airports. Respondents further argue that since MIAA has already paid some of the real estate tax assessments,
it is now estopped from claiming that the Airport Lands and Buildings are exempt from real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are exempt from real
estate tax under existing laws. If so exempt, then the real estate tax assessments issued by the City of
Paraaque, and all proceedings taken pursuant to such assessments, are void. In such event, the other issues
raised in this petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt from real
estate tax. Respondents claim that the deletion of the phrase "any government-owned or controlled so exempt
by its charter" in Section 234(e) of the Local Government Code withdrew the real estate tax exemption of
government-owned or controlled corporations. The deleted phrase appeared in Section 40(a) of the 1974 Real
Property Tax Code enumerating the entities exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from real estate tax.
However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the Introductory
Provisions of the Administrative Code of 1987 defines a government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined. x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock or
non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities either
wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51)
percent of its capital stock: x x x. (Emphasis supplied)
A government-owned or controlled corporation must be "organized as a stock or non-stock corporation."
MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no
capital stock divided into shares. MIAA has no stockholders or voting shares. Section 10 of the MIAA
Charter9provides:
SECTION 10. Capital. The capital of the Authority to be contributed by the National Government
shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to Ten Billion
(P10,000,000,000.00) Pesos to consist of:
(a) The value of fixed assets including airport facilities, runways and equipment and such other
properties, movable and immovable[,] which may be contributed by the National Government or
transferred by it from any of its agencies, the valuation of which shall be determined jointly with the
Department of Budget and Management and the Commission on Audit on the date of such
contribution or transfer after making due allowances for depreciation and other deductions taking into
account the loans and other liabilities of the Authority at the time of the takeover of the assets and
other properties;
(b) That the amount of P605 million as of December 31, 1986 representing about seventy percentum
(70%) of the unremitted share of the National Government from 1983 to 1986 to be remitted to the
National Treasury as provided for in Section 11 of E. O. No. 903 as amended, shall be converted into
the equity of the National Government in the Authority. Thereafter, the Government contribution to the
capital of the Authority shall be provided in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is divided into
shares and x x x authorized to distribute to the holders of such shares dividends x x x." MIAA has
capital but it is not divided into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not
a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code
defines a non-stock corporation as "one where no part of its income is distributable as dividends to its
members, trustees or officers." A non-stock corporation must have members. Even if we assume that the
Government is considered as the sole member of MIAA, this will not make MIAA a non-stock corporation. Nonstock corporations cannot distribute any part of their income to their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. 11 This prevents
MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable,
religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or
similar purposes, like trade, industry, agriculture and like chambers." MIAA is not organized for any of these
purposes. MIAA, a public utility, is organized to operate an international and domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or
controlled corporation. What then is the legal status of MIAA within the National Government?
MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental
functions. MIAA is like any other government instrumentality, the only difference is that MIAA is vested with
corporate powers. Section 2(10) of the Introductory Provisions of the Administrative Code defines a government
"instrumentality" as follows:
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if

not all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the instrumentality does not become a
corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains
a government instrumentality exercising not only governmental but also corporate powers. Thus, MIAA
exercises the governmental powers of eminent domain,12 police authority13 and the levying of fees and
charges.14 At the same time, MIAA exercises "all the powers of a corporation under the Corporation Law, insofar
as these powers are not inconsistent with the provisions of this Executive Order." 15
Likewise, when the law makes a government instrumentality operationally autonomous, the instrumentality
remains part of the National Government machinery although not integrated with the department framework.
The MIAA Charter expressly states that transforming MIAA into a "separate and autonomous body" 16 will make
its operation more "financially viable."17
Many government instrumentalities are vested with corporate powers but they do not become stock or nonstock corporations, which is a necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Examples are the Mactan International Airport Authority, the
Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these
government instrumentalities exercise corporate powers but they are not organized as stock or non-stock
corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code. These
government instrumentalities are sometimes loosely called government corporate entities. However, they are
not government-owned or controlled corporations in the strict sense as understood under the Administrative
Code, which is the governing law defining the legal relationship and status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which
states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the national government,
which historically merely delegated to local governments the power to tax. While the 1987 Constitution now
includes taxation as one of the powers of local governments, local governments may only exercise such power
"subject to such guidelines and limitations as the Congress may provide." 18
When local governments invoke the power to tax on national government instrumentalities, such power is
construed strictly against local governments. The rule is that a tax is never presumed and there must be clear
language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved
against taxation. This rule applies with greater force when local governments seek to tax national government
instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption.
However, when Congress grants an exemption to a national government instrumentality from local taxation,
such exemption is construed liberally in favor of the national government instrumentality. As this Court
declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in favor
of non tax-liability of such agencies.19
There is, moreover, no point in national and local governments taxing each other, unless a sound and
compelling policy requires such transfer of public funds from one government pocket to another.
There is also no reason for local governments to tax national government instrumentalities for rendering
essential public services to inhabitants of local governments. The only exception is when the legislature
clearly intended to tax government instrumentalities for the delivery of essential public services
for sound and compelling policy considerations. There must be express language in the law empowering
local governments to tax national government instrumentalities. Any doubt whether such power exists is
resolved against local governments.
Thus, Section 133 of the Local Government Code states that " unless otherwise provided" in the Code, local
governments cannot tax national government instrumentalities. As this Court held in Basco v. Philippine
Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the powers
vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can
regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them ." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local authorities
may perceive to be undesirable activities or enterprise using the power to tax as "a tool for regulation" (U.S. v.
Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the
State or the Republic of the Philippines. The Civil Code provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 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. (Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character stated in the preceding
article, is patrimonial property.
ARTICLE 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.
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like " roads,
canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State. The
term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port"
constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned by the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal fees and
other charges from the public does not remove the character of the Airport Lands and Buildings as properties
for public use. The operation by the government of a tollway does not change the character of the road as one
for public use. Someone must pay for the maintenance of the road, either the public indirectly through the
taxes they pay the government, or only those among the public who actually use the road through the toll fees
they pay upon using the road. The tollway system is even a more efficient and equitable manner of taxing the
public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is of public
dominion or not. Article 420 of the Civil Code defines property of public dominion as one "intended for public
use." Even if the government collects toll fees, the road is still "intended for public use" if anyone can use the
road under the same terms and conditions as the rest of the public. The charging of fees, the limitation on the
kind of vehicles that can use the road, the speed restrictions and other conditions for the use of the road do not
affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute
the bulk of the income that maintains the operations of MIAA. The collection of such fees does not change the
character of MIAA as an airport for public use. Such fees are often termed user's tax. This means taxing those
among the public who actually use a public facility instead of taxing all the public including those who never
use the particular public facility. A user's tax is more equitable a principle of taxation mandated in the 1987
Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the Philippines for both
international and domestic air traffic," 22 are properties of public dominion because they are intended for public
use. As properties of public dominion, they indisputably belong to the State or the Republic of the
Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion are outside the
commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that
properties devoted to public use are outside the commerce of man, thus:
According to article 344 of the Civil Code: "Property for public use in provinces and in towns comprises
the provincial and town roads, the squares, streets, fountains, and public waters, the promenades, and
public works of general service supported by said towns or provinces."
The said Plaza Soledad being a promenade for public use, the municipal council of Cavite could not in
1907 withdraw or exclude from public use a portion thereof in order to lease it for the sole benefit of
the defendant Hilaria Rojas. In leasing a portion of said plaza or public place to the defendant for
private use the plaintiff municipality exceeded its authority in the exercise of its powers by executing a
contract over a thing of which it could not dispose, nor is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside the commerce of man
may be the object of a contract, and plazas and streets are outside of this commerce, as was
decided by the supreme court of Spain in its decision of February 12, 1895, which says: "Communal
things that cannot be sold because they are by their very nature outside of commerce are
those for public use, such as the plazas, streets, common lands, rivers, fountains, etc."
(Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are outside the
commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use and to be made
available to the public in general. They are outside the commerce of man and cannot be disposed
of or even leased by the municipality to private parties. While in case of war or during an emergency,
town plazas may be occupied temporarily by private individuals, as was done and as was tolerated by
the Municipality of Pozorrubio, when the emergency has ceased, said temporary occupation or use
must also cease, and the town officials should see to it that the town plazas should ever be kept open
to the public and free from encumbrances or illegal private constructions. 24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of man, cannot be the
subject of an auction sale.25
Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition through
public or private sale. Any encumbrance, levy on execution or auction sale of any property of public dominion is
void for being contrary to public policy. Essential public services will stop if properties of public dominion are
subject to encumbrances, foreclosures and auction sale. This will happen if the City of Paraaque can foreclose
and compel the auction sale of the 600-hectare runway of the MIAA for non-payment of real estate tax.
Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw from public
usethe Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or Commonwealth Act No. 141,
which "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,"27 provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural Resources, the
President may designate by proclamation any tract or tracts of land of the public domain as
reservations for the use of the Republic of the Philippines or of any of its branches, or of the
inhabitants thereof, in accordance with regulations prescribed for this purposes, or for quasi-public

uses or purposes when the public interest requires it, including reservations for highways, rights of
way for railroads, hydraulic power sites, irrigation systems, communal pastures or lequas
communales, public parks, public quarries, public fishponds, working men's village and other
improvements for the public benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of Section eightythree shall be non-alienable and shall not be subject to occupation, entry, sale, lease, or
other disposition until again declared alienable under the provisions of this Act or by
proclamation of the President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands
these properties remain properties of public dominion and are inalienable.
Buildings are inalienable in their present status as properties of public dominion,
execution or foreclosure sale. As long as the Airport Lands and Buildings are
ownership remains with the State or the Republic of the Philippines.
and Buildings from public use,

Since the Airport Lands and
they are not subject to levy on
reserved for public use, their
The authority of the President to reserve lands of the public domain for public use, and to withdraw such public
use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. (1) The
President shall have the power to reserve for settlement or public use, and for specific
public purposes, any of the lands of the public domain, the use of which is not otherwise
directed by law. The reserved land shall thereafter remain subject to the specific public
purpose indicated until otherwise provided by law or proclamation;
x x x x. (Emphasis supplied)
d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings from the
Bureau of Air Transportation of the Department of Transportation and Communications. The MIAA Charter
provides:
SECTION 3. Creation of the Manila International Airport Authority. x x x x
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The Bureau
of Lands and other appropriate government agencies shall undertake an actual survey of the area
transferred within one year from the promulgation of this Executive Order and the corresponding title
to be issued in the name of the Authority. Any portion thereof shall not be disposed through
sale or through any other mode unless specifically approved by the President of the
Philippines. (Emphasis supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other property, movable or immovable, belonging to
the Airport, and all assets, powers, rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment which are
necessary for the operation of crash fire and rescue facilities, are hereby transferred to the Authority.
(Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the Republic and
outside the commerce of man.
SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. The Manila International Airport including the Manila
Domestic Airport as a division under the Bureau of Air Transportation is hereby abolished.
c. MIAA is a Mere Trustee of the Republic
x x x x.
MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48, Chapter 12,
Book I of the Administrative Code allows instrumentalities like MIAA to hold title to real properties
owned by the Republic, thus:
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) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.
(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)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because even its
executive head cannot sign the deed of conveyance on behalf of the Republic. Only the President of the
Republic can sign such deed of conveyance. 28
The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic receiving cash,
promissory notes or even stock since MIAA is not a stock corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands and
Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport accommodation and
service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to be upgraded to
meet the current and future air traffic and other demands of aviation in Metro Manila;
WHEREAS, a management and organization study has indicated that the objectives of providing
high standards of accommodation and service within the context of a financially viable
operation, will best be achieved by a separate and autonomous body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No. 1772, the
President of the Philippines is given continuing authority to reorganize the National Government,
which authority includes the creation of new entities, agencies and instrumentalities of
the Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was not meant to
transfer beneficial ownership of these assets from the Republic to MIAA. The purpose was merely
to reorganize a division in the Bureau of Air Transportation into a separate and autonomous body.
The Republic remains the beneficial owner of the Airport Lands and Buildings. MIAA itself is owned solely by the
Republic. No party claims any ownership rights over MIAA's assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed through
sale or through any other mode unless specifically approved by the President of the Philippines ."
This only means that the Republic retained the beneficial ownership of the Airport Lands and Buildings because
under Article 428 of the Civil Code, only the "owner has the right to x x x dispose of a thing." Since MIAA cannot
dispose of the Airport Lands and Buildings, MIAA does not own the Airport Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings without the
Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the President is the only one
who can authorize the sale or disposition of the Airport Lands and Buildings. This only confirms that the Airport
Lands and Buildings belong to the Republic.
e. Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property owned by the
Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local
governments from imposing "[t]axes, fees or charges of any kind on the National Government, its agencies
andinstrumentalities x x x." The real properties owned by the Republic are titled either in the name of the
Republic itself or in the name of agencies or instrumentalities of the National Government. The Administrative
Code allows real property owned by the Republic to be titled in the name of agencies or instrumentalities of the
national government. Such real properties remain owned by the Republic and continue to be exempt from real
estate tax.
The Republic may grant the beneficial use of its real property to an agency or instrumentality of the national
government. This happens when title of the real property is transferred to an agency or instrumentality even as
the Republic remains the owner of the real property. Such arrangement does not result in the loss of the tax
exemption. Section 234(a) of the Local Government Code states that real property owned by the Republic loses
its tax exemption only if the "beneficial use thereof has been granted, for consideration or otherwise, to
a taxable person." MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of
the Local Government Code. Thus, even if we assume that the Republic has granted to MIAA the beneficial use
of the Airport Lands and Buildings, such fact does not make these real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from
real estate tax. For example, the land area occupied by hangars that MIAA leases to private corporations is
subject to real estate tax. In such a case, MIAA has granted the beneficial use of such land area for a
consideration to ataxable person and therefore such land area is subject to real estate tax. In Lung Center
of the Philippines v. Quezon City, the Court ruled:
Accordingly, we hold that the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other hand, the
portions of the land occupied by the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.29
3. Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the Local
Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or juridical" upon
the effectivity of the Code. Section 193 provides:
SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions are hereby withdrawn upon effectivity of this Code. (Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues that since the Local
Government Code withdrew the tax exemption of all juridical persons, then MIAA is not exempt from real
estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the withdrawn
exemptions from realty tax cover not just GOCCs, but all persons. To repeat, the provisions lay
down the explicit proposition that the withdrawal of realty tax exemption applies to all persons. The
reference to or the inclusion of GOCCs is only clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized under our
laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus, the
determinative test is not just whether MIAA is a GOCC, but whether MIAA is a juridical
person at all. (Emphasis and underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its status
whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and 234 may be
examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly withdrew
the tax exemption of all juridical persons "[u]nless otherwise provided in this Code." Now, Section 133(o)
of the Local Government Code expressly provides otherwise, specifically prohibiting local governments
from imposing any kind of tax on national government instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays
shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and instrumentalities,
and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any kind of tax on
national government instrumentalities like the MIAA. Local governments are devoid of power to tax the national
government, its agencies and instrumentalities. The taxing powers of local governments do not extend to the
national government, its agencies and instrumentalities, "[u]nless otherwise provided in this Code" as stated in
the saving clause of Section 133. The saving clause refers to Section 234(a) on the exception to the exemption
from real estate tax of real property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are subject to
tax by local governments. The minority insists that the juridical persons exempt from local taxation are limited
to the three classes of entities specifically enumerated as exempt in Section 193. Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives duly
registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and educational
institutions. It would be belaboring the obvious why the MIAA does not fall within any of the exempt
entities under Section 193. (Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of the Local Government
Code. This theory will result in gross absurdities. It will make the national government, which itself is a juridical
person, subject to tax by local governments since the national government is not included in the enumeration
of exempt entities in Section 193. Under this theory, local governments can impose any kind of local tax, and
not only real estate tax, on the national government.
Under the minority's theory, many national government instrumentalities with juridical personalities will also be
subject to any kind of local tax, and not only real estate tax. Some of the national government instrumentalities
vested by law with juridical personalities are: Bangko Sentral ng Pilipinas, 30 Philippine Rice Research
Institute,31Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development
Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port Authority,37 Cebu
Port Authority,38 and Philippine National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which expressly prohibits local
governments from imposing any kind of tax on national government instrumentalities. Section 133(o) does not
distinguish between national government instrumentalities with or without juridical personalities. Where the
law does not distinguish, courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether MIAA is exempt from
local taxation is not whether MIAA is a juridical person, but whether it is a national government instrumentality
under Section 133(o) of the Local Government Code. Section 133(o) is the specific provision of law prohibiting
local governments from imposing any kind of tax on the national government, its agencies and
instrumentalities.
Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise provided in this
Code." This means that unless the Local Government Code grants an express authorization, local governments
have no power to tax the national government, its agencies and instrumentalities. Clearly, the rule is local
governments have no power to tax the national government, its agencies and instrumentalities. As an
exception to this rule, local governments may tax the national government, its agencies and instrumentalities
only if the Local Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the Code, which
makes the national government subject to real estate tax when it gives the beneficial use of its real properties
to a taxable entity. Section 234(a) of the Local Government Code provides:
SEC. 234. Exemptions from Real Property Tax The following are exempted from payment of the real
property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The exception to this
exemption is when the government gives the beneficial use of the real property to a taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the national government, its
agencies and instrumentalities are subject to any kind of tax by local governments. The exception to the
exemption applies only to real estate tax and not to any other tax. The justification for the exception to the
exemption is that the real property, although owned by the Republic, is not devoted to public use or public
service but devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of the Local Government Code,
the later provisions prevail over Section 133. Thus, the minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an accepted rule
of construction, in case of conflict the subsequent provisions should prevail. Therefore, MIAA, as a
juridical person, is subject to real property taxes, the general exemptions attaching to
instrumentalities under Section 133(o) of the Local Government Code being qualified by Sections 193
and 234 of the same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and Sections
193 and 234 on the other. No one has urged that there is such a conflict, much less has any one presenteda
persuasive argument that there is such a conflict. The minority's assumption of an irreconcilable conflict in the
statutory provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly admits its
subordination to other provisions of the Code when Section 193 states "[u]nless otherwise provided in this
Code." By its own words, Section 193 admits the superiority of other provisions of the Local Government Code
that limit the exercise of the taxing power in Section 193. When a provision of law grants a power but withholds
such power on certain matters, there is no conflict between the grant of power and the withholding of power.
The grantee of the power simply cannot exercise the power on matters withheld from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government Units." Section
133 limits the grant to local governments of the power to tax, and not merely the exercise of a delegated
power to tax. Section 133 states that the taxing powers of local governments "shall not extend to the levy" of

any kind of tax on the national government, its agencies and instrumentalities. There is no clearer limitation on
the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local governments, Section 133
logically prevails over Section 193 which grants local governments such taxing powers. By their very meaning
and purpose, the "common limitations" on the taxing power prevail over the grant or exercise of the taxing
power. If the taxing power of local governments in Section 193 prevails over the limitations on such taxing
power in Section 133, then local governments can impose any kind of tax on the national government, its
agencies and instrumentalities a gross absurdity.
The minority also contends that the phrase "government-owned or controlled corporation" should apply only to
corporations organized under the Corporation Code, the general incorporation law, and not to corporations
created by special charters. The minority sees no reason why government corporations with special charters
should have a capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under the Administrative
Code refer to those corporations owned by the government or its instrumentalities which are created
not by legislative enactment, but formed and organized under the Corporation Code through
registration with the Securities and Exchange Commission. In short, these are GOCCs without original
charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a capital structure for GOCCs
whose full ownership is limited by its charter to the State or Republic. Such GOCCs are not empowered
to declare dividends or alienate their capital shares.
Local governments have no power to tax the national government, its agencies and instrumentalities, except
as otherwise provided in the Local Government Code pursuant to the saving clause in Section 133 stating
"[u]nless otherwise provided in this Code." This exception which is an exception to the exemption of the
Republic from real estate tax imposed by local governments refers to Section 234(a) of the Code. The
exception to the exemption in Section 234(a) subjects real property owned by the Republic, whether titled in
the name of the national government, its agencies or instrumentalities, to real estate tax if the beneficial use of
such property is given to a taxable entity.
The contention of the minority is seriously flawed. It is not in accord with the Constitution and existing
legislations. It will also result in gross absurdities.
The minority also claims that the definition in the Administrative Code of the phrase "government-owned or
controlled corporation" is not controlling. The minority points out that Section 2 of the Introductory Provisions of
the Administrative Code admits that its definitions are not controlling when it provides:
First, the Administrative Code definition of the phrase "government-owned or controlled corporation" does not
distinguish between one incorporated under the Corporation Code or under a special charter. Where the law
does not distinguish, courts should not distinguish.
SEC. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a
particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is "flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes that a statute
may require a different meaning than that defined in the Administrative Code. However, this does not
automatically mean that the definition in the Administrative Code does not apply to the Local Government
Code. Section 2 of the Administrative Code clearly states that "unless the specific words x x x of a particular
statute shall require a different meaning," the definition in Section 2 of the Administrative Code shall apply.
Thus, unless there is specific language in the Local Government Code defining the phrase "government-owned
or controlled corporation" differently from the definition in the Administrative Code, the definition in the
Administrative Code prevails.
The minority does not point to any provision in the Local Government Code defining the phrase "governmentowned or controlled corporation" differently from the definition in the Administrative Code. Indeed, there is
none. The Local Government Code is silent on the definition of the phrase "government-owned or controlled
corporation." The Administrative Code, however, expressly defines the phrase "government-owned or
controlled corporation." The inescapable conclusion is that the Administrative Code definition of the phrase
"government-owned or controlled corporation" applies to the Local Government Code.
The third whereas clause of the Administrative Code states that the Code "incorporates in a unified document
the major structural, functional and procedural principles and rules of governance." Thus, the Administrative
Code is the governing law defining the status and relationship of government departments, bureaus, offices,
agencies and instrumentalities. Unless a statute expressly provides for a different status and relationship for a
specific government unit or entity, the provisions of the Administrative Code prevail.
Second, Congress has created through special charters several government-owned corporations organized as
stock corporations. Prime examples are the Land Bank of the Philippines and the Development Bank of the
Philippines. The special charter40 of the Land Bank of the Philippines provides:
SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion pesos, divided
into seven hundred and eighty million common shares with a par value of ten pesos each, which shall
be fully subscribed by the Government, and one hundred and twenty million preferred shares with a
par value of ten pesos each, which shall be issued in accordance with the provisions of Sections
seventy-seven and eighty-three of this Code. (Emphasis supplied)
Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be Five Billion
Pesos to be divided into Fifty Million common shares with par value of P100 per share. These shares
are available for subscription by the National Government. Upon the effectivity of this Charter, the
National Government shall subscribe to Twenty-Five Million common shares of stock worth Two Billion
Five Hundred Million which shall be deemed paid for by the Government with the net asset values of
the Bank remaining after the transfer of assets and liabilities as provided in Section 30 hereof.
(Emphasis supplied)
Other government-owned corporations organized as stock corporations under their special charters are the
Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and the Philippine
National Bank44 before it was reorganized as a stock corporation under the Corporation Code. All these
government-owned corporations organized under special charters as stock corporations are subject to real
estate tax on real properties owned by them. To rule that they are not government-owned or controlled
corporations because they are not registered with the Securities and Exchange Commission would remove
them from the reach of Section 234 of the Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those that meet
the two conditions prescribed in Section 16, Article XII of the Constitution. The first condition is that the
government-owned or controlled corporation must be established for the common good. The second condition
is that the government-owned or controlled corporation must meet the test of economic viability. Section 16,
Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of economic
viability. (Emphasis and underscoring supplied)
The Constitution expressly authorizes the legislature to create "government-owned or controlled corporations"
through special charters only if these entities are required to meet the twin conditions of common good and
economic viability. In other words, Congress has no power to create government-owned or controlled
corporations with special charters unless they are made to comply with the two conditions of common good
and economic viability. The test of economic viability applies only to government-owned or controlled
corporations that perform economic or commercial activities and need to compete in the market place. Being
essentially economic vehicles of the State for the common good meaning for economic development
purposes these government-owned or controlled corporations with special charters are usually organized as
stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and performing governmental or public
functions need not meet the test of economic viability. These instrumentalities perform essential public
services for the common good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even subsidize their entire
operations. These instrumentalities are not the "government-owned or controlled corporations" referred to in
Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government instrumentalities vested
with corporate powers but performing essential governmental or public functions. Congress has plenary
authority to create government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services. However, when the legislature
creates through special charters corporations that perform economic or commercial activities, such entities
known as "government-owned or controlled corporations" must meet the test of economic viability because
they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines and
similar government-owned or controlled corporations, which derive their income to meet operating expenses
solely from commercial transactions in competition with the private sector. The intent of the Constitution is to
prevent the creation of government-owned or controlled corporations that cannot survive on their own in the
market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the Constitutional
Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the government creates a
corporation, there is a sense in which this corporation becomes exempt from the test of economic
performance. We know what happened in the past. If a government corporation loses, then it makes
its claim upon the taxpayers' money through new equity infusions from the government and what is
always invoked is the common good. That is the reason why this year, out of a budget of P115 billion
for the entire government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have been relocated to
agrarian reform, to social services like health and education, to augment the salaries of grossly
underpaid public employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good," this
becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. And so, Madam President, I
reiterate, for the committee's consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST,"
together with the common good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his textbook The
1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant addition,
however, is the phrase "in the interest of the common good and subject to the test of economic
viability." The addition includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector can do better. Moreover,
economic viability is more than financial viability but also includes capability to make profit and
generate benefits not quantifiable in financial terms.46 (Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested with corporate powers and
performing essential public services. The State is obligated to render essential public services regardless of the
economic viability of providing such service. The non-economic viability of rendering such essential public
service does not excuse the State from withholding such essential services from the public.
However, government-owned or controlled corporations with special charters, organized essentially for
economic or commercial objectives, must meet the test of economic viability. These are the government-owned
or controlled corporations that are usually organized under their special charters as stock corporations, like the
Land Bank of the Philippines and the Development Bank of the Philippines. These are the government-owned or
controlled corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of "government-owned or controlled corporations" in Section
2(10) of the Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did not create MIAA to compete
in the market place. MIAA does not compete in the market place because there is no competing international
airport operated by the private sector. MIAA performs an essential public service as the primary domestic and
international airport of the Philippines. The operation of an international airport requires the presence of
personnel from the following government agencies:
1. The Bureau of Immigration and Deportation, to document the arrival and departure of passengers,
screening out those without visas or travel documents, or those with hold departure orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited importations;
3. The quarantine office of the Department of Health, to enforce health measures against the spread
of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and animal
diseases into the country;
under the Local Government Code. Such exception applies only if the beneficial use of real property owned by
the Republic is given to a taxable entity.
5. The Aviation Security Command of the Philippine National Police, to prevent the entry of terrorists
and the escape of criminals, as well as to secure the airport premises from terrorist attack or seizure;
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are properties of
public dominion. Properties of public dominion are owned by the State or the Republic. Article 420 of the Civil
Code provides:
6. The Air Traffic Office of the Department of Transportation and Communications, to authorize aircraft
to enter or leave Philippine airspace, as well as to land on, or take off from, the airport; and
7. The MIAA, to provide the proper premises such as runway and buildings for the government
personnel, passengers, and airlines, and to manage the airport operations.
All these agencies of government perform government functions essential to the operation of an international
airport.
MIAA performs an essential public service that every modern State must provide its citizens. MIAA derives its
revenues principally from the mandatory fees and charges MIAA imposes on passengers and airlines. The
terminal fees that MIAA charges every passenger are regulatory or administrative fees 47 and not income from
commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the Introductory
Provisions of the Administrative Code, which provides:
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually through
a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-owned or
controlled corporation. Without a change in its capital structure, MIAA remains a government instrumentality
under Section 2(10) of the Introductory Provisions of the Administrative Code. More importantly, as long as
MIAA renders essential public services, it need not comply with the test of economic viability. Thus, MIAA is
outside the scope of the phrase "government-owned or controlled corporations" under Section 16, Article XII of
the 1987 Constitution.
The minority belittles the use in the Local Government Code of the phrase "government-owned or controlled
corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution prescribes explicit
conditions for the creation of "government-owned or controlled corporations." The Administrative Code defines
what constitutes a "government-owned or controlled corporation." To belittle this phrase as "clarificatory or
illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of the
Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock
corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article XII of the
1987 Constitution because MIAA is not required to meet the test of economic viability. MIAA is a government
instrumentality vested with corporate powers and performing essential public services pursuant to Section
2(10) of the Introductory Provisions of the Administrative Code. As a government instrumentality, MIAA is not
subject to any kind of tax by local governments under Section 133(o) of the Local Government Code. The
exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity
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. (Emphasis supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands and Buildings
of MIAA are intended for public use, and at the very least intended for public service. Whether intended for
public use or public service, the Airport Lands and Buildings are properties of public dominion. As properties of
public dominion, the Airport Lands and Buildings are owned by the Republic and thus exempt from real estate
tax under Section 234(a) of the Local Government Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the legal
relation and status of government units, agencies and offices within the entire government machinery, MIAA is
a government instrumentality and not a government-owned or controlled corporation. Under Section 133(o) of
the Local Government Code, MIAA as a government instrumentality is not a taxable person because it is not
subject to "[t]axes, fees or charges of any kind" by local governments. The only exception is when MIAA leases
its real property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in which
case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport
Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of
Paraaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are
properties of public dominion and thus owned by the State or the Republic of the Philippines. Article 420
specifically mentions "ports x x x constructed by the State," which includes public airports and seaports, as
properties of public dominion and owned by the Republic. As properties of public dominion owned by the
Republic, there is no doubt whatsoever that the Airport Lands and Buildings are expressly exempt from real
estate tax under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled that
properties of public dominion are not subject to execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of Appeals of 5
October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the Airport Lands and Buildings
of the Manila International Airport Authority EXEMPT from the real estate tax imposed by the City of
Paraaque. We declare VOID all the real estate tax assessments, including the final notices of real estate tax
delinquencies, issued by the City of Paraaque on the Airport Lands and Buildings of the Manila International
Airport Authority, except for the portions that the Manila International Airport Authority has leased to private
parties. We also declare VOID the assailed auction sale, and all its effects, of the Airport Lands and Buildings of
the Manila International Airport Authority.No costs.SO ORDERED
EN BANC

G.R. No. 193462
February 4, 2014
DENNIS A.B. FUNA, Petitioner,

vs.
MANILA ECONOMIC AND CULTURAL OFFICE and the COMMISSION ON AUDIT, Respondents.
DECISION
PEREZ, J.:
This is a petition for mandamus1 to compel:
1.) the Commission on Audit (COA) to audit and examine the funds of the Manila Economic and
Cultural Office (MECO), and
2.) the MECO to submit to such audit and examination.
The Philippine Government recognizes the Government of the Peoples Republic of China as the sole legal
government of China, fully understands and respects the position of the Chinese Government that there is but
one China and that Taiwan is an integral part of Chinese territory, and decides to remove all its official
representations from Taiwan within one month from the date of signature of this communiqu. (Emphasis
supplied)
The Philippines commitment to the One China policy of the PROC, however, did not preclude the country from
keeping unofficial relations with Taiwan on a "people-to-people" basis. 10 Maintaining ties with Taiwan that is
permissible by the terms of the Joint Communiqu, however, necessarily required the Philippines, and Taiwan,
to course any such relations thru offices outside of the official or governmental organs.
Hence, despite ending their diplomatic ties, the people of Taiwan and of the Philippines maintained an unofficial
relationship facilitated by the offices of the Taipei Economic and Cultural Office, for the former, and the MECO,
for the latter.11
The MECO12 was organized on 16 December 1997 as a non-stock, non-profit corporation under Batas Pambansa
Blg. 68 or the Corporation Code. 13 The purposes underlying the incorporation of MECO, as stated in its articles
of incorporation,14 are as follows:
The antecedents:
Prelude
The aftermath of the Chinese civil war 2 left the country of China with two (2) governments in a stalemate
espousing competing assertions of sovereignty. 3 On one hand is the communist Peoples Republic of China
(PROC) which controls the mainland territories, and on the other hand is the nationalist Republic of China (ROC)
which controls the island of Taiwan. For a better part of the past century, both the PROC and ROC adhered to a
policy of "One China" i.e., the view that there is only one legitimate government in China, but differed in their
respective interpretation as to which that government is. 4
With the existence of two governments having conflicting claims of sovereignty over one country, came the
question as to which of the two is deserving of recognition as that countrys legitimate government. Even after
its relocation to Taiwan, the ROC used to enjoy diplomatic recognition from a majority of the worlds states,
partly due to being a founding member of the United Nations (UN). 5 The number of states partial to the PROCs
version of the One China policy, however, gradually increased in the 1960s and 70s, most notably after the UN
General Assembly adopted the monumental Resolution 2758 in 1971. 6 Since then, almost all of the states that
had erstwhile recognized the ROC as the legitimate government of China, terminated their official relations with
the said government, in favor of establishing diplomatic relations with the PROC. 7 The Philippines is one of such
states.
The Philippines formally ended its official diplomatic relations with the government in Taiwan on 9 June 1975,
when the country and the PROC expressed mutual recognition thru the Joint Communiqu of the Government of
the Republic of the Philippines and the Government of the Peoples Republic of China (Joint Communiqu). 8
Under the Joint Communiqu, the Philippines categorically stated its adherence to the One China policy of the
PROC. The pertinent portion of the Joint Communiqu reads: 9
1. To establish and develop the commercial and industrial interests of Filipino nationals here and
abroad, and assist on all measures designed to promote and maintain the trade relations of the
country with the citizens of other foreign countries;
2. To receive and accept grants and subsidies that are reasonably necessary in carrying out the
corporate purposes provided they are not subject to conditions defeatist for or incompatible with said
purpose;
3. To acquire by purchase, lease or by any gratuitous title real and personal properties as may be
necessary for the use and need of the corporation, and to dispose of the same in like manner when
they are no longer needed or useful; and
4. To do and perform any and all acts which are deemed reasonably necessary to carry out the
purposes. (Emphasis supplied)
From the moment it was incorporated, the MECO became the corporate entity "entrusted" by the Philippine
government with the responsibility of fostering "friendly" and "unofficial" relations with the people of Taiwan,
particularly in the areas of trade, economic cooperation, investment, cultural, scientific and educational
exchanges.15 To enable it to carry out such responsibility, the MECO was "authorized" by the government to
perform certain "consular and other functions" that relates to the promotion, protection and facilitation of
Philippine interests in Taiwan.16
At present, it is the MECO that oversees the rights and interests of Overseas Filipino Workers (OFWs) in Taiwan;
promotes the Philippines as a tourist and investment destination for the Taiwanese; and facilitates the travel of
Filipinos and Taiwanese from Taiwan to the Philippines, and vice versa. 17

Facts Leading to the Mandamus Petition
On 23 August 2010, petitioner sent a letter 18 to the COA requesting for a "copy of the latest financial and audit
report" of the MECO invoking, for that purpose, his "constitutional right to information on matters of public
concern." The petitioner made the request on the belief that the MECO, being under the "operational
supervision" of the Department of Trade and Industry (DTI), is a government owned and controlled corporation
(GOCC) and thus subject to the audit jurisdiction of the COA.19
MECOs board of directors.27 An illustration of this exercise is the assumption by Mr. Antonio Basilio as
chairman of the board of directors of the MECO in 2001, which was accomplished when former
President Gloria Macapagal-Arroyo, through a memorandum 28 dated 20 February 2001, expressed her
"desire" to the board of directors of the MECO for the election of Mr. Basilio as chairman. 29
3. The MECO is under the operational and policy supervision of the DTI. The MECO was placed under
the operational supervision of the DTI by EO No. 328, s. of 2004, and again under the policy
supervision of the same department by EO No. 426, s. 2005. 30
Petitioners letter was received by COA Assistant Commissioner Jaime P. Naranjo, the following day.
On 25 August 2010, Assistant Commissioner Naranjo issued a memorandum 20 referring the petitioners request
to COA Assistant Commissioner Emma M. Espina for "further disposition." In this memorandum, however,
Assistant Commissioner Naranjo revealed that the MECO was "not among the agencies audited by any of the
three Clusters of the Corporate Government Sector." 21
On 7 September 2010, petitioner learned about the 25 August 2010 memorandum and its contents.
Mandamus Petition
Taking the 25 August 2010 memorandum as an admission that the COA had never audited and examined the
accounts of the MECO, the petitioner filed the instant petition for mandamus on 8 September 2010. Petitioner
filed the suit in his capacities as "taxpayer, concerned citizen, a member of the Philippine Bar and law book
author."22 He impleaded both the COA and the MECO.
Petitioner posits that by failing to audit the accounts of the MECO, the COA is neglecting its duty under Section
2(1), Article IX-D of the Constitution to audit the accounts of an otherwise bona fide GOCC or government
instrumentality. It is the adamant claim of the petitioner that the MECO is a GOCC without an original charter
or, at least, a government instrumentality, the funds of which partake the nature of public funds. 23
According to petitioner, the MECO possesses all the essential characteristics of a GOCC and an instrumentality
under the Executive Order No. (EO) 292, s. 1987 or the Administrative Code: it is a non-stock corporation
vested with governmental functions relating to public needs; it is controlled by the government thru a board of
directors appointed by the President of the Philippines; and while not integrated within the executive
departmental framework, it is nonetheless under the operational and policy supervision of the DTI. 24 As
petitioner substantiates:
1. The MECO is vested with government functions. It performs functions that are equivalent to those of
an embassy or a consulate of the Philippine government. 25 A reading of the authorized functions of the
MECO as found in EO No. 15, s. 2001, reveals that they are substantially the same functions
performed by the Department of Foreign Affairs (DFA), through its diplomatic and consular missions,
per the Administrative Code.26
2. The MECO is controlled by the government. It is the President of the Philippines that actually
appoints the directors of the MECO, albeit indirectly, by way of "desire letters" addressed to the
To further bolster his position that the accounts of the MECO ought to be audited by the COA, the petitioner
calls attention to the practice, allegedly prevailing in the United States of America, wherein the American
Institute in Taiwan (AIT)the counterpart entity of the MECO in the United Statesis supposedly audited by
that countrys Comptroller General.31 Petitioner claims that this practice had been confirmed in a decision of the
United States Court of Appeals for the District of Columbia Circuit, in the case of Wood, Jr., ex rel. United States
of America v. The American Institute in Taiwan, et al. 32
The Position of the MECO
The MECO prays for the dismissal of the mandamus petition on procedural and substantial grounds.
On procedure, the MECO argues that the mandamus petition was prematurely filed. 33
The MECO posits that a cause of action for mandamus to compel the performance of a ministerial duty required
by law only ripens once there has been a refusal by the tribunal, board or officer concerned to perform such a
duty.34The MECO claims that there was, in this case, no such refusal either on its part or on the COAs because
the petitioner never made any demand for it to submit to an audit by the COA or for the COA to perform such
an audit, prior to filing the instant mandamus petition. 35 The MECO further points out that the only "demand"
that the petitioner made was his request to the COA for a copy of the MECOs latest financial and audit report
which request was not even finally disposed of by the time the instant petition was filed. 36
On the petitions merits, the MECO denies the petitioners claim that it is a GOCC or a government
instrumentality.37 While performing public functions, the MECO maintains that it is not owned or controlled by
the government, and its funds are private funds. 38 The MECO explains:
1. It is not owned or controlled by the government. Contrary to the allegations of the petitioner, the
President of the Philippines does not appoint its board of directors. 39 The "desire letter" that the
President transmits is merely recommendatory and not binding on the corporation. 40 As a corporation
organized under the Corporation Code, matters relating to the election of its directors and officers, as
well as its membership, are governed by the appropriate provisions of the said code, its articles of
incorporation and its by-laws.41 Thus, it is the directors who elect the corporations officers; the
members who elect the directors; and the directors who admit the members by way of a unanimous
resolution. All of its officers, directors, and members are private individuals and are not government
officials.42

2. The government merely has policy supervision over it. Policy supervision is a lesser form of
supervision wherein the governments oversight is limited only to ensuring that the corporations
activities are in tune with the countrys commitments under the One China policy of the PROC. 43 The
day-to-day operations of the corporation, however, remain to be controlled by its duly elected board of
directors.44
The MECO emphasizes that categorizing it as a GOCC or a government instrumentality can potentially violate
the countrys commitment to the One China policy of the PROC. 45 Thus, the MECO cautions against applying to
the present mandamus petition the pronouncement in the Wood decision regarding the alleged auditability of
the AIT in the United States.46
The Position of the COA
The COA, on the other hand, advances that the mandamus petition ought to be dismissed on procedural
grounds and on the ground of mootness.
The COA argues that the mandamus petition suffers from the following procedural defects:
1. The petitioner lacks locus standi to bring the suit. The COA claims that the petitioner has not shown,
at least in a concrete manner, that he had been aggrieved or prejudiced by its failure to audit the
accounts of the MECO.47
2. The petition was filed in violation of the doctrine of hierarchy of courts. The COA faults the filing of
the instant mandamus petition directly with this Court, when such petition could have very well been
presented, at the first instance, before the Court of Appeals or any Regional Trial Court. 48 The COA
claims that the petitioner was not able to provide compelling reasons to justify a direct resort to the
Supreme Court.49
At any rate, the COA argues that the instant petition already became moot when COA Chairperson Maria Gracia
M. Pulido-Tan (Pulido-Tan) issued Office Order No. 2011-698 50 on 6 October 2011.51 The COA notes that under
Office Order No. 2011-698, Chairperson Pulido-Tan already directed a team of auditors to proceed to Taiwan,
specifically for the purpose of auditing the accounts of, among other government agencies based therein, the
MECO.52
In conceding that it has audit jurisdiction over the accounts of the MECO, however, the COA clarifies that it
does not consider the former as a GOCC or a government instrumentality. On the contrary, the COA maintains
that the MECO is a non-governmental entity. 53
The COA argues that, despite being a non-governmental entity, the MECO may still be audited with respect to
the "verification fees" for overseas employment documents that it collects from Taiwanese employers on behalf
of the DOLE.54 The COA claims that, under Joint Circular No. 3-99, 55 the MECO is mandated to remit to the
Department of Labor and Employment (DOLE) a portion of such "verification fees." 56 The COA, therefore,
classifies the MECO as a non-governmental entity "required to pay xxx government share" subject to a partial
audit of its accounts under Section 26 of the Presidential Decree No. 1445 or the State Audit Code of the
Philippines (Audit Code).57
OUR RULING
We grant the petition in part. We declare that the MECO is a non-governmental entity. However, under existing
laws, the accounts of the MECO pertaining to the "verification fees" it collects on behalf of the DOLE as well as
the fees it was authorized to collect under Section 2(6) of EO No. 15, s. 2001, are subject to the audit
jurisdiction of the COA. Such fees pertain to the government and should be audited by the COA.
I
We begin with the preliminary issues.
Mootness of Petition
The first preliminary issue relates to the alleged mootness of the instant mandamus petition, occasioned by the
COAs issuance of Office Order No. 2011-698. The COA claims that by issuing Office Order No. 2011-698, it had
already conceded its jurisdiction over the accounts of the MECO and so fulfilled the objective of the instant
petition.58 The COA thus urges that the instant petition be dismissed for being moot and academic. 59
We decline to dismiss the mandamus petition on the ground of mootness.
A case is deemed moot and academic when, by reason of the occurrence of a supervening event, it ceases to
present any justiciable controversy. 60 Since they lack an actual controversy otherwise cognizable by courts,
moot cases are, as a rule, dismissible.61
The rule that requires dismissal of moot cases, however, is not absolute. It is subject to exceptions. In David v.
Macapagal-Arroyo,62 this Court comprehensively captured these exceptions scattered throughout our
jurisprudence:
The "moot and academic" principle is not a magical formula that can automatically dissuade the courts in
resolving a case. Courts will decide cases, otherwise moot and academic, if: first, there is a grave violation of
the Constitution;63 second, the exceptional character of the situation and the paramount public interest is
involved;64third, when constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public;65 and fourth, the case is capable of repetition yet evading review. 66
In this case, We find that the issuance by the COA of Office Order No. 2011-698 indeed qualifies as a
supervening event that effectively renders moot and academic the main prayer of the instant mandamus
petition. A writ of mandamus to compel the COA to audit the accounts of the MECO would certainly be a mere
superfluity, when the former had already obliged itself to do the same.
Be that as it may, this Court refrains from dismissing outright the petition. We believe that the mandamus
petition was able to craft substantial issues presupposing the commission of a grave violation of the
Constitution and involving paramount public interest, which need to be resolved nonetheless:

First. The petition makes a serious allegation that the COA had been remiss in its constitutional or legal duty to
audit and examine the accounts of an otherwise auditable entity in the MECO.
Second. There is paramount public interest in the resolution of the issue concerning the failure of the COA to
audit the accounts of the MECO. The propriety or impropriety of such a refusal is determinative of whether the
COA was able to faithfully fulfill its constitutional role as the guardian of the public treasury, in which any
citizen has an interest.
We sustain petitioners standing, as a concerned citizen, to file the instant petition.

The rules regarding legal standing in bringing public suits, or locus standi, are already well-defined in our case
law. Again, We cite David, which summarizes jurisprudence on this point: 73
By way of summary, the following rules may be culled from the cases decided by this
Court.1a\^/phi1 Taxpayers, voters, concerned citizens, and legislators may be accorded standing to sue,
provided that the following requirements are met:
Third. There is also paramount public interest in the resolution of the issue regarding the legal status of the
MECO; a novelty insofar as our jurisprudence is concerned. We find that the status of the MECOwhether it
may be considered as a government agency or nothas a direct bearing on the countrys commitment to the
One China policy of the PROC.67
(1) the cases involve constitutional issues;
An allegation as serious as a violation of a constitutional or legal duty, coupled with the pressing public interest
in the resolution of all related issues, prompts this Court to pursue a definitive ruling thereon, if not for the
proper guidance of the government or agency concerned, then for the formulation of controlling principles for
the education of the bench, bar and the public in general. 68 For this purpose, the Court invokes its symbolic
function.69
(3) for voters, there must be a showing of obvious interest in the validity of the election law in
question;
If the foregoing reasons are not enough to convince, We still add another:
Assuming that the allegations of neglect on the part of the COA were true, Office Order No. 2011-698 does not
offer the strongest certainty that they would not be replicated in the future. In the first place, Office Order No.
2011-698 did not state any legal justification as to why, after decades of not auditing the accounts of the
MECO, the COA suddenly decided to do so. Neither does it state any determination regarding the true status of
the MECO. The justifications provided by the COA, in fact, only appears in the memorandum 70 it submitted to
this Court for purposes of this case.
Thus, the inclusion of the MECO in Office Order No. 2011-698 appears to be entirely dependent upon the
judgment of the incumbent chairperson of the COA; susceptible of being undone, with or without reason, by her
or even her successor. Hence, the case now before this Court is dangerously capable of being repeated yet
evading review.
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure
is unconstitutional;
(4) for concerned citizens, there must be a showing that the issues raised are of transcendental
importance which must be settled early; and
(5) for legislators, there must be a claim that the official action complained of infringes upon their
prerogatives as legislators.
We rule that the instant petition raises issues of transcendental importance, involved as they are with the
performance of a constitutional duty, allegedly neglected, by the COA. Hence, We hold that the petitioner, as a
concerned citizen, has the requisite legal standing to file the instant mandamus petition.
To be sure, petitioner does not need to make any prior demand on the MECO or the COA in order to maintain
the instant petition. The duty of the COA sought to be compelled by mandamus, emanates from the
Constitution and law, which explicitly require, or "demand," that it perform the said duty. To the mind of this
Court, petitioner already established his cause of action against the COA when he alleged that the COA had
neglected its duty in violation of the Constitution and the law.
Verily, this Court should not dismiss the mandamus petition on the ground of mootness.
Principle of Hierarchy of Courts
Standing of Petitioner
The second preliminary issue is concerned with the standing of the petitioner to file the instant mandamus
petition. The COA claims that petitioner has none, for the latter was not able to concretely establish that he had
been aggrieved or prejudiced by its failure to audit the accounts of the MECO. 71
Related to the issue of lack of standing is the MECOs contention that petitioner has no cause of action to file
the instant mandamus petition. The MECO faults petitioner for not making any demand for it to submit to an
audit by the COA or for the COA to perform such an audit, prior to filing the instant petition. 72
The last preliminary issue is concerned with the petitions non-observance of the principle of hierarchy of
courts. The COA assails the filing of the instant mandamus petition directly with this Court, when such petition
could have very well been presented, at the first instance, before the Court of Appeals or any Regional Trial
Court.74 The COA claims that the petitioner was not able to provide compelling reasons to justify a direct resort
to the Supreme Court.75
In view of the transcendental importance of the issues raised in the mandamus petition, as earlier mentioned,
this Court waives this last procedural issue in favor of a resolution on the merits. 76

II
To the merits of this petition, then.
Section 29(1) of the Audit Code, however, limits the audit of the foregoing non-governmental entities only to
"funds xxx coming from or through the government." 81 This section of the Audit Code is, in turn, substantially
reproduced in Section 14(1), Book V of the Administrative Code. 82
The single most crucial question asked by this case is whether the COA is, under prevailing law, mandated to
audit the accounts of the MECO. Conversely, are the accounts of the MECO subject to the audit jurisdiction of
the COA?
In addition to the foregoing, the Administrative Code also empowers the COA to examine and audit "the books,
records and accounts" of public utilities "in connection with the fixing of rates of every nature, or in relation to
the proceedings of the proper regulatory agencies, for purposes of determining franchise tax." 83
Law, of course, identifies which accounts of what entities are subject to the audit jurisdiction of the COA.
Both petitioner and the COA claim that the accounts of the MECO are within the audit jurisdiction of the COA,
but vary on the extent of the audit and on what type of auditable entity the MECO is. The petitioner posits that
all accounts of the MECO are auditable as the latter is a bona fide GOCC or government instrumentality. 84 On
the other hand, the COA argues that only the accounts of the MECO that pertain to the "verification fees" it
collects on behalf of the DOLE are auditable because the former is merely a non-governmental entity "required
to pay xxx government share" per the Audit Code.85
Under Section 2(1) of Article IX-D of the Constitution, 77 the COA was vested with the "power, authority and
duty" to "examine, audit and settle" the "accounts" of the following entities:
1. The government, or any of its subdivisions, agencies and instrumentalities;
We examine both contentions.

2. GOCCs with original charters;
The MECO Is Not a GOCC or
Government Instrumentality
3. GOCCs without original charters;

4. Constitutional bodies, commissions and offices that have been granted fiscal autonomy under the
Constitution; and
We start with the petitioners contention.
5. Non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting institution to submit to the COA for audit as a
condition of subsidy or equity.78
The term "accounts" mentioned in the subject constitutional provision pertains to the "revenue," "receipts,"
"expenditures" and "uses of funds and property" of the foregoing entities. 79
Complementing the constitutional power of the COA to audit accounts of "non-governmental entities receiving
subsidy or equity xxx from or through the government" is Section 29(1) 80 of the Audit Code, which grants the
COA visitorial authority over the following non-governmental entities:
1. Non-governmental entities "subsidized by the government";
2. Non-governmental entities "required to pay levy or government share";
3. Non-governmental entities that have "received counterpart funds from the government"; and
4. Non-governmental entities "partly funded by donations through the government."
Petitioner claims that the accounts of the MECO ought to be audited by the COA because the former is a GOCC
or government instrumentality. Petitioner points out that the MECO is a non-stock corporation "vested with
governmental functions relating to public needs"; it is "controlled by the government thru a board of directors
appointed by the President of the Philippines"; and it operates "outside of the departmental framework,"
subject only to the "operational and policy supervision of the DTI." 86 The MECO thus possesses, petitioner
argues, the essential characteristics of a bona fide GOCC and government instrumentality. 87
We take exception to petitioners characterization of the MECO as a GOCC or government instrumentality. The
MECO is not a GOCC or government instrumentality.
Government instrumentalities are agencies of the national government that, by reason of some "special
function or jurisdiction" they perform or exercise, are allotted "operational autonomy" and are "not integrated
within the department framework." 88 Subsumed under the rubric "government instrumentality" are the
following entities:89
1. regulatory agencies,
2. chartered institutions,

3. government corporate entities or government instrumentalities with corporate powers
(GCE/GICP),90 and
1. To establish and develop the commercial and industrial interests of Filipino nationals here and
abroad and assist on all measures designed to promote and maintain the trade relations of the
country with the citizens of other foreign countries;
4. GOCCs
2. To receive and accept grants and subsidies that are reasonably necessary in carrying out the
corporate purposes provided they are not subject to conditions defeatist for or incompatible with said
purpose;
The Administrative Code defines a GOCC:91
(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock
case of stock corporations, to the extent of at least fifty-one (51) per cent of its capital stock: x x x.
The above definition is, in turn, replicated in the more recent Republic Act No. 10149 or the GOCC Governance
Act of 2011, to wit:92
(o) Government-Owned or -Controlled Corporation (GOCC) refers to any agency organized as a stock or nonstock corporation, vested with functions relating to public needs whether governmental or proprietary in
nature, and owned by the Government of the Republic of the Philippines directly or through its instrumentalities
either wholly or, where applicable as in the case of stock corporations, to the extent of at least a majority of its
outstanding capital stock: x x x.
3. To acquire by purchase, lease or by any gratuitous title real and personal properties as may be
necessary for the use and need of the corporation, and in like manner when they are
4. To do and perform any and all acts which are deemed reasonably necessary to carry out the
purposes. (Emphasis supplied)
The purposes for which the MECO was organized are somewhat analogous to those of a trade, business or
industry chamber,98 but only on a much larger scale i.e., instead of furthering the interests of a particular line of
business or industry within a local sphere, the MECO seeks to promote the general interests of the Filipino
people in a foreign land.
Finally, it is not disputed that none of the income derived by the MECO is distributable as dividends to any of its
members, directors or officers.
Verily, the MECO is organized as a non-stock corporation.
GOCCs, therefore, are "stock or non-stock" corporations "vested with functions relating to public needs" that
are "owned by the Government directly or through its instrumentalities." 93 By definition, three attributes thus
make an entity a GOCC: first, its organization as stock or non-stock corporation; 94 second, the public character
of its function; and third, government ownership over the same.
Possession of all three attributes is necessary to deem an entity a GOCC.
In this case, there is not much dispute that the MECO possesses the first and second attributes. It is the third
attribute, which the MECO lacks.
The MECO Is Organized as a Non-Stock Corporation
The organization of the MECO as a non-stock corporation cannot at all be denied. Records disclose that the
MECO was incorporated as a non-stock corporation under the Corporation Code on 16 December 1977. 95 The
incorporators of the MECO were Simeon R. Roxas, Florencio C. Guzon, Manuel K. Dayrit, Pio K. Luz and Eduardo
B. Ledesma, who also served as the corporations original members and directors. 96
The purposes for which the MECO was organized also establishes its non-profit character, to wit: 97
The MECO Performs Functions with a Public Aspect.

The public character of the functions vested in the MECO cannot be doubted either. Indeed, to a certain degree,
the functions of the MECO can even be said to partake of the nature of governmental functions. As earlier
intimated, it is the MECO that, on behalf of the people of the Philippines, currently facilitates unofficial relations
with the people in Taiwan.
Consistent with its corporate purposes, the MECO was "authorized" by the Philippine government to perform
certain "consular and other functions" relating to the promotion, protection and facilitation of Philippine
interests in Taiwan.99 The full extent of such authorized functions are presently detailed in Sections 1 and 2 of
EO No. 15, s. 2001:
SECTION 1. Consistent with its corporate purposes and subject to the conditions stated in Section 3 hereof,
MECO is hereby authorized to assist in the performance of the following functions:
1. Formulation and implementation of a program to attract and promote investments from Taiwan to
Philippine industries and businesses, especially in manufacturing, tourism, construction and other
preferred areas of investments;

2. Promotion of the export of Philippine products and Filipino manpower services, including Philippine
management services, to Taiwan;
3. Negotiation and/or assistance in the negotiation and conclusion of agreements or other
arrangements concerning trade, investment, economic cooperation, technology transfer, banking and
finance, scientific, cultural, educational and other modes of cooperative endeavors between the
Philippines and Taiwan, on a people-to-people basis, in accordance with established rules and
regulations;
4. Reporting on, and identification of, employment and business opportunities in Taiwan for the
promotion of Philippine exports, manpower and management services, and tourism;
5. Dissemination in Taiwan of information on the Philippines, especially in the fields of trade, tourism,
labor, economic cooperation, and cultural, educational and scientific endeavors;
6. Conduct of periodic assessment of market conditions in Taiwan, including submission of trade
statistics and commercial reports for use of Philippine industries and businesses; and
7. Facilitation, fostering and cultivation of cultural, sports, social, and educational exchanges between
the peoples of the Philippines and Taiwan.
SECTION 2. In addition to the above-mentioned authority and subject to the conditions stated in Section 3
hereof, MECO, through its branch offices in Taiwan, is hereby authorized to perform the following functions:
1. Issuance of temporary visitors visas and transit and crew list visas, and such other visa services as
may be authorized by the Department of Foreign Affairs;
2. Issuance, renewal, extension or amendment of passports of Filipino citizens in accordance with
existing regulations, and provision of such other passport services as may be required under the
circumstances;
A perusal of the above functions of the MECO reveals its uncanny similarity to some of the functions typically
performed by the DFA itself, through the latters diplomatic and consular missions. 100 The functions of the
MECO, in other words, are of the kind that would otherwise be performed by the Philippines own diplomatic
and consular organs, if not only for the governments acquiescence that they instead be exercised by the
MECO.
Evidently, the functions vested in the MECO are impressed with a public aspect.
The MECO Is Not Owned or Controlled by the Government Organization as a non-stock corporation and the
mere performance of functions with a public aspect, however, are not by themselves sufficient to consider the
MECO as a GOCC. In order to qualify as a GOCC, a corporation must also, if not more importantly, be owned by
the government.
The government owns a stock or non-stock corporation if it has controlling interest in the corporation. In a stock
corporation, the controlling interest of the government is assured by its ownership of at least fifty-one percent
(51%) of the corporate capital stock.101 In a non-stock corporation, like the MECO, jurisprudence teaches that
the controlling interest of the government is affirmed when "at least majority of the members are government
officials holding such membership by appointment or designation" 102 or there is otherwise "substantial
participation of the government in the selection" of the corporations governing board. 103
In this case, the petitioner argues that the government has controlling interest in the MECO because it is the
President of the Philippines that indirectly appoints the directors of the corporation. 104 The petitioner claims that
the President appoints directors of the MECO thru "desire letters" addressed to the corporations board. 105 As
evidence, the petitioner cites the assumption of one Mr. Antonio Basilio as chairman of the board of directors of
the MECO in 2001, which was allegedly accomplished when former President Macapagal-Arroyo, through a
memorandum dated 20 February 2001, expressed her "desire" to the board of directors of the MECO for the
election of Mr. Basilio as chairman.106
The MECO, however, counters that the "desire letters" that the President transmits are merely recommendatory
and not binding on it. 107 The MECO maintains that, as a corporation organized under the Corporation Code,
matters relating to the election of its directors and officers, as well as its membership, are ultimately governed
by the appropriate provisions of the said code, its articles of incorporation and its by-laws. 108
3. Certification or affirmation of the authenticity of documents submitted for authentication;

4. Providing translation services;
5. Assistance and protection to Filipino nationals and other legal/juridical persons working or residing
in Taiwan, including making representations to the extent allowed by local and international law on
their behalf before civil and juridical authorities of Taiwan; and
6. Collection of reasonable fees on the first four (4) functions enumerated above to defray the cost of
its operations.
As between the contrasting arguments, We find the contention of the MECO to be the one more consistent with
the law.
The fact of the incorporation of the MECO under the Corporation Code is key. The MECO was correct in
postulating that, as a corporation organized under the Corporation Code, it is governed by the appropriate
provisions of the said code, its articles of incorporation and its by-laws. In this case, it is the by-laws 109 of the
MECO that stipulates that its directors are elected by its members; its officers are elected by its directors; and
its members, other than the original incorporators, are admitted by way of a unanimous board resolution, to
wit:
SECTION II. MEMBERSHIP

Article 2. Members shall be classified as (a) Regular and (b) Honorary.
(a) Regular members shall consist of the original incorporators and such other members who, upon
application for membership, are unanimously admitted by the Board of Directors.
(b) Honorary member A person of distinction in business who as sympathizer of the objectives of the
corporation, is invited by the Board to be an honorary member.
It is significant to note that none of the original incorporators of the MECO were shown to be government
officials at the time of the corporations organization. Indeed, none of the members, officers or board of
directors of the MECO, from its incorporation up to the present day, were established as government
appointees or public officers designated by reason of their office. There is, in fact, no law or executive order
that authorizes such an appointment or designation. Hence, from a strictly legal perspective, it appears that
the presidential "desire letters" pointed out by petitionerif such letters even exist outside of the case of Mr.
Basilioare, no matter how strong its persuasive effect may be, merely recommendatory.
The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity.
SECTION III. BOARD OF DIRECTORS

Article 3. At the first meeting of the regular members, they shall organize and constitute themselves as a Board
composed of five (5) members, including its Chairman, each of whom as to serve until such time as his own
successor shall have been elected by the regular members in an election called for the purpose. The number of
members of the Board shall be increased to seven (7) when circumstances so warrant and by means of a
majority vote of the Board members and appropriate application to and approval by the Securities and
Exchange Commission. Unless otherwise provided herein or by law, a majority vote of all Board members
present shall be necessary to carry out all Board resolutions.
During the same meeting, the Board shall also elect its own officers, including the designation of the principal
officer who shall be the Chairman. In line with this, the Chairman shall also carry the title Chief Executive
Officer. The officer who shall head the branch or office for the agency that may be established abroad shall
have the title of Director and Resident Representative. He will also be the Vice-Chairman. All other members of
the Board shall have the title of Director.
xxxx
SECTION IV. EXECUTIVE COMMITTEE
Article 5. There shall be established an Executive Committee composed of at least three (3) members of the
Board. The members of the Executive Committee shall be elected by the members of the Board among
themselves.
xxxx
SECTION VI. OFFICERS: DUTIES, COMPENSATION
Article 8. The officers of the corporation shall consist of a Chairman of the Board, Vice-Chairman, Chief Finance
Officer, and a Secretary. Except for the Secretary, who is appointed by the Chairman of the Board, other officers
and employees of the corporation shall be appointed by the Board.
The categorical exclusion of the MECO from a GOCC makes it easier to exclude the same from any other class
of government instrumentality. The other government instrumentalities i.e., the regulatory agencies, chartered
institutions and GCE/GICP are all, by explicit or implicit definition, creatures of the law. 110 The MECO cannot be
any other instrumentality because it was, as mentioned earlier, merely incorporated under the Corporation
Code.
Hence, unless its legality is questioned, and in this case it was not, the fact that the MECO is operating under
the policy supervision of the DTI is no longer a relevant issue to be reckoned with for purposes of this case.
For whatever it is worth, however, and without justifying anything, it is easy enough for this Court to
understand the rationale, or necessity even, of the executive branch placing the MECO under the policy
supervision of one of its agencies.
It is evident, from the peculiar circumstances surrounding its incorporation, that the MECO was not intended to
operate as any other ordinary corporation. And it is not. Despite its private origins, and perhaps deliberately so,
the MECO was "entrusted"111 by the government with the "delicate and precarious" 112 responsibility of pursuing
"unofficial"113 relations with the people of a foreign land whose government the Philippines is bound not to
recognize. The intricacy involved in such undertaking is the possibility that, at any given time in fulfilling the
purposes for which it was incorporated, the MECO may find itself engaged in dealings or activities that can
directly contradict the Philippines commitment to the One China policy of the PROC. Such a scenario can only
truly be avoided if the executive department exercises some form of oversight, no matter how limited, over the
operations of this otherwise private entity.
Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with other private
corporations. From its over-reaching corporate objectives, its special duty and authority to exercise certain
consular functions, up to the oversight by the executive department over its operationsall the while
maintaining its legal status as a non-governmental entitythe MECO is, for all intents and purposes, sui
generis.
Certain Accounts of the MECO May
Be Audited By the COA.
The Deputy Representative and other officials and employees of a branch office or agency abroad are
appointed solely by the Vice Chairman and Resident Representative concerned. All such appointments however
are subject to ratification by the Board.
We now come to the COAs contention.

The COA argues that, despite being a non-governmental entity, the MECO may still be audited with respect to
the "verification fees" for overseas employment documents that the latter collects from Taiwanese employers
on behalf of the DOLE.114 The COA claims that, under Joint Circular No. 3-99, the MECO is mandated to remit to
the national government a portion of such "verification fees." 115 The COA, therefore, classifies the MECO as a
non-governmental entity "required to pay xxx government share" per the Audit Code. 116
are to be allocated as follows: (a) US$ 10 to be retained by the MECO as administrative fee, (b) US $10 to be
remitted to the DOLE, and (c) US$ 10 to be constituted as a common fund of the MECO and DOLE. 123
We agree that the accounts of the MECO pertaining to its collection of "verification fees" is subject to the audit
jurisdiction of the COA. However, We digress from the view that such accounts are the only ones that ought to
be audited by the COA. Upon careful evaluation of the information made available by the records vis--vis the
spirit and the letter of the laws and executive issuances applicable, We find that the accounts of the MECO
pertaining to the fees it was authorized to collect under Section 2(6) of EO No. 15, s. 2001, are likewise subject
to the audit jurisdiction of the COA.
Consular Fees Collected by the MECO
Verification Fees Collected by the MECO

In its comment,117 the MECO admitted that roughly 9% of its income is derived from its share in the "verification
fees" for overseas employment documents it collects on behalf of the DOLE.
The "verification fees" mentioned here refers to the "service fee for the verification of overseas employment
contracts, recruitment agreement or special powers of attorney" that the DOLE was authorized to collect under
Section 7 of EO No. 1022,118 which was issued by President Ferdinand E. Marcos on 1 May 1985. These fees are
supposed to be collected by the DOLE from the foreign employers of OFWs and are intended to be used for "the
promotion of overseas employment and for welfare services to Filipino workers within the area of jurisdiction of
[concerned] foreign missions under the administration of the [DOLE]." 119
Evidently, the entire "verification fees" being collected by the MECO are receivables of the DOLE. 124 Such
receipts pertain to the DOLE by virtue of Section 7 of EO No. 1022.
Aside from the DOLE "verification fees," however, the MECO also collects "consular fees," or fees it collects
from the exercise of its delegated consular functions.
The authority behind "consular fees" is Section 2(6) of EO No. 15, s. 2001. The said section authorizes the
MECO to collect "reasonable fees" for its performance of the following consular functions:
1. Issuance of temporary visitors visas and transit and crew list visas, and such other visa services as
may be authorized by the DFA;
2. Issuance, renewal, extension or amendment of passports of Filipino citizens in accordance with
existing regulations, and provision of such other passport services as may be required under the
circumstances;
3. Certification or affirmation of the authenticity of documents submitted for authentication; and
4. Providing translation services.
Joint Circular 3-99 was issued by the DOLE, DFA, the Department of Budget Management, the Department of
Finance and the COA in an effort to implement Section 7 of Executive Order No. 1022. 120 Thus, under Joint
Circular 3-99, the following officials have been tasked to be the "Verification Fee Collecting Officer" on behalf of
the DOLE:121
1. The labor attach or duly authorized overseas labor officer at a given foreign post, as duly
designated by the DOLE Secretary;
2. In foreign posts where there is no labor attach or duly authorized overseas labor officer, the
finance officer or collecting officer of the DFA duly deputized by the DOLE Secretary as approved by
the DFA Secretary;
3. In the absence of such finance officer or collecting officer, the alternate duly designated by the
head of the foreign post.
Since the Philippines does not maintain an official post in Taiwan, however, the DOLE entered into a "series" of
Memorandum of Agreements with the MECO, which made the latter the formers collecting agent with respect
to the "verification fees" that may be due from Taiwanese employers of OFWs. 122 Under the 27 February 2004
Memorandum of Agreement between DOLE and the MECO, the "verification fees" to be collected by the latter
Evidently, and just like the peculiarity that attends the DOLE "verification fees," there is no consular office for
the collection of the "consular fees." Thus, the authority for the MECO to collect the "reasonable fees," vested
unto it by the executive order.
The "consular fees," although held and expended by the MECO by virtue of EO No. 15, s. 2001, are, without
question, derived from the exercise by the MECO of consular functionsfunctions it performs by and only
through special authority from the government. There was never any doubt that the visas, passports and other
documents that the MECO issues pursuant to its authorized functions still emanate from the Philippine
government itself.
Such fees, therefore, are received by the MECO to be used strictly for the purpose set out under EO No. 15, s.
2001. They must be reasonable as the authorization requires. It is the government that has ultimate control
over the disposition of the "consular fees," which control the government did exercise when it provided in
Section 2(6) of EO No. 15, s. 2001 that such funds may be kept by the MECO "to defray the cost of its
operations."

The Accounts of the MECO Pertaining to the Verification Fees and Consular Fees May Be Audited by the COA.
Section 14(1), Book V of the Administrative Code authorizes the COA to audit accounts of non-governmental
entities "required to pay xxx or have government share" but only with respect to "funds xxx coming from or
through the government." This provision of law perfectly fits the MECO:
First. The MECO receives the "verification fees" by reason of being the collection agent of the DOLEa
government agency. Out of its collections, the MECO is required, by agreement, to remit a portion thereof to
the DOLE. Hence, the MECO is accountable to the government for its collections of such "verification fees" and,
for that purpose, may be audited by the COA.
Second. Like the "verification fees," the "consular fees" are also received by the MECO through the
government, having been derived from the exercise of consular functions entrusted to the MECO by the
government. Hence, the MECO remains accountable to the government for its collections of "consular fees"
and, for that purpose, may be audited by the COA.
Tersely put, the 27 February 2008 Memorandum of Agreement between the DOLE and the MECO and Section
2(6) of EO No. 15, s. 2001, vis--vis, respectively, the "verification fees" and the "consular fees," grant and at
the same time limit the authority of the MECO to collect such fees. That grant and limit require the audit by the
COA of the collections thereby generated.
He argued that by failing to audit the accounts of the MECO, the COA is neglecting its duty under Section 2(1),
Article IX-D of the Philippine Constitution to audit the accounts of an otherwise bona fide Government-Owned
and Controlled Corporation (GOCC) or government instrumentality.It is Funa's adamant claim that the MECO is
a GOCC without an original charter or, at least, a government instrumentality, the funds of which partake the
nature of public funds.According to Funa, the MECO possesses all the essential characteristics of a GOCC and
an instrumentality under Executive Order No. 292, s. 1987 of the Administrative Code.
Funa stressed that the MECO performs functions that are equivalent to those of an embassy or a consulate of
the Philippine government.He said that a reading of the authorized functions of the MECO, as found in EO No.
15, s. 2001, reveals that they are subtanstially the same functions performed by the Department of Foreign
Affairs (DFA), through its diplomatic and consular missions, per Administrative Code.
In its ruling, the SC said that "the mandamus petition was able to craft substantial issues presupposing the
commission of a grave violation of the Constitution and involving paramount public interest, which need to be
resolved nonetheless."
Conclusion
The MECO is not a GOCC or government instrumentality. It is a sui generis private entity especially entrusted by
the government with the facilitation of unofficial relations with the people in Taiwan without jeopardizing the
countrys faithful commitment to the One China policy of the PROC. However, despite its non-governmental
character, the MECO handles government funds in the form of the "verification fees" it collects on behalf of the
DOLE and the "consular fees" it collects under Section 2(6) of EO No. 15, s. 2001. Hence, under existing laws,
the accounts of the MECO pertaining to its collection of such "verification fees" and "consular fees" should be
audited by the COA.
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Manila Economic and Cultural
Office is hereby declared a non-governmental entity. However, the accounts of the Manila Economic and
Cultural Office pertaining to: the verification fees contemplated by Section 7 of Executive Order No. 1022
issued 1 May 1985, that the former collects on behalf of the Department of Labor and Employment, and the
fees it was authorized to collect under Section 2(6) of Executive Order No. 15 issued 16 May 2001, are subject
to the audit jurisdiction of the COA.No costs.SO ORDERED
Case digest
Funa and several other officers of a news daily were sued by former President and now Manila Mayor Joseph
"Erap" Ejercito Estrada for publishing the news series purportedly narrated allegations of money-laundering by
some Philippine government officials.He filed the petition before the SC in his capacities as a taxpayer, a
concerned citizen, a member of the Philippine Bar and law book author.Funa impleaded both the COA and the
MECO.
The SC ruled that the petition "raises issues of transcendental importance, involved as they are with the
performance of a constitutional duty, allegedly neglected, by the COA. Hence, we hold that the petitioner, as a
concerned citizen, has the requisite legal standing to file the [mandamus petition.]"It said that the MECO is not
a GOCC or government instrumentality.
The SC added that "government instrumentalities are agencies of the national government that, by reason of
some special function or jurisdiction they perform or exercise, "are allotted operational autonomy and are not
integrated within the department of framework."However, it stressed that the MECO is a non-profit and nonstock private corporation.
The ruling said that the MECO "is a sui generis private entity especially entrusted by the government with the
facilitation of unofficial relations with the people in Taiwan with jeopardizing the country's faithful commitment
to the One China Policy of the PROC [People's Republic of China.]""However, despite its non-governmental
character, the MECO handles government funds in the form of the verification fees it collects on behalf of the
[Department of Labor and Employment] and the consular fees it collects under Section 2(6) of EO No. 15, s.
2001," it added.
FIRST DIVISION

G.R. No. 155683
February 16, 2007
PETRON CORPORATION, Petitioner,

vs.
NATIONAL COLLEGE OF BUSINESS AND ARTS, Respondent.
DECISION
CORONA, J.:
The sole question raised in this petition for review on certiorari 1 is whether petitioner Petron Corporation
(Petron) should be held liable to pay attorneys fees and exemplary damages to respondent National College of
Business and Arts (NCBA).
This case, however, is but part of a larger controversy over the lawful ownership of seven parcels of land 2 in the
V. Mapa area of Sta. Mesa, Manila (the V. Mapa properties) that arose out of a series of events that began in
1969.3
Sometime in 1969, the V. Mapa properties, then owned by Felipe and Enrique Monserrat, Jr., were mortgaged to
the Development Bank of the Philippines (DBP) as part of the security for the P5.2 million loan of Manila Yellow
Taxicab Co., Inc. (MYTC) and Monserrat Enterprises Co. MYTC, for its part, mortgaged four parcels of land
located in Quiapo, Manila.
On March 31, 1975, however, Felipes undivided interest in the V. Mapa properties was levied upon in
execution of a money judgment rendered by the Regional Trial Court (RTC) of Manila in Filoil Marketing
Corporation v. MYTC, Felipe Monserrat, and Rosario Vda. De Monserrat (the Manila case).4 DBP challenged the
levy through a third-party claim asserting that the V. Mapa properties were mortgaged to it and were, for that
reason, exempt from levy or attachment. The RTC quashed it.
On June 18, 1981, MYTC and the Monserrats got DBP to accept a dacion en pago arrangement whereby MYTC
conveyed to the bank the four mortgaged Quiapo properties as full settlement of their loan obligation. But
despite this agreement, DBP did not release the V. Mapa properties from the mortgage.
On May 21, 1982, Felipe, acting for himself and as Enriques attorney-in-fact, sold the V. Mapa properties to
respondent NCBA. Part of the agreement was that Felipe and Enrique would secure the release of the titles to
the properties free of all liens and encumbrances including DBPs mortgage lien and Filoils levy on or before
July 31, 1982. But the Monserrats failed to comply with this undertaking. Thus, on February 3, 1983, NCBA
caused the annotation of an affidavit of adverse claim on the TCTs covering the V. Mapa properties.
Shortly thereafter, NCBA filed a complaint against Felipe and Enrique for specific performance with an
alternative prayer for rescission and damages in the RTC of Manila. The case was raffled to Branch 30 and
docketed as Civil Case No. 83-16617. On March 30, 1983, NCBA had a notice of lis pendens inscribed on the
TCTs of the V. Mapa properties. A little over two years later, NCBA impleaded DBP as an additional defendant in
order to compel it to release the V. Mapa properties from mortgage.
On February 28, 1985, during the pendency of Civil Case No. 83-16617, Enriques undivided interest in the V.
Mapa properties was levied on in execution of a judgment of the RTC of Makati (the Makati case) 5 holding him
liable to Petron (then known as Petrophil Corporation) on a 1972 promissory note. On April 29, 1985, the V.
Mapa properties were sold at public auction to satisfy the judgments in the Manila and Makati cases. Petron,
the highest bidder, acquired both Felipes and Enriques undivided interests in the property. The final deeds of
sale of Enriques and Felipes shares in the V. Mapa properties were awarded to Petron in 1986. Sometime later,
the Monserrats TCTs were cancelled and new ones were issued to Petron. Thus it was that, towards the end of
1987, Petron intervened in NCBAs suit against Felipe, Enrique and DBP (Civil Case No. 83-16617) to assert its
right to the V. Mapa properties.
The RTC rendered judgment on March 11, 1996. 6 It ruled, among other things, that Petron never acquired valid
title to the V. Mapa properties as the levy and sale thereof were void and that NCBA was now the lawful owner
of the properties. Moreover, the RTC held Petron, DBP, Felipe and Enrique jointly and severally liable to NCBA
for exemplary damages and attorneys fees for the following reasons:
FELIPE and ENRIQUE had no reason to renege on their undertaking in the Deed of Absolute Sale "to secure the
release of the titles to the properties xxx free from all the liens and encumbrances, and to cause the lifting of
the levy on execution of Commercial Credit Corporation, Industrial Finance Corporation[,] and Filoil over the V.
Mapa [p]roperty. Moreover, ENRIQUE had no reason to repudiate FELIPE and disavow authority he had [given]
the latter to sell his share in the V. Mapa property.
On the other hand, the mortgage in favor of DBP had been fully extinguished thru dacion en pago as early as
18 June 1981 but it unjustifiably and whimsically refused to release the mortgage and to surrender to the buyer
(NCBA) the owners duplicate copies of Transfer Certificates of Title No[s]. 83621 to 83627, thereby preventing
NCBA from registering the sale in its favor.
Similarly, [Petron] has absolutely no reason to claim the V. Mapa property. For, as shown above, the levy in
execution and sale of the shares of FELIPE and ENRIQUE in the V. Mapa property were null and void.
Finally, in their Memorandum of Agreement dated 25 September 1992 with Technical Institute of the
Philippines, [Petron] and DBP attempted to pre-empt this Courts power to adjudicate on the claim of ownership
stipulating that "to facilitate their defenses and cause of action in Civil Case No. 83-16617," they agreed on the
disposition of the V. Mapa property among themselves. For obvious reasons, this Court refused to give its
imprimatur and denied their prayer for dismissal of the complaint against DBP.
These acts of defendants and intervenor demonstrate their wanton, fraudulent, reckless, oppressive and
malevolent conduct in their dealings with NCBA. Furthermore, they acted with gross and evident bad faith in
refusing to satisfy NCBAs plainly valid and demandable claims. Assessment of exemplary damages and
attorneys fees in the amounts of P100,000.00 and P150,000.00, respectively, is therefore in order (Arts. 2208
and 2232, Civil Code).7

Enrique, DBP and Petron appealed to the Court of Appeals (CA). The appeal was docketed as CAG.R. CV No.
53466. In a decision dated June 21, 2002, 8 the CA affirmed the RTC decision in toto. On motion for
reconsideration, Petron and DBP tried to have the award of exemplary damages and attorneys fees deleted for
lack of legal and factual basis. The Philippine National Oil Company (PNOC), which had been allowed to
intervene in the appeal as transferee pendente lite of Petrons right to the V. Mapa properties, moved for
reconsideration of the ruling on ownership. In a resolution dated October 16, 2002, 9 the CA denied these
motions for lack of merit. Thereupon, Petron and PNOC took separate appeals to this Court.
In this appeal, the only issue is Petrons liability for exemplary damages and attorneys fees. And on this
matter, we reverse the rulings of the trial and appellate courts.
Article 2208 lays down the rule that in the absence of stipulation, attorneys fees cannot be recovered except in
the following instances:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to
incur expense to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs
plainly valid, just and demandable claim;
(6) In actions for legal support;
claim the V. Mapa properties because, in the RTCs opinion, the levy and sale thereof were void. 11 This was
sorely inadequate and it was erroneous for the CA to have upheld that ruling built on such a flimsy foundation.
Article 2208(5) contemplates a situation where one refuses unjustifiably and in evident bad faith to satisfy
anothers plainly valid, just and demandable claim, compelling the latter needlessly to seek redress from the
courts.12 In such a case, the law allows recovery of money the plaintiff had to spend for a lawyers assistance in
suing the defendant expenses the plaintiff would not have incurred if not for the defendants refusal to
comply with the most basic rules of fair dealing. It does not mean, however, that the losing party should be
made to pay attorneys fees merely because the court finds his legal position to be erroneous and upholds that
of the other party, for that would be an intolerable transgression of the policy that no one should be penalized
for exercising the right to have contending claims settled by a court of law. 13 In fact, even a clearly untenable
defense does not justify an award of attorneys fees unless it amounts to gross and evident bad faith. 14
Petrons claim to the V. Mapa properties, founded as it was on final deeds of sale on execution, was far from
untenable. No gross and evident bad faith could be imputed to Petron merely for intervening in NCBAs suit
against DBP and the Monserrats in order to assert what it believed (and had good reason to believe) were its
rights and to have the disputed ownership of the V. Mapa properties settled decisively in a single lawsuit.
With respect to the award of exemplary damages, the rule in this jurisdiction is that the plaintiff must show that
he is entitled to moral, temperate or compensatory damages before the court may even consider the question
of whether exemplary damages should be awarded. 15 In other words, no exemplary damages may be awarded
without the plaintiffs right to moral, temperate, liquidated or compensatory damages having first been
established. Therefore, in view of our ruling that Petron cannot be made liable to NCBA for compensatory
damages (i.e., attorneys fees), Petron cannot be held liable for exemplary damages either.
WHEREFORE, the petition is hereby GRANTED. The imposition of liability on Petron Corporation for exemplary
damages and attorneys fees is REVOKED. The June 21, 2002 decision and October 16, 2002 resolution of the
Court of Appeals in CAG.R. CV No. 53466 and the March 11, 1996 decision of the Regional Trial Court of Manila
in Civil Case No. 83-16617 are hereby MODIFIED accordingly.SO ORDERED.
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
THIRD DIVISION
(8) In actions for indemnity under workmens compensation and employers liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorneys fees and expenses
of litigation should be recovered.10
Here, the RTC held Petron liable to NCBA for attorneys fees under Article 2208(5), which allows such an award
"where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just,
and demandable claim." However, the only justification given for this verdict was that Petron had no reason to
G.R. No. 121171 December 29, 1998

ASSET PRIVATIZATION TRUST, petitioner,
vs.
COURT OF APPEALS, JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE
MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M. ANTONIO,
as Minority Stock-Holders of Marinduque Mining and Industrial Corporation, respondents.
KAPUNAN, J.:

The petition for review on certiorari before us seeks to reverse and set aside the decision of the Court of
Appeals which denied due course to the petition for certiorari filed by the Asset Privatization Trust (APT)
assailing the order of the Regional Trial Court (RTC) Branch 62, Makati City. The Makati RTC's order upheld and
confirmed the award made by the Arbitration Committee in favor of Marinduque Mining and Industrial
Corporation (MMIC) and against the Government, represented by herein petitioner APT for damages in the
amount of P2.5 BILLION (or approximately P4.5 BILLION, including interest).
Ironically, the staggering amount of damages was imposed on the Government for exercising its legitimate
right of foreclosure as creditor against the debtor MMIC as a consequence of the latter's failure to pay its
overdue and unpaid obligation of P22 billion to the Philippine National Bank (PNB) and the Development Bank
of the Philippines (DBP).
The antecedent facts
of the case.
The development, exploration and utilization of the mineral deposits in the Surigao Mineral Reservation have
been authorized by Republic Act No. 1528, as amended by Republic Acts Nos. 2077 and 4167, by virtue of
which laws, a Memorandum of Agreement was drawn on July 3, 1968, whereby the Republic of the Philippines
thru the Surigao Mineral Reservation Board, granted MMIC the exclusive right to explore, develop and exploit
nickel, cobalt and other minerals in the Surigao mineral reservation. 1 MMIC is a domestic corporation engaged
in mining with respondent Jesus S. Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by purchase of MMIC debenture bonds
and extension of guarantees. Further, the Philippine Government obtained a firm commitment form the DBP
and/or other government financing institutions to subscribe in MMIC and issue guarantee/s for foreign loans or
deferred payment arrangements secured from the US Eximbank, Asian Development Bank, Kobe Steel, of
amount not exceeding US$100 Million. 2
DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were based on the
unutilized portion of the Government commitment. Thereafter, the Government extended accommodations to
MMIC in various amounts.
3
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement whereby MMIC, as mortgagor,
agreed to constitute a mortgage in favor or PNB and DBP as mortgagees, over all MMIC's assets; subject of real
estate and chattel mortgage executed by the mortgagor, and additional assets described and identified,
including assets of whatever kind, nature or description, which the mortgagor may acquire whether in
substitution of, in replenishment, or in addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which expressly includes the event
that the MORTGAGOR shall fail to pay any amount secured by this Mortgage Trust Agreement when due. 4
Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the enumerated events of
defaults, circumstances by which the mortgagor may be declared in default, the procedure therefor, waiver of
period to foreclose, authority of Trustee before, during and after foreclosure, including taking possession of the
mortgaged properties. 5
In various requests for advances/remittances of loans if huge amounts, Deeds of Undertaking, Promissory
Notes, Loan Documents, Deeds of Real Estate Mortgages, MMIC invariably committed to pay either on demand
or under certain terms the loans and accommodations secured from or guaranteed by both DBP and PNB.
By 1984, DBP and PNB's financial both in loans and in equity in MMIC had reached tremendous proportions, and
MMIC was having a difficult time meeting its financial obligations. MMIC had an outstanding loan with DBP in
the amount of P13,792,607,565.92 as of August 31, 1984 and with PNB in the amount of P8,789,028,249.38 as
July 15, 1984 or a total Government expose of Twenty Two Billion Six Hundred Sixty-Eight Million Five Hundred
Thirty-Seven Hundred Seventy and 05/100 (P22, 668,537,770.05), Philippine Currency. 6 Thus, a financial
restructuring plan (FRP) designed to reduce MMIC's interest expense through debt conversion to equity was
drafted by the Sycip Gorres Velayo accounting firm. 7 On April 30, 1984, the FRP was approved by the Board of
Directors of the MMIC. 8However, the proposed FRP had never been formally adopted, approved or ratified by
either PNB or DBP. 9
In August and September 1984, as the various loans and advances made by DBP and PNB to MMIC had become
overdue and since any restructuring program relative to the loans was no longer feasible, and in compliance
with the directive of Presidential Decree No. 385, DBP and PNB as mortgagees of MMIC assets, decided to
exercise their right to extrajudicially foreclose the mortgages in accordance with the Mortgage Trust
Agreement. 10
The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly formed
corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial Corporation, and Island
Cement Corporation. In 1986, these assets were transferred to the Asset Privatization Trust (APT). 11
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of MMIC, filed a derivative
suit against DBP and PNB before the RTC of Makati, Branch 62, for Annulment of Foreclosures, Specific
Performance and Damages. 12 The suit, docketed as Civil Case No. 9900, prayed that the court: (1) annul the
foreclosures, restore the foreclosed assets to MMIC, and require the banks to account for their use and
operation in the interim; (2) direct the banks to honor and perform their commitments under the alleged FRP;
and (3) pay moral and exemplary damages, attorney's fees, litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of the DBP and the PNB's
interest in MMIC, mutually agreed to submit the case to arbitration by entering into a "Compromise and
Arbitration Agreement," stipulating, inter alia:
NOW THEREFORE, for and in consideration of the foregoing premises and the mutual covenants
contained herein the parties agree as follows:
1. Withdrawal and Compromise. The parties have agreed to withdraw their respective claims from the
Trial Court and to resolve their dispute through arbitration by praying to the Trial Court to issue a
Compromise Judgment based on this Compromise and Arbitration Agreement.
In withdrawing their dispute from the court and in choosing to resolve it through arbitration, the
parties have agreed that:

(a) their respective money claims shall be reduced to purely money claims; and
(b) as successor and assignee of the PNB and DBP interests in MMIC and the MMIC accounts, APT shall
likewise succeed to the rights and obligations of PNB and DBP in respect of the controversy subject of
Civil Case No. 9900 to be transferred to arbitration and any arbitral award/order against either PNB
and/or DBP shall be the responsibility be discharged by and be enforceable against APT, the parties
having agreed to drop PNB and DBP from the arbitration.
2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900 shall be
submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in Civil Case No. 9900
shall, with the approval of the Trial Court of this Compromise and Arbitration Agreement, be
transferred and reduced to pure pecuniary/money claims with the parties waiving and foregoing all
other forms of reliefs which they prayed for or should have prayed for in Civil Case No. 9900. 13
The Compromise and Arbitration Agreement limited the issues to the following:
5. Issues The issues to be submitted for the Committee's resolution shall be (a) Whether PLAINTIFFS
have the capacity or the personality to institute this derivative suit in behalf of the MMIC or its
directors, (b) Whether or not the actions leading to, and including,. the PNB-DBP foreclosure of the
MMIC
assets
were
proper,
valid
and
in
good
faith. 14
This agreement was presented for approval to the trial court. On October 14, 1992, the Makati RTC, Branch 61,
issued an order, to wit:
WHEREFORE, this Court orders:
1. Substituting PNB and DBP with the Asset Privatization Trust as party defendant.
recovery of which the void foreclosure sales were undertaken, continue to remain outstanding and
unpaid. Defendant APT as the successor-in-interest of PNB and DBP to the said loans is therefore
entitled and retains the right, to collect the same from MMIC pursuant to, and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that the latter may duly and
seasonably interpose. Such loans shall, however, be reduced by the amount which APT may have
realized from the sale of the seized assets of MMIC which by agreement should no longer be returned
even if the foreclosures were found to be null and void.
The documentary evidence submitted and adopted by the parties (Exhibits "3", "3-B"; Exhibit "100";
and also Exhibit "ZZZ") as their exhibits would show that the total outstanding obligation due to DBP
and PNB as of the date of foreclosure is P22,668,537,770.05, more or less.
Therefore defendant APT can, and is still entitled to, collect the outstanding obligations of MMIC to PNB
and DBP amounting to P22,668,537,770.05, more or less, with interest thereon as stipulated in the
loan documents from the date of foreclosure up to the time they are fully paid less the proportionate
liability of DBP as owner of 87% of the total capitalization of MMIC under the FRP. Simply put, DBP shall
share in the award of damages to, and in the obligations of, MMIC in proportion to its 87% equity in tile
total capital stock of MMIC.
xxx xxx xxx
As this Committee holds that the FRP is valid, DBP's equity in MMIC is raised to 87%. So pursuant to
the above provision of the Compromise and Arbitration Agreement, the 87% equity of DBP is hereby
deducted from the actual damages of P19,486,118,654.00 resulting in the net actual damages of
P2,531,635,425.02 plus interest.
DISPOSITION
WHEREFORE, premises considered, judgment is hereby rendered:
2. Approving the Compromise and Arbitration Agreement dated October 6, 1997, attached as Annex
"C" of the Omnibus Motion.
3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in this case into pure money
claims; and
4. The Complaint is hereby DISMISSED.
15
The Arbitration Committee was composed of retired Supreme Court Justice Abraham Sarmiento as Chairman,
Atty. Jose C. Sison and former Court of Appeals Justice Magdangal Elma as Members. On November 24, 1993,
after conducting several hearings, the Arbitration Committee rendered a majority decision in favor of MMIC, the
pertinent portions of which read as follows:
Since, as this Committee finds, there is no foreclosure at all as it was not legally and validly done, the
Committee holds and so declares that the loans of PNB and DBP to MMIC. for the payment and
1. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except the
DBP, the sum of P2,531,635,425.02 with interest thereon at the legal rate of six per cent (6%) per
annum reckoned from August 3, 9, and 24, 1984, pari passu, as and for actual damages. Payment of
these actual damages shall be offset by APT from the outstanding and unpaid loans of MMIC with DBP
and PNB, which have not been converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing the purchase price of the sale of
the shares of Island Cement Corporation in the amount of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that
would supercede [sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except the
DBP, the sum of P13,000.000.00, as and for moral and exemplary damages. Payment of these moral
and exemplary damages shall be offset by APT from the outstanding and unpaid loans of MMIC with

DBP and PNB, which have not been converted into equity. Should there be any balance due to MMIC
after the offsetting, the same shall be satisfied from the funds representing the purchase price of the
sale of the shares of Island Cement Corporation in the amount of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that
would supercede [sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of P10,000,000.00, to
be satisfied likewise from the funds held under escrow pursuant to the Escrow Agreement dated April
22, 1988 or to such subsequent escrow agreement that would supersede it, pursuant to paragraph (9)
of the Compromise and Arbitration Agreement, as and for moral damages; and
4. Ordering the defendant to pay arbitration costs.
This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED.
16
Motions for reconsideration were filed by both parties, but the same were denied.
On October 17, 1993, private respondents filed in the same Civil Case No. 9900 an "Application/Motion for
Confirmation of Arbitration Award." Petitioner countered with an "Opposition and Motion to Vacate Judgment"
raising the following grounds.
1. The plaintiffs Application/Motion is improperly filed with this branch of the Court, considering that
the said motion is neither a part nor the continuation of the proceedings in Civil Case No. 9900 which
was dismissed upon motion of the parties. In fact, the defendants in the said Civil Case No. 9900 were
the Development Bank of the Philippines and the Philippine National Bank (PNB);
2. Under Section 71 of Rep. Act 876, an arbitration under a contract or submission shall be deemed a
special proceedings and a party to the controversy which was arbitrated may apply to the court
having jurisdiction, (not necessarily with this Honorable Court) for an order confirming the award;
3. The issues submitted for arbitration have been limited to two: (1) propriety of the plaintiffs filing the
derivative suit and (2) the regularity of the foreclosure proceedings. The arbitration award sought to
be confirmed herein, far exceeded the issues submitted and even granted moral damages to one of
the herein plaintiffs;
4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the award where the
arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite
award upon the subject matter submitted to them was not made. 17
Private respondents filed a "REPLY AND OPPOSITION" dated November 10, 1984, arguing that a dismissal of
Civil Case No. 9900 was merely a "qualified dismissal" to pave the way for the submission of the controversy to
arbitration and operated simply as "a mere suspension of the proceedings" They denied that the Arbitration
Committee had exceeded its powers.
In an Order dated November 28, 1993, the trial court confirmed the award of the Arbitration Committee. The
dispositive portion of said order reads:
WHEREFORE, premises considered, and in the light of the parties [sic] Compromise and Arbitration
Agreement dated October 6, 1992, the Decision of the Arbitration Committee promulgated on
November 24, 1993, as affirmed in a Resolution dated July 26, 1994, and finally settled and clarified in
the Separate Opinion dated September 2, 1994 of Committee Member Elma, and the pertinent
provisions of RA 876, also known as the Arbitration Law, this Court GRANTS PLAINTIFFS' APPLICATION
AND THUS CONFIRMS THE ARBITRATION AWARD, AND JUDGMENT IS HEREBY RENDERED:
(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation (MMIC), except
the DBP, the sum of P3,811,757,425.00, as and for actual damages, which shall be partially satisfied
from the funds held under escrow in the amount of P503,000,000.00 pursuant to the Escrow
Agreement dated April 22, 1988. The balance of the award, after the escrow funds are fully applied,
shall be executed against the APT;
(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum of P13,000,000.00 as and for
moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00 as and for
moral damages; and
(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum of P1,705,410.23
as arbitration costs.
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2 of the
Compromise and Arbitration Agreement, and the final edict of the Arbitration Committee's decision,
and with this Court's Confirmation, the issuance of the Arbitration Committee's Award shall henceforth
be final and executory.SO ORDERED. 18
On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated November 28, 1994.
Private respondents, in turn, submitted their reply and opposition thereto.
On January 18, 1995, the trial court handed down its order denying APT's motion for reconsideration for lack of
merit and for having been filed out of time. The trial court declared that "considering that the defendant APT,
through counsel, officially and actually received a copy of the Order of this Court dated November 28, 1994 on
December 6, 1994, the Motion for Reconsideration thereof filed by the defendant APT on December 27, 1994,
or after the lapse of 21 days, was clearly filed beyond the 15-day reglementary period prescribed
or provided for by law for the filing of an appeal from final orders, resolutions, awards, judgments or decisions
of any court in all cases, and by necessary implication for the filing of a motion for reconsideration thereof."

On February 7, 1995, petitioner received private respondents' Motion for Execution and Appointment of
Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with temporary
restraining order and/or preliminary injunction dated February 13, 1996 to annul and declare as void the Orders
of the RTC-Makati dated November 28, 1994 and January 18, 1995 for having been issued without or in excess
of jurisdiction and/or with grave abuse of discretion. 19 As ground therefor, petitioner alleged that:
I
THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION MUCH LESS, HAS THE COURT AUTHORITY,
TO CONFIRM THE ARBITRAL AWARD CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900, HAD
PREVIOUSLY BEEN DISMISSED.
THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER WAS ESTOPPED FROM QUESTIONING
THE ARBITRATION AWARD, WHEN PETITIONER QUESTIONED THE JURISDICTION OF THE RTC-MAKATI, BRANCH 62
AND AT THE SAME TIME MOVED TO VACATE THE ARBITRAL AWARD.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT TRIAL COURT SHOULD HAVE EITHER
DISMISSED/DENIED PRIVATE RESPONDENTS' MOTION/PETITION FOR CONFIRMATION OF ARBITRATION AWARD
AND/OR SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL AWARD.
IV
THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APT'S PETITION FORCERTIORARI AS AN APPEAL
TAKEN FROM THE ORDER CONFIRMING THE AWARD.
II
V
THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND ACTED WITHOUT OR IN EXCESS OF
JURISDICTION, IN ISSUING THE QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND DENYING THE
MOTION FOR RECONSIDERATION OF ORDER OF AWARD.
III
THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED WITHOUT OR IN EXCESS OF AND
WITHOUT JURISDICTION IN RECKONING THE COUNTING OF THE PERIOD TO FILE MOTION FOR
RECONSIDERATION, NOT FROM THE DATE OF SERVICE OF THE COURT'S COPY CONFIRMING THE AWARD, BUT
FROM RECEIPT OF A XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING COUNSEL'S COPY THEREOF. 20
On July 12, 1995, he Court of Appeals, through its Fifth-Division, denied due course and dismissed the petition
forcertiorari.
THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF WHEN TO RECKON THE COUNTING OF
THE PERIOD TO FILE A MOTION FOR RECONSIDERATION. 21
The petition is impressed with merit.
I
The RTC of Makati, Branch 62,
did not have jurisdiction to confirm
the arbitral award.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals the following errors:
ASSIGNMENT OF ERRORS
I
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI REGIONAL TRIAL COURT, BRANCH 62
WHICH HAS PREVIOUSLY DISMISSED CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO CONFIRM THE ARBITRAL
AWARD UNDER THE SAME CIVIL CASE AND NOT RULING THAT THE APPLICATION FOR CONFIRMATION SHOULD
HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF AMONG THE DIFFERENT BRANCHES OF THE RTC.
II
The use of the term "dismissed" is not "a mere semantic imperfection". The dispositive portion of the Order of
the trial court dated October 14, 1992 stated in no uncertain terms:
4. The Complaint is hereby DISMISSED.
22
The term "dismiss" has a precise definition in law. "To dispose of an action, suit, or motion without trial
on the issues involved. Conclude, discontinue, terminate, quash." 23
Admittedly, the correct procedure was for the parties to go back to the court where the case was pending to
have the award confirmed by said court. However, Branch 62 made the fatal mistake of issuing a final order

dismissing the case. While Branch 62 should have merely suspended the case and not dismissed it, 24 neither of
the parties questioned said dismissal. Thus, both parties as well as said court are bound by such error.
It is erroneous then to argue, as private respondents do, that petitioner APT was charged with the knowledge
that the "case was merely stayed until arbitration finished," as again, the order of Branch 62 in very clear terms
stated that the "complaint was dismissed." By its own action, Branch 62 had lost jurisdiction over the case. It
could not have validly reacquired jurisdiction over the said case on mere motion of one of the parties. The
Rules of Court is specific on how a new case may be initiated and such is not done by mere motion in a
particular branch of the RTC. Consequently, as there was no "pending action" to speak of, the petition to
confirm the arbitral award should have been filed as a new case and raffled accordingly to one of the branches
of the Regional Trial Court.
under Rule 65 was proper.
The Court of Appeals in dismissing APT's petition for certiorari upheld the trial court's denial of APT's motion for
reconsideration of the trial court's order confirming the arbitral award, on the ground that said motion was filed
beyond the 15-day reglementary period; consequently, the petition for certiorari could not be resorted to as
substitute to the lost right of appeal.
We do not agree.
Section 99 of Republic Act No. 876,
II
Petitioner was not estopped from
28
provides that:
. . . An appeal may be taken from an order made in a proceeding under this Act, or from a judgment
entered upon an award through certiorari proceedings, but such appeals shall be limited to questions
of law. . . ..
The aforequoted provision, however, does not preclude a party aggrieved by the arbitral award from resorting
to the extraordinary remedy of certiorari under Rule 65 of the Rules of Court where, as in this case, the
Regional Trial Court to which the award was submitted for confirmation has acted without jurisdiction or with
grave abuse of discretion and there is no appeal, nor any plain, speedy remedy in the course of law.
questioning the jurisdiction of

Branch 62 of the RTC of Makati.
The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the RTC to confirm the
arbitral award because it sought affirmative relief in said court by asking that the arbitral award be vacated.
The rule is that "Where the court itself clearly has no jurisdiction over the subject matter or the nature of the
action, the invocation of this defense may be done at any time. It is neither for the courts nor for the parties to
violate or disregard that rule, let alone to confer that jurisdiction this matter being legislative in
character." 25 As a rule then, neither waiver nor estoppel shall apply to confer jurisdiction upon a court barring
highly meritorious and exceptional circumstances. 26 One such exception was enunciated in Tijam vs.
Sibonghanoy, 27 where it was held that "after voluntarily submitting a cause and encountering an adverse
decision on the merits, it is too late for the loser to question the jurisdiction or power of the court."
Petitioner's situation is different because from the outset, it has consistently held the position that the RTC,
Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it cannot be said that it was
estopped from questioning the RTC's jurisdiction. Petitioner's prayer for the setting aside of the arbitral award
was not inconsistent with its disavowal of the court's jurisdiction.
Thus, Section 1 of Rule 65 provides:

Sec 1. Petition for Certiorari: When any tribunal, board or officer exercising judicial functions, has
acted without or in excess of its or his jurisdiction, or with grave abuse of discretion and there is no
appeal, nor any plain, speed, and adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court alleging the facts with certainty and praying
that judgment be rendered annulling or modifying the proceedings, as the law requires, of such
tribunal, board or officer.
In the instant case, the respondent court erred in dismissing the special civil action for certiorari, it being clear
from the pleadings and the evidence that the trial court lacked jurisdiction and/or committed grave abuse of
discretion in taking cognizance of private respondents' motion to confirm the arbitral award and, worse, in
confirming said award which is grossly and patently not in accord with the arbitration agreement, as will be
hereinafter demonstrated.
IV
III
The nature and limits of the
Appeal of petitioner to the
Arbitrators' power.
Court of Appeals thru certiorari
As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to the law or as
to the facts. 29 Courts are without power to amend or overrule merely because of disagreement with matters of
law or facts determined by the arbitrators. 30 They will not review the findings of law and fact contained in an
award, and will not undertake to substitute their judgment for that of the arbitrators, since any other rule would
make an award the commencement, not the end, of litigation. 31 Errors of law and fact, or an erroneous
decision of matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly
and honestly made. 32 Judicial review of an arbitration is thus, more limited than judicial review of a trial. 33
Nonetheless, the arbitrators' award is not absolute and without exceptions. The arbitrators cannot resolve
issues beyond the scope of the submission agreement. 34 The parties to such an agreement are bound by the
arbitrators' award only to the extent and in the manner prescribed by the contract and only if the award is
rendered in conformity thereto. 35 Thus, Sections 24 and 25 of the Arbitration Law provide grounds for vacating,
rescinding or modifying an arbitration award. Where the conditions described in Articles 2038, 36
2039, 37 and 1040 38 of the Civil Code applicable to compromises and arbitration are attendant, the arbitration
award may also be annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals,
39
we held:
. . . . It is stated explicitly under Art. 2044 of the Civil Code that the finality of the arbitrators' award is
not absolute and without exceptions. Where the conditions described in Articles 2038, 2039 and 2040
applicable to both compromises and arbitrations are obtaining, the arbitrator's award may be annulled
or rescended. Additionally, under Sections 24 and 25 of the Arbitration Law, there are grounds for
vacating, modifying or rescinding an arbitrator's award. Thus, if and when the factual circumstances
referred to the above-cited provisions are present, judicial review of the award is properly warranted.
Sec. 24. Grounds for vacating award. In any one of the following cases, the court must make an
order vacating the award upon the petition of any party to the controversy when such party proves
affirmatively that in the arbitration proceeding:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient
cause shown, or in refusing to hear evidence pertinent and material to the controversy; that one or
more of the arbitrators was disqualified to act as such under section nine hereof, and willfully refrained
from disclosing such disqualifications or any other misbehavior by which the rights of any party have
been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final
and definite award upon the subject matter submitted to them was not made. (Emphasis ours)
xxx xxx xxx.
Section 25 which enumerates the grounds for modifying the award provides:
Sec. 25. Grounds for modifying or correcting award In anyone of the following cases, the court must
make an order modifying or correcting the award, upon the application of any party to the controversy
which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an evident mistake in the description of
any person, thing or property referred to in the award; or
According, Section 20 of R.A. 876 provides:

Sec. 20. Form and contents of award. The award must be made in writing and signed and
acknowledge by a majority of the arbitrators, if more than one; and by the sole arbitrator, if there is
only only. Each party shall be furnished with a copy of the award. The arbitrators in their award may
grant any remedy or relief which they deem just and equitable and within the scope of the agreement
of the parties, which shall include, but not be limited to, the specific performance of a contract.
(b) Where the arbitrators have awarded upon a matter not submitted to them, not affecting the merits
of the decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting the merits of the controversy, and if
it had been a commissioner's report, the defect could have been amended or disregarded by the
court.
xxx xxx xxx

xxx xxx xxx
The arbitrators shall have the power to decide only those matters which have been submitted to
them. The terms of the award shall be confined to such disputes. (Emphasis ours).
xxx xxx xxx
Sec. 24 of the same law enumerating the grounds for vacating an award states:
Finally, it should be stressed that while a court is precluded from overturning an award for errors in the
determination of factual issues, nevertheless, if an examination of the record reveals no support whatever for
the arbitrators determinations, their award must be vacated. 40 in the same manner, an award must be vacated
if it was made in "manifest disregard of the law." 41

Against the backdrop of the foregoing provisions and principles, we find that the arbitrators came out with an
award in excess of their powers and palpably devoid of factual and legal basis.
V
There was no financial
structuring program:
Q : Now in this portion of Exh. "L" which was marked as Exh. "L-1", and we adopted as Exh. 37-A for
the respondent, may I know from you, Dr. Mapa what you meant by "that the decision to foreclose was
neither precipitate nor arbitrary"?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty consideration of the
information that we have received, and listening to the prospects which reported to us that what we
had assumed would be the premises of the financial rehabilitation plan was not materialized nor
expected to materialize.
Q : And this statement that "it was premised upon the known fact" that means, it was referring to the
decision to foreclose, was premised upon the known fact that the rehabilitation plan earlier approved
by the stockholders was no longer feasible, just what is meant "by no longer feasible"?
foreclosure of mortgage
was fully justified.
A : Because the revenue that they were counting on to make the rehabilitation plan possible, was not
anymore expected to be forthcoming because it will result in a short fall compared to the prices that
were actually taking place in the market.
The point need not be belabored that PNB and DBP had the legitimate right to foreclose of the mortgages of
MMIC whose obligations were past due. The foreclosure was not a wrongful act of the banks and, therefore,
could not be the basis of any award of damages. There was no financial restructuring agreement to speak of
that could have constituted an impediment to the exercise of the banks' right to foreclose.
Q : And I suppose that was what you were referring to when you stated that the production targets
and assumed prices of MMIC's products, among other projections, used in the financial reorganization
program that will make it viable were not met nor expected to be met?
As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote a separate opinion:
A : Yes.
1. The various loans and advances made by DBP and PNB to MMIC have become overdue and remain
unpaid. The fact that a FRP was drawn up is enough to establish that MMIC has not been complying
with the terms of the loan agreement. Restructuring simply connotes that the obligations are past due
that is why it is "restructurable";
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it only means that
MMIC had been informed or notified that its obligations were past due and that foreclosure is
forthcoming;
3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the FRP or
proceeding with the foreclosure. Cabarrus, who filed this case supposedly in behalf of MMIC should
have insisted on the FRP. Yet Cabarrus himself opposed the FRP;
4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith but with the honest
and sincere belief that foreclosure was the only alternative; a decision further explained by Dr. Placido
Mapa who testified that foreclosure was, in the judgment of PNB, the best move to save MMIC itself.
xxx xxx xxx

Which brings me to my last point in this separate opinion. Was PNB and DBP absolutely unjustified in
foreclosing the mortgages?
In this connection, it can readily be seen and it cannot quite be denied that MMIC accounts in PNB-DBP
were past due. The drawing up of the FRP is the best proof of this. When MMIC adopted a restructuring
program for its loan, it only meant that these loans were already due and unpaid. If these loans were
restructurable because they were already due and unpaid, they are likewise "forecloseable". The
option is with the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option to foreclose.
Neither does it mean that the FRP is legally binding and implementable. It must be pointed that said
FRP will, in effect, supersede the existing and past due loans of MMIC with PNB-DBP. It will become the
new loan agreement between the lenders and the borrowers. As in all other contracts, there must
therefore be a meeting of minds of the parties; the PNB and DBP must have to validly adopt and ratify
such FRP before they can be bound by it; before it can be implemented. In this case, not an iota of
proof has been presented by the PLAINTIFFS showing that PNB and DBP ratified and adopted the FRP.
PLAINTIFFS simply relied on a legal doctrine of promissory estoppel to support its allegations in this
regard. 42

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No. 385, which took effect
on January 31, 1974. The decree requires government financial institutions to foreclose collaterals for loans
where the arrearages amount to 20% of the total outstanding obligations. The pertinent provisions of said
decree read as follow:
Sec. 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days
from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit,
accommodation, and/or guarantees granted by them whenever the arrearages on such account,
including accrued interest and other charges, amount to at least twenty percent (20%) of the total
outstanding obligations, including interest and other charges, as appearing in the books of account
and/or related records of the financial institutions concerned. This shall be without prejudice to the
exercise by the government financial institutions of such rights and/or remedies available to them
under their respective contracts with their debtors, including the right to foreclosure on loans, credits,
accommodations and/or guarantees on which the arrearages are less than twenty percent (20%).
Sec. 2. No restraining order temporary or permanent injunction shall be issued by the court against
any government financial institution in any action taken by such institution in compliance with
themandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or
permanent injunction is sought by the borrower(s) or any third party or parties, except after due
hearing in which it is established by the borrower and admitted by the government financial institution
concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filing of
foreclosure proceedings. (Emphasis supplied.)
Private respondents' thesis that the foreclosure proceedings were null and void because of lack of publication in
the newspaper is nothing more than a mere unsubstantiated aliegation not borne out by the evidence. In any
case, a disputable presumption exists in favor of petitioner that official duty has been regularly performed and
ordinary course of business has been followed. 43
VI
Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the facts of the case, the
arbitrators in making the award went beyond the arbitration agreement.
In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for judgment in their
favor:
1. Declaring the foreclosures effected by the defendants DBP and PNB on the assets of MMIC null and
void and directing said defendants to restore the foreclosed assets to the possession of MMIC, to
render an accounting of their use and/or operation of said assets and to indemnify MMIC for the loss
occasioned by its dispossession or the deterioration thereof;
2. Directing the defendants DBP and PNB to honor and perform their commitments under the financial
reorganization plan which was approved at the annual stockholders' meeting of MMIC on 30 April
1984;
3. Condemning the defendants DBP and PNB, jointly and severally to pay the plaintiffs actual
damages consisting of the loss of value of their investments amounting to not less than P80,000,000,
the damnum emergens and lucrum cessans in such amount as may be established during the trial,
moral damages in such amount as this Honorable Court may deem just and equitable in the premises,
exemplary damages in such amount as this Honorable Court may consider appropriate for the purpose
of setting an example for the public good, attorney's fees and litigation expenses in such amounts as
may be proven during the trial, and the costs legally taxable in this litigation.
Further, plaintiffs pray for such other reliefs as may be just and equitable in the premises.
44
Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties clearly and explicitly
defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of
the MMIC or its directors;
(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of the MMIC assets
were proper, valid and in good faith. 45
Item No. 8 of the Agreement provides for the period by which the Committee was to render its decision, as well
as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later than six (6) months from
the date of its constitution.
In the event the committee finds that PLAINTIFFS have the personality to file this suit and the extrajudicial foreclosure of the MMIC assets wrongful, it shall make an award in favor of the PLAINTIFFS
(excluding DBP), in an amount as may be established or warranted by the evidence which shall be
payable in Philippine Pesos at the time of the award. Such award shall be paid by the APT or its
successor-in-interest within sixty (60) days from the date of the award in accordance with the
provisions of par. 9 hereunder. . . . . The PLAINTIFFS' remedies under this Section shall be in addition to
other remedies that may be available to the PLAINTIFFS, all such remedies being cumulative and not
exclusive of each other.
On the other hand, in case the arbitration committee finds that PLAINTIFFS have no capacity to sue
and/or that the extra-judicial foreclosure is valid and legal, it shall also make an award in favor of APT
based on the counterclaims of DBP and PNB in an amount as may be established or warranted by the
evidence. This decision of the arbitration committee in favor of APT shall likewise finally settle all
issues regarding the foreclosure of the MMIC assets so that the funds held in escrow mentioned in par.
9
hereunder
will
thus
be
released
in
full
in
favor
of
APT. 46
The clear and explicit terms of the submission notwithstanding, the Arbitration Committee clearly exceeded its
powers or so imperfectly executed them: (a) in ruling on and declaring valid the FRP; (b) in awarding damages

to MMIC which was not a party to the derivative suit; and (c) in awarding moral damages to Jesus S. Cabarrus,
Sr.
DBP and so this Committee holds can not, in any event, brook any denial that it was bound to
begin with, and the fact is that adequate or not (the FRP), the government is still bound by virtue of its
acts.
The arbiters overstepped

The FRP, of course, did not itself promise a resounding success, although it raised DBP's equity in
MMIC to 87%. It is not an excuse, however, for the government to deny its commitments. 52
their powers by declaring as
Atty. Sison, however, did not agree and correctly observed that:
valid the proposed Financial

Restructuring Program.
The Arbitration Committee went beyond its mandate and thus acted in excess of its powers when it ruled on
the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the "validity of the
foreclosure" and to transform the relief prayed for therein into pure money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the proposed FRP. It
cannot be overemphasized that a FRP, as a contract, requires the consent of the parties thereto. 47 The contract
must bind both contracting parties. 48 Private respondents even by their own admission recognized that the FRP
had yet not been carried out and that the loans of MMIC had not yet been converted into equity. 49
However, the Arbitration Committee not only declared the FRP valid and effective, but also converted the loans
of MMIC into equity raising the equity of DBP to 87%. 50
The Arbitration Committee ruled that there was "a commitment to carry out the FRP"
promissory estoppel.
51
on the ground of
Similarly, the principle of promissory estoppel applies in the present case considering as we observed,
the fact that the government (that is, Alfredo Velayo) was the FRP's proponent. Although the plaintiffs
are agreed that the government executed no formal agreement, the fact remains that the DBP itself
which made representations that the FRP constituted a "way out" for MMIC. The Committee believes
that although the DBP did not formally agree (assuming that the board and stockholders' approvals
were not formal enough), it is bound nonetheless if only for its conspicuous representations.
Although the DBP sat in the board in a dual capacity as holder of 36% of MMIC's equity (at that
time) and as MMIC's creditor the DBP can not validly renege on its commitments simply because at
the same time, it held interests against the MMIC.
The fact, of course, is that as APT itself asserted, the FRP was being "carried out" although apparently,
it would supposedly fall short of its targets. Assuming that the FRP would fail to meet its targets, the
But the doctrine of promissory estoppel can hardly find application here. The nearest that there can be
said of any estoppel being present in this case is the fact that the board of MMIC was, at the time the
FRP was adopted, mostly composed of PNB and DBP representatives. But those representatives, singly
or collectively, are not themselves PNB or DBP. They are individuals with personalities separate and
distinct from the banks they represent. PNB and DBP have different boards with different members
who may have different decisions. It is unfair to impose upon them the decision of the board of
another company and thus pin them down on the equitable principle of estoppel. Estoppel is a
principle based on equity and it is certainly not equitable to apply it in this particular situation.
Otherwise the rights of entirely separate distinct and autonomous legal entities like PNB and DBP with
thousands of stockholders will be suppressed and rendered nugatory. 53
As a rule, a corporation exercises its powers, including the power to enter into contracts, through its board of
directors. While a corporation may appoint agents to enter into a contract in its behalf, the agent should not
exceed his authority. 54 In the case at bar, there was no showing that the representatives of PNB and DBP in
MMIC even had the requisite authority to enter into a debt-for-equity swap. And if they had such authority,
there was no showing that the banks, through their board of directors, had ratified the FRP.
Further, how could the MMIC be entitled to a big amount of moral damages when its credit reputation was not
exactly something to be considered sound and wholesome. Under Article 2217 of the Civil Code, moral
damages include besmirched reputation which a corporation may possibly suffer. A corporation whose overdue
and unpaid debts to the Government alone reached a tremendous amount of P22 Billion Pesos cannot certainly
have a solid business reputation to brag about. As Atty. Sison in his separate opinion persuasively put it:
Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral damages.
While the Supreme Court may have awarded moral damages to a corporation for besmirched
reputation in Mambulao vs. PNB, 22 SCRA 359, such ruling cannot find application in this case. It must
be pointed out that when the supposed wrongful act of foreclosure was done, MMIC's credit reputation
was no longer a desirable one. The company then was already suffering from serious financial crisis
which definitely projects an image not compatible with good and wholesome reputation. So it could
not be said that there was a "reputation" besmirched by the act of foreclosure. 55
The arbiters exceeded their
authority in awarding damages
to MMIC, which is not impleaded

as a party to the derivative suit.
Civil Case No. 9900 filed before the RTC being a derivative suit, MMIC should have been impleaded as a party. It
was not joined as a party plaintiff or party defendant at any stage of the proceedings. As it is, the award of
damages to MMIC, which was not a party before the Arbitration Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder
filing suit for the corporation's behalf is only a nominal party. The corporation should be included as a party in
the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest. . . . . 56
It is a condition sine qua non that the corporation be impleaded as a party because
. . . Not only is the corporation an indispensable party, but it is also the present rule that it must be
served with process. The reason given is that the judgment must be made binding upon the
corporation in order that the corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of action. In other words the
corporation must be joined as party because it is its cause of action that is being litigated and because
judgment must be a res ajudicata against it. 57
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit of
the stockholders." In other words, to allow shareholders to sue separately would conflict with the
separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the
case of Evangelista v. Santos, that "the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the distribution among them of part of
the corporate assets before the dissolution of the corporation and the liquidation of its debts and
liabilities, something which cannot be legally done in view of section 16 of the Corporation Law . . .;
(3) the filing of such suits would conflict with the duty of the management to sue for the protection of
all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in a ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act. 58
If at all an award was due MMIC, which it was not, the same should have been given sans deduction, regardless
of whether or not the party liable had equity in the corporation, in view of the doctrine that a corporation has a
personality separate and distinct from its individual stockholders or members. DBP's alleged equity, even if it
were indeed 87%, did not give it ownership over any corporate property, including the monetary award, its
right over said corporate property being a mere expectancy or inchoate right. 59 Notably, the stipulation even
had the effect of prejudicing the other creditors of MMIC.
The arbiters, likewise,
exceeded their authority
in awarding moral damages
to Jesus Cabarrus, Sr.
It is perplexing how the Arbitration Committee can in one breath rule that the case before it is a derivative suit,
in which the aggrieved party or the real party in interest is supposedly the MMIC, and at the same time award
moral damages to an individual stockholder, to wit:
WHEREFORE, premises considered, judgment is hereby rendered:
xxx xxx xxx
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of P10,000,000.00, to
be satisfied likewise from the funds held under escrow pursuant to the Escrow Agreement dated April
22, 1988 or to such subsequent escrow agreement that would supersede it, pursuant to paragraph (9),
Compromise and Arbitration Agreement, as and for moral damages; . . . 60
The majority decision of the Arbitration Committee sought to justify its award of moral damages to Jesus S.
Cabarrus, Sr. by pointing to the fact that among the assets seized by the government were assets belonging to
Industrial Enterprise Inc. (IEI), of which Cabarrus is the majority stockholder. It then acknowledged that
Cabarrus had already recovered said assets in the RTC, but that "he won no more than actual damages. While
the Committee cannot possibly speak for the RTC, there is no doubt that Jesus S. Cabarrus, Sr., suffered moral
damages on account of that specific foreclosure, damages the Committee believes and so holds, he, Jesus S.
Cabarrus, Sr., may be awarded in this proceeding." 61
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the majority stockholder,
having been ventilated in a complaint he previously filed with the RTC, from which he obtained actual damages,
he was barred by res judicata from filing a similar case in another court, this time asking for moral damages
which he failed to get from the earlier case. 62 Worse, private respondents violated the rule against non-forum
shopping.

It is a basic postulate that a corporation has a personality separate and distinct from its stockholders. 63 The
properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong was committed in the
foreclosure, it was done against the corporation. Another reason is that Jesus S. Cabarrus, Sr. cannot directly
claim those damages for himself that would result in the appropriation by, and the distribution to, him part of
the corporation's assets before the dissolution of the corporation and the liquidation of its debts and liabilities.
The Arbitration Committee, therefore, passed upon matters nor submitted to it. Moreover, said cause of action
had already been decided in a separate case. It is thus quite patent that the arbitration committee exceeded
the authority granted to it by the parties' Compromise and Arbitration Agreement by awarding moral damages
to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral damages to Jesus S.
Cabarrus, Sr.:
MAMBULAO LUMBER COMPANY, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines
Norte,defendants-appellees.
ANGELES, J.:
An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case No. 52089,
entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and Anacleto Heraldo,
defendants", dismissing the complaint against both defendants and sentencing the plaintiff to pay to defendant
Philippine National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of 6% per
annum from December 22, 1961 until fully paid, and the costs of suit.
In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which may be
restated as follows:
It is clear and it cannot be disputed therefore that based on these stipulated issues,
the partiesthemselves have agreed that the basic ingredient of the causes of action in this case is the
wrong committed on the corporation (MMIC) for the alleged illegal foreclosure of its assets. By
agreeing to this stipulation, PLAINTIFFS themselves (Cabarrus, et al.) admit that the cause of action
pertains only to the corporation (MMIC) and that they are filing this for and in behalf of MMIC.
1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not
P58,213.51 as concluded by the court a quo; hence, the proceeds of the foreclosure sale of its real
property alone in the amount of P56,908.00 on that date, added to the sum of P738.59 it remitted to
the PNB thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;
Perforce this has to be so because it is the basic rule in Corporation Law that "the shareholders have
no title, legal or equitable to the property which is owned by the corporation (13 Am. Jur. 165; Pascual
vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs. Register of Deeds, 6 SCRA 373, the rule has been
reiterated that "a stockholder is not the co-owner of corporate property." Since the property or assets
foreclosed belongs [sic] to MMIC, the wrong committed, if any, is done against the corporation. There
is therefore no direct injury or direct violation of the rights of Cabarrus et al. There is no way, legal or
equitable, by which Cabarrus et al. could recover damages in their personal capacities even assuming
or just because the foreclosure is improper or invalid. The Compromise and Arbitration Agreement
itself and the elementary principles of Corporation Law say so. Therefore, I am constrained to dissent
from the award of moral damages to Cabarrus. 64
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional sum
of P298.54 as expenses of the foreclosure sale;
From the foregoing discussions, it is evident that, not only did the arbitration committee exceed its powers or
so imperfectly execute them, but also, its findings and conclusions are palpably devoid of any factual basis, and
in manifest disregard of the law.
3. That the subsequent foreclosure sale of its chattels is null and void, not only because it had already
settled its indebtedness to the PNB at the time the sale was effected, but also for the reason that the
said sale was not conducted in accordance with the provisions of the Chattel Mortgage Law and the
venue agreed upon by the parties in the mortgage contract;
4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and
5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of
plaintiff's vigorous opposition thereto, and in taking possession thereof after the sale thru force,
intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB is liable to
plaintiff for damages and attorney's fees.
The antecedent facts of the case, as found by the trial court, are as follows:
We do not find it necessary to remand this case to the RTC for appropriate action. The pleadings and
memoranda filed with this Court, as well as in the Court of Appeals, raised and extensively discussed the issues
on the merits. Such being the case, there is sufficient basis for us to resolve the controversy between the
parties anchored on the records and the pleadings before us. 65
WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the Orders of the Regional
Trial Court of Makati, Branch 62, dated November 28, 1994 and January 19, 1995, is hereby REVERSED and SET
ASIDE, and the decision of the Arbitration Committee is hereby VACATED.SO ORDERED.
G.R. No. L-22973
January 30, 1968
EN BANC
On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of
defendant PNB and the former offered real estate, machinery, logging and transportation equipments
as collaterals. The application, however, was approved for a loan of P100,000 only. To secure the
payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together with the
buildings and improvements existing thereon, situated in the poblacion of Jose Panganiban (formerly
Mambulao), province of Camarines Norte, and covered by Transfer Certificate of Title No. 381 of the
land records of said province, as well as various sawmill equipment, rolling unit and other fixed assets
of the plaintiff, all situated in its compound in the aforementioned municipality.
On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which the
plaintiff signed a promissory note wherein it promised to pay to the PNB the said sum in five equal

yearly installments at the rate of P6,528.40 beginning July 31, 1957, and every year thereafter, the
last of which would be on July 31, 1961.
Norte to defer it to December 21, 1961, at the same time and place. A copy of said advice was sent to
the plaintiff for its information and guidance.
On October 19, 1956, the PNB made another release of P15,500 as part of the approved loan granted
to the plaintiff and so on the said date, the latter executed another promissory note wherein it agreed
to pay to the former the said sum in five equal yearly installments at the rate of P3,679.64 beginning
July 31, 1957, and ending on July 31, 1961.
The foreclosure sale of the parcel of land, together with the buildings and improvements thereon,
covered by Transfer Certificate of Title No. 381, was, however, held on November 21, 1961, and the
said property was sold to the PNB for the sum of P56,908.00, subject to the right of the plaintiff to
redeem the same within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo
executed a certificate of sale in favor of the PNB and a copy thereof was sent to the plaintiff.
The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated
demands were made upon the plaintiff to pay its obligation but it failed or otherwise refused to do so.
Upon inspection and verification made by employees of the PNB, it was found that the plaintiff had
already stopped operation about the end of 1957 or early part of 1958.
On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting
him to take possession of the parcel of land, together with the improvements existing thereon,
covered by Transfer Certificate of Title No. 381 of the land records of Camarines Norte, and to sell it at
public auction in accordance with the provisions of Act No. 3135, as amended, for the satisfaction of
the unpaid obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59,
excluding attorney's fees. In compliance with the request, on October 16, 1961, the Provincial Sheriff
of Camarines Norte issued the corresponding notice of extra-judicial sale and sent a copy thereof to
the plaintiff. According to the notice, the mortgaged property would be sold at public auction at 10:00
a.m. on November 21, 1961, at the ground floor of the Court House in Daet, Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting
him to take possession of the chattels mortgaged to it by the plaintiff and sell them at public auction
also on November 21, 1961, for the satisfaction of the sum of P57,646.59, plus 6% annual interest
therefore from September 23, 1961, attorney's fees equivalent to 10% of the amount due and the
costs and expenses of the sale. On the same day, the PNB sent notice to the plaintiff that the former
was foreclosing extrajudicially the chattels mortgaged by the latter and that the auction sale thereof
would be held on November 21, 1961, between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte,
where the mortgaged chattels were situated.
On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the chattels
mortgaged by the plaintiff and made an inventory thereof in the presence of a PC Sergeant and a
policeman of the municipality of Jose Panganiban. On November 9, 1961, the said Deputy Sheriff
issued the corresponding notice of public auction sale of the mortgaged chattels to be held on
November 21, 1961, at 10:00 a.m., at the plaintiff's compound situated in the municipality of Jose
Panganiban, Province of Camarines Norte.
On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one to
the Naga Branch of the PNB and another to the Provincial Sheriff of Camarines Norte, protesting
against the foreclosure of the real estate and chattel mortgages on the grounds that they could not be
effected unless a Court's order was issued against it (plaintiff) for said purpose and that the
foreclosure proceedings, according to the terms of the mortgage contracts, should be made in Manila.
In said letter to the Naga Branch of the PNB, it was intimated that if the public auction sale would be
suspended and the plaintiff would be given an extension of ninety (90) days, its obligation would be
settled satisfactorily because an important negotiation was then going on for the sale of its "whole
interest" for an amount more than sufficient to liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a request for
extension of the foreclosure sale of the mortgaged chattels and so it advised the Sheriff of Camarines
In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a
bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of the balance of the
obligation of the plaintiff after the application thereto of the sum of P56,908.00 representing the
proceeds of the foreclosure sale of parcel of land described in Transfer Certificate of Title No. 381. In
the said letter, the plaintiff reiterated its request that the foreclosure sale of the mortgaged chattels
be discontinued on the grounds that the mortgaged indebtedness had been fully paid and that it could
not be legally effected at a place other than the City of Manila.
In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines Norte
that it had fully paid its obligation to the PNB, and enclosed therewith a copy of its letter to the latter
dated December 14, 1961.
On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff
acknowledging the remittance of P738.59 with the advice, however, that as of that date the balance of
the account of the plaintiff was P9,161.76, to which should be added the expenses of guarding the
mortgaged chattels at the rate of P4.00 a day beginning December 19, 1961. It was further explained
in said letter that the sum of P57,646.59, which was stated in the request for the foreclosure of the
real estate mortgage, did not include the 10% attorney's fees and expenses of the sale. Accordingly,
the plaintiff was advised that the foreclosure sale scheduled on the 21st of said month would be
stopped if a remittance of P9,161.76, plus interest thereon and guarding fees, would be made.
On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and
they were awarded to the PNB for the sum of P4,200 and the corresponding bill of sale was issued in
its favor by Deputy Provincial Sheriff Heraldo.
In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised the plaintiff
giving it priority to repurchase the chattels acquired by the former at public auction. This offer was
reiterated in a letter dated January 3, 1962, of the Attorney of the Naga Branch of the PNB to the
plaintiff, with the suggestion that it exercise its right of redemption and that it apply for the
condonation of the attorney's fees. The plaintiff did not follow the advice but on the contrary it made
known of its intention to file appropriate action or actions for the protection of its interests.
On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose
Panganiban, Camarines Norte, and they informed Luis Salgado, Chief Security Guard of the premises,
that the properties therein had been auctioned and bought by the PNB, which in turn sold them to
Mariano Bundok. Upon being advised that the purchaser would take delivery of the things he bought,
Salgado was at first reluctant to allow any piece of property to be taken out of the compound of the
plaintiff. The employees of the PNB explained that should Salgado refuse, he would be exposing
himself to a litigation wherein he could be held liable to pay big sum of money by way of damages.
Apprehensive of the risk that he would take, Salgado immediately sent a wire to the President of the
plaintiff in Manila, asking advice as to what he should do. In the meantime, Mariano Bundok was able
to take out from the plaintiff's compound two truckloads of equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's President directing him
not to deliver the "chattels" without court order, with the information that the company was then filing
an action for damages against the PNB. On the following day, May 25, 1962, two trucks and men of
Mariano Bundok arrived but Salgado did not permit them to take out any equipment from inside the
compound of the plaintiff. Thru the intervention, however, of the local police and PC soldiers, the
trucks of Mariano Bundok were able finally to haul the properties originally mortgaged by the plaintiff
to the PNB, which were bought by it at the foreclosure sale and subsequently sold to Mariano Bundok.
Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the first
paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant PNB the sum of
P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961 (day following the date
of the questioned foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber Company
interposed the instant appeal.
We shall discuss the various points raised in appellant's brief in seriatim.
The first question Mambulao Lumber Company poses is that which relates to the amount of its indebtedness to
the PNB arising out of the principal loans and the accrued interest thereon. It is contended that its obligation
under the terms of the two promissory notes it had executed in favor of the PNB amounts only to P56,485.87 as
of November 21, 1961, when the sale of real property was effected, and not P58,213.51 as found by the trial
court.
There is merit to this claim. Examining the terms of the promissory note executed by the appellant in favor of
the PNB, we find that the agreed interest on the loan of P43,000.00 P27,500.00 released on August 2, 1956
as per promissory note of even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as per
promissory note of the same date (Exhibit C-4) was six per cent (6%) per annum from the respective date of
said notes "until paid". In the statement of account of the appellant as of September 22, 1961, submitted by
the PNB, it appears that in arriving at the total indebtedness of P57,646.59 as of that date, the PNB had
compounded the principal of the loan and the accrued 6% interest thereon each time the yearly amortizations
became due, and on the basis of these compounded amounts charged additional delinquency interest on them
up to September 22, 1961; and to this erroneously computed total of P57,646.59, the trial court added 6%
interest per annum from September 23, 1961 to November 21 of the same year. In effect, the PNB has claimed,
and the trial court has adjudicated to it,interest on accrued interests from the time the various amortizations of
the loan became due until the real estate mortgage executed to secure the loan was extra-judicially foreclosed
on November 21, 1961. This is an error. Section 5 of Act No. 2655 expressly provides that in computing the
interest on any obligation, promissory note or other instrument or contract, compound interest shall not be
reckoned, except by agreement, or in default thereof, whenever the debt is judicially claimed. This is also the
clear mandate of Article 2212 of the new Civil Code which provides that interest due shall earn legal interest
only from the time it is judicially demanded, and of Article 1959 of the same code which ordains that interest
due and unpaid shall not earn interest. Of course, the parties may, by stipulation, capitalize the interest due
and unpaid, which as added principal shall earn new interest; but such stipulation is nowhere to be found in the
terms of the promissory notes involved in this case. Clearly therefore, the trial court fell into error when it
awarded interest on accrued interests, without any agreement to that effect and before they had been
judicially demanded.
Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor of the PNB.
With respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of the real property,
appellant maintains that the same has no basis, factual or legal, and should not have been awarded. It likewise
decries the award of attorney's fees which, according to the appellant, should not be deducted from the
proceeds of the sale of the real property, not only because there is no express agreement in the real estate
mortgage contract to pay attorney's fees in case the same is extra-judicially foreclosed, but also for the reason
that the PNB neither spent nor incurred any obligation to pay attorney's fees in connection with the said extrajudicial foreclosure under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this respect, the trial
court said:
The parcel of land, together with the buildings and improvements existing thereon covered by Transfer
Certificate of Title No. 381, was sold for P56,908. There was, however, no evidence how much was the
expenses of the foreclosure sale although from the pertinent provisions of the Rules of Court, the
Sheriff's fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and
P297.54 as his commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.
There is really no evidence of record to support the conclusion that the PNB is entitled to the amount awarded
as expenses of the extra-judicial foreclosure sale. The court below committed error in applying the provisions of
the Rules of Court for purposes of arriving at the amount awarded. It is to be borne in mind that the fees
enumerated under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff
serving processes of the court in connection with judicial foreclosure of mortgages under Rule 68 of the new
Rules, and not in cases of extra-judicial foreclosure of mortgages under Act 3135. The law applicable is Section
4 of Act 3135 which provides that the officer conducting the sale is entitled to collect a fee of P5.00 for each
day of actual work performed in addition to his expenses in connection with the foreclosure sale. Admittedly,
the PNB failed to prove during the trial of the case, that it actually spent any amount in connection with the
said foreclosure sale. Neither may expenses for publication of the notice be legally allowed in the absence of
evidence on record to support it. 1It is true, as pointed out by the appellee bank, that courts should take judicial
notice of the fees provided for by law which need not be proved; but in the absence of evidence to show at
least the number of working days the sheriff concerned actually spent in connection with the extra-judicial
foreclosure sale, the most that he may be entitled to, would be the amount of P10.00 as a reasonable
allowance for two day's work one for the preparation of the necessary notices of sale, and the other for
conducting the auction sale and issuance of the corresponding certificate of sale in favor of the buyer.
Obviously, therefore, the award of P298.54 as expenses of the sale should be set aside.
But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in case the
same is extra-judicially foreclosed, cannot be favorably considered, as would readily be revealed by an
examination of the pertinent provision of the mortgage contract. The parties to the mortgage appear to have
stipulated under paragraph (c) thereof, inter alia:
. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the Mortgagee his
attorney-in-fact to sell the property mortgaged under Act 3135, as amended, to sign all documents
and to perform all acts requisite and necessary to accomplish said purpose and to appoint its
substitute as such attorney-in-fact with the same powers as above specified. In case of judicial
foreclosure, the Mortgagor hereby consents to the appointment of the Mortgagee or any of its
employees as receiver, without any bond, to take charge of the mortgaged property at once, and to
hold possession of the same and the rents, benefits and profits derived from the mortgaged property
before the sale, less the costs and expenses of the receivership; the Mortgagor hereby agrees further
that in all cases, attorney's fees hereby fixed at Ten Per cent (10%) of the total indebtedness then
unpaid which in no case shall be less than P100.00 exclusive of all fees allowed by law, and the
expenses of collection shall be the obligation of the Mortgagor and shall with priority, be paid to the
Mortgagee out of any sums realized as rents and profits derived from the mortgaged property or from
the proceeds realized from the sale of the said property and this mortgage shall likewise stand as
security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure sale
mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears to be part of the
second sentence, a reading of the whole context of the stipulation would readily show that it logically refers to

extra-judicial foreclosure found in the first sentence and to judicial foreclosure mentioned in the next sentence.
And the ambiguity in the stipulation suggested and pointed out by the appellant by reason of the faulty
sentence construction should not be made to defeat the otherwise clear intention of the parties in the
agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees were
applicable to the extra-judicial foreclosure sale of its real properties, still, the award of P5,821.35 for attorney's
fees has no legal justification, considering the circumstance that the PNB did not actually spend anything by
way of attorney's fees in connection with the sale. In support of this proposition, appellant cites authorities to
the effect: (1) that when the mortgagee has neither paid nor incurred any obligation to pay an attorney in
connection with the foreclosure sale, the claim for such fees should be denied; 2 and (2) that attorney's fees will
not be allowed when the attorney conducting the foreclosure proceedings is an officer of the corporation
(mortgagee) who receives a salary for all the legal services performed by him for the corporation. 3 These
authorities are indeed enlightening; but they should not be applied in this case. The very same authority first
cited suggests that said principle is not absolute, for there is authority to the contrary. As to the fact that the
foreclosure proceeding's were handled by an attorney of the legal staff of the PNB, we are reluctant to
exonerate herein appellant from the payment of the stipulated attorney's fees on this ground alone,
considering the express agreement between the parties in the mortgage contract under which appellant
became liable to pay the same. At any rate, we find merit in the contention of the appellant that the award of
P5,821.35 in favor of the PNB as attorney's fees is unconscionable and unreasonable, considering that all that
the branch attorney of the said bank did in connection with the foreclosure sale of the real property was to file
a petition with the provincial sheriff of Camarines Norte requesting the latter to sell the same in accordance
with the provisions of Act 3135.
The principle that courts should reduce stipulated attorney's fees whenever it is found under the circumstances
of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to entertain any serious
objection to it. Thus, this Court has explained:
But the principle that it may be lawfully stipulated that the legal expenses involved in the collection of
a debt shall be defrayed by the debtor does not imply that such stipulations must be enforced in
accordance with the terms, no matter how injurious or oppressive they may be. The lawful purpose to
be accomplished by such a stipulation is to permit the creditor to receive the amount due him under
his contract without a deduction of the expenses caused by the delinquency of the debtor. It should
not be permitted for him to convert such a stipulation into a source of speculative profit at the
expense of the debtor.
Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees stipulated
appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court officer charged with
the duty of assisting the court in administering impartial justice between the parties, and hence, the fees
should be subject to judicial control. Nor should it be ignored that sound public policy demands that courts
disregard stipulations for counsel fees, whenever they appear to be a source of speculative profit at the
expense of the debtor or mortgagor. 5 And it is not material that the present action is between the debtor and
the creditor, and not between attorney and client. As court have power to fix the fee as between attorney and
client, it must necessarily have the right to say whether a stipulation like this, inserted in a mortgage contract,
is valid. 6
In determining the compensation of an attorney, the following circumstances should be considered: the amount
and character of the services rendered; the responsibility imposed; the amount of money or the value of the
property affected by the controversy, or involved in the employment; the skill and experience called for in the
performance of the service; the professional standing of the attorney; the results secured; and whether or not
the fee is contingent or absolute, it being a recognized rule that an attorney may properly charge a much larger
fee when it is to be contingent than when it is not. 7 From the stipulation in the mortgage contract earlier
quoted, it appears that the agreed fee is 10% of the total indebtedness, irrespective of the manner the
foreclosure of the mortgage is to be effected. The agreement is perhaps fair enough in case the foreclosure
proceedings is prosecuted judicially but, surely, it is unreasonable when, as in this case, the mortgage was
foreclosed extra-judicially, and all that the attorney did was to file a petition for foreclosure with the sheriff
concerned. It is to be assumed though, that the said branch attorney of the PNB made a study of the case
before deciding to file the petition for foreclosure; but even with this in mind, we believe the amount of
P5,821.35 is far too excessive a fee for such services. Considering the above circumstances mentioned, it is our
considered opinion that the amount of P1,000.00 would be more than sufficient to compensate the work
aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the real properties alone together
with the amount it remitted to the PNB later was more than sufficient to liquidate its total obligation to herein
appellee bank. Again, we find merit in this claim. From the foregoing discussion of the first two errors assigned,
and for purposes of determining the total obligation of herein appellant to the PNB as of November 21, 1961
when the real estate mortgage was foreclosed, we have the following illustration in support of this
conclusion:1wph1.t
A. I.
Contracts for attorney's services in this jurisdiction stands upon an entirely different footing from
contracts for the payment of compensation for any other services. By express provision of section 29
of the Code of Civil Procedure, an attorney is not entitled in the absence of express contract to recover
more than a reasonable compensation for his services; and even when an express contract is made
the court can ignore it and limit the recovery to reasonable compensation if the amount of the
stipulated fee is found by the court to be unreasonable. This is a very different rule from that
announced in section 1091 of the Civil Code with reference to the obligation of contracts in general,
where it is said that such obligation has the force of law between the contracting parties. Had the
plaintiff herein made an express contract to pay his attorney an uncontingent fee of P2,115.25 for the
services to be rendered in reducing the note here in suit to judgment, it would not have been enforced
against him had he seen fit to oppose it, as such a fee is obviously far greater than is necessary to
remunerate the attorney for the work involved and is therefore unreasonable. In order to enable the
court to ignore an express contract for an attorney's fees, it is not necessary to show, as in other
contracts, that it is contrary to morality or public policy (Art. 1255, Civil Code). It is enough that it is
unreasonable or unconscionable. 4
Principal Loan
(a) Promissory note dated August 2, 1956
P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961
(b) Promissory note dated October 19, 1956
P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961
II.
Sheriff's fees [for two (2) day's work]
III.
Attorney's fee
4,734.08
10.00
1,000.00
Total obligation as of Nov. 21, 1961

B. -
8,751.78
P57,495.86

I.
Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961
II.
Additional amount remitted to the PNB on Dec. 18, 1961
P56,908.00
738.59
Total amount of Payment made to PNB as of Dec. 18, 1961
P57,646.59
Deduct: Total obligation to the PNB
P57,495.86
Excess Payment to the PNB
P 150.73
========
From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose the
mortgage of herein appellant's chattels on December 21, 1961; and on this ground alone, we may declare the
sale of appellant's chattels on the said date, illegal and void. But we take into consideration the fact that the
PNB must have been led to believe that the stipulated 10% of the unpaid loan for attorney's fees in the real
estate mortgage was legally maintainable, and in accordance with such belief, herein appellee bank insisted
that the proceeds of the sale of appellant's real property was deficient to liquidate the latter's total
indebtedness. Be that as it may, however, we still find the subsequent sale of herein appellant's chattels illegal
and objectionable on other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of its real
estate mortgage on November 21, 1961, can not be doubted, as shown not only by its letter to the PNB on
November 19, 1961, but also in its letter to the provincial sheriff of Camarines Norte on the same date. These
letters were followed by another letter to the appellee bank on December 14, 1961, wherein herein appellant,
in no uncertain terms, reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at
Jose Panganiban, Camarines Norte for the reasons therein stated that: (1) it had settled in full its total
obligation to the PNB by the sale of the real estate and its subsequent remittance of the amount of P738.59;
and (2) that the contemplated sale at Jose Panganiban would violate their agreement embodied under
paragraph (i) in the Chattel Mortgage which provides as follows:
(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the parties
hereto agree that the corresponding complaint for foreclosure or the petition for sale should be filed
with the courts or the sheriff of the City of Manila, as the case may be; and that the Mortgagor shall
pay attorney's fees hereby fixed at ten per cent (10%) of the total indebtedness then unpaid but in no
case shall it be less than P100.00, exclusive of all costs and fees allowed by law and of other expenses
incurred in connection with the said foreclosure. [Emphasis supplied]
Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard of the
objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte and not in the City
of Manila as agreed upon, the PNB proceeded with the foreclosure sale of said chattels. The trial court,
however, justified said action of the PNB in the decision appealed from in the following rationale:
While it is true that it was stipulated in the chattel mortgage contract that a petition for the extrajudicial foreclosure thereof should be filed with the Sheriff of the City of Manila, nevertheless, the
effect thereof was merely to provide another place where the mortgage chattel could be sold in
addition to those specified in the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot
abrogate much less impliedly repeal a specific provision of the statute. Considering that Section 14 of
Act No. 1508 vests in the mortgagee the choice where the foreclosure sale should be held, hence, in
the case under consideration, the PNB had three places from which to select, namely: (1) the place of
residence of the mortgagor; (2) the place of the mortgaged chattels were situated; and (3) the place
stipulated in the contract. The PNB selected the second and, accordingly, the foreclosure sale held in
Jose Panganiban, Camarines Norte, was legal and valid.
To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to sell
the mortgaged property at a public place in the municipality where the mortgagor resides or where the
property is situated, 8 this Court has held that the sale of a mortgaged chattel may be made in a place other
than that where it is found, provided that the owner thereof consents thereto; or that there is an agreement to
this effect between the mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed to have
the sale of the mortgaged chattels in the City of Manila, which, any way, is the residence of the mortgagor, it
cannot be rightly said that mortgagee still retained the power and authority to select from among the places
provided for in the law and the place designated in their agreement over the objection of the mortgagor. In
providing that the mortgaged chattel may be sold at the place of residence of the mortgagor or the place
where it is situated, at the option of the mortgagee, the law clearly contemplated benefits not only to the
mortgagor but to the mortgagee as well. Their right arising thereunder, however, are personal to them; they do
not affect either public policy or the rights of third persons. They may validly be waived. So, when herein
mortgagor and mortgagee agreed in the mortgage contract that in cases of both judicial and extra-judicial
foreclosure under Act 1508, as amended, the corresponding complaint for foreclosure or the petition for sale
should be filed with the courts or the Sheriff of Manila, as the case may be , they waived their corresponding
rights under the law. The correlative obligation arising from that agreement have the force of law between
them and should be complied with in good faith. 10
By said agreement the parties waived the legal venue, and such waiver is valid and legally effective,
because it, was merely a personal privilege they waived, which is not contrary, to public policy or to
the prejudice of third persons. It is a general principle that a person may renounce any right which the
law gives unless such renunciation is expressly prohibited or the right conferred is of such nature that
its renunciation would be against public policy. 11
On the other hand, if a place of sale is specified in the mortgage and statutory requirements in regard
thereto are complied with, a sale is properly conducted in that place. Indeed, in the absence of a
statute to the contrary, a sale conducted at a place other than that stipulated for in the mortgage is
invalid, unless the mortgagor consents to such sale. 12
Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should make a return
of his doings which shall particularly describe the articles sold and the amount received from each article. From
this, it is clear that the law requires that sale be made article by article, otherwise, it would be impossible for
him to state the amount received for each item. This requirement was totally disregarded by the Deputy Sheriff
of Camarines Norte when he sold the chattels in question in bulk, notwithstanding the fact that the said
chattels consisted of no less than twenty different items as shown in the bill of sale. 13 This makes the sale of
the chattels manifestly objectionable. And in the absence of any evidence to show that the mortgagor had
agreed or consented to such sale in gross, the same should be set aside.
It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in accordance
with its terms, or where the proceedings as to the sale of foreclosure do not comply with the statute. 14 This rule
applies squarely to the facts of this case where, as earlier shown, herein appellee bank insisted, and the
appellee deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels at Jose
Panganiban, Camarines Norte, in utter disregard of the valid objection of the mortgagor thereto for the reason
that it is not the place of sale agreed upon in the mortgage contract; and the said deputy sheriff sold all the
chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and
Sawmill equipment consisting of a 150 HP Murphy Engine, plainer, large circular saws etc.) as a single lot in
violation of the requirement of the law to sell the same article by article. The PNB has resold the chattels to
another buyer with whom it appears to have actively cooperated in subsequently taking possession of and

removing the chattels from appellant compound by force, as shown by the circumstance that they had to take
along PC soldiers and municipal policemen of Jose Panganiban who placed the chief security officer of the
premises in jail to deprive herein appellant of its possession thereof. To exonerate itself of any liability for the
breach of peace thus committed, the PNB would want us to believe that it was the subsequent buyer alone,
who is not a party to this case, that was responsible for the forcible taking of the property; but assuming this to
be so, still the PNB cannot escape liability for the conversion of the mortgaged chattels by parting with its
interest in the property. Neither would its claim that it afterwards gave a chance to herein appellant to
repurchase or redeem the chattels, improve its position, for the mortgagor is not under obligation to take
affirmative steps to repossess the chattels that were converted by the mortgagee. 15 As a consequence of the
said wrongful acts of the PNB and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that
herein appellant is entitled to collect from them, jointly and severally, the full value of the chattels in question
at the time they were illegally sold by them. To this effect was the holding of this Court in a similar situation. 16
The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant for the
full value of the truck at the time the plaintiff thus carried it off to be sold; and of course, the burden is
on the defendant to prove the damage to which he was thus subjected. . . .
This brings us to the problem of determining the value of the mortgaged chattels at the time of their sale in
1961. The trial court did not make any finding on the value of the chattels in the decision appealed from and
denied altogether the right of the appellant to recover the same. We find enough evidence of record, however,
which may be used as a guide to ascertain their value. The record shows that at the time herein appellant
applied for its loan with the PNB in 1956, for which the chattels in question were mortgaged as part of the
security therefore, herein appellant submitted a list of the chattels together with its application for the loan
with a stated value of P107,115.85. An official of the PNB made an inspection of the chattels in the same year
giving it an appraised value of P42,850.00 and a market value of P85,700.00. 17 The same chattels with some
additional equipment acquired by herein appellant with part of the proceeds of the loan were reappraised in a
re-inspection conducted by the same official in 1958, in the report of which he gave all the chattels an
appraised value of P26,850.00 and a market value of P48,200.00. 18 Another re-inspection report in 1959 gave
the appraised value as P19,400.00 and the market value at P25,600.00. 19 The said official of the PNB who
made the foregoing reports of inspection and re-inspections testified in court that in giving the values
appearing in the reports, he used a conservative method of appraisal which, of course, is to be expected of an
official of the appellee bank. And it appears that the values were considerably reduced in all the re-inspection
reports for the reason that when he went to herein appellant's premises at the time, he found the chattels no
longer in use with some of the heavier equipments dismantled with parts thereof kept in the bodega; and
finding it difficult to ascertain the value of the dismantled chattels in such condition, he did not give them
anymore any value in his reports.
Noteworthy is the fact, however, that in the last re-inspection report he made of the chattels in 1961, just a
few months before the foreclosure sale, the same inspector of the PNB reported that the heavy equipment of
herein appellant were "lying idle and rusty" but were "with a shed free from rains" 20 showing that although they
were no longer in use at the time, they were kept in a proper place and not exposed to the elements. The
President of the appellant company, on the other hand, testified that its caterpillar (tractor) alone is worth
P35,000.00 in the market, and that the value of its two trucks acquired by it with part of the proceeds of the
loan and included as additional items in the mortgaged chattels were worth no less than P14,000.00. He
likewise appraised the worth of its Murphy engine at P16,000.00 which, according to him, when taken together
with the heavy equipments he mentioned, the sawmill itself and all other equipment forming part of the
chattels under consideration, and bearing in mind the current cost of equipments these days which he alleged
to have increased by about five (5) times, could safely be estimated at P120,000.00. This testimony, except for
the appraised and market values appearing in the inspection and re-inspection reports of the PNB official
earlier mentioned, stand uncontroverted in the record; but We are not inclined to accept such testimony at its
par value, knowing that the equipments of herein appellant had been idle and unused since it stopped
operating its sawmill in 1958 up to the time of the sale of the chattels in 1961. We have no doubt that the
value of chattels was depreciated after all those years of inoperation, although from the evidence
aforementioned, We may also safely conclude that the amount of P4,200.00 for which the chattels were sold in
the foreclosure sale in question was grossly unfair to the mortgagor. Considering, however, the facts that the
appraised value of P42,850.00 and the market value of P85,700.00 originally given by the PNB official were
admittedly conservative; that two 6 x 6 trucks subsequently bought by the appellant company had thereafter
been added to the chattels; and that the real value thereof, although depreciated after several years of
inoperation, was in a way maintained because the depreciation is off-set by the marked increase in the cost of
heavy equipment in the market, it is our opinion that the market value of the chattels at the time of the sale
should be fixed at the original appraised value of P42,850.00.
Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously, an
artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. 21 A
corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral
damages. The same cannot be considered under the facts of this case, however, not only because it is
admitted that herein appellant had already ceased in its business operation at the time of the foreclosure sale
of the chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels
could have upon its reputation or business standing would undoubtedly be the same whether the sale was
conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in
the mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding with
the sale in utter disregard of the agreement to have the chattels sold in Manila as provided for in the mortgage
contract, to which their attentions were timely called by herein appellant, and in disposing of the chattels in
gross for the miserable amount of P4,200.00, herein appellant should be awarded exemplary damages in the
sum of P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as attorney's fees for
herein appellant.
WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is
set aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered
to pay, jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as follows:
P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with
interest at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in exemplary
damages, and P3,000.00 as attorney's fees. Costs against both appellees.
Case digest
Facts:
Petitioner Mambulao Lumber applied for an industrial loan with herein respondent PNB and was approved with
its real estate, machinery and equipments as collateral. PNB released the approved loan but petitioner failed to
pay and was later discovered to have already stopped in its operation. PNB then moved for the foreclosure and
sale of the mortgaged properties. The properties were sold and petitioner sent a bank draft to PNB to settle the
balance of the obligation. PNB however alleges that a remaining balance stands and a foreclosure sale would
still be held unless petitioner remits said amount. The foreclosure sale proceeded and petitioners properties
were taken out of its compound. Petitioner filed actions before the court and claims among others, moral
damages.
Issue:
Whether or not petitioner corporation, who has already ceased its operation, may claim for moral damages.
Ruling: NO.
Herein appellants claim for moral damages, however, seems to have no legal or factual basis. Obviously, an
artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright,

serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. A
corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral
damages. The same cannot be considered under the facts of this case, however, not only because it is
admitted that herein appellant had already ceased in its business operation at the time of the foreclosure sale
of the chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels
could have upon its reputation or business standing would undoubtedly be the same whether the sale was
conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in
the mortgage contract.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 125272 October 7, 1999

CANDIDO AMIL, petitioner,
vs.
COURT OF APPEALS, and SPOUSES ERNESTO GADOR and NILA GADOR, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals, dated January 29, 1996,
affirming the decision of the Regional Trial Court, Branch 36, Dumaguete City, Negros Oriental, dated October
26, 1993, which declared private respondents Ernesto and Nila Gador the absolute owners of the parcel of land,
covered by Transfer Certificate of Title No. 14021, in Calindagan, Dumaguete City, Negros Oriental.
The facts are as follows:
Petitioner Amil and private respondents Ernesto and Nila Gador executed a document entitled "Deed of Pacto
de Retro Sale," dated November 14, 1987, involving the land in dispute. The parties stipulated:
That Vendor A-Retro, Candido C. Amil, for and in consideration of the sum of THIRTY
THOUSAND (P30,000.00) PESOS, Philippine Currency, in hand paid to him and receipt whereof
is hereby acknowledged to his entire satisfaction, do by these presents, SELL, TRANSFER and
CONVEY, under Pacto De Retro, unto the herein Vendees A-Retro, the spouses Ernesto T.
Gador and Nila A. Gador, their heirs, successors and assigns, the above described parcel of
land together with all the improvements thereon, free from all liens and
encumbrances.1wphi1.nt
That Vendor A-Retro, Candido C. Amil, reserve for himself the right to redeem or repurchase
the property herein sold, and the Vendees A-Retro, in turn, obligate themselves to resell the
parcel of land sold, within a period of THREE (3) YEARS, from and after the due execution of
this instrument, for the same price of THIRTY THOUSAND (P30,000.00) PESOS, Philippine
Currency; PROVIDED,HOWEVER, that if the Vendor A-Retro, Candido C. Amil, fails to exercise
his right to redeem or repurchase as herein granted within the period stipulated upon, then
this conveyance shall be deemed to be an absolute and irrevocable sale, without the
necessity of executing any further deed or instituting judicial action to consolidate the
ownership in the name of the Vendees A-Retro. 2
The parties executed another document entitled "Addendum to Deed of Pacto de Retro Sale," dated December
12, 1987 which provided:
That the Party of the First Part, the spouses Ernesto T. Gador and Nila A. Gador, are the
Mortgagees of that certain parcel of land situated at Barrio Calindagan, Dumaguete City,
under Transfer Certificate of Title No. 14021 and the Party of the Second Part is the Mortgagor
of said parcel of land, for and in consideration of the sum of Thirty Thousand (P30,000.00)
Pesos, Philippine Currency, per Doc. No. 3; Book No. 1; Page No. 1; Series of 1987 of Notary
Public Jose G. Hernando, Jr., dated the 14th day of November, 1987, at Dumaguete City.
That considering that the Party of the First Part has to pay an additional sum of One Thousand
and Eight Hundred (P1,800.00) Pesos, Philippine Currency, to cover costs or expenses for
Capital Gains Tax and Documentary Stamps, the Party of the Second Part hereby agrees and
covenants that his right to redeem or repurchase the parcel of land subject matter of the
Mortgage, within the period stipulated, shall cover and include said amount of (P1,800.00) or
the total sum of Thirty One Thousand Eight Hundred (P31,800.00) Pesos, Philippine
Currency. 3
After the redemption period had expired, private respondents filed a petition for the consolidation of their
ownership over the property in question. Petitioner was declared in default as his counsel, Atty. Reynaldo
Piero, failed to file an answer to the petition. Thereafter, the case was heard and on October 26, 1993,
judgment was rendered by the court, the dispositive portion of which states:
WHEREFORE, in view of the foregoing and considering the fact that respondent failed to file
an answer to the petition or failed to appear before this Court, in spite of the Court's efforts in
exerting all possible means to give the respondent his day in Court in order for him to be duly
heard before this Court in connection with this case, this Court hereby renders Judgment
declaring petitioners Ernesto T. Gador and Nila A. Gador as the absolute owners of the Five
Hundred (500) square meters of Lot No. 782-D-4 of the Subdivision Plan, Psd-07-03-006671,
being a portion of Lot 782-D (LRC) Psd-120931, situated in the Barrio of Calindagan, City of
Dumaguete, the same being covered by Transfer Certificate of Title No. 14021. The Register
of Deeds of Dumaguete City is hereby ordered to make the corresponding annotation of the
Consolidation of Ownership in the Vendees-A-Retro, Ernesto T. Gador and Nila A. Gador on the
Transfer Certificate of Title No. 14021 upon payment of the prescribed fees thereof.
Petitioner, through a new counsel, then filed a motion for new trial, which, however, was denied. He appealed
to the Court of Appeals, which, in its decision dated January 29, 1996, affirmed the decision of the trial court.
The Court of Appeals ruled:

We agree with the trial court's denial of respondent-appellant's motion for new trial.
Respondent had been given full opportunity to answer and be heard. It is the duty of a party
litigant to make inquiries to counsel on matters concerning his case (Elino Ong Reyes vs. CA,
189 SCRA 46; Florendo vs. Florendo, 27 SCRA 432). In fact, respondent's alleged counsel
never even entered his appearance. Under these circumstances, including those earlier
adverted to, We rule that respondent did not exercise the ordinary prudence required of him
by Rule 37, section 1(a) of the Rules of Court, and his negligence is not excusable to justify a
new trial.
We find likewise without merit defendant-appellant's contentions that the Addendum dated
December 12, 1987 clarifies or at least engenders doubt as to the real intent of the parties
and that the contract is in reality a mortgage. The Addendum itself speaks of a capital gains
tax to be paid by the spouses Ernesto and Nila Gador. It also states that Candido C. Amil
"hereby agrees and covenants (that) his right to redeem on repurchase the parcel of land . . .
". Such stipulations are distinctive indicia of a sale, transfer or exchange of real property with
right to repurchase. The two documents, read together and taken jointly, clearly evince a
contract of sale with right to repurchase. It is therefore of no moment that the words
"mortgage" and "mortgagee" were used in the Addendum. If words appear to be contrary to
the evident intention of the parties, the latter shall prevail over the former. (Article 1370, New
Civil Code; SY vs. Court of Appeals, 131 SCRA 116).
WHEREFORE, finding no error in the judgment appealed from, the same is hereby
AFFIRMED in toto. With costs against appellant.
Hence, this petition. It is contended that
1. The lower Court gravely erred in denying appellant's motion for new trial; and
2 The lower Court gravely erred in granting consolidation of ownership in favor of petitionersappellees considering that by their own evidence, namely, the "Addendum to Deed of Pacto
de RetroSale" dated December 12, 1987 (Exh. "B", Record), it is expressly stated that the
contract is merely MORTGAGE, NOT PACTO DE RETRO SALE.
We find the petition to be meritorious. Rule 37, 1 of the Revised Rules, of Court of 1964 provides:
Within the period for perfecting appeal, the aggrieved party may move the trial court to set
aside the judgment and grant a new trial for one or more of the following causes materially
affecting the substantial rights of said party:
(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have
guarded against and by reason of which such aggrieved party has probably been impaired in
his rights;
(b) Newly discovered evidence, which he could not, with reasonable diligence, have
discovered, and produced at the trial, and which if presented would probably alter the result;
(c) Award of excessive damages, or insufficiency of the evidence to justify the decision, or
that the decision is against the law.
As already noted, the Court of Appeals affirmed the denial of a new trial on the ground that the failure of
petitioner's original counsel to file an answer within the reglementary period cannot be considered as
excusable negligence which ordinary prudence could not have guarded against. According to the Court of
Appeals, petitioner is bound by the mistakes of his former counsel.
To be sure, as a rule, a party is bound by the mistakes of his counsel. As we explained in Tesoro v. Court of
Appeals: 4
It has been repeatedly enunciated that a client is bound by the action of his counsel in the
conduct of a case and cannot be heard to complain that the result might have been different
had he proceeded differently. A client is bound by the mistakes of his lawyer. If such grounds
were to be admitted as reasons for reopening cases, there would never be an end to a suit so
long as new counsel could be employed who could allege and show that prior counsel had not
been sufficiently diligent or experienced or learned.
Accordingly, this Court has affirmed the denial by trial courts of motions for new trial on the ground that the
failure of counsel to file an answer within the reglementary period cannot be considered as excusable
negligence. 5
In this case, however, there are factual considerations necessitating a different outcome. First, an exception to
the principle that a client is bound by the mistakes of his counsel is one wherein the negligence of the latter is
so gross that the former was deprived of his day in court, as a result of which he is deprived of property without
due process of law. Thus, in Legarda v. Court of Appeals, 6 this Court ordered the restoration to petitioner of her
property sold at public auction in satisfaction of a default judgment resulting from the failure of her counsel to
submit an answer and his lack of vigilance in protecting her interests in subsequent proceedings before the trial
court and the Court of Appeals.
In the instant case, petitioner was likewise declared in default because of the failure of his former counsel, Atty.
Piero, to file within the reglementary period an answer to private respondents' petition for consolidation of
ownership. Atty. Piero likewise failed to take any action to protect the interests of petitioner in subsequent
proceedings before the trial court, such as by filing an opposition to the motion to declare him in default or by
moving to set aside the order of default. It was Arty. Saleto J. Erasmes, the present counsel of petitioner, who
filed the motion for new trial after a judgment by default had been rendered against him. As a consequence of
his former counsel's gross negligence, petitioner was deprived of his day in court.
Secondly, as we have emphasized, trial courts should be liberal in setting aside orders of default and granting
motions for new trial if the defendant appears to have a meritorious defense. 7 Parties must be given every
opportunity to present their sides. The issuance of orders of default should be the exception rather than the
rule, to be allowed only in clear cases of obstinate refusal by the defendant to comply with the orders of the
trial court. 8

Thirdly, petitioner appears to have a meritorious defense. Indeed, it would appear that the contract between
petitioner and private respondents is an equitable mortgage rather than a pacto de retro sale. Arts. 1602 and
1603 of the Civil Code provide:
Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases:
EN BANC
[G.R. No. L-32409. February 27, 1971.]
BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M.
RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, ARTURO LOGRONIO,
RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN
DOE, JOHN DOE, and JOHN DOE, Respondents.
DECISION
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary
mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a corporation duly organized
and existing under the laws of the Philippines, and its President, Frederick E. Seggerman, pray this Court to
declare null and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to order
respondents to desist from enforcing the same and/or keeping the documents, papers and effects seized by
virtue thereof, as well as from enforcing the tax assessments on petitioner corporation alleged by petitioners to
have been made on the basis of the said documents, papers and effects, and to order the return of the latter to
petitioners. We gave due course to the petition but did not issue the writ of preliminary injunction prayed for
therein.
(5) When the vendor binds himself to pay the taxes on the thing sold;
The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1aw library
(6) In any other case where it may be fairly inferred that the real intention of the parties is
that the transaction shall procure the payment of a debt or the performance of any other
obligation.
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter addressed
to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against petitioners for
violation of Section 46(a) of the National Internal Revenue Code, in relation to all other pertinent provisions
thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de Leon, one
of herein respondents, to make and file the application for search warrant which was attached to the letter.
In any of the foregoing cases, any money, fruits, or other benefit to be received by the
vendee as rent or otherwise shall be considered as interest which shall be subject to the
usury laws.
Art. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall
be construed as an equitable mortgage.
The price of P30,000.00 for the subject property appears to be unusually inadequate. Furthermore, the words
"mortgage," "mortgagor," and "mortgagees" appear in the "Addendum to Deed of Pacto de Retro Sale." Finally,
it should be noted that the "Deed of Pacto de Retro Sale" provides that "if the Vendor A-Retro, Candido C. Amil,
fails to exercise his right to redeem or repurchase as herein granted within the period stipulated upon, then this
conveyance shall be deemed to be an absolute and irrevocable sale, without the necessity of executing any
further deed or instituting judicial action to consolidate the ownership in the name of the Vendees A-Retro."
This stipulation is void for being a pactum commissorium. 9 Considering all these, the trial court should have
granted petitioner a new trial to enable him to present evidence on the true nature of the contract in question.
WHEREFORE, the decision of the Court of Appeals dated January 29, 1996, is hereby REVERSED and the case is
REMANDED to the Regional Trial Court, Branch 36 Dumaguete City, Negros Oriental for further proceedings in
accordance with this decision.1wphi1.nt
SO ORDERED.
VILLAMOR, J.:
In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent
Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers:
respondent Veras aforesaid letter-request; an application for search warrant already filled up but still unsigned
by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De Leon; a
deposition in printed form of respondent Logronio already accomplished and signed by him but not yet
subscribed; and a search warrant already accomplished but still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy
Clerk of Court to take the depositions of respondents De Leon and Logronio. After the session had adjourned,
respondent Judge was informed that the depositions had already been taken. The stenographer, upon request
of respondent Judge, read to him her stenographic notes; and thereafter, respondent Judge asked respondent
Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis,
he could be charged for perjury. Respondent Judge signed respondent de Leons application for search warrant
and respondent Logronios deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge and
accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant
petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners lawyers protested
the search on the ground that no formal complaint or transcript of testimony was attached to the warrant. The
agents nevertheless proceeded with their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search
warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory writs of injunction be
issued, that the search warrant be declared null and void, and that the respondents be ordered to pay
petitioners, jointly and severally, damages and attorneys fees. On March 18, 1970, the respondents, thru the
Solicitor General, filed an answer to the petition. After hearing, the court, presided over by respondent Judge,

issued on July 29, 1970, an order dismissing the petition for dissolution of the search warrant. In the meantime,
or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner corporation in the
total sum of P2,594,729.97, partly, if not entirely, based on the documents thus seized. Petitioners came to this
Court.
The petition should be granted for the following reasons:chanrob1es virtual 1aw library
"SR. ORENSE. No cree Su Seoria que el tomar le declaracion de ese denunciante por escrito siempre requeriria
algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las
vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo que entre dos males
debemos escoger. el menor.
1. Respondent Judge failed to personally examine the complainant and his witness.
The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court
are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable
searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be
determined by the judge after examination under oath or affirmation of the complainant and the witnesses he
may produce, and particularly describing the place to be searched, and the persons or things to be seized."
(Art. III, Sec. 1, Constitution.)
"SEC. 3. Requisites for issuing search warrant. A search warrant shall not issue but upon probable cause in
connection with one specific offense to be determined by the judge or justice of the peace after examination
under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the
place to be searched and the persons or things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. The judge or justice of the peace must, before issuing the warrant,
personally examine on oath or affirmation the complainant and any witnesses he may produce and take their
depositions in writing, and attach them to the record, in addition to any affidavits presented to him." (Rule 126,
Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3, of
the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the
judge himself and not by others. The phrase "which shall be determined by the judge after examination under
oath or affirmation of the complainant and the witnesses he may produce," appearing in the said constitutional
provision, was introduced by Delegate Francisco as an amendment to the draft submitted by the SubCommittee of Seven. The following discussion in the Constitutional Convention (Laurel, Proceedings of the
Philippine Constitutional Convention, Vol. III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compaero los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia
mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Seoria que causaria cierta
demora el procedimiento apuntado en su enmienda en tal forma que podria frustrar los fines de la justicia o si
Su Seoria encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia con los
derechos del individuo en su persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Seoria pregunta por la siguiente razon:
el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa
del Juez sin que alguien vaya el juez a presentar ese escrito o peticion de sucuestro. Esa persona que presenta
el registro puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento de registro.
Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no se atendra
solamente a sea peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin examiner a los
testigos.
"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are incorporating in our
constitution something of a fundamental character. Now, before a judge could issue a search warrant, he must
be under the obligation to examine personally under oath the complainant and if he has any witness, the
witnesses that he may produce . . ."cralaw virtua1aw library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it
requires the judge, before issuing a search warrant, to "personally examine on oath or affirmation the
complainant and any witnesses he may produce . . ."cralaw virtua1aw library
Personal examination by the judge of the complainant and his witnesses is necessary to enable him to
determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the
Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of warrants
except "upon probable cause." The determination of whether or not a probable cause exists calls for the
exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in the
absence of any rule to the contrary.
In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant
(respondent De Leon) and his witness (respondent Logronio). While it is true that the complainants application
for search warrant and the witness printed-form deposition were subscribed and sworn to before respondent
Judge, the latter did not ask either of the two any question the answer to which could possibly be the basis for
determining whether or not there was probable cause against herein petitioners. Indeed, the participants seem
to have attached so little significance to the matter that notes of the proceedings before respondent Judge
were not even taken. At this juncture it may be well to recall the salient facts. The transcript of stenographic
notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of this case in the court below
shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took
the depositions of the complainant and his witness, and that stenographic notes thereof were taken by Mrs.
Gaspar. At that time respondent Judge was at the sala hearing a case. After respondent Judge was through with
the hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant De Leon and witness Logronio went to
respondent Judges chamber and informed the Judge that they had finished the depositions. Respondent Judge
then requested the stenographer to read to him her stenographic notes. Special Deputy Clerk Gonzales
testified as follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them,
requested Mr. Logronio to raise his hand and warned him if his deposition will be found to be false and without
legal basis, he can be charged criminally for perjury. The Honorable Court told Mr. Logronio whether he affirms
the facts contained in his deposition and the affidavit executed before Mr. Rodolfo de Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?
"A The Honorable Judge.

"Q The deposition or the affidavit?
"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search warrant.
The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-M70 was thus limited to listening to the stenographers readings of her notes, to a few words of warning against
the commission of perjury, and to administering the oath to the complainant and his witness. This cannot be
consider a personal examination. If there was an examination at all of the complainant and his witness, it was
the one conducted by the Deputy Clerk of Court. But, as stated, the Constitution and the rules require a
personal examination by the judge. It was precisely on account of the intention of the delegates to the
Constitutional Convention to make it a duty of the issuing judge to personally examine the complainant and his
witnesses that the question of how much time would be consumed by the judge in examining them came up
before the Convention, as can be seen from the record of the proceedings quoted above. The reading of the
stenographic notes to respondent Judge did not constitute sufficient compliance with the constitutional
mandate and the rule; for by that manner respondent Judge did not have the opportunity to observe the
demeanor of the complainant and his witness, and to propound initial and follow-up questions which the judicial
mind, on account of its training, was in the best position to conceive. These were important in arriving at a
sound inference on the all-important question of whether or not there was probable cause.
2. The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal Revenue Code in
relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and 209." The question is:
Was the said search warrant issued "in connection with one specific offense," as required by Sec. 3, Rule 126?
To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to
above. Thus we find the following:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent
returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the information
required under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any article
subject to a specific tax, without having paid the privilege tax therefore, or who aids or abets in the conduct of
illicit distilling, rectifying, compounding, or illicit manufacture of any article subject to specific tax . . .," and
provides that in the case of a corporation, partnership, or association, the official and/or employee who caused
the violation shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output removed,
or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is the
violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which are interrelated. The second
is the violation of Sec. 53 (withholding of income taxes at source). The third is the violation of Sec. 208
(unlawful pursuit of business or occupation); and the fourth is the violation of Sec. 209 (failure to make a return
of receipts, sales, business or gross value of output actually removed or to pay the tax due thereon). Even in
their classification the six above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72
and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and
Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383), is not
applicable, because there the search warrants were issued for "violation of Central Bank Laws, Internal
Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was issued for violation of
only one code, i.e., the National Internal Revenue Code. The distinction more apparent than real, because it
was precisely on account of the Stonehill incident, which occurred sometime before the present Rules of Court
took effect on January 1, 1964, that this Court amended the former rule by inserting therein the phrase "in
connection with one specific offense," and adding the sentence "No search warrant shall issue for more than
one specific offense," in what is now Sec. 3, Rule 126. Thus we said in Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that
this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that a search warrant shall
not issue but upon probable cause in connection with one specific offense. Not satisfied with this qualification,
the Court added thereto a paragraph, directing that no search warrant shall issue for more than one specific
offense."
3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this
manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements books,
customers ledgers); receipts for payments received; certificates of stocks and securities; contracts, promissory
notes and deeds of sale; telex and coded messages; business communications, accounting and business
records; checks and check stubs; records of bank deposits and withdrawals; and records of foreign remittances,
covering the years 1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of
the Revised Rules of Court, that the warrant should particularly describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit:chanrob1es
virtual 1aw library
Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit
journals, typewriters, and other documents and/or paper showing all business transactions including
disbursement receipts, balance sheets and related profit and loss statements.
"Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of
petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus
openly contravening the explicit command of our Bill of Rights that the things to be seized be particularly
described as well as tending to defeat its major objective: the elimination of general warrants."cralaw
virtua1aw library
While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said warrant
nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of general warrants,
for the language used therein is so all-embracing as to include all conceivable records of petitioner corporation,

which, if seized, could possibly render its business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain the purpose of
the requirement that the warrant should particularly describe the place to be searched and the things to be
seized, to wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search warrant
should particularly describe the place to be searched and the things to be seized. The evident purpose and
intent of this requirement is to limit the things to be seized to those, and only those, particularly described in
the search warrant to leave the officers of the law with no discretion regarding what articles they shall seize,
to the end that unreasonable searches and seizures may not be made, that abuses may not be committed.
That this is the correct interpretation of this constitutional provision is borne out by American
authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in
this case.
A search warrant may be said to particularly describe the things to be seized when the description therein is as
specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or when the description
expresses a conclusion of fact not of law by which the warrant officer may be guided in making the search
and seizure (idem., dissent of Abad Santos, J.,); or when the things described are limited to those which bear
direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of Court).
The herein search warrant does not conform to any of the foregoing tests. If the articles desired to be seized
have any direct relation to an offense committed, the applicant must necessarily have some evidence, other
than those articles, to prove the said offense; and the articles subject of search and seizure should come in
handy merely to strengthen such evidence. In this event, the description contained in the herein disputed
warrant should have mentioned, at least, the dates, amounts, persons, and other pertinent data regarding the
receipts of payments, certificates of stocks and securities, contracts, promissory notes, deeds of sale,
messages and communications, checks, bank deposits and withdrawals, records of foreign remittances, among
others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a motion for reconsideration
of respondent Judges order of July 29, 1970. The contention is without merit. In the first place, when the
questions raised before this Court are the same as those which were squarely raised in and passed upon by the
court below, the filing of a motion for reconsideration in said court before certiorari can be instituted in this
Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule
requiring the filing of a motion for reconsideration before an application for a writ of certiorari can be
entertained was never intended to be applied without considering the circumstances. (Matutina v. Buslon, Et
Al., 109 Phil., 140.) In the case at bar time is of the essence in view of the tax assessments sought to be
enforced by respondent officers of the Bureau of Internal Revenue against petitioner corporation, On account of
which immediate and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26 SCRA 768.)
Lastly, the rule does not apply where, as in this case, the deprivation of petitioners fundamental right to due
process taints the proceeding against them in the court below not only with irregularity but also with nullity.
(Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to protection against unreasonable search
and seizures. Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is charged
with a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its
constitutional powers, cannot refuse to produce the books and papers of such corporation, we do not wish to be
understood as holding that a corporation is not entitled to immunity, under the 4th Amendment, against
unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an
assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can
only be proceeded against by due process of law, and is protected, under the 14th Amendment, against
unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to a
corporation, the ground that it was not privileged from producing its books and papers. But the rights of a
corporation against unlawful search and seizure are to be protected even if the same result might have been
achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of America, 251 U.S. 385, 64
L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to object
against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations
have their respective personalities, separate and distinct from the personality of herein petitioners, regardless
of the amount of shares of stock or the interest of each of them in said corporations, whatever, the offices they
hold therein may be. Indeed, it is well settled that the legality of a seizure can be contested only by the party
whose rights have been impaired thereby, and that the objection to an unlawful search and seizure is purely
personal and cannot be availed of by third parties. Consequently, petitioners herein may not validly object to
the use in evidence against them of the documents, papers and things seized from the offices and premises of
the corporations adverted to above, since the right to object to the admission of said papers in evidence
belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the
corporate officers in proceedings against them in their individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose offices documents, papers and
effects were searched and seized were the petitioners. In the case at bar, the corporation to whom the seized
documents belong, and whose rights have thereby been impaired, is itself a petitioner. On that score, petitioner
corporation here stands on a different footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely as claimed by petitioners at
least partly as in effect admitted by respondents based on the documents seized by virtue of Search
Warrant No. 2-M-70. Furthermore, the fact that the assessments were made some one and one-half months
after the search and seizure on February 25, 1970, is a strong indication that the documents thus seized served
as basis for the assessments. Those assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by respondent
Judge is declared null and void; respondents are permanently enjoined from enforcing the said search warrant;
the documents, papers and effects seized thereunder are ordered to be returned to petitioners; and respondent
officials the Bureau of Internal Revenue and their representatives are permanently enjoined from enforcing the
assessments mentioned in Annex "G" of the present petition, as well as other assessments based on the
documents, papers and effects seized under the search warrant herein nullified, and from using the same
against petitioners in any criminal or other proceeding. No pronouncement as to costs.
Facts: Commissioner of Internal Revenue, wrote a letter addressed to respondent Judge Vivencio M. Ruiz
requesting the issuance of a search warrant against petitioners for violation of Section 46(a) of the National
Internal Revenue Code. Revenue Examiner Rodolfo de Leon and Arturo Logronio went to CFI with proper
documents. Judge Vivencio Ruiz asked his secretary to take the deposition and when done stenographer read it
to the judge. Logronio took the oath ans was warned by judge that he may be charged with perjury if found
lying. Search warrant was issued and served. Petitioners lawyers protested the search on the ground that no
formal complaint or transcript of testimony was attached to the warrant. The agents nevertheless proceeded

with their search which yielded six boxes of documents. BIR based on the documents seized. Petitioner contend
that judged failed to personally examine the complainant and witnesses.
Issue: Whether or not search warrant is null and void on the ground of no personal examination of the jusge?
Decision: This cannot be consider a personal examination. If there was an examination at all of the
complainant and his witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the
Constitution and the rules require a personal examination by the judge. It was precisely on account of the
intention of the delegates to the Constitutional Convention to make it a duty of the issuing judge to personally
examine the complainant and his witnesses that the question of how much time would be consumed by the
judge in examining them came up before the Convention, as can be seen from the record of the proceedings
quoted above. The reading of the stenographic notes to respondent Judge did not constitute sufficient
compliance with the constitutional mandate and the rule; for by that manner respondent Judge did not have
the opportunity to observe the demeanor of the complainant and his witness, and to propound initial and
follow-up questions which the judicial mind, on account of its training, was in the best position to conceive.
These were important in arriving at a sound inference on the all-important question of whether or not there was
probable cause.
SECOND DIVISION

G.R. No. L-31061 August 17, 1976
SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS & SEWERAGE
AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF BULACAN, defendants-appellees.
ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff corporation (non- stock may institute an action in
behalf of its individual members for the recovery of certain parcels of land allegedly owned by said members;
for the nullification of the transfer certificates of title issued in favor of defendants appellees covering the
aforesaid parcels of land; for a declaration of "plaintiff's members as absolute owners of the property" and the
issuance of the corresponding certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of First
Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against defendants-appellees to recover the
ownership and possession of a large tract of land in San Jose del Monte, Bulacan, containing an area of
27,982,250 square meters, more or less, registered under the Torrens System in the name of defendantsappellees' predecessors-in-interest. 1 The complaint, as amended on June 13, 1966, specifically alleged that
plaintiff is a corporation organized and existing under the laws of the Philippines, with its principal office and
place of business at San Jose del Monte, Bulacan; that its membership is composed of natural persons residing
at San Jose del Monte, Bulacan; that the members of the plaintiff corporation, through themselves and their
predecessors-in-interest, had pioneered in the clearing of the fore-mentioned tract of land, cultivated the same
since the Spanish regime and continuously possessed the said property openly and public under concept of
ownership adverse against the whole world; that defendant-appellee Gregorio Araneta, Inc., sometime in the
year 1958, through force and intimidation, ejected the members of the plaintiff corporation fro their possession
of the aforementioned vast tract of land; that upon investigation conducted by the members and officers of
plaintiff corporation, they found out for the first time in the year 1961 that the land in question "had been
either fraudelently or erroneously included, by direct or constructive fraud, in Original Certificate of Title No.
466 of the Land of Records of the province of Bulacan", issued on May 11, 1916, which title is fictitious, nonexistent and devoid of legal efficacy due to the fact that "no original survey nor plan whatsoever" appears to
have been submitted as a basis thereof and that the Court of First Instance of Bulacan which issued the decree
of registration did not acquire jurisdiction over the land registration case because no notice of such proceeding
was given to the members of the plaintiff corporation who were then in actual possession of said properties;
that as a consequence of the nullity of the original title, all subsequent titles derived therefrom, such as
Transfer Certificate of Title No. 4903 issued in favor of Gregorio Araneta and Carmen Zaragoza, which was
subsequently cancelled by Transfer Certificate of Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer
Certificate of Title No. 4988 issued in the name of, the National Waterworks & Sewerage Authority (NWSA),
Transfer Certificate of Title No. 4986 issued in the name of Hacienda Caretas, Inc., and another transfer
certificate of title in the name of Paradise Farms, Inc., are therefore void. Plaintiff-appellant consequently
prayed (1) that Original Certificate of Title No. 466, as well as all transfer certificates of title issued and derived
therefrom, be nullified; (2) that "plaintiff's members" be declared as absolute owners in common of said
property and that the corresponding certificate of title be issued to plaintiff; and (3) that defendant-appellee
Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the amended
complaint on the grounds that (1) the complaint states no cause of action; and (2) the cause of action, if any, is
barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to dismiss
based on the same grounds. Appellee National Waterworks & Sewerage Authority did not file any motion to
dismiss. However, it pleaded in its answer as special and affirmative defenses lack of cause of action by the
plaintiff-appellant and the barring of such action by prescription and laches.
During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7, 1966, praying
that the case be transferred to another branch of the Court of First Instance sitting at Malolos, Bulacan,
According to defendants-appellees, they were not furnished a copy of said motion, hence, on October 14, 1966,
the lower court issued an Order requiring plaintiff-appellant to furnish the appellees copy of said motion, hence,
on October 14, 1966, defendant-appellant's motion dated October 7, 1966 and, consequently, prayed that the
said motion be denied for lack of notice and for failure of the plaintiff-appellant to comply with the Order of
October 14, 1966. Similarly, defendant-appellee paradise Farms, Inc. filed, on December 2, 1966, a
manifestation information the court that it also did not receive a copy of the afore-mentioned of appellant. On
January 24, 1967, the trial court issued an Order dismissing the amended complaint.

On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds that the
court had no jurisdiction to issue the Order of dismissal, because its request for the transfer of the case from
the Valenzuela Branch of the Court of First Instance to the Malolos Branch of the said court has been approved
by the Department of Justice; that the complaint states a sufficient cause of action because the subject matter
of the controversy in one of common interest to the members of the corporation who are so numerous that the
present complaint should be treated as a class suit; and that the action is not barred by the statute of
limitations because (a) an action for the reconveyance of property registered through fraud does not prescribe,
and (b) an action to impugn a void judgment may be brought any time. This motion was denied by the trial
court in its Order dated February 22, 1967. From the afore-mentioned Order of dismissal and the Order denying
its motion for reconsideration, plaintiff-appellant appealed to the Court of Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no question of fact was involved in the appeal
but only questions of law and jurisdiction, certified this case to this Court for resolution of the legal issues
involved in the controversy.
I
Appellant contends, as a first assignment of error, that the trial court acted without authority and jurisdiction in
dismissing the amended complaint when the Secretary of Justice had already approved the transfer of the case
to any one of the two branches of the Court of First Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases with the assignment of cases in the
different branches of the same Court of First Instance. Jurisdiction implies the power of the court to decide a
case, while venue the place of action. There is no question that respondent court has jurisdiction over the case.
The venue of actions in the Court of First Instance is prescribed in Section 2, Rule 4 of the Revised Rules of
Court. The laying of venue is not left to the caprice of plaintiff, but must be in accordance with the aforesaid
provision of the rules. 2The mere fact that a request for the transfer of a case to another branch of the same
court has been approved by the Secretary of Justice does not divest the court originally taking cognizance
thereof of its jurisdiction, much less does it change the venue of the action. As correctly observed by the trial
court, the indorsement of the Undersecretary of Justice did not order the transfer of the case to the Malolos
Branch of the Bulacan Court of First Instance, but only "authorized" it for the reason given by plaintiff's counsel
that the transfer would be convenient for the parties. The trial court is not without power to either grant or
deny the motion, especially in the light of a strong opposition thereto filed by the defendant. We hold that the
court a quo acted within its authority in denying the motion for the transfer the case to Malolos notwithstanding
the authorization" of the same by the Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the motions to dismiss refer to the lack of personality of
plaintiff to file the instant action. Essentially, the term 'cause of action' is composed of two elements:
(1) the right of the plaintiff and (2) the violation of such right by the defendant. (Moran, Vol. 1, p. 111).
For these reasons, the rules require that every action must be prosecuted and defended in the name
of the real party in interest and that all persons having an interest in the subject of the action and in
obtaining the relief demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In the amended complaint,
the people whose rights were alleged to have been violated by being deprived and dispossessed of
their land are the members of the corporation and not the corporation itself. The corporation has a
separate. and distinct personality from its members, and this is not a mere technicality but a matter of
substantive law. There is no allegation that the members have assigned their rights to the corporation
or any showing that the corporation has in any way or manner succeeded to such rights. The
corporation evidently did not have any rights violated by the defendants for which it could seek
redress. Even if the Court should find against the defendants, therefore, the plaintiff corporation would
not be entitled to the reliefs prayed for, which are recoveries of ownership and possession of the land,
issuance of the corresponding title in its name, and payment of damages. Neither can such reliefs be
awarded to the members allegedly deprived of their land, since they are not parties to the suit. It
appearing clearly that the action has not been filed in the names of the real parties in interest, the
complaint must be dismissed on the ground of lack of cause of action. 3
Viewed in the light of existing law and jurisprudence, We find that the trial court correctly dismissed the
amended complaint.
It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity
to be considered as separate and apart from the individual stockholders or members who compose it, and is
not affected by the personal rights, obligations and transactions of its stockholders or members. 4 The property
of the corporation is its property and not that of the stockholders, as owners, although they have equities in it.
Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its
members. 5Conversely, a corporation ordinarily has no interest in the individual property of its stockholders
unless transferred to the corporation, "even in the case of a one-man corporation. 6 The mere fact that one is
president of a corporation does not render the property which he owns or possesses the property of the
corporation, since the president, as individual, and the corporation are separate similarities. 7 Similarly,
stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled
the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock
certificates were considered not to have such legal or equitable title or interest in the land, as would support a
suit for title, especially against parties other than the corporation. 8
It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the
persons composing it, is but a legal fiction introduced for the purpose of convenience and to subserve the ends
of justice. 9 This separate personality of the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or where
necessary to achieve equity. 10
Thus, when "the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, ... the law will regard the corporation as an association of persons, or in the case of two
corporations, merge them into one, the one being merely regarded as part or instrumentality of the
other. 11 The same is true where a corporation is a dummy and serves no business purpose and is intended only
as a blind, or an alter ego or business conduit for the sole benefit of the stockholders. 12 This doctrine of
disregarding the distinct personality of the corporation has been applied by the courts in those cases when the
corporate entity is used for the evasion of taxes 13or when the veil of corporate fiction is used to confuse

legitimate issue of employer-employee relationship, 14 or when necessary for the protection of creditors, in
which case the veil of corporate fiction may be pierced and the funds of the corporation may be garnished to
satisfy the debts of a principal stockholder. 15 The aforecited principle is resorted to by the courts as a measure
protection for third parties to prevent fraud, illegality or injustice. 16
It has not been claimed that the members have assigned or transferred whatever rights they may have on the
land in question to the plaintiff corporation. Absent any showing of interest, therefore, a corporation, like
plaintiff-appellant herein, has no personality to bring an action for and in behalf of its stockholders or members
for the purpose of recovering property which belongs to said stockholders or members in their personal
capacities.
It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right conferred'
by law upon a person. 17 Evidently, there can be no wrong without a corresponding right, and no breach of duty
by one person without a corresponding right belonging to some other person. 18 Thus, the essential elements of
a cause of action are legal right of the plaintiff, correlative obligation of the defendant, an act or omission of the
defendant in violation of the aforesaid legal right. 19 Clearly, no right of action exists in favor of plaintiff
corporation, for as shown heretofore it does not have any interest in the subject matter of the case which is
material and, direct so as to entitle it to file the suit as a real party in interest.
interpreted, that does not involved a Question in which other parties are interested. ... (Emphasis
supplied )
Here, there is only one party plaintiff, and the plaintiff corporation does not even have an interest in the subject
matter of the controversy, and cannot, therefore, represent its members or stockholders who claim to own in
their individual capacities ownership of the said property. Moreover, as correctly stated by the appellees, a
class suit does not lie in actions for the recovery of property where several persons claim Partnership of their
respective portions of the property, as each one could alleged and prove his respective right in a different way
for each portion of the land, so that they cannot all be held to have Identical title through acquisition
prescription. 23
Having shown that no cause of action in favor of the plaintiff exists and that the action in the lower court
cannot be considered as a class suit, it would be unnecessary and an Idle exercise for this Court to resolve the
remaining issue of whether or not the plaintiffs action for reconveyance of real property based upon
constructive or implied trust had already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the plaintiff-appellant.
Sulo ng Bayan vs. Araneta
[GR L-31061, 17 August 1976]
III
Appellant maintains, however, that the amended complaint may be treated as a class suit, pursuant to Section
12 of Rule 3 of the Revised Rules of Court.
In order that a class suit may prosper, the following requisites must be present: (1) that the subject matter of
the controversy is one of common or general interest to many persons; and (2) that the parties are so
numerous that it is impracticable to bring them all before the court. 20
Under the first requisite, the person who sues must have an interest in the controversy, common with those for
whom he sues, and there must be that unity of interest between him and all such other persons which would
entitle them to maintain the action if suit was brought by them jointly. 21
As to what constitutes common interest in the subject matter of the controversy, it has been explained in Scott
v. Donald 22 thus:
The interest that will allow parties to join in a bill of complaint, or that will enable the court to dispense
with the presence of all the parties, when numerous, except a determinate number, is not only an
interest in the question, but one in common in the subject Matter of the suit; ... a community of
interest growing out of the nature and condition of the right in dispute; for, although there may not be
any privity between the numerous parties, there is a common title out of which the question arises,
and which lies at the foundation of the proceedings ... [here] the only matter in common among the
plaintiffs, or between them and the defendants, is an interest in the Question involved which alone
cannot lay a foundation for the joinder of parties. There is scarcely a suit at law, or in equity which
settles a Principle or applies a principle to a given state of facts, or in which a general statute is
Facts: On 26 April 1966, Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of First Instance of
Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against Gregorio Araneta Inc. (GAI), Paradise Farms Inc.,
National Waterworks & Sewerage Authority (NAWASA), Hacienda Caretas Inc., and the Register of Deeds of
Bulacan to recover the ownership and possession of a large tract of land in San Jose del Monte, Bulacan,
containing an area of 27,982,250 sq. ms., more or less, registered under the Torrens System in the name of
GAI, et. al.'s predecessors-in-interest (who are members of the corporation). On 2 September 1966, GAI filed a
motion to dismiss the amended complaint on the grounds that (1) the complaint states no cause of action; and
(2) the cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas,
Inc. filed motions to dismiss based on the same grounds. NAWASA did not file any motion to dismiss. However,
it pleaded in its answer as special and affirmative defenses lack of cause of action by Sulo ng Bayan Inc. and
the barring of such action by prescription and laches. On 24 January 1967, the trial court issued an Order
dismissing the (amended) complaint. On 14 February 1967, Sulo ng Bayan filed a motion to reconsider the
Order of dismissal, arguing among others that the complaint states a sufficient cause of action because the
subject matter of the controversy in one of common interest to the members of the corporation who are so
numerous that the present complaint should be treated as a class suit. The motion was denied by the trial court
in its Order dated 22 February 1967.
Sulo ng Bayan appealed to the Court of Appeals. On 3 September 1969, the Court of Appeals, upon finding that
no question of fact was involved in the appeal but only questions of law and jurisdiction, certified the case to
the Supreme Court for resolution of the legal issues involved in the controversy.
Issue:
1.
Whether the corporation (non-stock) may institute an action in behalf of its individual members for the
recovery of certain parcels of land allegedly owned by said members, among others.
2.
suit
Held:
Whether the complaint filed by the corporation in behalf of its members may be treated as a class

1. It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal
entity to be considered as separate and apart from the individual stockholders or members who compose it,
and is not affected by the personal rights, obligations and transactions of its stockholders or members. The
property of the corporation is its property and not that of the stockholders, as owners, although they have
equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. Conversely, a corporation ordinarily has no interest in the individual property of its
stockholders unless transferred to the corporation, "even in the case of a one-man corporation." The mere fact
that one is president of a corporation does not render the property which he owns or possesses the property of
the corporation, since the president, as individual, and the corporation are separate similarities. Similarly,
stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled
the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock
certificates were considered not to have such legal or equitable title or interest in the land, as would support a
suit for title, especially against parties other than the corporation. It must be noted, however, that the juridical
personality of the corporation, as separate and distinct from the persons composing it, is but a legal fiction
introduced for the purpose of convenience and to subserve the ends of justice. This separate personality of the
corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or
cover for fraud or illegality, or to work -an injustice, or where necessary to achieve equity. It has not been
claimed that the members have assigned or transferred whatever rights they may have on the land in question
to the corporation. Absent any showing of interest, therefore, a corporation, has no personality to bring an
action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to
said stockholders or members in their personal capacities

Set I

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Set I Corporation Code * Bosycouts to Bache v Ruz*Page 1 of 84

G.R. No. 177131

BOY SCOUTS OF THE PHILIPPINES, Petitioner,

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Art. 44. The following are juridical persons:

The BSPs Classification Under the Administrative Code of 1987

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Requisites for Declaration of Unconstitutionality Not Met in this Case

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MR. ESCUDERO: May I answer, Mr. Chairman?

THE CHAIRMAN: Yes, gentleman.

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Petitioners allege in their petition that:

We find the petition without merit.

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January 18, 2011

DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR M. VIARI, Petitioners,

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Its existence as a chartered corporation remained unchallenged on ground of unconstitutionality

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3. Visiting detainees; and

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[To read a digest of the Court's Resolution, please click here.]

The dispositive portion of the Decision read:

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G.R. No. 136374

The minority opinion

FRANCISCA S. BALUYOT, petitioner,

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February 28, 2006

THE VETERANS FEDERATION OF THE PHILIPPINES represented by Esmeraldo R. Acorda, Petitioner,

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The factual and procedural antecedents of this case are as follows:

Dear Col. De Ocampo:

Department Circular No. 04

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Section 6 Penal Sanctions

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as well as Section 3.3 which allows the Secretary of DND to

THE FATE OF DEPARTMENT CIRCULAR NO. 04

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1. Nature of Power to Create a Corporation (Sec. 16 Art, XII 1987 Constitution)

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the City Assessor of Paraaque ("respondents") from