Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 136888

June 29, 2005

PHILIPPINE CHARTER INSURANCE CORPORATION, petitioner,

vs.
CHEMOIL LIGHTERAGE CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a petition for review on certiorari which assails the Decision of the Court of
Appeals1 in CA-G.R. CV No. 56209, dated 18 December 1998. The Decision reversed and set
aside the decision of the Regional Trial Court (RTC),2 Branch 16, City of Manila, which ordered
herein respondent to pay the petitioners claim in the amount of P5,000,000.00 with legal interest
from the date of the filing of the complaint.
THE FACTS
Petitioner Philippine Charter Insurance Corporation is a domestic corporation engaged in the
business of non-life insurance. Respondent Chemoil Lighterage Corporation is also a domestic
corporation engaged in the transport of goods.
On 24 January 1991, Samkyung Chemical Company, Ltd., based in Ulsan, South Korea, shipped
62.06 metric tons of the liquid chemical DIOCTYL PHTHALATE (DOP) on board MT
"TACHIBANA" which was valued at US$90,201.57 under Bill of Lading No. ULS/MNL-13 and
another 436.70 metric tons of DOP valued at US$634,724.89 under Bill of Lading No.
ULS/MNL-24 to the Philippines. The consignee was Plastic Group Phils., Inc. (PGP) in Manila.
PGP insured the cargo with herein petitioner Philippine Charter Insurance Corporation against all
risks. The insurance was under Marine Policies No. MRN-307215 dated 06 February 1991 for
P31,757,969.19 and No. MRN-307226 for P4,514,881.00. Marine Endorsement No. 27867 dated
11 May 1991 was attached and formed part of MRN-30721, amending the latters insured value
to P24,667,422.03, and reduced the premium accordingly.
The ocean tanker MT "TACHIBANA" unloaded the cargo to Tanker Barge LB-1011 of
respondent Chemoil Lighterage Corporation, which shall transport the same to Del Pan Bridge in
Pasig River. Tanker Barge LB-1011 would unload the cargo to tanker trucks, also owned by the
respondent, and haul it by land to PGPs storage tanks in Calamba, Laguna.

Upon inspection by PGP, the samples taken from the shipment showed discoloration from
yellowish to amber, demonstrating that it was damaged, as DOP is colorless and water clear. PGP
then sent a letter to the petitioner dated 18 February 19918 where it formally made an insurance
claim for the loss it sustained due to the contamination.
The petitioner requested an independent insurance adjuster, the GIT Insurance Adjusters, Inc.
(GIT), to conduct a Quantity and Condition Survey of the shipment. On 22 February 1991, GIT
issued a Report,9 part of which states:
As unloading progressed, it was observed on February 14, 1991 that DOP samples taken were
discolored from yellowish to amber. Inspection of cargo tanks showed manhole covers of ballast
tanks ceilings loosely secured. Furthermore, it was noted that the rubber gaskets of the manhole
covers of the ballast tanks re-acted to the chemical causing shrinkage thus, loosening the covers
and cargo ingress to the rusty ballast tanks10
On 13 May 1991, the petitioner paid PGP the amount of P5,000,000.0011 as full and final
payment for the loss. PGP issued a Subrogation Receipt to the petitioner.
Meanwhile, on 03 April 1991, PGP paid the respondent the amount of P301,909.50 as full
payment for the latters services, as evidenced by Official Receipt No. 1274.12
On 15 July 1991, an action for damages was instituted by the petitioner-insurer against
respondent-carrier before the RTC, Branch 16, City of Manila, docketed as Civil Case No. 9157923.13 The petitioner prayed for actual damages in the amount of P5,000,000.00, attorneys
fees in the amount of no less than P1,000,000.00, and costs of suit.
An Answer with Compulsory Counterclaim14 was filed by the respondent on 05 September 1991.
The respondent admitted it undertook to transport the consignees shipment from MT
"TACHIBANA" to the Del Pan Bridge, Pasig River, where it was transferred to its tanker trucks
for hauling to PGPs storage tanks in Calamba, Laguna. The respondent alleged that before the
DOP was loaded into its barge (LB-1011), the surveyor/representative of PGP, Adjustment
Standard Corporation, inspected it and found the same clean, dry, and fit for loading. The entire
loading and unloading of the shipment were also done under the control and supervision of
PGPs surveyor/representative. It was also mentioned by the respondent that the contract
between it and PGP expressly stipulated that it shall be free from any and all claims arising from
contamination, loss of cargo or part thereof; that the consignee accepted the cargo without any
protest or notice; and that the cargo shall be insured by its owner sans recourse against all risks.
As subrogee, the petitioner was bound by this stipulation. As carrier, no fault and negligence can
be attributed against respondent as it exercised extraordinary diligence in handling the cargo.15
After due hearing, the trial court rendered a Decision on 06 January 1997, the dispositive portion
of which reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff

ordering defendant to pay plaintiffs claim of P5,000,000.00 with legal interest from the date of
the filing of the complaint. The counterclaims are DISMISSED.16
Aggrieved by the trial courts decision, the respondent sought relief with the Court of Appeals
where it alleged in the main that PGP failed to file any notice, claim or protest within the period
required by Article 366 of the Code of Commerce, which is a condition precedent to the accrual
of a right of action against the carrier.17 A telephone call which was supposedly made by a certain
Alfred Chan, an employee of PGP, to one of the Vice Presidents of the respondent, informing the
latter of the discoloration, is not the notice required by Article 366 of the Code of Commerce.18
On 18 December 1998, the Court of Appeals promulgated its Decision reversing the trial court,
the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby REVERSED AND SET ASIDE and a
new one is entered dismissing the complaint.19
A petition for review on certiorari20 was filed by the petitioner with this Court, praying that the
decision of the trial court be affirmed.
After the respondent filed its Comment21 and the petitioner filed its Reply22 thereto, this Court
issued a Resolution23 on 18 August 1999, giving due course to the petition.
ASSIGNMENT OF ERRORS
The petitioner assigns as errors the following:
I
THE APPELLATE COURT GRAVELY ERRED IN FINDING THAT THE NOTICE OF
CLAIM WAS NOT FILED WITHIN THE REQUIRED PERIOD.
II
THE APPELLATE COURT GRAVELY ERRED IN NOT HOLDING THAT DAMAGE TO
THE CARGO WAS DUE TO THE FAULT OR NEGLIGENCE OF RESPONDENT CHEMOIL.
III
THE APPELLATE COURT GRAVELY ERRED IN SETTING ASIDE THE TRIAL COURTS
DECISION AND IN DISMISSING THE COMPLAINT.24
ISSUES

Synthesized, the issues that must be addressed by this Court are:

I
WHETHER OR NOT THE NOTICE OF CLAIM WAS FILED WITHIN THE REQUIRED
PERIOD. If the answer is in the affirmative,
II
WHETHER OR NOT THE DAMAGE TO THE CARGO WAS DUE TO THE FAULT OR
NEGLIGENCE OF THE RESPONDENT.
THE COURTS RULINGS
Article 366 of the Code of Commerce has profound application in the case at bar. This provision
of law imparts:
Art. 366. Within twenty-four hours following the receipt of the merchandise a claim may be
made against the carrier on account of damage or average found upon opening the packages,
provided that the indications of the damage or average giving rise to the claim cannot be
ascertained from the exterior of said packages, in which case said claim shall only be admitted at
the time of the receipt of the packages.
After the periods mentioned have elapsed, or after the transportation charges have been paid, no
claim whatsoever shall be admitted against the carrier with regard to the condition in which the
goods transported were delivered.
As to the first issue, the petitioner contends that the notice of contamination was given by
Alfredo Chan, an employee of PGP, to Ms. Encarnacion Abastillas, Vice President for
Administration and Operations of the respondent, at the time of the delivery of the cargo, and
therefore, within the required period.25 This was done by telephone.
The respondent, however, claims that the supposed notice given by PGP over the telephone was
denied by Ms. Abastillas. Between the testimonies of Alfredo Chan and Encarnacion Abastillas,
the latters testimony is purportedly more credible because it would be quite unbelievable and
contrary to business practice for Alfredo Chan to merely make a verbal notice of claim that
involves millions of pesos.26
On this point, the Court of Appeals declared:
. . . We are inclined to sustain the view that a telephone call made to defendant-company could
constitute substantial compliance with the requirement of notice considering that the notice was
given to a responsible official, the Vice-President, who promptly replied that she will look into
the matter. However, it must be pointed out that compliance with the period for filing notice is an

essential part of the requirement, i.e.. immediately if the damage is apparent, or otherwise within
twenty-four hours from receipt of the goods, the clear import being that prompt examination of
the goods must be made to ascertain damage if this is not immediately apparent. We have
examined the evidence, and We are unable to find any proof of compliance with the required
period, which is fatal to the accrual of the right of action against the carrier.27
The petitioner is of the view that there was an incongruity in the findings of facts of the trial
court and the Court of Appeals, the former allegedly holding that the period to file the notice had
been complied with, while the latter held otherwise.
We do not agree. On the matter concerning the giving of the notice of claim as required by
Article 366 of the Code of Commerce, the finding of fact of the Court of Appeals does not
actually contradict the finding of fact of the trial court. Both courts held that, indeed, a telephone
call was made by Alfredo Chan to Encarnacion Abastillas, informing the latter of the
contamination. However, nothing in the trial courts decision stated that the notice of claim was
relayed or filed with the respondent-carrier immediately or within a period of twenty-four hours
from the time the goods were received. The Court of Appeals made the same finding. Having
examined the entire records of the case, we cannot find a shred of evidence that will precisely
and ultimately point to the conclusion that the notice of claim was timely relayed or filed.
The allegation of the petitioner that not only the Vice President of the respondent was informed,
but also its drivers, as testified by Alfredo Chan, during the time that the delivery was actually
being made, cannot be given great weight as no driver was presented to the witness stand to
prove this. Part of the testimony of Alfredo Chan is revealing:
Q:
Mr. Witness, were you in your plant site at the time these various cargoes were delivered?
A: No, sir.

Q: So, do you have a first hand knowledge that your plant representative informed the driver of
the alleged contamination?
A: What do you mean by that?
Q: Personal knowledge [that] you yourself heard or saw them [notify] the driver?
A: No, sir.28
From the preceding testimony, it is quite palpable that the witness Alfredo Chan had no personal
knowledge that the drivers of the respondent were informed of the contamination.

The requirement that a notice of claim should be filed within the period stated by Article 366 of
the Code of Commerce is not an empty or worthless proviso. In a case, we held:
The object sought to be attained by the requirement of the submission of claims in pursuance of
this article is to compel the consignee of goods entrusted to a carrier to make prompt demand for
settlement of alleged damages suffered by the goods while in transport, so that the carrier will be
enabled to verify all such claims at the time of delivery or within twenty-four hours thereafter,
and if necessary fix responsibility and secure evidence as to the nature and extent of the alleged
damages to the goods while the matter is still fresh in the minds of the parties.29
In another case, we ruled, thus:
More particularly, where the contract of shipment contains a reasonable requirement of giving
notice of loss of or injury to the goods, the giving of such notice is a condition precedent to the
action for loss or injury or the right to enforce the carriers liability. Such requirement is not an
empty formalism. The fundamental reason or purpose of such a stipulation is not to relieve the
carrier from just liability, but reasonably to inform it that the shipment has been damaged and
that it is charged with liability therefore, and to give it an opportunity to examine the nature and
extent of the injury. This protects the carrier by affording it an opportunity to make an
investigation of a claim while the matter is fresh and easily investigated so as to safeguard itself
from false and fraudulent claims.30
The filing of a claim with the carrier within the time limitation therefore actually constitutes a
condition precedent to the accrual of a right of action against a carrier for loss of, or damage to,
the goods. The shipper or consignee must allege and prove the fulfillment of the condition. If it
fails to do so, no right of action against the carrier can accrue in favor of the former. The
aforementioned requirement is a reasonable condition precedent; it does not constitute a
limitation of action.31
The second paragraph of Article 366 of the Code of Commerce is also edifying. It is not only
when the period to make a claim has elapsed that no claim whatsoever shall be admitted, as no
claim may similarly be admitted after the transportation charges have been paid.
In this case, there is no question that the transportation charges have been paid, as admitted by
the petitioner, and the corresponding official receipt32 duly issued. But the petitioner is of the
view that the payment for services does not invalidate its claim. It contends that under the second
paragraph of Article 366 of the Code of Commerce, it is clear that if notice or protest has been
made prior to payment of services, claim against the bad order condition of the cargo is allowed.
We do not believe so. As discussed at length above, there is no evidence to confirm that the
notice of claim was filed within the period provided for under Article 366 of the Code of
Commerce. Petitioners contention proceeds from a false presupposition that the notice of claim
was timely filed.

Considering that we have resolved the first issue in the negative, it is therefore unnecessary to
make a resolution on the second issue.
WHEREFORE, in view of all the foregoing, the Decision of the Court of Appeals dated 18
December 1998, which reversed and set aside the decision of the trial court, is hereby
AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 129015

August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,

vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.

DECISION

TINGA, J.:
Called to fore in the present petition is a classic textbook question if a bank pays out on a
forged check, is it liable to reimburse the drawer from whose account the funds were paid out?
The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous
reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while
based in Bian, Laguna, maintained a current account with defendant Far East Bank and Trust
Company1 ("FEBTC") at the latters Bel-Air, Makati branch.2 The sole signatory to Samsung
Constructions account was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks
remained in the custody of the companys accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No.
432100 to the banks branch in Bel-Air, Makati. The check, payable to cash and drawn against
Samsung Constructions current account, was in the amount of Nine Hundred Ninety Nine

Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the
balance of Samsung Constructions account. After ascertaining there were enough funds to cover
the check,5 she compared the signature appearing on the check with the specimen signature of
Jong as contained in the specimen signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check.
She then asked Gonzaga to submit proof of his identity, and the latter presented three (3)
identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma
Velez, as it was bank policy that two bank branch officers approve checks exceeding One
Hundred Thousand Pesos, for payment or encashment. Velez likewise counterchecked the
signature on the check as against that on the signature card. He too concluded that the check was
indeed signed by Jong. Velez then forwarded the check and signature card to Shirley Syfu,
another bank officer, for approval. Syfu then noticed that Jose Sempio III ("Sempio"), the
assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to
Syfu and the other bank officers, he being the assistant accountant of Samsung Construction.
Syfu showed the check to Sempio, who vouched for the genuineness of Jongs signature.
Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of
equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong,
Syfu authorized the banks encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the
bank account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand
Five Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a
check for Jongs signature, Kyu perused the checkbook and found that the last blank check was
missing.7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for the amount of the check.8 Jong proceeded to
the police station and consulted with his lawyers.9 Subsequently, a criminal case for qualified
theft was filed against Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC
credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), with interest.11 In response, FEBTC said that it was still conducting an
investigation on the matter. Unsatisfied, Samsung Construction filed a Complaint on 10 June
1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the payment
of the amount debited as a result of the questioned check plus interest, and attorneys fees.12 The
case was docketed as Civil Case No. 92-61506 before the Regional Trial Court ("RTC") of
Manila, Branch 9.13
During the trial, both sides presented their respective expert witnesses to testify on the claim that
Jongs signature was forged. Samsung Corporation, which had referred the check for
investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She
testified that based on her examination, she concluded that Jongs signature had been forged on
the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National
Police (PNP),14 presented Rosario C. Perez, a document examiner from the PNP Crime

Laboratory. She testified that her findings showed that Jongs signature on the check was
genuine.15
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI
expert. In a Decision dated 25 April 1994, the RTC held that Jongs signature on the check was
forged and accordingly directed the bank to pay or credit back to Samsung Constructions
account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
together with interest tolled from the time the complaint was filed, and attorneys fees in the
amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth
Division of the Court of Appeals rendered a Decision,16 reversing the RTC Decision and
absolving FEBTC from any liability. The Court of Appeals held that the contradictory findings of
the NBI and the PNP created doubt as to whether there was forgery.17 Moreover, the appellate
court also held that assuming there was forgery, it occurred due to the negligence of Samsung
Construction, imputing blame on the accountant Kyu for lack of care and prudence in keeping
the checks, which if observed would have prevented Sempio from gaining access thereto.18 The
Court of Appeals invoked the ruling in PNB v. National City Bank of New York19 that, if a loss,
which must be borne by one or two innocent persons, can be traced to the neglect or fault of
either, such loss would be borne by the negligent party, even if innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the
facts when it overturned the RTCs finding of forgery. It also contends that the appellate court
erred in finding that it had been negligent in safekeeping the check, and in applying the equity
principle enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact,
the Court is obliged to examine the record to draw out the correct conclusions. Upon
examination of the record, and based on the applicable laws and jurisprudence, we reverse the
Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it is sought
to enforce such right is precluded from setting up the forgery or want of authority.
(Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative," and payment
made "through or under such signature" is ineffectual or does not discharge the instrument.21 If
payment is made, the drawee cannot charge it to the drawers account. The traditional
justification for the result is that the drawee is in a superior position to detect a forgery because
he has the makers signature and is expected to know and compare it.22 The rule has a healthy
cautionary effect on banks by encouraging care in the comparison of the signatures against those

on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure
and to distribute the cost among its customers who use checks makes the drawee an ideal party to
spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the
privilege of drawing checks in the ordinary course of business, the relationship between
the bank and the depositor is that of debtor and creditor. So far as the legal relationship
between the two is concerned, the situation is the same as though the bank had borrowed
money from the depositor, agreeing to repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The bank owes the depositor money in
the same sense that any debtor owes money to his creditor. Added to this, in the case of
bank and depositor, there is, of course, the banks obligation to pay checks drawn by the
depositor in proper form and presented in due course. When the bank receives the
deposit, it impliedly agrees to pay only upon the depositors order. When the bank pays a
check, on which the depositors signature is a forgery, it has failed to comply with its
contract in this respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so
closely resemble the genuine as to defy detection by the depositor himself. And yet, if a
bank pays the check, it is paying out its own money and not the depositors.
The forgery may be committed by a trusted employee or confidential agent. The bank still
must bear the loss. Even in a case where the forged check was drawn by the depositors
partner, the loss was placed upon the bank. The case referred to is Robinson v. Security
Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the
defendant bank for money which had been deposited to the plaintiffs credit and which
the bank had paid out on checks bearing forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff
waited eight or nine months after discovering the forgery, before notifying the bank, did
not, as a matter of law, constitute a ratification of the payment, so as to preclude the
plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound to know its
depositors signature." The rule is variously expressed in the many decisions in which the
question has been considered. But they all sum up to the proposition that a bank must
know the signatures of those whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern commercial
transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in his book
Negotiable Instruments and Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw
against the customers account by specifying whose signature is necessary on checks that
are chargeable against the customers account. Therefore, a check drawn against the
account of an individual customer that is signed by someone other than the customer, and
without authority from her, is not properly payable and is not chargeable to the
customers account, inasmuch as any "unauthorized signature on an instrument is
ineffective" as the signature of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the
party whose signature is forged.26 On the premise that Jongs signature was indeed forged,
FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability
attaches even if the bank exerts due diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious experts; and when a bank has been so
deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being
deceived.27 The forgery may be so near like the genuine as to defy detection by the depositor
himself, and yet the bank is liable to the depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document
formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial,
this presumption must be overcome but this can only be done by convincing testimony and
effective illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in
view of the conflicting conclusions made by handwriting experts from the NBI and the
PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery. In the
case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that
forgery cannot be presumed; it must be proved by clear, positive and convincing
evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an
opponents expert witness to stand uncontradicted, thus the spectacle of competing expert
witnesses is not unusual. The trier of fact will have to decide which version to believe, and
explain why or why not such version is more credible than the other. Reliance therefore cannot
be placed merely on the fact that there are colliding opinions of two experts, both clothed with
the presumption of official duty, in order to draw a conclusion, especially one which is extremely
crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial
hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the
understanding that it has the appropriate skill and competence to plough through the minutiae

that scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course,
courts, like humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate
courts error in this case warrants special attention, as it is absurd and even dangerous as a
precedent. If this rationale were adopted as a governing standard by every court in the land,
barely any actionable claim would prosper, defeated as it would be by the mere invocation of the
existence of a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than
that of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at
the conclusion that the testimony of the NBI document examiner is more credible
because the testimony of the PNP Crime Laboratory Services document examiner reveals
that there are a lot of differences in the questioned signature as compared to the standard
specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the
manner of execution of the standard signatures used reveals that it is a free rapid
continuous execution or stroke as shown by the tampering terminal stroke of the
signatures whereas the questioned signature is a hesitating slow drawn execution stroke.
Clearly, the person who executed the questioned signature was hesitant when the
signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there
[are] differences on that questioned signature and the standard signatures."31 This Court, in
examining the signatures, makes a similar finding. The PNP expert excused the noted
"differences" by asserting that they were mere "variations," which are normal deviations found in
writing.32 Yet the RTC, which had the opportunity to examine the relevant documents and to
personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly
finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted
several times with apparent differences between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly assert that these differences were just
"variations,"33 as if the mere conjuration of the word would sufficiently disquiet whatever doubts
about the deviations. Such conclusion, standing alone, would be of little or no value unless
supported by sufficiently cogent reasons which might amount almost to a demonstration.34
The most telling difference between the questioned and genuine signatures examined by the PNP
is in the final upward stroke in the signature, or "the point to the short stroke of the terminal in
the capital letter L," as referred to by the PNP examiner who had marked it in her comparison
chart as "point no. 6." To the plain eye, such upward final stroke consists of a vertical line which
forms a ninety degree (90) angle with the previous stroke. Of the twenty one (21) other genuine
samples examined by the PNP, at least nine (9) ended with an upward stroke.35 However, unlike
the questioned signature, the upward strokes of eight (8) of these signatures are looped, while the
upward stroke of the seventh36 forms a severe forty-five degree (45) with the previous stroke.
The difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency
in point no. 6.

Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or
the last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned
signature as a mere variation,38 the same excuse she proffered for the other marked differences
noted by the Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner,
and not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A
document examiner for fifteen years, she had been promoted to the rank of Senior Document
Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive Seminar in Question Document
Examination, conducted by the NBI Academy, which qualified her as a document examiner.40
She had trained with the Royal Hongkong Police Laboratory and is a member of the
International Association for Identification.41 As of the time she testified, she had examined more
than fifty to fifty-five thousand questioned documents, on an average of fifteen to twenty
documents a day.42 In comparison, PNP document examiner Perez admitted to having examined
only around five hundred documents as of her testimony.43
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination
method consisting of analysis, recognition, comparison and evaluation of the writing habits with
the use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in order to facilitate the
necessary comparisons.44 She compared the questioned signature as against ten (10) other sample
signatures of Jong. Five of these signatures were executed on checks previously issued by Jong,
while the other five contained in business letters Jong had signed.45 The NBI found that there
were significant differences in the handwriting characteristics existing between the questioned
and the sample signatures, as to manner of execution, link/connecting strokes, proportion
characteristics, and other identifying details.46
The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons
in its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it
failed to convincingly demonstrate why such findings were more credible than those of the NBI
expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card signed by Jong, which was relied upon by
the employees of FEBTC in authenticating Jongs signature. The distinction is irrelevant in
establishing forgery. Forgery can be established comparing the contested signatures as against
those of any sample signature duly established as that of the persons whose signature was forged.

FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned
signature against the bank signature cards. The crucial fact in question is whether or not the
check was forged, not whether the bank could have detected the forgery. The latter issue
becomes relevant only if there is need to weigh the comparative negligence between the
bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the
signature on the check was not his.47 The assertion may seem self-serving at first blush, yet it
cannot be ignored that Jong was in the best position to know whether or not the signature on the
check was his. While his claim should not be taken at face value, any averments he would have
on the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is
supported by the findings of the NBI examiner. They are also backed by factual circumstances
that support the conclusion that the assailed check was indeed forged. Judicial notice can be
taken that is highly unusual in practice for a business establishment to draw a check for close to a
million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported
the forgery upon its discovery. He filed the appropriate criminal charges against Sempio, the
putative forger.48
Now for determination is whether Samsung Construction was precluded from setting up the
defense of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals
concluded that Samsung Construction was negligent, and invoked the doctrines that "where a
loss must be borne by one of two innocent person, can be traced to the neglect or fault of either,
it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through
whose means it has succeeded49 or who put into the power of the third person to perpetuate the
wrong."50 Applying these rules, the Court of Appeals determined that it was the negligence of
Samsung Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the acts of one
Jose Sempio III, an assistant accountant employed by the plaintiff Samsung
[Construction] Co. Philippines, Inc. who supposedly stole the blank check and who
presumably is responsible for its encashment through a forged signature of Jong Kyu Lee.
Sempio was assistant to the Korean accountant who was in possession of the blank
checks and who through negligence, enabled Sempio to have access to the same. Had the
Korean accountant been more careful and prudent in keeping the blank checks Sempio
would not have had the chance to steal a page thereof and to effect the forgery. Besides,
Sempio was an employee who appears to have had dealings with the defendant Bank in
behalf of the plaintiff corporation and on the date the check was encashed, he was there to
certify that it was a genuine check issued to purchase equipment for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate court failed to explain precisely
how the Korean accountant was negligent or how more care and prudence on his part would have
prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party whose signature was
forged cannot necessarily imply that such partys negligence was the cause for the forgery.
Employers do not possess the preternatural gift of cognition as to the evil that may lurk within
the hearts and minds of their employees. The Courts pronouncement in PCI Bank v. Court of
Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors confidential
employee or agent, who by virtue of his position had unusual facilities for perpetrating
the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift
the loss to the drawer-payor, in the absence of some circumstance raising estoppel against
the drawer.54
Admittedly, the record does not clearly establish what measures Samsung Construction
employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the
checks inside a "safety box,"55 and no contrary version was presented by FEBTC. However, such
testimony cannot prove that the checks were indeed kept in a safety box, as Jongs testimony on
that point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to how the
checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
Samsung Constructions part. The presumption remains that every person takes ordinary care of
his concerns,56 and that the ordinary course of business has been followed.57 Negligence is not
presumed, but must be proven by him who alleges it.58 While the complaint was lodged at the
instance of Samsung Construction, the matter it had to prove was the claim it had alleged whether the check was forged. It cannot be required as well to prove that it was not negligent,
because the legal presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung
Construction was negligent. While the payee, as in this case, may not have the personal
knowledge as to the standard procedures observed by the drawer, it well has the means of
disputing the presumption of regularity. Proving a negative fact may be "a difficult office,"59 but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the
presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with
the Court of Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that
there was no negligence on the part of the bank in its acceptance and payment of the forged
check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer
is not precluded from setting up the defense of forgery under Section 23 by his own negligence.
The rule of equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by the
Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The drawee who
has paid upon the forged signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not that of his customer. But
it follows obviously that if the payee, holder, or presenter of the forged paper has himself

been in default, if he has himself been guilty of a negligence prior to that of the banker, or
if by any act of his own he has at all contributed to induce the banker's negligence, then
he may lose his right to cast the loss upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature
bears the loss. The exception to this rule arises only when negligence can be traced on the part of
the drawer whose signature was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the burden of loss. The Court
finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its
checks. For one, the settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract
some of the check blanks, forges the depositors signature and collect on the checks from the
bank.62 And for another, in point of fact Samsung Construction was not negligent at all since it
reported the forgery almost immediately upon discovery.63
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were
not of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,64
which was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer
differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer and
forgery of an indorsement is that the drawee is in a position to verify the drawers
signature by comparison with one in his hands, but has ordinarily no opportunity to verify
an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a check which bears
either a forgery of the drawers signature or a forged indorsement. But the bank may, as a
general rule, recover back the money which it has paid on a check bearing a forged
indorsement, whereas it has not this right to the same extent with reference to a check
bearing a forgery of the drawers signature.66
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged
check, we might as well comment on the banks performance of its duty. It might be so that the
bank complied with its own internal rules prior to paying out on the questionable check. Yet,
there are several troubling circumstances that lead us to believe that the bank itself was remiss in
its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual
enough to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms
this through its own internal procedures. Checks below twenty-five thousand pesos require only
the approval of the teller; those between twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should the amount exceed one hundred
thousand pesos, the concurrence of two bank officers is required.67

In this case, not only did the amount in the check nearly total one million pesos, it was also
payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it is
not ordinary business practice for a check for such large amount to be made payable to cash or to
bearer, instead of to the order of a specified person.68 Moreover, the check was presented for
payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who
did not carry with him any written proof that he was authorized by Samsung Construction to
encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken independently, much more so
if they are evaluated in concurrence. Given the shadiness attending Gonzagas presentment of the
check, it was not sufficient for FEBTC to have merely complied with its internal procedures, but
mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the
authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to
contact Jong over the phone to verify the check.70 She added that calling the issuer or drawer of
the check to verify the same was not part of the standard procedure of the bank, but an "extra
effort."71 Even assuming that such personal verification is tantamount to extraordinary diligence,
it cannot be denied that FEBTC still paid out the check despite the absence of any proof of
verification from the drawer. Instead, the bank seems to have relied heavily on the say-so of
Sempio, who was present at the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted
with the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC
would contact Jong about problems with his account, Jong would hand the phone over to
Sempio.72 However, the only proof of such allegations is the testimony of Gemma Velez, who
also testified that she did not know Sempio personally,73 and had met Sempio for the first time
only on the day the check was encashed.74 In fact, Velez had to inquire with the other officers of
the bank as to whether Sempio was actually known to the employees of the bank.75 Obviously,
Velez had no personal knowledge as to the past relationship between FEBTC and Sempio, and
any averments of her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did
not present as a witness any other employee of their Bel-Air branch, including those who
supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of
Samsung Construction, the irregular circumstances attending the presentment of the forged check
should have put the bank on the highest degree of alert. The Court recently emphasized that the
highest degree of care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their duty to
protect in return their many clients and depositors who transact business with them. They
have the obligation to treat their clients account meticulously and with the highest degree
of care, considering the fiduciary nature of their relationship. The diligence required of
banks, therefore, is more than that of a good father of a family.76
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained
from Jong personally that the signature in the questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose signature was forged
may still recover from the bank as long as he or she is not precluded from setting up the defense
of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to
enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting up the forgery, the general rule should
apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its
funds and cannot charge the amount so paid to the account of the depositor.77 A bank is liable,
irrespective of its good faith, in paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28
November 1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch
9, dated 25 April 1994 is REINSTATED. Costs against respondent.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 156167

May 16, 2005

GULF RESORTS, INC., petitioner,

vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by
petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE
CORPORATION. Petitioner assails the appellate court decision1 which dismissed its two appeals
and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the
insurance companys liability for earthquake damage to petitioners properties. Petitioner avers
that, pursuant to its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all
damages to the properties within its resort caused by earthquake. Respondent contends that the
rider limits its liability for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance Company
(AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from 1984-85;
1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and "F"; also Exhs. "1", "2", "3"
and "4" respectively), the risk of loss from earthquake shock was extended only to
plaintiffs two swimming pools, thus, "earthquake shock endt." (Item 5 only) (Exhs. "C1"; "D-1," and "E" and two (2) swimming pools only (Exhs. "C-1"; D-1", "E" and "F-

1"). "Item 5" in those policies referred to the two (2) swimming pools only (Exhs. "1-B",
"2-B", "3-B" and "F-2"); that subsequently AHAC(AIU) issued in plaintiffs favor Policy
No. 206-4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. "G"
also "G-1") and in said policy the earthquake endorsement clause as indicated in Exhibits
"C-1", "D-1", Exhibits "E" and "F-1" was deleted and the entry under
Endorsements/Warranties at the time of issue read that plaintiff renewed its policy with
AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No. 2064568061-9 (Exh. "H") which carried the entry under "Endorsement/Warranties at Time of
Issue", which read "Endorsement to Include Earthquake Shock (Exh. "6-B-1") in the
amount of P10,700.00 and paid P42,658.14 (Exhs. "6-A" and "6-B") as premium thereof,
computed as follows:

Ite
m

- P7,691,000.00 - on the Clubhouse only

@ .392%;

- 1,500,000.00 - on the furniture, etc. contained in

the building above-mentioned@ .
490%;

393,000.00 - on the two swimming pools, only

(against the peril of earthquake
shock only) @ 0.100%

116,600.00 other buildings include as

follows:

a) Tilter
House

- P19,800.00 - 0.551%

b) Power
House

- P41,000.00 - 0.551%

c) House
Shed

- P55,000.00 - 0.540%

P100,000.00 - for furniture, fixtures, lines aircon and operating equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
Policy No. 206-4568061-9 (Exh. "H") provided that the policy wording and rates in said
policy be copied in the policy to be issued by defendant; that defendant issued Policy No.
31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991 for
P10,700,600.00 for a total premium of P45,159.92 (Exh. "I"); that in the computation of
the premium, defendants Policy No. 31944 (Exh. "I"), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:

RateVarious

Premium P37,420.60 F/L

2,061.52

Typhoon

1,030.76

EC

393.00

ES

Doc.
Stamps

3,068.10

F.S.T.

776.89

Prem.
Tax

409.05

TOTAL

45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs. "C",
"D", "E", "F", "G" and "H"), the premium against the peril of earthquake shock is the
same, that is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" and
"4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G"
and "H") and in Policy No. 31944 issued by defendant, the shock endorsement
provide(sic):
In consideration of the payment by the insured to the company of the sum
included additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this policy due to the contrary, that this insurance
covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. "1-D", "2-D",
"3-A", "4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that
on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and plaintiffs
properties covered by Policy No. 31944 issued by defendant, including the two
swimming pools in its Agoo Playa Resort were damaged.2
After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to
file a formal claim, then assigned the investigation of the claim to an independent claims
adjuster, Bayne Adjusters and Surveyors, Inc.3 On July 30, 1990, respondent, through its adjuster,
requested petitioner to submit various documents in support of its claim. On August 7, 1990,
Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,4 rendered a
preliminary report5 finding extensive damage caused by the earthquake to the clubhouse and to
the two swimming pools. Mr. de Leon stated that "except for the swimming pools, all affected
items have no coverage for earthquake shocks."6 On August 11, 1990, petitioner filed its formal
demand7 for settlement of the damage to all its properties in the Agoo Playa Resort. On August
23, 1990, respondent denied petitioners claim on the ground that its insurance policy only
afforded earthquake shock coverage to the two swimming pools of the resort.8 Petitioner and
respondent failed to arrive at a settlement.9 Thus, on January 24, 1991, petitioner filed a
complaint10 with the regional trial court of Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties,
with interest thereon, as computed under par. 29 of the policy (Annex "B") until fully
paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by
plaintiff on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;

5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against
the peril of earthquake shock, the same premium it paid against earthquake shock only on
the two swimming pools in all the policies issued by AHAC(AIU) (Exhibits "C", "D",
"E", "F" and "G"). From this fact the Court must consequently agree with the position of
defendant that the endorsement rider (Exhibit "7-C") means that only the two swimming
pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the language
used in the policy in litigation is clear and unambiguous hence there is no need for
interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which struck on
July 16, 1990. Defendant having admitted that the damage to the swimming pools was
appraised by defendants adjuster at P386,000.00, defendant must, by virtue of the
contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph
that defendant is liable only for the damage caused to the two (2) swimming pools and
that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As to
the counterclaims of defendant, the Court does not agree that the action filed by plaintiff
is baseless and highly speculative since such action is a lawful exercise of the plaintiffs
right to come to Court in the honest belief that their Complaint is meritorious. The prayer,
therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of
THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the date of
the filing of the Complaint until defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the
Court of Appeals based on the following assigned errors:14

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN

ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER
ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE
ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY
16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS
RIGHT TO RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944;
EXH "I") BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID POLICY
ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND
THE ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16,
1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT
IS ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT
24% PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it
attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not
convinced that the last two (2) insurance contracts (Exhs. "G" and "H"), which the
plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance contract
with Philippine Charter Insurance Corporation is said to have been based and copied
(Exh. "I"), covered an extended earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants
prayer for the imposition of interest 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools, as
the Court a quo and this Court correctly found it to be liable only, it then cannot be said
that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the
rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et al.,
G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception rather
than a rule, it is necessary for the court to make findings of facts and law that would bring
the case within the exception and justify the grant of such award (Country Bankers
Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No.
136914, January 25, 2002). Therefore, holding that the plaintiff-appellants action is not

baseless and highly speculative, We find that the Court a quo did not err in granting the
same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.15
Petitioner filed the present petition raising the following issues:16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2)
SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS
PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED,
ATTORNEYS FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured
and not only the swimming pools. It used the words "any property insured by this policy," and it
should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is
confirmed in the body of the insurance policy itself, which states that it is "[s]ubject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage Endt.,
FEA Warranty & Annual Payment Agreement On Long Term Policies."17
Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission
when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording
of the insurance policy, because the rider is the more deliberate expression of the agreement of
the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of
petitioner and against respondent. It was respondent which caused the ambiguity when it made
the policy in issue.

Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should
be interpreted as a caveat on the standard fire insurance policy, such as to remove the two
swimming pools from the coverage for the risk of fire. It should not be used to limit the
respondents liability for earthquake shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was not paid
under the extended coverage. The premium for the earthquake shock coverage was already
included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend
earthquake shock coverage to all insured properties. When it secured an insurance policy from
respondent, petitioner told respondent that it wanted an exact replica of its latest insurance policy
from American Home Assurance Company (AHAC-AIU), which covered all the resorts
properties for earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake shock. Respondents
insurance adjuster, Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit
the necessary documents for its building claims and other repair costs. Thus, under the doctrine
of equitable estoppel, it cannot deny that the insurance policy it issued to petitioner covered all of
the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of
the Revised Rules of Court as its remedy, and there is no need for calibration of the evidence in
order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments:18
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended
coverage against earthquake shock to petitioners insured properties other than on the two
swimming pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools were
insured against earthquake shock. From 1988 until 1990, the provisions in its policy were
practically identical to its earlier policies, and there was no increase in the premium paid.
AHAC-AIU, in a letter19 by its representative Manuel C. Quijano, categorically stated that its
previous policy, from which respondents policy was copied, covered only earthquake shock for
the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the
policy only covered earthquake shock damage on the two swimming pools. The amount was the
same amount paid by petitioner for earthquake shock coverage on the two swimming pools from
1990-1991. No additional premium was paid to warrant coverage of the other properties in the
resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the earthquake
shock coverage to all of petitioners properties. As per its agreement with petitioner, respondent
copied its policy from the AHAC-AIU policy provided by petitioner. Although the first five
policies contained the said qualification in their riders title, in the last two policies, this

qualification in the title was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such
deletion was a mere inadvertence. This inadvertence did not make the policy incomplete, nor did
it broaden the scope of the endorsement whose descriptive title was merely enumerated. Any
ambiguity in the policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as covered for
earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the
phrase "Item 5 P393,000.00 on the two swimming pools only (against the peril of earthquake
shock only)" meant that only the swimming pools were insured for earthquake damage. The
same phrase is used in toto in the policies from 1989 to 1990, the only difference being the
designation of the two swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for
all the properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as
premium for coverage of the swimming pools against earthquake shock. No other premium was
paid for earthquake shock coverage on the other properties. In addition, the use of the qualifier
"ANY" instead of "ALL" to describe the property covered was done deliberately to enable the
parties to specify the properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be
included in the earthquake shock coverage. Petitioners own evidence shows that it only required
respondent to follow the exact provisions of its previous policy from AHAC-AIU. Respondent
complied with this requirement. Respondents only deviation from the agreement was when it
modified the provisions regarding the replacement cost endorsement. With regard to the issue
under litigation, the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
maintaining that only the two swimming pools were covered for earthquake shock. The
adjusters letter notifying petitioner to present certain documents for its building claims and
repair costs was given to petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase "Item 5 Only"
after the descriptive name or title of the Earthquake Shock Endorsement. However, the words of
the policy reflect the parties clear intention to limit earthquake shock coverage to the two
swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not
object to any deficiency nor did it institute any action to reform the policy. The policy binds the
petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses.
Since respondent was willing and able to pay for the damage caused on the two swimming pools,
it cannot be considered to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.

In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as
included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
earthquake shock only)20
Second, under the breakdown for premium payments,21 it was stated that:

PREMIUM RECAPITULATION

ITEM
NOS.

AMOUNT RATES

PREMIUM

393,000.00 0.100%E/S

393.0022]

xxx

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of nature. 23
Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To Include the
Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE
SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF
A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY
UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x
x x AND TO PAY THE PREMIUM.
Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . .

. . . . . . . . additional premium the Company agrees, notwithstanding what is stated in the
printed conditions of this Policy to the contrary, that this insurance covers loss or damage
(including loss or damage by fire) to any of the property insured by this Policy
occasioned by or through or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they
may be hereby expressly varied) and that any reference therein to loss or damage by fire
should be deemed to apply also to loss or damage occasioned by or through or in
consequence of Earthquake.24
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the
insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.25 All its parts are reflective of the true intent of the parties. The
policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then made
to control; neither do particular words or phrases necessarily determine its character. Petitioner
cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All
the provisions and riders, taken and interpreted together, indubitably show the intention of the
parties to extend earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the
parties to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the
Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event. Thus, an insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a premium.26
(Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the
insured against a specified peril.27 In fire, casualty, and marine insurance, the premium payable
becomes a debt as soon as the risk attaches.28 In the subject policy, no premium payments were
made with regard to earthquake shock coverage, except on the two swimming pools. There is no
mention of any premium payable for the other resort properties with regard to earthquake shock.

This is consistent with the history of petitioners previous insurance policies from AHAC-AIU.
As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy
during the period from March 4, 1984 to March 4, 1985 the coverage on earthquake
shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty,
there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two
swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange
for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course
subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance
to take.

Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14,
1989, did you give written instruction to Forte Insurance Agency advising it that the
earthquake shock coverage must extend to all properties of Agoo Playa Resort in La
Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction
to that effect of extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there
was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is
that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions
with respect to your instructions that all properties must be covered again by earthquake
shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance
Company marked Exhibit "G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I was
contented already that the previous limitation pertaining to the two swimming pools was
already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other Insurance
Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage
Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies"29 to
the insurance policy as proof of the intent of the parties to extend the coverage for earthquake
shock. However, this phrase is merely an enumeration of the descriptive titles of the riders,
clauses, warranties or endorsements to which the policy is subject, as required under Section 50,
paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the
coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone. As
explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:

DIRECT EXAMINATION OF JUAN BARANDA III30

TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been
previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you
have occasion to review of (sic) these six (6) policies issued by your company [in
favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is, on the
basis on (sic) the wordings indicated in Exhibits C to H respectively what was the extent
of the coverage [against] the peril of earthquake shock as provided for in each of the six
(6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as
provided for in each of the six (6) policies extend to the two (2) swimming pools
only?
WITNESS:
Because it says here in the policies, in the enumeration "Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement)," sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.

WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis.
For swimming pools we do cover earthquake shock. For building we covered it
for full earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for
other things other than swimming pool? You are covering building? They are
covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the
thing that comes to my mind is either insuring a swimming pool, foundations,
they are normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E
and F inclusive [remained] its coverage against earthquake shock to two (2) swimming
pools only but that Exhibits G and H respectively entend the coverage against earthquake
shock to all the properties indicated in the respective schedules attached to said policies,
what can you say about that testimony of plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the
other half of it. I assure you that this one covers the two swimming pools with
respect to earthquake shock endorsement. Based on it, if we are going to look at
the premium there has been no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to include the earthquake
shock, I think there is a substantial increase in the premium. We are not only
going to consider the two (2) swimming pools of the other as stated in the policy.
As I see, there is no increase in the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:

They are the same in the sence (sic), in the amount of the coverage. If you are
going to do some computation based on the rates you will arrive at the same
premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was
placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you
have pointed to during your direct-examination, the phrase "Item no. 5 only"
meaning to (sic) the two (2) swimming pools was deleted from the policies issued
by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of
the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent.
Being a company underwriter, we do not cover. . it was inadvertent because of the
previous policies that we have issued with no specific attachments, premium rates
and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and subsequent
acts to the issuance of the insurance policy falsely gave the petitioner assurance that the coverage
of the earthquake shock endorsement included all its properties in the resort. Respondent only

insured the properties as intended by the petitioner. Petitioners own witness testified to this
agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did
you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of procuring the policy
from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as
this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will
be charging will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions
and scope of coverage of Exhibits "I" and "H" sometime in the third week of March,
1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy
wordings as well as scope of coverage of Exhibits "I" and "H" respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that
the policy wordings and rates were copied from the insurance policy I sent them but it
was only when this case erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit "I" and those indicated in
Exhibit "H" respectively?

A. With regard to the wordings I did not notice any difference because it was exactly the
same P393,000.00 on the two (2) swimming pools only against the peril of earthquake
shock which I understood before that this provision will have to be placed here because
this particular provision under the peril of earthquake shock only is requested because
this is an insurance policy and therefore cannot be insured against fire, so this has to be
placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not
proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster,
Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters
and Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement
for earthquake shock covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors,
Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of
the insurance coverage policy and it was indicated under Item 3 specifically that the
coverage is only for earthquake shock. Then, I remember I had a talk with Atty. Umlas
(sic), and I relayed to him what I had found out in the policy and he confirmed to me
indeed only Item 3 which were the two swimming pools have coverage for earthquake
shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except
for the swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I
found out that under Item 3 it was specific on the wordings that on the two swimming
pools only, then enclosed in parenthesis (against the peril[s] of earthquake shock only),
and secondly, when I examined the summary of premium payment only Item 3 which
refers to the swimming pools have a computation for premium payment for earthquake
shock and all the other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on
the general rule that insurance contracts are contracts of adhesion which should be liberally

construed in favor of the insured and strictly against the insurer company which usually prepares
it.31 A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations
in the contract, while the other party merely affixes his signature or his "adhesion" thereto.
Through the years, the courts have held that in these type of contracts, the parties do not bargain
on equal footing, the weaker party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker party whom the courts of justice
must protect.32 Consequently, any ambiguity therein is resolved against the insurer, or construed
liberally in favor of the insured.33
The case law will show that this Court will only rule out blind adherence to terms where facts
and circumstances will show that they are basically one-sided.34 Thus, we have called on lower
courts to remain careful in scrutinizing the factual circumstances behind each case to determine
the efficacy of the claims of contending parties. In Development Bank of the Philippines v.
National Merchandising Corporation, et al.,35 the parties, who were acute businessmen of
experience, were presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot
claim it did not know the provisions of the policy. From the inception of the policy, petitioner
had required the respondent to copy verbatim the provisions and terms of its latest insurance
policy from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in
securing the insurance policy of petitioner, is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those
facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine
Charter Insurance Corporation as long as it will follow the same or exact provisions of
the previous insurance policy we had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in
the American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the AIU Policy
No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 2064568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some

terms, specifically in the replacement cost endorsement, but the principal provisions of the policy
remained essentially similar to AHAC-AIUs policy. Consequently, we cannot apply the "fine
print" or "contract of adhesion" rule in this case as the parties intent to limit the coverage of the
policy to the two swimming pools only is not ambiguous.37
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for
certiorari is dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. No. 141462 December 15, 2005
DANZAS CORPORATION and ALL TRANSPORT NETWORK, INC., Petitioners,
vs.
HON. ZEUS C. ABROGAR, Presiding Judge of Br. 150 of Makati City, SEABOARD
EASTERN INSURANCE CO., INC. and PHILIPPINE SKYLANDERS, INC., Respondents.
DECISION
CORONA, J.:
Petitioner Danzas Corporation, through its agent, petitioner All Transport Network brings to us
this petition for review on certiorari1 questioning the decision2 and resolution3 of the Court of
Appeals which affirmed two orders issued by the Regional Trial Court, Makati City, Branch
150.4
The facts of the case follow.5
On February 22, 1994, petitioner Danzas took a shipment of nine packages of ICS watches for
transport to Manila. The consignee, International Freeport Traders, Inc. (IFTI) secured Marine
Risk Note No. 0000342 from private respondent Seaboard.
On March 2, 1994, the Korean Airlines plane carrying the goods arrived in Manila and
discharged the goods to the custody of private respondent Philippine Skylanders, Inc. for
safekeeping. On withdrawal of the shipment from private respondent Skylanders warehouse,
IFTI noted that one package containing 475 watches was shortlanded while the remaining eight
were found to have sustained tears on sides and the retape of flaps. On further examination and
inventory of the cartons, it was discovered that 176 Guess watches were missing. Private
respondent Seaboard, as insurer, paid the losses to IFTI.
On February 23, 1995, Seaboard, invoking its right of subrogation, filed a complaint against
Skylanders, petitioner and its authorized representative, petitioner All Transport Network, Inc.
(ATN), praying for actual damages in the amount of P612,904.97 plus legal interest, attorneys
fees and cost of suit. Petitioners impleaded Korean Airlines (KAL) as third-party defendant.

While the case was pending, IFTIs treasurer, Mary Eileen Gozon accepted the proposal of KAL
to settle consignees claim by paying the amount of US $522.20. On May 8, 1996, Felipe
Acebedo, IFTIs representative received a check from KAL and correspondingly signed a release
form.
On July 2, 1996, petitioners filed a motion to dismiss the case on the ground that private
respondent Seaboards demand had been paid or otherwise extinguished by KAL.
On December 9, 1996, the trial court issued an order denying the motion to dismiss. Petitioners,
private respondent Skylanders and KAL filed separate motions for reconsideration. Prior to the
resolution of these motions, the trial court allowed private respondent Skylanders to present
evidence in a preliminary hearing on November 14, 1997, after which the court set a date to hear
the presentation of rebuttal evidence.
On December 5, 1997, petitioners filed a manifestation and motion for reconsideration of the
order of the trial court dated November 14, 1997, questioning the propriety of the preliminary
hearing.
On February 18, 1998, the trial court issued an order denying: (1) the motion for reconsideration
of the December 9, 1996 order filed by petitioners, private respondent Skylanders and KAL; (2)
the motion to dismiss filed by Skylanders and (3) petitioners motion for reconsideration of the
November 14, 1997 order.
On April 6, 1998, petitioners filed in the Court of Appeals a special civil action for certiorari
under Rule 65 of the Rules of Court. On March 5, 1999, the CA dismissed the petition.6
Petitioners filed7 a motion for reconsideration but this was denied.8
Hence, this petition.
Petitioners principal contention is that private respondents right of subrogation was
extinguished when IFTI received payment from KAL in settlement of its obligation. They also
claim that public respondent committed grave abuse of discretion by refusing to dismiss the case
on that ground. Finally, they claim that, by granting private respondent Skylanders a preliminary
hearing on an affirmative defense other than one of the grounds stated in Section 1, Rule 16 of
the 1997 Rules of Civil Procedure, public respondent committed another grave abuse of
discretion.
For its part, private respondent Seaboard argues that the payment made by the tortfeasor did not
relieve it of liability because at the time of payment, its (Seaboards) suit against petitioners was
already ongoing. It also insists that because the assailed order was interlocutory, it was not a
proper subject for certiorari.9
Private respondent Skylanders likewise contends that the order denying dismissal cannot be the
subject of certiorari in the absence of grave abuse of discretion. It also defends the trial courts

order granting a preliminary hearing, saying that, assuming the trial court had erroneously
granted such a hearing, such error was merely one of judgment and not of jurisdiction as to merit
certiorari.10
The petition has no merit.
It is true that the doctrine in Manila Mahogany Manufacturing Corporation v. Court of Appeals11
remains the controlling doctrine on the issue of whether the tortfeasor, by settling with the
insured, defeats the right to subrogation of the insurer. According to Manila Mahogany:
Since the insurer can be subrogated to only such rights as the insured may have, should the
insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the
insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover
from the insured whatever it has paid to the latter, unless the release was made with the consent
of the insurer.
This is buttressed by a later decision, Pan Malayan Insurance Corporation v. Court of Appeals,12
in which we cited a number of exceptions to the rule laid down in Article 2207 of the Civil
Code.13 Under the first of these exceptions, "if the assured by his own act releases the wrongdoer
or third party liable for the loss or damage from liability, the insurers right of subrogation is
defeated."
However, certain factual differences pointed out by private respondent Seaboard render this
doctrine inapplicable. In Manila Mahogany, the tortfeasor San Miguel Corporation paid the
insured without knowing that the insurer had already made such payment. KAL was not similarly
situated, being fully aware of the prior payment made by the insurer to the consignee. Private
respondent Seaboard asserts that, being in bad faith, KAL should bear the consequences of its
actions. 14
While Manila Mahogany is silent on whether the existence of good faith or bad faith on the
tortfeasors part affects the insurers right of subrogation, there exists a wealth of U.S.
jurisprudence holding that whenever the wrongdoer settles with the insured without the consent
of the insurer and with knowledge of the insurers payment and right of subrogation, such right is
not defeated by the settlement.15 Because this doctrine is actually consistent with the facts of
Mahogany and helps fill a slight gap left by our ruling in that case, we adopt it now. The trial
court correctly refused to dismiss the case. In that respect, therefore, the trial court did not
commit grave abuse of discretion which would justify certiorari.
We likewise find that no grave abuse of discretion was committed by public respondent when it
granted private respondent Skylanders motion for a preliminary hearing.
In California and Hawaiian Sugar Company v. Pioneer Insurance and Surety Corporation,16 we
held that a preliminary hearing was not mandatory but was rather subject to the discretion of the
trial court. We found in that instance that the trial court had committed grave abuse of discretion

in refusing the partys motion for a preliminary hearing on the ground that the case was
premature, not having been submitted for arbitration. A preliminary hearing could have settled
the entire case, thereby helping decongest the dockets. It was therefore the refusal to allow the
most efficient and expeditious process which we condemned.
In the instant case, we are not convinced that public respondents act of allowing a preliminary
hearing constituted grave abuse of discretion.
In Land Bank of the Philippines v. the Court of Appeals17 we discussed the meaning of "grave
abuse of discretion:"
Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction or, in other words, where the power is exercised in an arbitrary
manner by reason of passion, prejudice, or personal hostility, and it must be so patent or gross as
to amount to an evasion of a positive duty or to a virtual refusal to perform the duty enjoined or
to act at all in contemplation of law.
The special civil action for certiorari is a remedy designed for the correction of errors of
jurisdiction and not errors of judgment. The raison detre for the rule is when a court
exercises its jurisdiction, an error committed while so engaged does not deprive it of the
jurisdiction being exercised when the error is committed. If it did, every error committed by a
court would deprive it of its jurisdiction and every erroneous judgment would be a void
judgment. In such a scenario, the administration of justice would not survive. Hence, where the
issue or question involved affects the wisdom or legal soundness of the decisionnot the
jurisdiction of the court to render said decisionthe same is beyond the province of a
special civil action for certiorari. (emphasis supplied)
Public respondents order granting the preliminary hearing does not at all fit the description
above. At worst, it was an error in judgment which is beyond the domain of certiorari.
WHEREFORE, in view of the foregoing, the petition is hereby DENIED. The decision and
resolution of the Court of Appeals are AFFIRMED.
Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 144274

September 20, 2004

NOSTRADAMUS VILLANUEVA, petitioner,

vs.
PRISCILLA R. DOMINGO and LEANDRO LUIS R. DOMINGO, respondents.
DECISION
CORONA, J.:
This is a petition to review the decision1 of the Court of Appeals in CA-G.R. CV No. 52203
affirming in turn the decision of the trial court finding petitioner liable to respondent for
damages. The dispositive portion read:
WHEREFORE, the appealed decision is hereby AFFIRMED except the award of
attorneys fees including appearance fees which is DELETED.
SO ORDERED.2
The facts of the case, as summarized by the Court of Appeals, are as follows:
[Respondent] Priscilla R. Domingo is the registered owner of a silver Mitsubishi Lancer
Car model 1980 bearing plate No. NDW 781 91 with [co-respondent] Leandro Luis R.
Domingo as authorized driver. [Petitioner] Nostradamus Villanueva was then the
registered "owner" of a green Mitsubishi Lancer bearing Plate No. PHK 201 91.

On 22 October 1991 at about 9:45 in the evening, following a green traffic light,
[respondent] Priscilla Domingos silver Lancer car with Plate No. NDW 781 91 then
driven by [co-respondent] Leandro Luis R. Domingo was cruising along the middle lane
of South Superhighway at moderate speed from north to south. Suddenly, a green
Mitsubishi Lancer with plate No. PHK 201 91 driven by Renato Dela Cruz Ocfemia
darted from Vito Cruz Street towards the South Superhighway directly into the path of
NDW 781 91 thereby hitting and bumping its left front portion. As a result of the impact,
NDW 781 91 hit two (2) parked vehicles at the roadside, the second hitting another
parked car in front of it.
Per Traffic Accident Report prepared by Traffic Investigator Pfc. Patrocinio N. Acido,
Renato dela Cruz Ocfemia was driving with expired license and positive for alcoholic
breath. Hence, Manila Assistant City Prosecutor Oscar A. Pascua recommended the filing
of information for reckless imprudence resulting to (sic) damage to property and physical
injuries.
The original complaint was amended twice: first, impleading Auto Palace Car Exchange
as commercial agent and/or buyer-seller and second, impleading Albert Jaucian as
principal defendant doing business under the name and style of Auto Palace Car
Exchange.
Except for Ocfemia, all the defendants filed separate answers to the complaint.
[Petitioner] Nostradamus Villanueva claimed that he was no longer the owner of the car
at the time of the mishap because it was swapped with a Pajero owned by Albert
Jaucian/Auto Palace Car Exchange. For her part, Linda Gonzales declared that her
presence at the scene of the accident was upon the request of the actual owner of the
Mitsubishi Lancer (PHK 201 91) [Albert Jaucian] for whom she had been working as
agent/seller. On the other hand, Auto Palace Car Exchange represented by Albert Jaucian
claimed that he was not the registered owner of the car. Moreover, it could not be held
subsidiary liable as employer of Ocfemia because the latter was off-duty as utility
employee at the time of the incident. Neither was Ocfemia performing a duty related to
his employment.3
After trial, the trial court found petitioner liable and ordered him to pay respondent actual, moral
and exemplary damages plus appearance and attorneys fees:
WHEREFORE, judgment is hereby rendered for the plaintiffs, ordering Nostradamus
Villanueva to pay the amount of P99,580 as actual damages, P25,000.00 as moral
damages, P25,000.00 as exemplary damages and attorneys fees in the amount of
P10,000.00 plus appearance fees of P500.00 per hearing with legal interest counted from
the date of judgment. In conformity with the law on equity and in accordance with the
ruling in First Malayan Lending and Finance Corporation vs. Court of Appeals (supra),

Albert Jaucian is hereby ordered to indemnify Nostradamus Villanueva for whatever

amount the latter is hereby ordered to pay under the judgment.
SO ORDERED.4
The CA upheld the trial courts decision but deleted the award for appearance and attorneys fees
because the justification for the grant was not stated in the body of the decision. Thus, this
petition for review which raises a singular issue:
MAY THE REGISTERED OWNER OF A MOTOR VEHICLE BE HELD LIABLE FOR
DAMAGES ARISING FROM A VEHICULAR ACCIDENT INVOLVING HIS MOTOR
VEHICLE WHILE BEING OPERATED BY THE EMPLOYEE OF ITS BUYER
WITHOUT THE LATTERS CONSENT AND KNOWLEDGE?5
Yes.
We have consistently ruled that the registered owner of any vehicle is directly and primarily
responsible to the public and third persons while it is being operated.6 The rationale behind such
doctrine was explained way back in 1957 in Erezo vs. Jepte7:
The principle upon which this doctrine is based is that in dealing with vehicles registered under
the Public Service Law, the public has the right to assume or presume that the registered owner is
the actual owner thereof, for it would be difficult for the public to enforce the actions that they
may have for injuries caused to them by the vehicles being negligently operated if the public
should be required to prove who the actual owner is. How would the public or third persons
know against whom to enforce their rights in case of subsequent transfers of the vehicles? We do
not imply by his doctrine, however, that the registered owner may not recover whatever amount
he had paid by virtue of his liability to third persons from the person to whom he had actually
sold, assigned or conveyed the vehicle.
Under the same principle the registered owner of any vehicle, even if not used for a
public service, should primarily be responsible to the public or to third persons for
injuries caused the latter while the vehicle is being driven on the highways or streets. The
members of the Court are in agreement that the defendant-appellant should be held liable
to plaintiff-appellee for the injuries occasioned to the latter because of the negligence of
the driver, even if the defendant-appellant was no longer the owner of the vehicle at the
time of the damage because he had previously sold it to another. What is the legal basis
for his (defendant-appellants) liability?
There is a presumption that the owner of the guilty vehicle is the defendant-appellant as he is the
registered owner in the Motor Vehicles Office. Should he not be allowed to prove the truth, that
he had sold it to another and thus shift the responsibility for the injury to the real and actual
owner? The defendant holds the affirmative of this proposition; the trial court held the negative.

The Revised Motor Vehicle Law (Act No. 3992, as amended) provides that no vehicle may be
used or operated upon any public highway unless the same is property registered. It has been
stated that the system of licensing and the requirement that each machine must carry a
registration number, conspicuously displayed, is one of the precautions taken to reduce the
danger of injury to pedestrians and other travelers from the careless management of automobiles.
And to furnish a means of ascertaining the identity of persons violating the laws and ordinances,
regulating the speed and operation of machines upon the highways (2 R.C.L. 1176). Not only are
vehicles to be registered and that no motor vehicles are to be used or operated without being
properly registered for the current year, but that dealers in motor vehicles shall furnish thee
Motor Vehicles Office a report showing the name and address of each purchaser of motor vehicle
during the previous month and the manufacturers serial number and motor number. (Section
5(c), Act No. 3992, as amended.)
Registration is required not to make said registration the operative act by which ownership in
vehicles is transferred, as in land registration cases, because the administrative proceeding of
registration does not bear any essential relation to the contract of sale between the parties
(Chinchilla vs. Rafael and Verdaguer, 39 Phil. 888), but to permit the use and operation of the
vehicle upon any public highway (section 5 [a], Act No. 3992, as amended). The main aim of
motor vehicle registration is to identify the owner so that if any accident happens, or that any
damage or injury is caused by the vehicle on the public highways, responsibility therefore can be
fixed on a definite individual, the registered owner. Instances are numerous where vehicles
running on public highways caused accidents or injuries to pedestrians or other vehicles without
positive identification of the owner or drivers, or with very scant means of identification. It is to
forestall these circumstances, so inconvenient or prejudicial to the public, that the motor vehicle
registration is primarily ordained, in the interest of the determination of persons responsible for
damages or injuries caused on public highways:
One of the principal purposes of motor vehicles legislation is identification of the vehicle and of
the operator, in case of accident; and another is that the knowledge that means of detection are
always available may act as a deterrent from lax observance of the law and of the rules of
conservative and safe operation. Whatever purpose there may be in these statutes, it is
subordinate at the last to the primary purpose of rendering it certain that the violator of the law or
of the rules of safety shall not escape because of lack of means to discover him. The purpose of
the statute is thwarted, and the displayed number becomes a "share and delusion," if courts
would entertain such defenses as that put forward by appellee in this case. No responsible person
or corporation could be held liable for the most outrageous acts of negligence, if they should be
allowed to pace a "middleman" between them and the public, and escape liability by the manner
in which they recompense servants. (King vs. Brenham Automobile Co., Inc. 145 S.W. 278,
279.)
With the above policy in mind, the question that defendant-appellant poses is: should not the
registered owner be allowed at the trial to prove who the actual and real owner is, and in
accordance with such proof escape or evade responsibility by and lay the same on the person

actually owning the vehicle? We hold with the trial court that the law does not allow him to do
so; the law, with its aim and policy in mind, does not relieve him directly of the responsibility
that the law fixes and places upon him as an incident or consequence of registration. Were a
registered owner allowed to evade responsibility by proving who the supposed transferee or
owner is, it would be easy for him, by collusion with others or otherwise, to escape said
responsibility and transfer the same to an indefinite person, or to one who possesses no property
with which to respond financially for the damage or injury done. A victim of recklessness on the
public highways is usually without means to discover or identify the person actually causing the
injury or damage. He has no means other than by a recourse to the registration in the Motor
Vehicles Office to determine who is the owner. The protection that the law aims to extend to him
would
become illusory were the registered owner given the opportunity to escape liability by disproving
his ownership. If the policy of the law is to be enforced and carried out, the registered owner
should not be allowed to prove the contrary to the prejudice of the person injured, that is, to
prove that a third person or another has become the owner, so that he may thereby be relieved of
the responsibility to the injured person.
The above policy and application of the law may appear quite harsh and would seem to conflict
with truth and justice. We do not think it is so. A registered owner who has already sold or
transferred a vehicle has the recourse to a third-party complaint, in the same action brought
against him to recover for the damage or injury done, against the vendee or transferee of the
vehicle. The inconvenience of the suit is no justification for relieving him of liability; said
inconvenience is the price he pays for failure to comply with the registration that the law
demands and requires.
In synthesis, we hold that the registered owner, the defendant-appellant herein, is primarily
responsible for the damage caused to the vehicle of the plaintiff-appellee, but he (defendantappellant) has a right to be indemnified by the real or actual owner of the amount that he may be
required to pay as damage for the injury caused to the plaintiff-appellant.8
Petitioner insists that he is not liable for damages since the driver of the vehicle at the time of the
accident was not an authorized driver of the new (actual) owner of the vehicle. He claims that the
ruling in First Malayan Leasing and Finance Corporation vs. CA9 implies that to hold the
registered owner liable for damages, the driver of the vehicle must have been authorized, allowed
and permitted by its actual owner to operate and drive it. Thus, if the vehicle is driven without
the knowledge and consent of the actual owner, then the registered owner cannot be held liable
for damages.
He further argues that this was the underlying theory behind Duavit vs. CA10 wherein the court
absolved the registered owner from liability after finding that the vehicle was virtually stolen
from the owners garage by a person who was neither authorized nor employed by the owner.

Petitioner concludes that the ruling in Duavit and not the one in First Malayan should be
applicable to him.
Petitioners argument lacks merit. Whether the driver is authorized or not by the actual owner is
irrelevant to determining the liability of the registered owner who the law holds primarily and
directly responsible for any accident, injury or death caused by the operation of the vehicle in the
streets and highways. To require the driver of the vehicle to be authorized by the actual owner
before the registered owner can be held accountable is to defeat the very purpose why motor
vehicle legislations are enacted in the first place.
Furthermore, there is nothing in First Malayan which even remotely suggests that the driver
must be authorized before the registered owner can be held accountable. In First Malayan, the
registered owner, First Malayan Corporation, was held liable for damages arising from the
accident even if the vehicle involved was already owned by another party:
This Court has consistently ruled that regardless of who the actual owner is of a motor
vehicle might be, the registered owner is the operator of the same with respect to the
public and third persons, and as such, directly and primarily responsible for the
consequences of its operation. In contemplation of law, the owner/operator of record is
the employer of the driver, the actual operator and employer being considered merely as
his agent (MYC-Agro-Industrial Corporation vs. Vda. de Caldo, 132 SCRA 10, citing
Vargas vs. Langcay, 6 SCRA 174; Tamayo vs. Aquino, 105 Phil. 949).
We believe that it is immaterial whether or not the driver was actually employed
by the operator of record. It is even not necessary to prove who the actual owner
of the vehicle and the employer of the driver is. Granting that, in this case, the
father of the driver is the actual owner and that he is the actual employer,
following the well-settled principle that the operator of record continues to be the
operator of the vehicle in contemplation of law, as regards the public and third
person, and as such is responsible for the consequences incident to its operation,
we must hold and consider such owner-operator of record as the employer, in
contemplation of law, of the driver. And, to give effect to this policy of law as
enunciated in the above cited decisions of this Court, we must now extend the
same and consider the actual operator and employer as the agent of the operator of
record.11
Contrary to petitioners position, the First Malayan ruling is applicable to him since the case
involves the same set of facts the registered owner had previously sold the vehicle to
someone else and was being driven by an employee of the new (actual) owner. Duavit
is inapplicable since the vehicle there was not transferred to another; the registered and
the actual owner was one and the same person. Besides, in Duavit, the defense of the
registered owner, Gilberto Duavit, was that the vehicle was practically stolen from his
garage by Oscar Sabiano, as affirmed by the latter:

Defendant Sabiano, in his testimony, categorically admitted that he took the jeep
from the garage of defendant Duavit without the consent and authority of the
latter. He testified further that Duavit even filed charges against him for the theft
of the jeep but which Duavit did not push through as his (Sabianos) parents
apologized to Duavit on his behalf.12
As correctly pointed out by the CA, the Duavit ruling is not applicable to petitioners case
since the circumstance of unauthorized use was not present. He in fact voluntarily
delivered his car to Albert Jaucian as part of the downpayment for a vehicle he
purchased from Jaucian. Thus, he could not claim that the vehicle was stolen from him
since he voluntarily ceded possession thereof to Jaucian. It was the latter, as the new
(actual) owner, who could have raised the defense of theft to prove that he was not
liable for the acts of his employee Ocfemia. Thus, there is no reason to apply the Duavit
ruling to this case.
The ruling in First Malayan has been reiterated in BA Finance Corporation vs. CA13 and
more recently in Aguilar, Sr. vs. Commercial Savings Bank.14 In BA Finance, we held the
registered owner liable even if, at the time of the accident, the vehicle was leased by
another party and was driven by the lessees employee. In Aguilar, the registered
owner-bank answered for damages for the accident even if the vehicle was being driven
by the Vice-President of the Bank in his private capacity and not as an officer of the
Bank, as claimed by the Bank. We find no reason to deviate from these decisions.
The main purpose of vehicle registration is the easy identification of the owner who can
be held responsible for any accident, damage or injury caused by the vehicle. Easy
identification prevents inconvenience and prejudice to a third party injured by one who is
unknown or unidentified. To allow a registered owner to escape liability by claiming that
the driver was not authorized by the new (actual) owner results in the public detriment
the law seeks to avoid.
Finally, the issue of whether or not the driver of the vehicle during the accident was
authorized is not at all relevant to determining the liability of the registered owner. This
must be so if we are to comply with the rationale and principle behind the registration
requirement under the motor vehicle law.
WHEREFORE, the petition is hereby DENIED. The January 26, 2000 decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
SECOND DIVISION

G.R. No. 137775. March 31, 2005

FGU INSURANCE CORPORATION, Petitioners,
vs.
THE COURT OF APPEALS, SAN MIGUEL CORPORATION, and ESTATE OF ANG
GUI, represented by LUCIO, JULIAN, and JAIME, all surnamed ANG, and CO TO,
Respondents.
G.R. No. 140704. March 31, 2005
ESTATE OF ANG GUI, Represented by LUCIO, JULIAN and JAIME, all surnamed ANG,
and CO TO, Petitioners,
vs.
THE HONORABLE COURT OF APPEALS, SAN MIGUEL CORP., and FGU
INSURANCE CORP., Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us are two separate Petitions for review assailing the Decision1 of the Court of Appeals in
CA-G.R. CV No. 49624 entitled, "San Miguel Corporation, Plaintiff-Appellee versus Estate of
Ang Gui, represented by Lucio, Julian and Jaime, all surnamed Ang, and Co To, DefendantsAppellants, ThirdParty Plaintiffs versus FGU Insurance Corporation, Third-Party DefendantAppellant," which affirmed in toto the decision2 of the Regional Trial Court of Cebu City, Branch
22. The dispositive portion of the Court of Appeals decision reads:
WHEREFORE, for all the foregoing, judgment is hereby rendered as follows:
1) Ordering defendants to pay plaintiff the sum of P1,346,197.00 and an interest of 6% per
annum to be reckoned from the filing of this case on October 2, 1990;
2) Ordering defendants to pay plaintiff the sum of P25,000.00 for attorneys fees and an
additional sum of P10,000.00 as litigation expenses;
3) With cost against defendants.
For the Third-Party Complaint:
1) Ordering third-party defendant FGU Insurance Company to pay and reimburse defendants the
amount of P632,700.00.3
The Facts

Evidence shows that Anco Enterprises Company (ANCO), a partnership between Ang Gui and
Co To, was engaged in the shipping business. It owned the M/T ANCO tugboat and the D/B
Lucio barge which were operated as common carriers. Since the D/B Lucio had no engine of its
own, it could not maneuver by itself and had to be towed by a tugboat for it to move from one
place to another.
On 23 September 1979, San Miguel Corporation (SMC) shipped from Mandaue City, Cebu, on
board the D/B Lucio, for towage by M/T ANCO, the following cargoes:
Bill of Lading No. Shipment Destination
1 25,000 cases Pale Pilsen Estancia, Iloilo
350 cases Cerveza Negra Estancia, Iloilo
2 15,000 cases Pale Pilsen San Jose, Antique
200 cases Cerveza Negra San Jose, Antique
The consignee for the cargoes covered by Bill of Lading No. 1 was SMCs Beer Marketing
Division (BMD)-Estancia Beer Sales Office, Estancia, Iloilo, while the consignee for the cargoes
covered by Bill of Lading No. 2 was SMCs BMD-San Jose Beer Sales Office, San Jose,
Antique.
The D/B Lucio was towed by the M/T ANCO all the way from Mandaue City to San Jose,
Antique. The vessels arrived at San Jose, Antique, at about one oclock in the afternoon of 30
September 1979. The tugboat M/T ANCO left the barge immediately after reaching San Jose,
Antique.
When the barge and tugboat arrived at San Jose, Antique, in the afternoon of 30 September 1979,
the clouds over the area were dark and the waves were already big. The arrastre workers
unloading the cargoes of SMC on board the D/B Lucio began to complain about their difficulty
in unloading the cargoes. SMCs District Sales Supervisor, Fernando Macabuag, requested
ANCOs representative to transfer the barge to a safer place because the vessel might not be able
to withstand the big waves.
ANCOs representative did not heed the request because he was confident that the barge could
withstand the waves. This, notwithstanding the fact that at that time, only the M/T ANCO was
left at the wharf of San Jose, Antique, as all other vessels already left the wharf to seek shelter.
With the waves growing bigger and bigger, only Ten Thousand Seven Hundred Ninety (10,790)
cases of beer were discharged into the custody of the arrastre operator.
At about ten to eleven oclock in the evening of 01 October 1979, the crew of D/B Lucio
abandoned the vessel because the barges rope attached to the wharf was cut off by the big

waves. At around midnight, the barge run aground and was broken and the cargoes of beer in the
barge were swept away.
As a result, ANCO failed to deliver to SMCs consignee Twenty-Nine Thousand Two Hundred
Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra. The
value per case of Pale Pilsen was Forty-Five Pesos and Twenty Centavos (P45.20). The value of
a case of Cerveza Negra was Forty-Seven Pesos and Ten Centavos (P47.10), hence, SMCs claim
against ANCO amounted to One Million Three Hundred Forty-Six Thousand One Hundred
Ninety-Seven Pesos (P1,346,197.00).
As a consequence of the incident, SMC filed a complaint for Breach of Contract of Carriage and
Damages against ANCO for the amount of One Million Three Hundred Forty-Six Thousand One
Hundred Ninety-Seven Pesos (P1,346,197.00) plus interest, litigation expenses and Twenty-Five
Percent (25%) of the total claim as attorneys fees.
Upon Ang Guis death, ANCO, as a partnership, was dissolved hence, on 26 January 1993, SMC
filed a second amended complaint which was admitted by the Court impleading the surviving
partner, Co To and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed
Ang. The substituted defendants adopted the original answer with counterclaim of ANCO "since
the substantial allegations of the original complaint and the amended complaint are practically
the same."
ANCO admitted that the cases of beer Pale Pilsen and Cerveza Negra mentioned in the
complaint were indeed loaded on the vessel belonging to ANCO. It claimed however that it had
an agreement with SMC that ANCO would not be liable for any losses or damages resulting to
the cargoes by reason of fortuitous event. Since the cases of beer Pale Pilsen and Cerveza Negra
were lost by reason of a storm, a fortuitous event which battered and sunk the vessel in which
they were loaded, they should not be held liable. ANCO further asserted that there was an
agreement between them and SMC to insure the cargoes in order to recover indemnity in case of
loss. Pursuant to that agreement, the cargoes to the extent of Twenty Thousand (20,000) cases
was insured with FGU Insurance Corporation (FGU) for the total amount of Eight Hundred
Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) per Marine Insurance Policy No.
29591.
Subsequently, ANCO, with leave of court, filed a Third-Party Complaint against FGU, alleging
that before the vessel of ANCO left for San Jose, Antique with the cargoes owned by SMC, the
cargoes, to the extent of Twenty Thousand (20,000) cases, were insured with FGU for a total
amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) under
Marine Insurance Policy No. 29591. ANCO further alleged that on or about 02 October 1979, by
reason of very strong winds and heavy waves brought about by a passing typhoon, the vessel run
aground near the vicinity of San Jose, Antique, as a result of which, the vessel was totally
wrecked and its cargoes owned by SMC were lost and/or destroyed. According to ANCO, the
loss of said cargoes occurred as a result of risks insured against in the insurance policy and

during the existence and lifetime of said insurance policy. ANCO went on to assert that in the
remote possibility that the court will order ANCO to pay SMCs claim, the third-party defendant
corporation should be held liable to indemnify or reimburse ANCO whatever amounts, or
damages, it may be required to pay to SMC.
In its answer to the Third-Party complaint, third-party defendant FGU admitted the existence of
the Insurance Policy under Marine Cover Note No. 29591 but maintained that the alleged loss of
the cargoes covered by the said insurance policy cannot be attributed directly or indirectly to any
of the risks insured against in the said insurance policy. According to FGU, it is only liable under
the policy to Third-party Plaintiff ANCO and/or Plaintiff SMC in case of any of the following:
a) total loss of the entire shipment;
b) loss of any case as a result of the sinking of the vessel; or
c) loss as a result of the vessel being on fire.
Furthermore, FGU alleged that the Third-Party Plaintiff ANCO and Plaintiff SMC failed to
exercise ordinary diligence or the diligence of a good father of the family in the care and
supervision of the cargoes insured to prevent its loss and/or destruction.
Third-Party defendant FGU prayed for the dismissal of the Third-Party Complaint and asked for
actual, moral, and exemplary damages and attorneys fees.
The trial court found that while the cargoes were indeed lost due to fortuitous event, there was
failure on ANCOs part, through their representatives, to observe the degree of diligence required
that would exonerate them from liability. The trial court thus held the Estate of Ang Gui and Co
To liable to SMC for the amount of the lost shipment. With respect to the Third-Party complaint,
the court a quo found FGU liable to bear Fifty-Three Percent (53%) of the amount of the lost
cargoes. According to the trial court:
. . . Evidence is to the effect that the D/B Lucio, on which the cargo insured, run-aground and
was broken and the beer cargoes on the said barge were swept away. It is the sense of this Court
that the risk insured against was the cause of the loss.
...
Since the total cargo was 40,550 cases which had a total amount of P1,833,905.00 and the
amount of the policy was only for P858,500.00, defendants as assured, therefore, were
considered co-insurers of third-party defendant FGU Insurance Corporation to the extent of
975,405.00 value of the cargo. Consequently, inasmuch as there was partial loss of only
P1,346,197.00, the assured shall bear 53% of the loss4 [Emphasis ours]

The appellate court affirmed in toto the decision of the lower court and denied the motion for
reconsideration and the supplemental motion for reconsideration.
Hence, the petitions.
The Issues
In G.R. No. 137775, the grounds for review raised by petitioner FGU can be summarized into
two: 1) Whether or not respondent Court of Appeals committed grave abuse of discretion in
holding FGU liable under the insurance contract considering the circumstances surrounding the
loss of the cargoes; and 2) Whether or not the Court of Appeals committed an error of law in
holding that the doctrine of res judicata applies in the instant case.
In G.R. No. 140704, petitioner Estate of Ang Gui and Co To assail the decision of the appellate
court based on the following assignments of error: 1) The Court of Appeals committed grave
abuse of discretion in affirming the findings of the lower court that the negligence of the
crewmembers of the D/B Lucio was the proximate cause of the loss of the cargoes; and 2) The
respondent court acted with grave abuse of discretion when it ruled that the appeal was without
merit despite the fact that said court had accepted the decision in Civil Case No. R-19341, as
affirmed by the Court of Appeals and the Supreme Court, as res judicata.
Ruling of the Court
First, we shall endeavor to dispose of the common issue raised by both petitioners in their
respective petitions for review, that is, whether or not the doctrine of res judicata applies in the
instant case.
It is ANCOs contention that the decision in Civil Case No. R-19341,5 which was decided in its
favor, constitutes res judicata with respect to the issues raised in the case at bar.
The contention is without merit. There can be no res judicata as between Civil Case No. R19341 and the case at bar. In order for res judicata to be made applicable in a case, the following
essential requisites must be present: 1) the former judgment must be final; 2) the former
judgment must have been rendered by a court having jurisdiction over the subject matter and the
parties; 3) the former judgment must be a judgment or order on the merits; and 4) there must be
between the first and second action identity of parties, identity of subject matter, and identity of
causes of action.6
There is no question that the first three elements of res judicata as enumerated above are indeed
satisfied by the decision in Civil Case No. R-19341. However, the doctrine is still inapplicable
due to the absence of the last essential requisite of identity of parties, subject matter and causes
of action.

The parties in Civil Case No. R-19341 were ANCO as plaintiff and FGU as defendant while in
the instant case, SMC is the plaintiff and the Estate of Ang Gui represented by Lucio, Julian and
Jaime, all surnamed Ang and Co To as defendants, with the latter merely impleading FGU as
third-party defendant.
The subject matter of Civil Case No. R-19341 was the insurance contract entered into by ANCO,
the owner of the vessel, with FGU covering the vessel D/B Lucio, while in the instant case, the
subject matter of litigation is the loss of the cargoes of SMC, as shipper, loaded in the D/B Lucio
and the resulting failure of ANCO to deliver to SMCs consignees the lost cargo. Otherwise
stated, the controversy in the first case involved the rights and liabilities of the shipowner vis-vis that of the insurer, while the present case involves the rights and liabilities of the shipper vis-vis that of the shipowner. Specifically, Civil Case No. R-19341 was an action for Specific
Performance and Damages based on FGU Marine Hull Insurance Policy No. VMF-MH-13519
covering the vessel D/B Lucio, while the instant case is an action for Breach of Contract of
Carriage and Damages filed by SMC against ANCO based on Bill of Lading No. 1 and No. 2,
with defendant ANCO seeking reimbursement from FGU under Insurance Policy No. MA58486, should the former be held liable to pay SMC.
Moreover, the subject matter of the third-party complaint against FGU in this case is different
from that in Civil Case No. R-19341. In the latter, ANCO was suing FGU for the insurance
contract over the vessel while in the former, the third-party complaint arose from the insurance
contract covering the cargoes on board the D/B Lucio.
The doctrine of res judicata precludes the re-litigation of a particular fact or issue already passed
upon by a court of competent jurisdiction in a former judgment, in another action between the
same parties based on a different claim or cause of action. The judgment in the prior action
operates as estoppel only as to those matters in issue or points controverted, upon the
determination of which the finding or judgment was rendered.7 If a particular point or question is
in issue in the second action, and the judgment will depend on the determination of that
particular point or question, a former judgment between the same parties or their privies will be
final and conclusive in the second if that same point or question was in issue and adjudicated in
the first suit.8
Since the case at bar arose from the same incident as that involved in Civil Case No. R-19341,
only findings with respect to matters passed upon by the court in the former judgment are
conclusive in the disposition of the instant case. A careful perusal of the decision in Civil Case
No. R-19341 will reveal that the pivotal issues resolved by the lower court, as affirmed by both
the Court of Appeals and the Supreme Court, can be summarized into three legal conclusions: 1)
that the D/B Lucio before and during the voyage was seaworthy; 2) that there was proper notice
of loss made by ANCO within the reglementary period; and 3) that the vessel D/B Lucio was a
constructive total loss.

Said decision, however, did not pass upon the issues raised in the instant case. Absent therein
was any discussion regarding the liability of ANCO for the loss of the cargoes. Neither did the
lower court pass upon the issue of the alleged negligence of the crewmembers of the D/B Lucio
being the cause of the loss of the cargoes owned by SMC.
Therefore, based on the foregoing discussion, we are reversing the findings of the Court of
Appeals that there is res judicata.
Anent ANCOs first assignment of error, i.e., the appellate court committed error in concluding
that the negligence of ANCOs representatives was the proximate cause of the loss, said issue is a
question of fact assailing the lower courts appreciation of evidence on the negligence or lack
thereof of the crewmembers of the D/B Lucio. As a rule, findings of fact of lower courts,
particularly when affirmed by the appellate court, are deemed final and conclusive. The Supreme
Court cannot review such findings on appeal, especially when they are borne out by the records
or are based on substantial evidence.9 As held in the case of Donato v. Court of Appeals,10 in this
jurisdiction, it is a fundamental and settled rule that findings of fact by the trial court are entitled
to great weight on appeal and should not be disturbed unless for strong and cogent reasons
because the trial court is in a better position to examine real evidence, as well as to observe the
demeanor of the witnesses while testifying in the case.11
It is not the function of this Court to analyze or weigh evidence all over again, unless there is a
showing that the findings of the lower court are totally devoid of support or are glaringly
erroneous as to constitute palpable error or grave abuse of discretion.12
A careful study of the records shows no cogent reason to fault the findings of the lower court, as
sustained by the appellate court, that ANCOs representatives failed to exercise the extraordinary
degree of diligence required by the law to exculpate them from liability for the loss of the
cargoes.
First, ANCO admitted that they failed to deliver to the designated consignee the Twenty Nine
Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of
Cerveza Negra.
Second, it is borne out in the testimony of the witnesses on record that the barge D/B Lucio had
no engine of its own and could not maneuver by itself. Yet, the patron of ANCOs tugboat M/T
ANCO left it to fend for itself notwithstanding the fact that as the two vessels arrived at the port
of San Jose, Antique, signs of the impending storm were already manifest. As stated by the lower
court, witness Mr. Anastacio Manilag testified that the captain or patron of the tugboat M/T
ANCO left the barge D/B Lucio immediately after it reached San Jose, Antique, despite the fact
that there were already big waves and the area was already dark. This is corroborated by
defendants own witness, Mr. Fernando Macabueg.13
The trial court continued:

At that precise moment, since it is the duty of the defendant to exercise and observe
extraordinary diligence in the vigilance over the cargo of the plaintiff, the patron or captain of
M/T ANCO, representing the defendant could have placed D/B Lucio in a very safe location
before they left knowing or sensing at that time the coming of a typhoon. The presence of big
waves and dark clouds could have warned the patron or captain of M/T ANCO to insure the
safety of D/B Lucio including its cargo. D/B Lucio being a barge, without its engine, as the
patron or captain of M/T ANCO knew, could not possibly maneuver by itself. Had the patron or
captain of M/T ANCO, the representative of the defendants observed extraordinary diligence in
placing the D/B Lucio in a safe place, the loss to the cargo of the plaintiff could not have
occurred. In short, therefore, defendants through their representatives, failed to observe the
degree of diligence required of them under the provision of Art. 1733 of the Civil Code of the
Philippines.14
Petitioners Estate of Ang Gui and Co To, in their Memorandum, asserted that the contention of
respondents SMC and FGU that "the crewmembers of D/B Lucio should have left port at the
onset of the typhoon is like advising the fish to jump from the frying pan into the fire and an
advice that borders on madness."15
The argument does not persuade. The records show that the D/B Lucio was the only vessel left at
San Jose, Antique, during the time in question. The other vessels were transferred and
temporarily moved to Malandong, 5 kilometers from wharf where the barge remained.16 Clearly,
the transferred vessels were definitely safer in Malandong than at the port of San Jose, Antique,
at that particular time, a fact which petitioners failed to dispute
ANCOs arguments boil down to the claim that the loss of the cargoes was caused by the
typhoon Sisang, a fortuitous event (caso fortuito), and there was no fault or negligence on their
part. In fact, ANCO claims that their crewmembers exercised due diligence to prevent or
minimize the loss of the cargoes but their efforts proved no match to the forces unleashed by the
typhoon which, in petitioners own words was, by any yardstick, a natural calamity, a fortuitous
event, an act of God, the consequences of which petitioners could not be held liable for.17
The Civil Code provides:
Art. 1733. Common carriers, from the nature of their business and for reasons of public policy
are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of
the passengers transported by them, according to all the circumstances of each case.
Such extraordinary diligence in vigilance over the goods is further expressed in Articles 1734,
1735, and 1745 Nos. 5, 6, and 7 . . .
Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

...
Art. 1739. In order that the common carrier may be exempted from responsibility, the natural
disaster must have been the proximate and only cause of the loss. However, the common
carrier must exercise due diligence to prevent or minimize loss before, during and after the
occurrence of flood, storm, or other natural disaster in order that the common carrier may be
exempted from liability for the loss, destruction, or deterioration of the goods . . . (Emphasis
supplied)
Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor from
liability)18 by definition, are extraordinary events not foreseeable or avoidable, events that could
not be foreseen, or which though foreseen, were inevitable. It is therefore not enough that the
event should not have been foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid.19
In this case, the calamity which caused the loss of the cargoes was not unforeseen nor was it
unavoidable. In fact, the other vessels in the port of San Jose, Antique, managed to transfer to
another place, a circumstance which prompted SMCs District Sales Supervisor to request that
the D/B Lucio be likewise transferred, but to no avail. The D/B Lucio had no engine and could
not maneuver by itself. Even if ANCOs representatives wanted to transfer it, they no longer had
any means to do so as the tugboat M/T ANCO had already departed, leaving the barge to its own
devices. The captain of the tugboat should have had the foresight not to leave the barge alone
considering the pending storm.
While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster,
ANCO could not escape liability to respondent SMC. The records clearly show the failure of
petitioners representatives to exercise the extraordinary degree of diligence mandated by law. To
be exempted from responsibility, the natural disaster should have been the proximate and only
cause of the loss.20 There must have been no contributory negligence on the part of the common
carrier. As held in the case of Limpangco Sons v. Yangco Steamship Co.:21
. . . To be exempt from liability because of an act of God, the tug must be free from any previous
negligence or misconduct by which that loss or damage may have been occasioned. For,
although the immediate or proximate cause of the loss in any given instance may have been what
is termed an act of God, yet, if the tug unnecessarily exposed the two to such accident by any
culpable act or omission of its own, it is not excused.22
Therefore, as correctly pointed out by the appellate court, there was blatant negligence on the
part of M/T ANCOs crewmembers, first in leaving the engine-less barge D/B Lucio at the mercy
of the storm without the assistance of the tugboat, and again in failing to heed the request of
SMCs representatives to have the barge transferred to a safer place, as was done by the other
vessels in the port; thus, making said blatant negligence the proximate cause of the loss of the
cargoes.

We now come to the issue of whether or not FGU can be held liable under the insurance policy to
reimburse ANCO for the loss of the cargoes despite the findings of the respondent court that such
loss was occasioned by the blatant negligence of the latters employees.
One of the purposes for taking out insurance is to protect the insured against the consequences of
his own negligence and that of his agents. Thus, it is a basic rule in insurance that the
carelessness and negligence of the insured or his agents constitute no defense on the part of the
insurer.23 This rule however presupposes that the loss has occurred due to causes which could not
have been prevented by the insured, despite the exercise of due diligence.
The question now is whether there is a certain degree of negligence on the part of the insured or
his agents that will deprive him the right to recover under the insurance contract. We say there is.
However, to what extent such negligence must go in order to exonerate the insurer from liability
must be evaluated in light of the circumstances surrounding each case. When evidence show that
the insureds negligence or recklessness is so gross as to be sufficient to constitute a willful act,
the insurer must be exonerated.
In the case of Standard Marine Ins. Co. v. Nome Beach L. & T. Co.,24 the United States Supreme
Court held that:
The ordinary negligence of the insured and his agents has long been held as a part of the risk
which the insurer takes upon himself, and the existence of which, where it is the proximate cause
of the loss, does not absolve the insurer from liability. But willful exposure, gross negligence,
negligence amounting to misconduct, etc., have often been held to release the insurer from such
liability.25 [Emphasis ours]
...
In the case of Williams v. New England Insurance Co., 3 Cliff. 244, Fed. Cas. No. 17,731, the
owners of an insured vessel attempted to put her across the bar at Hatteras Inlet. She struck on
the bar and was wrecked. The master knew that the depth of water on the bar was such as to
make the attempted passage dangerous. Judge Clifford held that, under the circumstances, the
loss was not within the protection of the policy, saying:
Authorities to prove that persons insured cannot recover for a loss occasioned by their own
wrongful acts are hardly necessary, as the proposition involves an elementary principle of
universal application. Losses may be recovered by the insured, though remotely occasioned by
the negligence or misconduct of the master or crew, if proximately caused by the perils insured
against, because such mistakes and negligence are incident to navigation and constitute a part of
the perils which those who engage in such adventures are obliged to incur; but it was never
supposed that the insured could recover indemnity for a loss occasioned by his own wrongful act
or by that of any agent for whose conduct he was responsible.26 [Emphasis ours]

From the above-mentioned decision, the United States Supreme Court has made a distinction
between ordinary negligence and gross negligence or negligence amounting to misconduct and
its effect on the insureds right to recover under the insurance contract. According to the Court,
while mistake and negligence of the master or crew are incident to navigation and constitute a
part of the perils that the insurer is obliged to incur, such negligence or recklessness must not be
of such gross character as to amount to misconduct or wrongful acts; otherwise, such negligence
shall release the insurer from liability under the insurance contract.
In the case at bar, both the trial court and the appellate court had concluded from the evidence
that the crewmembers of both the D/B Lucio and the M/T ANCO were blatantly negligent. To
wit:
There was blatant negligence on the part of the employees of defendants-appellants when the
patron (operator) of the tug boat immediately left the barge at the San Jose, Antique wharf
despite the looming bad weather. Negligence was likewise exhibited by the defendantsappellants representative who did not heed Macabuags request that the barge be moved to a
more secure place. The prudent thing to do, as was done by the other sea vessels at San Jose,
Antique during the time in question, was to transfer the vessel to a safer wharf. The negligence of
the defendants-appellants is proved by the fact that on 01 October 1979, the only simple vessel
left at the wharf in San Jose was the D/B Lucio.27 [Emphasis ours]
As stated earlier, this Court does not find any reason to deviate from the conclusion drawn by the
lower court, as sustained by the Court of Appeals, that ANCOs representatives had failed to
exercise extraordinary diligence required of common carriers in the shipment of SMCs cargoes.
Such blatant negligence being the proximate cause of the loss of the cargoes amounting to One
Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00)
This Court, taking into account the circumstances present in the instant case, concludes that the
blatant negligence of ANCOs employees is of such gross character that it amounts to a wrongful
act which must exonerate FGU from liability under the insurance contract.
WHEREFORE, premises considered, the Decision of the Court of Appeals dated 24 February
1999 is hereby AFFIRMED with MODIFICATION dismissing the third-party complaint.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 150094

August 18, 2004

FEDERAL EXPRESS CORPORATION, petitioner,

vs.
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY,
INC., respondents.

DECISION

PANGANIBAN, J.:

Basic is the requirement that before suing to recover loss of or damage to transported goods, the
plaintiff must give the carrier notice of the loss or damage, within the period prescribed by the
Warsaw Convention and/or the airway bill.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the June 4,
2001 Decision2 and the September 21, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR
CV No. 58208. The assailed Decision disposed as follows:
"WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack
of merit. The appealed Decision of Branch 149 of the Regional Trial Court of Makati
City in Civil Case No. 95-1219, entitled 'American Home Assurance Co. and PHILAM
Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS,
INC. (formerly U-WAREHOUSE, INC.),' is hereby AFFIRMED and REITERATED.
"Costs against the [petitioner and Cargohaus, Inc.]."4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The antecedent facts are summarized by the appellate court as follows:
"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of
Nebraska, USA delivered to Burlington Air Express (BURLINGTON), an agent of
[Petitioner] Federal Express Corporation, a shipment of 109 cartons of veterinary
biologicals for delivery to consignee SMITHKLINE and French Overseas Company in
Makati City, Metro Manila. The shipment was covered by Burlington Airway Bill No.
11263825 with the words, 'REFRIGERATE WHEN NOT IN TRANSIT' and
'PERISHABLE' stamp marked on its face. That same day, Burlington insured the cargoes
in the amount of $39,339.00 with American Home Assurance Company (AHAC). The
following day, Burlington turned over the custody of said cargoes to Federal Express
which transported the same to Manila. The first shipment, consisting of 92 cartons arrived
in Manila on January 29, 1994 in Flight No. 0071-28NRT and was immediately stored at
[Cargohaus Inc.'s] warehouse. While the second, consisting of 17 cartons, came in two
(2) days later, or on January 31, 1994, in Flight No. 0071-30NRT which was likewise
immediately stored at Cargohaus' warehouse. Prior to the arrival of the cargoes, Federal
Express informed GETC Cargo International Corporation, the customs broker hired by
the consignee to facilitate the release of its cargoes from the Bureau of Customs, of the
impending arrival of its client's cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after the
cargoes arrived in Manila, a non-licensed custom's broker who was assigned by GETC to
facilitate the release of the subject cargoes, found out, while he was about to cause the
release of the said cargoes, that the same [were] stored only in a room with two (2) air

conditioners running, to cool the place instead of a refrigerator. When he asked an

employee of Cargohaus why the cargoes were stored in the 'cool room' only, the latter
told him that the cartons where the vaccines were contained specifically indicated therein
that it should not be subjected to hot or cold temperature. Thereafter, DIONEDA, upon
instructions from GETC, did not proceed with the withdrawal of the vaccines and instead,
samples of the same were taken and brought to the Bureau of Animal Industry of the
Department of Agriculture in the Philippines by SMITHKLINE for examination wherein
it was discovered that the 'ELISA reading of vaccinates sera are below the positive
reference serum.'
"As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE
abandoned the shipment and, declaring 'total loss' for the unusable shipment, filed a claim
with AHAC through its representative in the Philippines, the Philam Insurance Co., Inc.
('PHILAM') which recompensed SMITHKLINE for the whole insured amount of
THIRTY NINE THOUSAND THREE HUNDRED THIRTY NINE DOLLARS
($39,339.00). Thereafter, [respondents] filed an action for damages against the
[petitioner] imputing negligence on either or both of them in the handling of the cargo.
"Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being
held solidarily liable for the loss as follows:
'WHEREFORE, judgment is hereby rendered in favor of [respondents] and
[petitioner and its Co-Defendant Cargohaus] are directed to pay [respondents],
jointly and severally, the following:
1. Actual damages in the amount of the peso equivalent of US$39,339.00
with interest from the time of the filing of the complaint to the time the
same is fully paid.
2. Attorney's fees in the amount of P50,000.00 and
3. Costs of suit.
'SO ORDERED.'
"Aggrieved, [petitioner] appealed to [the CA]."5
Ruling of the Court of Appeals
The Test Report issued by the United States Department of Agriculture (Animal and Plant Health
Inspection Service) was found by the CA to be inadmissible in evidence. Despite this ruling, the
appellate court held that the shipping Receipts were a prima facie proof that the goods had
indeed been delivered to the carrier in good condition. We quote from the ruling as follows:
"Where the plaintiff introduces evidence which shows prima facie that the goods were
delivered to the carrier in good condition [i.e., the shipping receipts], and that the carrier

delivered the goods in a damaged condition, a presumption is raised that the damage
occurred through the fault or negligence of the carrier, and this casts upon the carrier the
burden of showing that the goods were not in good condition when delivered to the
carrier, or that the damage was occasioned by some cause excepting the carrier from
absolute liability. This the [petitioner] failed to discharge. x x x."6
Found devoid of merit was petitioner's claim that respondents had no personality to sue. This
argument was supposedly not raised in the Answer or during trial.
Hence, this Petition.7
The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
"I.
Are the decision and resolution of the Honorable Court of Appeals proper subject for
review by the Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure?
"II.
Is the conclusion of the Honorable Court of Appeals petitioner's claim that respondents
have no personality to sue because the payment was made by the respondents to
Smithkline when the insured under the policy is Burlington Air Express is devoid of merit
correct or not?
"III.
Is the conclusion of the Honorable Court of Appeals that the goods were received in good
condition, correct or not?
"IV.
Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?
"V.
Is the Honorable Court of Appeals correct in ignoring and disregarding respondents' own
admission that petitioner is not liable? and
"VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?"8

Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme
Court? (2) Is Federal Express liable for damage to or loss of the insured goods?
This Court's Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a
question of law cognizable by the Supreme Court.9
In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning
the conclusions drawn from such facts. Hence, this case is a proper subject for review by this
Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no personality to sue -- thus, no cause of action against
it -- because the payment made to Smithkline was erroneous.
Pertinent to this issue is the Certificate of Insurance10 ("Certificate") that both opposing parties
cite in support of their respective positions. They differ only in their interpretation of what their
rights are under its terms. The determination of those rights involves a question of law, not a
question of fact. "As distinguished from a question of law which exists 'when the doubt or
difference arises as to what the law is on a certain state of facts' -- 'there is a question of fact
when the doubt or difference arises as to the truth or the falsehood of alleged facts'; or when the
'query necessarily invites calibration of the whole evidence considering mainly the credibility of
witnesses, existence and relevancy of specific surrounding circumstance, their relation to each
other and to the whole and the probabilities of the situation.'"11
Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is "payable to order x x x
upon surrender of this Certificate." Such wording conveys the right of collecting on any such
damage or loss, as fully as if the property were covered by a special policy in the name of the
holder itself. At the back of the Certificate appears the signature of the representative of
Burlington. This document has thus been duly indorsed in blank and is deemed a bearer
instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or
of being indemnified for loss of or damage to the insured shipment, as fully as if the property
were covered by a special policy in the name of the holder. Hence, being the holder of the

Certificate and having an insurable interest in the goods, Smithkline was the proper payee of the
insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation
Receipt12 in favor of respondents. The latter were thus authorized "to file claims and begin suit
against any such carrier, vessel, person, corporation or government." Undeniably, the consignee
had a legal right to receive the goods in the same condition it was delivered for transport to
petitioner. If that right was violated, the consignee would have a cause of action against the
person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods,
the insurer's entitlement to subrogation pro tanto -- being of the highest equity -- equips it with a
cause of action in case of a contractual breach or negligence.13 "Further, the insurer's subrogatory
right to sue for recovery under the bill of lading in case of loss of or damage to the cargo is
jurisprudentially upheld."14
In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all
intents and purposes, it stands in the place and in substitution of the consignee. A fortiori, both
the insurer and the consignee are bound by the contractual stipulations under the bill of lading.15
Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed
out that respondents' claim and right of action are already barred. The latter, and even the
consignee, never filed with the carrier any written notice or complaint regarding its claim for
damage of or loss to the subject cargo within the period required by the Warsaw Convention
and/or in the airway bill. Indeed, this fact has never been denied by respondents and is plainly
evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
"6. No action shall be maintained in the case of damage to or partial loss of the shipment
unless a written notice, sufficiently describing the goods concerned, the approximate date
of the damage or loss, and the details of the claim, is presented by shipper or consignee to
an office of Burlington within (14) days from the date the goods are placed at the disposal
of the person entitled to delivery, or in the case of total loss (including non-delivery)
unless presented within (120) days from the date of issue of the [Airway Bill]."16
Relevantly, petitioner's airway bill states:
"12./12.1 The person entitled to delivery must make a complaint to the carrier in writing
in the case:

12.1.1 of visible damage to the goods, immediately after discovery of the damage and at
the latest within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of
the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal;
and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the
date of the issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air
waybill was used, or to the first carrier or to the last carrier or to the carrier who
performed the transportation during which the loss, damage or delay took place."17
Article 26 of the Warsaw Convention, on the other hand, provides:
"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without
complaint shall be prima facie evidence that the same have been delivered in good
condition and in accordance with the document of transportation.
(2) In case of damage, the person entitled to delivery must complain to the carrier
forthwith after the discovery of the damage, and, at the latest, within 3 days from the date
of receipt in the case of baggage and 7 days from the date of receipt in the case of goods.
In case of delay the complaint must be made at the latest within 14 days from the date on
which the baggage or goods have been placed at his disposal.
(3) Every complaint must be made in writing upon the document of transportation or by
separate notice in writing dispatched within the times aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie against the carrier,
save in the case of fraud on his part."18
Condition Precedent
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor
actually constitutes a condition precedent to the accrual of a right of action against a carrier for
loss of or damage to the goods.19 The shipper or consignee must allege and prove the fulfillment
of the condition. If it fails to do so, no right of action against the carrier can accrue in favor of the
former. The aforementioned requirement is a reasonable condition precedent; it does not
constitute a limitation of action.20
The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The
fundamental reasons for such a stipulation are (1) to inform the carrier that the cargo has been
damaged, and that it is being charged with liability therefor; and (2) to give it an opportunity to

examine the nature and extent of the injury. "This protects the carrier by affording it an
opportunity to make an investigation of a claim while the matter is fresh and easily investigated
so as to safeguard itself from false and fraudulent claims."21
When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires
a notice of claim for loss of or damage to goods shipped and the stipulation is not complied with,
its enforcement can be prevented and the liability cannot be imposed on the carrier. To stress,
notice is a condition precedent, and the carrier is not liable if notice is not given in accordance
with the stipulation.22 Failure to comply with such a stipulation bars recovery for the loss or
damage suffered.23
Being a condition precedent, the notice must precede a suit for enforcement.24 In the present
case, there is neither an allegation nor a showing of respondents' compliance with this
requirement within the prescribed period. While respondents may have had a cause of action
then, they cannot now enforce it for their failure to comply with the aforesaid condition
precedent.
In view of the foregoing, we find no more necessity to pass upon the other issues raised by
petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's co-defendant in
respondents' Complaint below -- has been adjudged by the trial court as liable for, inter alia,
"actual damages in the amount of the peso equivalent of US $39,339."25 This judgment was
affirmed by the Court of Appeals and is already final and executory.26
WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it
pertains to Petitioner Federal Express Corporation. No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153563

February 07, 2005

NATIONAL TRUCKING AND FORWARDING CORPORATION, petitioner,

vs.
LORENZO SHIPPING CORPORATION, Respondent.

DECISION
QUISUMBING, J.:
For review on certiorari are the Decision1 dated January 16, 2002, of the Court of Appeals, in
CA-G.R. CV No. 48349, and its Resolution,2 of May 13, 2002, denying the motion for
reconsideration of herein petitioner National Trucking and Forwarding Corporation (NTFC). The
impugned decision affirmed in toto the judgment3 dated November 14, 1994 of the Regional
Trial Court (RTC) of Manila, Branch 53, in Civil Case No. 90-52102.
The undisputed facts, as summarized by the appellate court, are as follows:
On June 5, 1987, the Republic of the Philippines, through the Department of Health (DOH), and
the Cooperative for American Relief Everywhere, Inc. (CARE) signed an agreement wherein
CARE would acquire from the United States government donations of non-fat dried milk and
other food products from January 1, 1987 to December 31, 1989. In turn, the Philippines would
transport and distribute the donated commodities to the intended beneficiaries in the country.
The government entered into a contract of carriage of goods with herein petitioner National
Trucking and Forwarding Corporation (NTFC). Thus, the latter shipped 4,868 bags of non-fat
dried milk through herein respondent Lorenzo Shipping Corporation (LSC) from September to
December 1988. The consignee named in the bills of lading issued by the respondent was
Abdurahman Jama, petitioners branch supervisor in Zamboanga City.
On reaching the port of Zamboanga City, respondents agent, Efren Ruste4 Shipping Agency,
unloaded the 4,868 bags of non-fat dried milk and delivered the goods to petitioners warehouse.
Before each delivery, Rogelio Rizada and Ismael Zamora, both delivery checkers of Efren Ruste
Shipping Agency, requested Abdurahman to surrender the original bills of lading, but the latter
merely presented certified true copies thereof. Upon completion of each delivery, Rogelio and
Ismael asked Abdurahman to sign the delivery receipts. However, at times when Abdurahman
had to attend to other business before a delivery was completed, he instructed his subordinates to
sign the delivery receipts for him.
Notwithstanding the precautions taken, the petitioner allegedly did not receive the subject goods.
Thus, in a letter dated March 11, 1989, petitioner NTFC filed a formal claim for non-delivery of
the goods shipped through respondent.
In its letter of April 26, 1989, the respondent explained that the cargo had already been delivered
to Abdurahman Jama. The petitioner then decided to investigate the loss of the goods. But before
the investigation was over, Abdurahman Jama resigned as branch supervisor of petitioner.
Noting but disbelieving respondents insistence that the goods were delivered, the government
through the DOH, CARE, and NTFC as plaintiffs filed an action for breach of contract of
carriage, against respondent as defendant, with the RTC of Manila.

After trial, the RTC resolved the case as follows:

WHEREFORE, judgment is hereby rendered in favor of the defendant and against the plaintiffs,
dismissing the latters complaint, and ordering the plaintiffs, pursuant to the defendants
counterclaim, to pay, jointly and solidarily, to the defendant, actual damages in the amount of
P50,000.00, and attorneys fees in the amount of P70,000.00, plus the costs of suit.
SO ORDERED.5
Dissatisfied with the foregoing ruling, herein petitioner appealed to the Court of Appeals. It
faulted the lower court for not holding that respondent failed to deliver the cargo, and that
respondent failed to exercise the extraordinary diligence required of common carriers. Petitioner
also assailed the lower court for denying its claims for actual, moral, and exemplary damages,
and for awarding actual damages and attorneys fees to the respondent.6
The Court of Appeals found that the trial court did not commit any reversible error. It dismissed
the appeal, and affirmed the assailed decision in toto.
Undaunted, petitioner now comes to us, assigning the following errors:
I
THE COURT OF APPEALS GRAVELY ERRED WHEN IT FAILED TO APPRECIATE AND
APPLY THE LEGAL STANDARD OF EXTRAORDINARY DILIGENCE IN THE SHIPMENT
AND DELIVERY OF GOODS TO THE RESPONDENT AS A COMMON CARRIER, AS
WELL AS THE ACCOMPANYING LEGAL PRESUMPTION OF FAULT OR NEGLIGENCE
ON THE PART OF THE COMMON CARRIER, IF THE GOODS ARE LOST, DESTROYED
OR DETERIORATED, AS REQUIRED UNDER THE CIVIL CODE.
II
THE COURT OF APPEALS GRAVELY ERRED WHEN IT SUSTAINED THE BASELESS
AND ARBITRARY AWARD OF ACTUAL DAMAGES AND ATTORNEYS FEES
INASMUCH AS THE ORIGINAL COMPLAINT WAS FILED IN GOOD FAITH, WITHOUT
MALICE AND WITH THE BEST INTENTION OF PROTECTING THE INTEREST AND
INTEGRITY OF THE GOVERNMENT AND ITS CREDIBILITY AND RELATIONSHIP
WITH INTERNATIONAL RELIEF AGENCIES AND DONOR STATES AND
ORGANIZATION.7
The issues for our resolution are: (1) Is respondent presumed at fault or negligent as common
carrier for the loss or deterioration of the goods? and (2) Are damages and attorneys fees due
respondent?

Anent the first issue, petitioner contends that the respondent is presumed negligent and liable for
failure to abide by the terms and conditions of the bills of lading; that Abdurahman Jamas failure
to testify should not be held against petitioner; and that the testimonies of Rogelio Rizada and
Ismael Zamora, as employees of respondents agent, Efren Ruste Shipping Agency, were biased
and could not overturn the legal presumption of respondents fault or negligence.
For its part, the respondent avers that it observed extraordinary diligence in the delivery of the
goods. Prior to releasing the goods to Abdurahman, Rogelio and Ismael required the surrender of
the original bills of lading, and in their absence, the certified true copies showing that
Abdurahman was indeed the consignee of the goods. In addition, they required Abdurahman or
his designated subordinates to sign the delivery receipts upon completion of each delivery.
We rule for respondent.
Article 17338 of the Civil Code demands that a common carrier observe extraordinary diligence
over the goods transported by it. Extraordinary diligence is that extreme measure of care and
caution which persons of unusual prudence and circumspection use for securing and preserving
their own property or rights.9 This exacting standard imposed on common carriers in a contract
of carriage of goods is intended to tilt the scales in favor of the shipper who is at the mercy of the
common carrier once the goods have been lodged for shipment. Hence, in case of loss of goods
in transit, the common carrier is presumed under the law to have been at fault or negligent.10
However, the presumption of fault or negligence, may be overturned by competent evidence
showing that the common carrier has observed extraordinary diligence over the goods.
In the instant case, we agree with the court a quo that the respondent adequately proved that it
exercised extraordinary diligence. Although the original bills of lading remained with petitioner,
respondents agents demanded from Abdurahman the certified true copies of the bills of lading.
They also asked the latter and in his absence, his designated subordinates, to sign the cargo
delivery receipts.
This practice, which respondents agents testified to be their standard operating procedure, finds
support in Article 353 of the Code of Commerce:
ART. 353. . . .
After the contract has been complied with, the bill of lading which the carrier has issued shall be
returned to him, and by virtue of the exchange of this title with the thing transported, the
respective obligations and actions shall be considered cancelled, .
In case the consignee, upon receiving the goods, cannot return the bill of lading subscribed
by the carrier, because of its loss or of any other cause, he must give the latter a receipt for
the goods delivered, this receipt producing the same effects as the return of the bill of
lading. (Emphasis supplied)

Conformably with the aforecited provision, the surrender of the original bill of lading is not a
condition precedent for a common carrier to be discharged of its contractual obligation. If
surrender of the original bill of lading is not possible, acknowledgment of the delivery by signing
the delivery receipt suffices. This is what respondent did.
We also note that some delivery receipts were signed by Abdurahmans subordinates and not by
Abdurahman himself as consignee. Further, delivery checkers Rogelio and Ismael testified that
Abdurahman was always present at the initial phase of each delivery, although on the few
occasions when Abdurahman could not stay to witness the complete delivery of the shipment, he
authorized his subordinates to sign the delivery receipts for him. This, to our mind, is sufficient
and substantial compliance with the requirements.
We further note that, strangely, petitioner made no effort to disapprove Abdurahmans resignation
until after the investigation and after he was cleared of any responsibility for the loss of the
goods. With Abdurahman outside of its reach, petitioner cannot now pass to respondent what
could be Abdurahmans negligence, if indeed he were responsible.
On the second issue, petitioner submits there is no basis for the award of actual damages and
attorneys fees. It maintains that its original complaint for sum of money with damages for
breach of contract of carriage was not fraudulent, in bad faith, nor malicious. Neither was the
institution of the action rash nor precipitate. Petitioner avers the filing of the action was intended
to protect the integrity and interest of the government and its relationship and credibility with
international relief agencies and donor states.
On the other hand, respondent maintains that petitioners suit was baseless and malicious
because instead of going after its absconding employee, petitioner wanted to recoup its losses
from respondent. The trial court and the Court of Appeals were justified in granting actual
damages and reasonable attorneys fees to respondent.
On this point, we agree with petitioner.
The right to litigate should bear no premium. An adverse decision does not ipso facto justify an
award of attorneys fees to the winning party.11 When, as in the instant case, petitioner was
compelled to sue to protect the credibility of the government with international organizations, we
are not inclined to grant attorneys fees. We find no ill motive on petitioners part, only an
erroneous belief in the righteousness of its claim.
Moreover, an award of attorneys fees, in the concept of damages under Article 2208 of the Civil
Code,12 requires factual and legal justifications. While the law allows some degree of discretion
on the part of the courts in awarding attorneys fees and expenses of litigation, the discretion
must be exercised with great care approximating as closely as possible, the instances exemplified
by the law.13 We have searched but found nothing in petitioners suit that justifies the award of
attorneys fees.

Respondent failed to show proof of actual pecuniary loss, hence, no actual damages are due in
favor of respondent.14
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision and resolution
of the Court of Appeals in CA-G.R. CV No. 48349 dated January 16, 2002 and May 13, 2002
respectively, denying petitioners claim for actual, moral and exemplary damages are
AFFIRMED. The award of actual damages and attorneys fees to respondent pursuant to the
latters counterclaim in the trial court is DELETED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 159121

February 3, 2005

PAMPLONA PLANTATION COMPANY, INC. and/or JOSE LUIS BONDOC, petitioners,

vs.
RODEL TINGHIL, MARYGLENN SABIHON, ESTANISLAO BOBON, CARLITO
TINGHIL, BONIFACIO TINGHIL, NOLI TINGHIL, EDGAR TINGHIL, ERNESTO
ESTOMANTE, SALLY TOROY, BENIGNO TINGHIL JR., ROSE ANN NAPAO,
DIOSDADO TINGHIL, ALBERTO TINGHIL, ANALIE TINGHIL, and ANTONIO
ESTOMANTE, respondents.
DECISION
PANGANIBAN, J.:
To protect the rights of labor, two corporations with identical directors, management, office and
payroll should be treated as one entity only. A suit by the employees against one corporation
should be deemed as a suit against the other. Also, the rights and claims of workers should not be
prejudiced by the acts of the employer that tend to confuse them about its corporate identity. The
corporate fiction must yield to truth and justice.
The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to annul the
January 31, 2003 Decision2 and the June 17, 2003 Resolution3 of the Court of Appeals (CA) in
CA-GR SP No. 62813. The assailed Decision disposed as follows:
"WHEREFORE, in view of the foregoing, the petition is GRANTED. The assailed decision of
public respondent NLRC dated 19 July 2000 [is] REVERSED and SET ASIDE and a new one
entered DIRECTING private respondents to reinstate petitioners, except Rufino Bacubac, Felix
Torres and Antonio Canolas, to their former positions without loss of seniority rights plus
payment of full backwages. However, if reinstatement is no longer feasible, a one-month salary
for every year of service shall be paid the petitioners as ordered by the Labor Arbiter in his
decision dated 31 August 1998 plus payment of full backwages computed from date of illegal
dismissal to the finality of this decision."4
The Decision5 of the National Labor Relations Commission (NLRC),6 reversed by the CA,
disposed as follows:
"WHEREFORE, premises considered, the decision appealed from is hereby REVERSED, and
another one entered DISMISSING the complaint."7
The June 17, 2003 Resolution denied petitioners Motion for Reconsideration.
The Facts
The CA summarized the antecedents as follows:
"Sometime in 1993, [Petitioner] Pamplona Plantations Company, Inc. (company for brevity) was
organized for the purpose of taking over the operations of the coconut and sugar plantation of
Hacienda Pamplona located in Pamplona, Negros Oriental. It appears that Hacienda Pamplona
was formerly owned by a certain Mr. Bower who had in his employ several agricultural workers.
"When the company took over the operation of Hacienda Pamplona in 1993, it did not absorb all
the workers of Hacienda Pamplona. Some, however, were hired by the company during harvest
season as coconut hookers or sakador, coconut filers, coconut haulers, coconut scoopers or
lugiteros, and charcoal makers.
"Sometime in 1995, Pamplona Plantation Leisure Corporation was established for the purpose of
engaging in the business of operating tourist resorts, hotels, and inns, with complementary
facilities, such as restaurants, bars, boutiques, service shops, entertainment, golf courses, tennis
courts, and other land and aquatic sports and leisure facilities.
"On 15 December 1996, the Pamplona Plantation Labor Independent Union (PAPLIU)
conducted an organizational meeting wherein several [respondents] who are either union
members or officers participated in said meeting.

"Upon learning that some of the [respondents] attended the said meeting, [Petitioner] Jose Luis
Bondoc, manager of the company, did not allow [respondents] to work anymore in the
plantation.
"Thereafter, on various dates, [respondents] filed their respective complaints with the NLRC,
Sub-Regional Arbitration Branch No. VII, Dumaguete City against [petitioners] for unfair labor
practice, illegal dismissal, underpayment, overtime pay, premium pay for rest day and holidays,
service incentive leave pay, damages, attorneys fees and 13th month pay.
"On 09 October 1997, [respondent] Carlito Tinghil amended his complaint to implead Pamplona
Plantation Leisure Corporation x x x.
"On 31 August 1998, Labor Arbiter Jose G. Gutierrez rendered a decision finding [respondents],
except Rufino Bacubac, Antonio Caolas and Felix Torres who were complainants in another
case, to be entitled to separation pay.
xxxxxxxxx
"[Petitioners] appealed the Labor Arbiters decision to [the] NLRC. In the assailed decision dated
19 July 2000, the NLRCs Fourth Division reversed the Labor Arbiter, ruling that [respondents],
except Carlito Tinghil, failed to implead Pamplona Plantation Leisure Corporation, an
indispensable party and that there exist no employer-employee relation between the parties.
xxxxxxxxx
"[Respondents] filed a motion for reconsideration which was denied by [the] NLRC in a
Resolution dated 06 December 2000."8
Respondents elevated the case to the CA via a Petition for Certiorari under Rule 65 of the Rules
of Court.
Ruling of the Court of Appeals
Guided by the fourfold test for determining the existence of an employer-employee relationship,
the CA held that respondents were employees of petitioner-company. Finding there was a "power
to hire," the appellate court considered the admission of petitioners in their Comment that they
had hired respondents as coconut filers, coconut scoopers, charcoal makers, or as pieceworkers.
The fact that respondents were paid by piecework did not mean that they were not employees of
the company. Further, the CA ruled that petitioners necessarily exercised control over the work
they performed, since the latter were working within the premises of the plantation. According to
the CA, the mere existence -- not necessarily the actual exercise -- of the right to control the
manner of doing work sufficed to meet the fourth element of an employer-employee relation.

The appellate court also held that respondents were regular employees, because the tasks they
performed were necessary and indispensable to the operation of the company. Since there was no
compliance with the twin requirements of a valid and/or authorized cause and of procedural due
process, their dismissal was illegal.
Hence, this Petition.9
Issues
In their Memorandum, petitioners submit the following issues for our consideration:
"1. Whether or not the finding of the Court of Appeals that herein respondents are employees of
Petitioner Pamplona Plantation Company, Inc. is contrary to the admissions of the respondents
themselves.
"2. Whether or not the Court of Appeals has decided in a way not in accord with law and
jurisprudence, and with grave abuse of discretion, in not dismissing the respondents complaint
for failure to implead Pamplona Plantation Leisure Corp., which is an indispensable party to this
case.
"3. Whether or not the Court of Appeals has decided in a way not in accord with law and
jurisprudence, and with grave abuse of discretion in ordering reinstatement or payment of
separation pay and backwages to the respondents, considering the lack of employer-employee
relationship between petitioner and respondents."10
The main issue raised is whether the case should be dismissed for the non-joinder of the
Pamplona Plantation Leisure Corporation. The other issues will be taken up in the discussion of
the main question.
The Courts Ruling
The Petition lacks merit.
Preliminary Issue:
Factual Matters
Section 1 of Rule 45 of the Rules of Court states that only questions of law are entertained in
appeals by certiorari to the Supreme Court. However, jurisprudence has recognized several
exceptions in which factual issues may be resolved by this Court:11 (1) the legal conclusions
made by the lower tribunal are speculative;12 (2) its inferences are manifestly mistaken,13 absurd,
or impossible; (3) the lower court committed grave abuse of discretion; (4) the judgment is based
on a misapprehension of facts;14 (5) the findings of fact of the lower tribunals are conflicting;15
(6) the CA went beyond the issues; (7) the CAs findings are contrary to the admissions of the

parties;16 (8) the CA manifestly overlooked facts not disputed which, if considered, would justify
a different conclusion; (9) the findings of fact are conclusions without citation of the specific
evidence on which they are based; and (10) when the findings of fact of the CA are premised on
the absence of evidence but such findings are contradicted by the evidence on record.17
The very same reason that constrained the appellate court to review the factual findings of the
NLRC impels this Court to take its own look at the facts. Normally, the Supreme Court is not a
trier of facts.18 However, since the findings of the CA and the NLRC on this point were
conflicting, we waded through the records to find out if there was basis for the formers reversal
of the NLRCs Decision. We shall discuss our factual findings together with our review of the
main issue.
Main Issue:
Piercing the Corporate Veil
Petitioners contend that the CA should have dismissed the case for the failure of respondents
(except Carlito Tinghil) to implead the Pamplona Plantation Leisure Corporation, an
indispensable party, for being the true and real employer. Allegedly, respondents admitted in their
Affidavits dated February 3, 1998,19 that they had been employed by the leisure corporation
and/or engaged to perform activities that pertained to its business.
Further, as the NLRC allegedly noted in their individual Complaints, respondents specifically
averred that they had worked in the "golf course" and performed related jobs in the "recreational
facilities" of the leisure corporation. Hence, petitioners claim that, as a sugar and coconut
plantation company separate and distinct from the Pamplona Plantation Leisure Corporation, the
petitioner-company is not the real party in interest.
We are not persuaded.
An examination of the facts reveals that, for both the coconut plantation and the golf course,
there is only one management which the laborers deal with regarding their work.20 A portion of
the plantation (also called Hacienda Pamplona) had actually been converted into a golf course
and other recreational facilities. The weekly payrolls issued by petitioner-company bore the
name "Pamplona Plantation Co., Inc."21 It is also a fact that respondents all received their pay
from the same person, Petitioner Bondoc -- the managing director of the company. Since the
workers were working for a firm known as Pamplona Plantation Co., Inc., the reason they sued
their employer through that name was natural and understandable.
True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona Plantation Leisure
Corporation appear to be separate corporate entities. But it is settled that this fiction of law
cannot be invoked to further an end subversive of justice.22

The principle requiring the piercing of the corporate veil mandates courts to see through the
protective shroud that distinguishes one corporation from a seemingly separate one.23 The
corporate mask may be removed and the corporate veil pierced when a corporation is the mere
alter ego of another.24 Where badges of fraud exist, where public convenience is defeated, where
a wrong is sought to be justified thereby, or where a separate corporate identity is used to evade
financial obligations to employees or to third parties,25 the notion of separate legal entity should
be set aside26 and the factual truth upheld. When that happens, the corporate character is not
necessarily abrogated.27 It continues for other legitimate objectives. However, it may be pierced
in any of the instances cited in order to promote substantial justice.
In the present case, the corporations have basically the same incorporators and directors and are
headed by the same official. Both use only one office and one payroll and are under one
management. In their individual Affidavits, respondents allege that they worked under the
supervision and control of Petitioner Bondoc -- the common managing director of both the
petitioner-company and the leisure corporation. Some of the laborers of the plantation also work
in the golf course.28 Thus, the attempt to make the two corporations appear as two separate
entities, insofar as the workers are concerned, should be viewed as a devious but obvious means
to defeat the ends of the law. Such a ploy should not be permitted to cloud the truth and
perpetrate an injustice.
We note that this defense of separate corporate identity was not raised during the proceedings
before the labor arbiter. The main argument therein raised by petitioners was their alleged lack of
employer-employee relationship with, and power of control over, the means and methods of
work of respondents because of the seasonal nature of the latters work.29
Neither was the issue of non-joinder of indispensable parties raised in petitioners appeal before
the NLRC.30 Nevertheless, in its Decision31 dated July 19, 2000, the Commission concluded that
the plantation company and the leisure corporation were two separate and distinct corporations,
and that the latter was an indispensable party that should have been impleaded. We quote below
pertinent portions of that Decision:
"Respondent posits that it is engaged in operating and maintaining sugar and coconut plantation.
The positions of complainants could only be determined through their individual complaints. Yet
all complainants alleged in their affidavits x x x that they were working at the golf course.
Worthy to note that only Carlito Tinghil amended his complaint to include Pamplona Leisure
Corporation, which respondents maintain is a separate corporation established in 1995. Thus, xxx
Pamplona Plantation Co., Inc. and Pamplona Leisure Corporation are two separate and distinct
corporations. Except for Carlito Tinghil the complainants have the wrong party respondent.
Pamplona Leisure Corporation is an indispensable party without which there could be no final
determination of the case."32

Indeed, it was only after this NLRC Decision was issued that the petitioners harped on the
separate personality of the Pamplona Plantation Co., Inc., vis--vis the Pamplona Plantation
Leisure Corporation.
As cited above, the NLRC dismissed the Complaints because of the alleged admission of
respondents in their Affidavits that they had been working at the golf course. However, it failed
to appreciate the rest of their averments. Just because they worked at the golf course did not
necessarily mean that they were not employed to do other tasks, especially since the golf course
was merely a portion of the coconut plantation. Even petitioners admitted that respondents had
been hired as coconut filers, coconut scoopers or charcoal makers.33 Consequently, NLRCs
conclusion derived from the Affidavits of respondents stating that they were employees of the
Pamplona Plantation Leisure Corporation alone was the result of an improper selective
appreciation of the entire evidence.
Furthermore, we note that, contrary to the NLRCs findings, some respondents indicated that
their employer was the Pamplona Plantation Leisure Corporation, while others said that it was
the Pamplona Plantation Co., Inc. But in all these Affidavits, both the leisure corporation and
petitioner-company were identified or described as entities engaged in the development and
operation of sugar and coconut plantations, as well as recreational facilities such as a golf course.
These allegations reveal that petitioner successfully confused the workers as to who their true
and real employer was. All things considered, their faulty belief that the plantation company and
the leisure corporation were one and the same can be attributed solely to petitioners. It would
certainly be unjust to prejudice the claims of the workers because of the misleading actions of
their employer.
Non-Joinder of Parties
Granting for the sake of argument that the Pamplona Plantation Leisure Corporation is an
indispensable party that should be impleaded, NLRCs outright dismissal of the Complaints was
still erroneous.
The non-joinder of indispensable parties is not a ground for the dismissal of an action.34 At any
stage of a judicial proceeding and/or at such times as are just, parties may be added on the
motion of a party or on the initiative of the tribunal concerned.35 If the plaintiff refuses to
implead an indispensable party despite the order of the court, that court may dismiss the
complaint for the plaintiffs failure to comply with the order. The remedy is to implead the nonparty claimed to be indispensable.36 In this case, the NLRC did not require respondents to
implead the Pamplona Plantation Leisure Corporation as respondent; instead, the Commission
summarily dismissed the Complaints.
In any event, there is no need to implead the leisure corporation because, insofar as respondents
are concerned, the leisure corporation and petitioner-company are one and the same entity.
Salvador v. Court of Appeals37 has held that this Court has "full powers, apart from that power

and authority which is inherent, to amend the processes, pleadings, proceedings and decisions by
substituting as party-plaintiff the real party-in-interest."
In Alonso v. Villamor,38 we had the occasion to state thus:
"There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose
is to facilitate the application of justice to the rival claims of contending parties. They were
created, not to hinder and delay, but to facilitate and promote, the administration of justice. They
do not constitute the thing itself, which courts are always striving to secure to litigants. They are
designed as the means best adapted to obtain that thing. In other words, they are a means to an
end. When they lose the character of the one and become the other, the administration of justice
is at fault and courts are correspondingly remiss in the performance of their obvious duty."
The controlling principle in the interpretation of procedural rules is liberality, so that they may
promote their object and assist the parties in obtaining just, speedy and inexpensive
determination of every action and proceeding.39 When the rules are applied to labor cases, this
liberal interpretation must be upheld with even greater vigor.40 Without in any way depriving the
employer of its legal rights, the thrust of statutes and rules governing labor cases has been to
benefit workers and avoid subjecting them to great delays and hardships. This intent holds
especially in this case, in which the plaintiffs are poor laborers.
Employer-Employee Relationship
Petitioners insist that respondents are not their employees, because the former exercised no
control over the latters work hours and method of performing tasks. Thus, petitioners contend
that under the "control test," the workers were independent contractors.
We disagree. As shown by the evidence on record, petitioners hired respondents, who performed
tasks assigned by their respective officers-in-charge, who in turn were all under the direct
supervision and control of Petitioner Bondoc. These allegations are contained in the workers
Affidavits, which were never disputed by petitioners. Also uncontroverted are the payrolls
bearing the name of the plantation company and signed by Petitioner Bondoc. Some of these
payrolls include the time records of the employees. These documents prove that petitionercompany exercised control and supervision over them.
To operate against the employer, the power of control need not have been actually exercised.
Proof of the existence of such power is enough.41 Certainly, petitioners wielded that power to hire
or dismiss, as well as to check on the progress and the quality of work of the laborers.
Jurisprudence provides other equally important considerations42 that support the conclusion that
respondents were not independent contractors. First, they cannot be said to have carried on an
independent business or occupation.43 They are not engaged in the business of filing, scooping
and hauling coconuts and/or operating and maintaining a plantation and a golf course. Second,
they do not have substantial capital or investment in the form of tools, equipment, machinery,

work premises, and other implements needed to perform the job, work or service under their own
account or responsibility.44 Third, they have been working exclusively for petitioners for several
years. Fourth, there is no dispute that petitioners are in the business of growing coconut trees for
commercial purposes. There is no question, either, that a portion of the plantation was converted
into a golf course and other recreational facilities. Clearly, respondents performed usual, regular
and necessary services for petitioners business.
WHEREFORE, the Petition is DENIED, and the assailed Decision AFFIRMED. Costs against
the petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 141735

June 8, 2005

SAPPARI K. SAWADJAAN, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, THE CIVIL SERVICE COMMISSION and
AL-AMANAH INVESTMENT BANK OF THE PHILIPPINES, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision1 of the Court
of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil
Service Commission (CSC) dated 11 August 1994 and 11 April 1995, respectively, which in turn
affirmed Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment
Bank of the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of
Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest
of the Service and dismissing him from the service, and its Resolution2 of 15 December 1999
dismissing petitioners Motion for Reconsideration.

The records show that petitioner Sappari K. Sawadjaan was among the first employees of the
Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on
02 August 1973. He rose through the ranks, working his way up from his initial designation as
security guard, to settling clerk, bookkeeper, credit investigator, project analyst, appraiser/
inspector, and eventually, loans analyst.3
In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to
inspect the properties offered as collaterals by Compressed Air Machineries and Equipment
Corporation (CAMEC) for a credit line of Five Million Pesos (P5,000,000.00). The properties
consisted of two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-130671
and No. C-52576. On the basis of his Inspection and Appraisal Report,4 the PAB granted the loan
application. When the loan matured on 17 May 1989, CAMEC requested an extension of 180
days, but was granted only 120 days to repay the loan.5
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.6
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No.
264 (which created the PAB). All assets, liabilities and capital accounts of the PAB were
transferred to the AIIBP,7 and the existing personnel of the PAB were to continue to discharge
their functions unless discharged.8 In the ensuing reorganization, Sawadjaan was among the
personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP,
discovered that TCT No. N-130671 was spurious, the property described therein non-existent,
and that the property covered by TCT No. C-52576 had a prior existing mortgage in favor of one
Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to
look into the CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in
losses.9 The subsequent events, as found and decided upon by the Court of Appeals,10 are as
follows:
On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman
Roberto F. De Ocampo charging him with Dishonesty in the Performance of Official Duties
and/or Conduct Prejudicial to the Best Interest of the Service and preventively suspending him.
In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee
that he could not submit himself to the jurisdiction of the Committee because of its alleged
partiality. For his failure to appear before the hearing set on 17 September 1993, after the hearing
of 13 September 1993 was postponed due to the Manifestation of even date filed by petitioner,
the Investigating Committee declared petitioner in default and the prosecution was allowed to
present its evidence ex parte.

On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions
of which reads as follows:
In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as
appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank,
respondent should be held liable therefore. At this juncture, however, the Investigating
Committee is of the considered opinion that he could not be held liable for the administrative
offense of dishonesty considering the fact that no evidence was adduced to show that he profited
or benefited from being remiss in the performance of his duties. The record is bereft of any
evidence which would show that he received any amount in consideration for his nonperformance of his official duties.
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to
perform his official duties resulted to the prejudice and substantial damage to the Islamic Bank
for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL
TO THE BEST INTEREST OF THE SERVICE.
Premises considered, the Investigating Committee recommends that respondent SAPPARI
SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION
from office in accordance with the Civil Service Commissions Memorandum Circular No. 30,
Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution
No. 2309 finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or
Conduct Prejudicial to the Best Interest of the Service and imposing the penalty of Dismissal
from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution
No. 2332 on 20 February 1994 reducing the penalty imposed on petitioner from dismissal to
suspension for a period of six (6) months and one (1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board
(MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of
merit and affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of
Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for
Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the
following assignment of errors:

I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has

committed a grave abuse of discretion amounting to excess or lack of jurisdiction when it
initiated and conducted administrative investigation without a validly promulgated rules
of procedure in the adjudication of administrative cases at the Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave abuse of
discretion amounting to lack of jurisdiction when it prematurely and falsely assumed
jurisdiction of the case not appealed to it, but to the Merit System Protection Board.
III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner
Sawadjaan of having deliberately reporting false information and therefore guilty of
Dishonesty and Conduct Prejudicial to the Best Interest of the Service and penalized with
dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable
Court pursuant to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that petitioner raises for
the first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure
governing the adjudication and disposition of administrative cases involving its personnel. It is a
rule that issues not properly brought and ventilated below may not be raised for the first time on
appeal, save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257)
none of which, however, obtain in this case. Granting arguendo that the issue is of such
exceptional character that the Court may take cognizance of the same, still, it must fail. Section
26 of Republic Act No. 6848 (1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to
manage the Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry out
effectively the provisions of this Charter as well as internal rules and regulations necessary for
the conduct of its Islamic banking business and all matters related to personnel organization,
office functions and salary administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled "Prescribing Procedure
and Sanctions to Ensure Speedy Disposition of Administrative Cases" directs, "all administrative
agencies" to "adopt and include in their respective Rules of Procedure" provisions designed to
abbreviate administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the Islamic Bank
[AIIBP] to promulgate rules of procedure before administrative discipline may be imposed upon
its employees. The internal rules of procedures ordained to be adopted by the Board refers to that
necessary for the conduct of its Islamic banking business and all matters related to "personnel
organization, office functions and salary administration." On the contrary, Section 26 of RA 6848

gives the Board of Directors of the Islamic Bank the "broadest powers to manage the Islamic
Bank." This grant of broad powers would be an idle ceremony if it would be powerless to
discipline its employees.
The second assignment of error must likewise fail. The issue is raised for the first time via this
petition for certiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he
could have raised the alleged lack of jurisdiction in his Motion for Reconsideration of Resolution
No. 94-4483 of the CSC, he did not do so. By filing the Motion for Reconsideration, he is
estopped from denying the CSCs jurisdiction over him, as it is settled rule that a party who asks
for an affirmative relief cannot later on impugn the action of the tribunal as without jurisdiction
after an adverse result was meted to him. Although jurisdiction over the subject matter of a case
may be objected to at any stage of the proceedings even on appeal, this particular rule, however,
means that jurisdictional issues in a case can be raised only during the proceedings in said case
and during the appeal of said case (Aragon v. Court of Appeals, 270 SCRA 603). The case at bar
is a petition [for] certiorari and not an appeal.
But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387
dated 29 June 1993, provides:
Decisions in administrative cases involving officials and employees of the civil service
appealable to the Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative
Code of 1987) including personnel actions such as contested appointments shall now be appealed
directly to the Commission and not to the MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:
. . . The functions of the MSPB relating to the determination of administrative disciplinary cases
were, in other words, re-allocated to the Commission itself.
Be that as it may, "(i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this
case, administrative agency) has jurisdiction or not, the provisions of the law should be inquired
into. Furthermore, `the jurisdiction of the court must appear clearly from the statute law or it
will not be held to exist."(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision
of law abovecited, the Civil Service Commission clearly has jurisdiction over the Administrative
Case against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners proposition that
he should not be liable, as in the first place, he was not qualified to perform the functions of
appraiser/investigator because he lacked the necessary training and expertise, and therefore,
should not have been found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the
CSC. Petitioner himself admits that the position of appraiser/inspector is "one of the most serious
[and] sensitive job in the banking operations." He should have been aware that accepting such a
designation, he is obliged to perform the task at hand by the exercise of more than ordinary

prudence. As appraiser/investigator, he is expected, among others, to check the authenticity of

the documents presented by the borrower by comparing them with the originals on file with the
proper government office. He should have made it sure that the technical descriptions in the
location plan on file with the Bureau of Lands of Marikina, jibe with that indicated in the TCT of
the collateral offered by CAMEC, and that the mortgage in favor of the Islamic Bank was duly
annotated at the back of the copy of the TCT kept by the Register of Deeds of Marikina. This,
petitioner failed to do, for which he must be held liable. That he did not profit from his false
report is of no moment. Neither the fact that it was not deliberate or willful, detracts from the
nature of the act as dishonest. What is apparent is he stated something to be a fact, when he really
was not sure that it was so.
Wherefore, above premises considered, the instant Petition is DISMISSED, and the assailed
Resolutions of the Civil Service Commission are hereby AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address,11 but
apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by
himself, filed a Motion for New Trial12 in the Court of Appeals based on the following grounds:
fraud, accident, mistake or excusable negligence and newly discovered evidence. He claimed
that he had recently discovered that at the time his employment was terminated, the AIIBP had
not yet adopted its corporate by-laws. He attached a Certification13 by the Securities and
Exchange Commission (SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft
by-laws to the SEC, and that its registration was being held in abeyance pending certain
corrections being made thereon. Sawadjaan argued that since the AIIBP failed to file its by-laws
within 60 days from the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law, the
bank and its stockholders had "already forfeited its franchise or charter, including its license to
exist and operate as a corporation,"14 and thus no longer have "the legal standing and personality
to initiate an administrative case."
Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a
motion for reconsideration.15 This motion was denied by the court a quo in its Resolution of 15
December 1999.16
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules
of Court challenging the above Decision and Resolution of the Court of Appeals on the ground
that the court a quo erred: i) in ignoring the facts and evidences that the alleged Islamic Bank has
no valid by-laws; ii) in ignoring the facts and evidences that the Islamic Bank lost its juridical
personality as a corporation on 16 April 1990; iii) in ignoring the facts and evidences that the
alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to act in the manner
they did in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service
Commission who erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as
a result of fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo and his
group, including Roberto F. de Ocampo; v) in affirming an unconscionably harsh and/or

excessive penalty; and vi) in failing to consider newly discovered evidence and reverse its
decision accordingly.
Subsequently, petitioner Sawadjaan filed an "Ex-parte Urgent Motion for Additional Extension
of Time to File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the
Philippines),17 Reply (to Respondents Consolidated Comment,)18 and Reply (to the Alleged
Comments of Respondent Al-Amanah Islamic Bank of the Philippines)."19 On 13 October 2000,
he informed this Court that he had terminated his lawyers services, and, by himself, prepared
and filed the following: 1) Motion for New Trial;20 2) Motion to Declare Respondents in Default
and/or Having Waived their Rights to Interpose Objection to Petitioners Motion for New Trial;21
3) Ex-Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G.
Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to
Inhibit them from Appearing in this Case Until they Can Present Valid Evidence of Legal
Authority;22 4) Opposition/Reply (to Respondent AIIBPs Alleged Comment);23 5) Ex-Parte
Urgent Motion to Punish Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a
Commitment Order/Warrant for His Arrest;24 6) Reply/Opposition (To the Formal Notice of
Withdrawal of Undersigned Counsel as Legal Counsel for the Respondent Islamic Bank with
Opposition to Petitioners Motion to Punish Undersigned Counsel for Contempt of Court for the
Issuance of a Warrant of Arrest);25 7) Memorandum for Petitioner;26 8) Opposition to SolGens
Motion for Clarification with Motion for Default and/or Waiver of Respondents to File their
Memorandum;27 9) Motion for Contempt of Court and Inhibition/Disqualification with
Opposition to OGCCs Motion for Extension of Time to File Memorandum;28 10) Motion for
Enforcement (In Defense of the Rule of Law);29 11) Motion and Opposition (Motion to Punish
OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and
Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest;
and Opposition to their Alleged "Manifestation and Motion" Dated February 5, 2002);30 12)
Motion for Reconsideration of Item (a) of Resolution dated 5 February 2002 with Supplemental
Motion for Contempt of Court;31 13) Motion for Reconsideration of Portion of Resolution Dated
12 March 2002;32 14) Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum
(To: CSC and AIIBPs Memorandum);33 15) Reply Memorandum (To: CSCs Memorandum)
With Ex-Parte Urgent Motion for Additional Extension of time to File Reply Memorandum (To:
AIIBPs Memorandum);34 and 16) Reply Memorandum (To: OGCCs Memorandum for
Respondent AIIBP).35
Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive
flaws.
The general rule is that the remedy to obtain reversal or modification of the judgment on the
merits is appeal. This is true even if the error, or one of the errors, ascribed to the court rendering
the judgment is its lack of jurisdiction over the subject matter, or the exercise of power in excess
thereof, or grave abuse of discretion in the findings of fact or of law set out in the decision.36

The records show that petitioners counsel received the Resolution of the Court of Appeals
denying his motion for reconsideration on 27 December 1999. The fifteen day reglamentary
period to appeal under Rule 45 of the Rules of Court therefore lapsed on 11 January 2000. On 23
February 2000, over a month after receipt of the resolution denying his motion for
reconsideration, the petitioner filed his petition for certiorari under Rule 65.
It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy
of appeal,37 and though there are instances38 where the extraordinary remedy of certiorari may be
resorted to despite the availability of an appeal,39 we find no special reasons for making out an
exception in this case.
Even if we were to overlook this fact in the broader interests of justice and treat this as a special
civil action for certiorari under Rule 65,40 the petition would nevertheless be dismissed for
failure of the petitioner to show grave abuse of discretion. Petitioners recurrent argument,
tenuous at its very best, is premised on the fact that since respondent AIIBP failed to file its bylaws within the designated 60 days from the effectivity of Rep. Act No. 6848, all proceedings
initiated by AIIBP and all actions resulting therefrom are a patent nullity. Or, in his words, the
AIIBP and its officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file
administrative charges and investigate petitioner in the manner they did and allegedly passed
Board Resolution No. 2309 on December 13, 1993 which is null and void for lack of an (sic)
authorized and valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming,
erroneously, a null and void "Resolution No. 2309 dated December 13, 1993 of the Board of
Directors of Al-Amanah Islamic Investment Bank of the Philippines" in CSC Resolution No. 944483 dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its
Resolution No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous,
resulting from fraud, falsifications and misrepresentations of the alleged Chairman and CEO
Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his group at the alleged
Islamic Bank.41
Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed
grave abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition for
certiorari. Petitioner already raised the question of AIIBPs corporate existence and lack of
jurisdiction in his Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was
denied by the Court of Appeals. Despite the volume of pleadings he has submitted thus far, he
has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business,
has shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here
represented by the Office of the Government Corporate Counsel, "the principal law office of
government-owned corporations, one of which is respondent bank."42 At the very least, by its
failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation43

whose right to exercise corporate powers may not be inquired into collaterally in any private suit
to which such corporations may be a party.44
Moreover, a corporation which has failed to file its by-laws within the prescribed period does not
ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations,45 details the procedures and remedies that may be availed of before
an order of revocation can be issued. There is no showing that such a procedure has been
initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a corporate controversy,
but a labor dispute; and it is an employers basic right to freely select or discharge its employees,
if only as a measure of self-protection against acts inimical to its interest.46 Regardless of
whether AIIBP is a corporation, a partnership, a sole proprietorship, or a sari-sari store, it is an
undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain his services during
its reorganization, controlled the means and methods by which his work was to be performed,
paid his wages, and, eventually, terminated his services.47
And though he has had ample opportunity to do so, the petitioner has not alleged that he is
anything other than an employee of AIIBP. He has neither claimed, nor shown, that he is a
stockholder or an officer of the corporation. Having accepted employment from AIIBP, and
rendered his services to the said bank, received his salary, and accepted the promotion given him,
it is now too late in the day for petitioner to question its existence and its power to terminate his
services. One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.481avvphi1
Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we
would be hard pressed to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the
properties offered by CAMEC as collaterals and check the copies of the certificates of title
against those on file with the Registry of Deeds. Not only did he fail to conduct these routine
checks, but he also deliberately misrepresented in his appraisal report that after reviewing the
documents and conducting a site inspection, he found the CAMEC loan application to be in
order. Despite the number of pleadings he has filed, he has failed to offer an alternative
explanation for his actions.
When he was informed of the charges against him and directed to appear and present his side on
the matter, the petitioner sent instead a memorandum questioning the fairness and impartiality of
the members of the investigating committee and refusing to recognize their jurisdiction over him.
Nevertheless, the investigating committee rescheduled the hearing to give the petitioner another
chance, but he still refused to appear before it.

Thereafter, witnesses were presented, and a decision was rendered finding him guilty of
dishonesty and dismissing him from service. He sought a reconsideration of this decision and the
same committee whose impartiality he questioned reduced their recommended penalty to
suspension for six months and one day. The board of directors, however, opted to dismiss him
from service.
On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official
duties greatly prejudiced the AIIBP, for which he should be held accountable. It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance
of his duties as appraiser/inspector. Had respondent performed his duties as appraiser/inspector,
he could have easily noticed that the property located at Balintawak, Caloocan City covered by
TCT No. C-52576 and which is one of the properties offered as collateral by CAMEC is
encumbered to Divina Pablico. Had respondent reflected such fact in his appraisal/inspection
report on said property the ISLAMIC BANK would not have approved CAMECs loan of
P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent knowing fully well the
Banks policy of not accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and
verify from the Registry of Deeds of Marikina the authenticity of the property located at
Mayamot, Antipolo, Rizal covered by TCT No. N-130671 and which is one of the properties
offered as collateral by CAMEC for its P5 Million loan in 1988. If he only visited and verified
with the Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could have
easily discovered that TCT No. N-130671 is fake and the property described therein nonexistent.
...
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to
perform his official duties resulted to the prejudice and substantial damage to the ISLAMIC
BANK for which he should be held liable for the administrative offense of CONDUCT
PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.49
From the foregoing, we find that the CSC and the court a quo committed no grave abuse of
discretion when they sustained Sawadjaans dismissal from service. Grave abuse of discretion
implies such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction,
or, in other words, where the power is exercised in an arbitrary or despotic manner by reason of
passion or personal hostility, and it must be so patent and gross as to amount to an evasion of
positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation
of law.50 The records show that the respondents did none of these; they acted in accordance with
the law.

WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March
1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and
its Resolution of 15 December 1999 are hereby affirmed. Costs against the petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 159795

July 30, 2004

SPOUSES ROBERTO & EVELYN DAVID and COORDINATED GROUP, INC.,

petitioners,
vs.
CONSTRUCTION INDUSTRY AND ARBITRATION COMMISSION and SPS.
NARCISO & AIDA QUIAMBAO, respondents.

DECISION

PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court, assailing
the Decision and Resolution of the Court of Appeals, dated June 30, 2003 and August 27, 2003,
respectively, in CA-G.R. SP No. 72736.
Petitioner COORDINATED GROUP, INC. (CGI) is a corporation engaged in the construction
business, with petitioner-spouses ROBERTO and EVELYN DAVID as its President and
Treasurer, respectively.
The records reveal that on October 7, 1997, respondent-spouses NARCISO and AIDA
QUIAMBAO engaged the services of petitioner CGI to design and construct a five-storey
concrete office/residential building on their land in Tondo, Manila. The Design/Build Contract of
the parties provided that: (a) petitioner CGI shall prepare the working drawings for the
construction project; (b) respondents shall pay petitioner CGI the sum of Seven Million Three
Hundred Nine Thousand Eight Hundred Twenty-One and 51/100 Pesos (P7,309,821.51) for the

construction of the building, including the costs of labor, materials and equipment, and Two
Hundred Thousand Pesos (P200,000.00) for the cost of the design; and (c) the construction of the
building shall be completed within nine (9) months after securing the building permit.
The completion of the construction was initially scheduled on or before July 16, 1998 but was
extended to November 15, 1998 upon agreement of the parties. It appears, however, that
petitioners failed to follow the specifications and plans as previously agreed upon. Respondents
demanded the correction of the errors but petitioners failed to act on their complaint.
Consequently, respondents rescinded the contract on October 31, 1998, after paying 74.84% of
the cost of construction.
Respondents then engaged the services of another contractor, RRA and Associates, to inspect the
project and assess the actual accomplishment of petitioners in the construction of the building. It
was found that petitioners revised and deviated from the structural plan of the building without
notice to or approval by the respondents.1
Respondents filed a case for breach of contract against petitioners before the Regional Trial
Court (RTC) of Manila. At the pre-trial conference, the parties agreed to submit the case for
arbitration to the CONSTRUCTION INDUSTRY ARBITRATION COMMISSION (CIAC).
Respondents filed a request2 for arbitration with the CIAC and nominated Atty. Custodio O.
Parlade as arbitrator. Atty. Parlade was appointed by the CIAC as sole arbitrator to resolve the
dispute. With the agreement of the parties, Atty. Parlade designated Engr. Loreto C. Aquino to
assist him in assessing the technical aspect of the case. The RTC of Manila then dismissed the
case and transmitted its records to the CIAC.3
After conducting hearings and two (2) ocular inspections of the construction site, the arbitrator
rendered judgment against petitioners, thus:
AWARD
In summary, award is hereby made in favor of the Quiambaos against the Respondents, jointly
and severally, as follows:

Lost Rentals

- P1,680,000.00

Cost to Complete,
Rectification, etc.

2,281,028.71

Damages due to
erroneous staking

117,000.00

Professional fees for

geodetic surveys, etc.

72,500.00

Misc. expenses/
professional fees of
engineers

118,642.50

Bills for water and

electricity, PLDT

15,247.68

Attorneys Fees

100,000.00

Moral Damages

250,000.00

Exemplary Damages

250,000.00

TOTAL

P4,884,418.89

There is likewise an award in favor of the Respondents (petitioners herein) and against the
Claimants (respondents herein) for the value of the materials and equipment left at (the) site (in)
the amount of P238,372.75. Respondent CGI is likewise credited with an 80% accomplishment
having a total value of P5,847,857.20.
All other claims and counterclaims are hereby dismissed for lack of merit.

To recapitulate:

Payments already made to

P5,275,041
CGI
.00

Amount awarded above to

4,864,418.8
Claimants
9

Total

10,159,459.
89

Payments
due CGI for
80% work
accomplishm P5,847,857
ent
.20 -

Cost of
materials and
equipment
238,372.75 -

Total :

P6,086,299
.95

Deducting this amount of P6,086,229.95 from P10,159,459.89, the result is a net award in favor
the Claimants of (sic) the amount of P4,073,229.94.
WHEREFORE, the Respondents are hereby ordered to pay, jointly and severally, the Claimants
the amount of P4,073,229.94 with interest at 6% per annum from the date of the promulgation of
this Award, and 12% per annum of the net award, including accrued interest, from the time it
becomes final and executory until it is fully paid.
Each party is hereby directed to pay to the Commission P15,000.00 as such partys share in the
experts fees paid to Engr. Loreto C. Aquino.
SO ORDERED.4
Petitioners appealed to the Court of Appeals which affirmed the arbitrators Decision but deleted
the award for lost rentals.5
Unsatisfied, petitioners filed this petition for review on certiorari, raising the following issues:

I. THERE WAS NO BASIS, IN FACT AND IN LAW, TO ALLOW RESPONDENTS TO

UNILATERALLY RESCIND THE DESIGN/BUILT CONTRACT, AFTER
PETITIONERS HAVE (SIC) SUBSTANTIALLY PERFORMED THEIR OBLIGATION
UNDER THE SAID CONTRACT.
II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS
JOINTLY AND SEVERALLY LIABLE WITH CO-PETITIONER COORDINATED
(GROUP, INC.), IN CLEAR VIOLATION OF THE DOCTRINE OF SEPARATE
JURIDICAL PERSONALITY.
We find no merit in the petition.
Executive Order No. 1008 entitled, "Construction Industry Arbitration Law" provided for an
arbitration mechanism for the speedy resolution of construction disputes other than by court
litigation. It recognized the role of the construction industry in the countrys economic progress
as it utilizes a large segment of the labor force and contributes substantially to the gross national
product of the country.6 Thus, E.O. No. 1008 vests on the Construction Industry Arbitration
Commission (CIAC) original and exclusive jurisdiction over disputes arising from or connected
with construction contracts entered into by parties who have agreed to submit their case to
voluntary arbitration. Section 19 of E.O. No. 1008 provides that its arbitral award shall be
appealable to the Supreme Court only on questions of law.7
There is a question of law when the doubt or difference in a given case arises as to what the law
is on a certain set of facts, and there is a question of fact when the doubt arises as to the truth or
falsity of the alleged facts.8 Thus, for a question to be one of law, it must not involve an
examination of the probative value of the evidence presented by the parties and there must be no
doubt as to the veracity or falsehood of the facts alleged.9
In the case at bar, it is readily apparent that petitioners are raising questions of fact. In their
first assigned error, petitioners claim that at the time of rescission, they had completed 80% of
the construction work and still have 15 days to finish the project. They likewise insist that they
constructed the building in accordance with the contract and any modification on the plan was
with the consent of the respondents.
These claims of petitioners are refuted by the evidence on record. In holding that respondents
were justified in rescinding the contract, the Court of Appeals upheld the factual findings of
the sole arbitrator, thus:
xxx
(A)s the Building was taking shape, they noticed deviations from the approved plans
and specifications for the Building. Most noticeable were two (2) concrete columns
in the middle of the basement which effectively and permanently obstructed the
basement for the parking of vehicles x x x. In addition, three (3) additional concrete
columns were constructed from the ground floor to the roof deck x x x which
affected the overall dimension of the building such as altering the specified beam

depths, passageways and windows. In addition, Mrs. Quiambao provided a virtual

litany of alleged defects, to wit: (a) the Building was not vertically plumbed xxx; (b)
provisions for many architectural members were not provided for, such as, (i) the recesses
for window plant boxes are lacking xxx, (ii) provisions for precast molding are lacking
xxx, (iii) canopies are also lacking x x x; (c) misaligned walls, ugly discrepancies and
gaps; (d) skewed walls to floors/landings; (e) low head clearances and truncated beams x
x x; (f) narrow and disproportionate stairs xxx one (1) instead of two (2) windows at the
fire exit x x x, (g) absence of water-proofing along the basement wall x x x and at the
roof deck which caused leaks that damages the mezzanine floor x x x; (h) the use of
smaller diagonal steel trusses at the penthouse. x x x There were others which were
shown during the site inspection such as: (1) L-shaped kitchen counters instead of the
required U-shaped counters x x x; (2) failure to provide marble tops for the kitchen
counters; (3) installation of single-tub sinks where the plans called for double-type
stainless kitchen sinks x x x; (4) installation of much smaller windows than those
required; (5) misaligned window easements to wall, (6) floors were damaged by roof
leaks, (6) poor floor finish, misaligned tiles, floors with "kapak" and disproportionate
drawers and cabinets. A more comprehensive list of alleged defects, deviations and
complaints of the Quiambaos is found in a report marked Exhibit C-144. Many of these
defects were seen during the site inspection and the only defense and comment of
CGI was that these were punch-list items which could have been corrected prior to
completion and turn-over of the Building had the Contract not been terminated by
the Claimants (respondents here). x x x Thus, x x x (petitioner) CGI argued that: "In any
construction work, before a contractor turns-over the project to the owner, punchlisting
of defects is done so as to ensure compliance and satisfaction of both the contractor and
the owner. Punch listing means that the contractor will list all major and minor defects
and rectifies them before the turnover of the project to the owner. After all defects had
been arranged, the project is now turned over to the owner. For this particular project,
no turn over was made by the contractor to the owner yet. Actually, we were already
pinpointing these defects for punch listing before we were terminated illegally. As alleged
by the owner, the deficiencies mentioned are stubouts of water closets at toilets, roofing
and framing, doors, cabinets, ceiling and stairs and other were not yet completed and
rectified by us. In fact we were counting on our project engineer in charge x x x to do this
in as much as this is one of his duties to do for the company. x x x" Confirmatory of this
assertion of CGI that it was willing to undertake the appropriate corrective works
(whether or not the items are punch-list items) is Exhibit C-88 which is a letter prepared
by CGIs Windell F. Vizconde, checked by CGIs Gary M. Garcia and noted by CGIs
Benjie Lipardo, addressed to the Quiambaos which stated that:
"As per our discussion during the last meeting dated Sept. 28, 1998 the following items
was (sic) confirmed and clarified. These are described as follows:
"1. All ceiling cornices shall be installed as per plan specification which is 1" x 4" in
size.
"2. All baseboards shall be installed as per plan specification which is wood 1" x 4" in
size.

"3. Electrical Meter center and main panel breaker should be retained to its present
location.
"4. Elevation of office, dining and stair lobby of ground floor shall be 4" higher than the
elevation of parking area (subject for verification).
"5. All door jambs at C.R. has (sic) to be replaced with concrete framing jambs.
"6. All ceilings mailers should be 2 x 2 in size.
"7. All plywood ceiling that was damaged by rain water shall be replaced.
"8. Provide a pipe chase for the enclosure of soil stack pipe and water line pipe at the
ground floor level between grid line 3-4 along the light well area.
"9. Front side elevation view shall be follow (sic) as per plan specialy (sic) at 4th flr.
"10. One column at basement floor along grid line 2# B has to be verified by the
structural designer if ever it is safe to removed (sic) the column and what will be their
(sic) recommendation to support the load.
"11. Existing doors D-2 and D-3 shall be replaced a (sic) new one."
While Mrs. Quiambao appeared not to have given her conformity, this document from
CGI is an admission by CGI of the deficiencies in the construction of the Building
which needed to be corrected.
It appears that concrete samples taken from the basement, ground floor, mezzanine
and 2nd floor of the Building were subjected to a concrete core test by Geotesting
International, Inc., geotechnical and materials testing engineers. A report dated
January 20, 1999 x x x showed x x x that (5) samples x x x failed the test. Sample S2
while it showed a comprehensive strength of 3147 psi, the corrective strength in psi was
below the specified comprehensive strength of 3000 psi. CGI failed to produce evidence
of similar tests during the construction of the Building although it is normal construction
practice for the contractor to provide samples for concrete core tests.
Deformed reinforcing steel bar specimens from the building were subjected to
physical tests. These tests were conducted at the Materials Testing Laboratory of the
Department of Civil Engineering, College of Engineering, University of the Philippines.
x x x There were 18 samples and x x x 8 failed the test although all of them passed the
cold bend test. x x x CGI submitted Quality Test Certificates issued by Steel Asia
certifying to the mechanical test results and chemical composition of the steel materials
tested x x x. However, the samples were provided by the manufacturer, not by CGI, to
Steel Asia, and there is no showing that the materials supplied by the manufacturer to
CGI for the Building formed part of the steel materials, part of which was tested.

xxx
Regarding the additional columns at the basement and at the first floor to the roof
deck of the Building, which effectively restricted the use of the basement as a
parking area, and likewise reduced the area which could be used by the Quiambaos
in the different floors of the Building, Engr. Roberto J. David admitted that these
represented a design change which was made and implemented by CGI without the
conformnity of the Claimants. The Contract specifically provided in Article II that "the
CONTRACTOR shall submit to the OWNER all designs for the OWNERS approval."
This implies necessarily that all changes in the approved design shall likewise be
submitted to the OWNER for approval. This change, in my view, is the single most
serious breach of the Contract committed by CGI which justified the decision of the
Claimants to terminate the Contract. x x x (T)here is no evidence to show that the
Quiambaos approved the revision of the structural plans to provide for the construction of
the additional columns. x x x
x x x Engr. Villasenor defended his structural design as adequate. He admitted that the
revision of the plans which resulted in the construction of additional columns was in
pursuance of the request of Engr. David to revise the structural plans to provide for
a significant reduction of the cost of construction. When Engr. David was asked for
the justification for the revision for the plans, he confirmed that he wanted to reduce
the cost of construction. In any case, whether the cause of revision of the plans was
the under-design of the foundation or for reasons of economy, it is CGI which is at
fault. CGI prepared the structural plans and quoted the price for constructing the
Building. The Quiambaos accepted both the plans and the price. If CGI made a
mistake in designing the foundation or in estimating the cost of construction, it was
at fault. It cannot correct that mistake by revising the plans and implementing the
revisions without informing the Quiambaos and obtaining their unequivocal
approval of such changes.
In addition, CGI admitted that no relocation survey was made by it prior to the
construction of the Building. Consequently, a one-meter portion of the Building was
constructed beyond the property line. In justification, Engr. Barba V. Santos declared that
CGI made the layout of the proposed structure based on the existing fence. x x x (I)t is
understood that a contractor, in constructing a building, must first conduct a relocation
survey before construction precisely to avoid the situation which developed here, that the
Building was not properly constructed within the owners property line. x x x This
resulted in the under-utilization of the property, small as it is, and the exposure of the
Quiambaos to substantial damages to the owner of the adjoining property encroached
upon.
A third major contested issue concerned the construction of the cistern. x x x A
cistern is an underground tank used to collect water for drinking purposes. The
contentious points regarding the construction of the cistern are: first, that the cistern was
designed to accumulate up to 10,000 gallons of water; as constructed, its capacity

was less than the design capacity. Second, there is no internal partition separating
the cistern from the sump pit. x x x
Considering that the cistern is a receptacle for the collection of drinking water, it is
incomprehensible why the Respondents (herein petitioners), in the design and
construction of the cistern, has (sic) not taken the necessary measures to make
certain that the water in the cistern will be free from contamination. x x x
Thus, granting the arguments of the Respondents (herein petitioners) that the observed
defects in the Building could be corrected before turn-over and acceptance of the
Building if CGI had been allowed to complete its construction, the construction of
additional columns, the construction of the Building such that part of it is outside
the property line established a sufficient legal and factual basis for the decision of
the Quiambaos to terminate the Contract. The fact that five (5) of nine (9) the (sic)
concrete samples subjected to a core test, and eight (8) of eighteen (18) deformed
reinforcing steel bar specifics subjected to physical tests failed the tests and the
under-design of the cistern was established after the Contract was terminated also
served to confirm the justified suspicion of the Quiambaos that the Building was
defective or was not constructed according to approved plans and specifications.10
(emphases supplied)
These are technical findings of fact made by expert witnesses and affirmed by the arbitrator.
They were also affirmed by the Court of Appeals. We find no reason to revise them.
The second assigned error likewise involves a question of fact. It is contended that petitionerspouses David cannot be held jointly and severally liable with petitioner CGI in the payment of
the arbitral award as they are merely its corporate officers.
At first glance, the issue may appear to be a question of law as it would call for application of the
law on the separate liability of a corporation. However, the law can be applied only after
establishing a factual basis, i.e., whether petitioner-spouses as corporate officers were grossly
negligent in ordering the revisions on the construction plan without the knowledge and consent
of the respondent-spouses. On this issue, the Court of Appeals again affirmed the factual
findings of the arbitrator, thus:
As a general rule, the officers of a corporation are not personally liable for their official
acts unless it is shown that they have exceeded their authority. However, the personal
liability of a corporate director, trustee or officer, along with corporation, may so
validly attach when he assents to a patently unlawful act of the corporation or for
bad faith or gross negligence in directing its affairs.
The following findings of public respondent (CIAC) would support its ruling in holding
petitioners severally and jointly liable with the Corporation:
" x x x When asked whether the Building was underdesigned considering the poor
quality of the soil, Engr. Villasenor defended his structural design as adequate. He

admitted that the revision of the plans which resulted in the construction of
additional columns was in pursuance of the request of Engr. David to revise
the structural plans to provide for a significant reduction of the cost of
construction. When Engr. David was asked for the justification for the
revision of the plans, he confirmed that he wanted to reduce the cost of
construction. x x x" (emphases supplied)11
Clearly, the case at bar does not raise any genuine issue of law. We reiterate the rule that factual
findings of construction arbitrators are final and conclusive and not reviewable by this Court on
appeal, except when the petitioner proves affirmatively that: (1) the award was procured by
corruption, fraud or other undue means; (2) there was evident partiality or corruption of the
arbitrators or of any of them; (3) 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; (4) one or more of the arbitrators were disqualified to act as such under section
nine of Republic Act No. 876 and willfully refrained from disclosing such disqualifications or of
any other misbehavior by which the rights of any party have been materially prejudiced; or (5)
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.12 Petitioners failed to
show that any of these exceptions applies to the case at bar.
Finally, it bears to remind petitioners of this Courts ruling in the 1993 case of Hi-Precision
Steel Center, Inc. vs. Lim Kim Steel Builders, Inc.13 which emphasized the rationale for
limiting appeal to legal questions in construction cases resolved through arbitration, thus:
x x x Consideration of the animating purpose of voluntary arbitration in general, and
arbitration under the aegis of the CIAC in particular, requires us to apply rigorously the
above principle embodied in Section 19 that the Arbitral Tribunals findings of fact shall
be final and inappealable (sic).
Voluntary arbitration involves the reference of a dispute to an impartial body, the
members of which are chosen by the parties themselves, which parties freely consent in
advance to abide by the arbitral award issued after proceedings where both parties had the
opportunity to be heard. The basic objective is to provide a speedy and inexpensive
method of settling disputes by allowing the parties to avoid the formalities, delay,
expense and aggravation which commonly accompany ordinary litigation, especially
litigation which goes through the entire hierarchy of courts. Executive Order No.
1008 created an arbitration facility to which the construction industry in the Philippines
can have recourse. The Executive Order was enacted to encourage the early and
expeditious settlement of disputes in the construction industry, a public policy the
implementation of which is necessary and important for the realization of the national
development goals.
Aware of the objective of voluntary arbitration in the labor field, in the construction
industry, and in other area for that matter, the Court will not assist one or the other or
even both parties in any effort to subvert or defeat that objective for their private
purposes. The Court will not review the factual findings of an arbitral tribunal upon the

artful allegation that such body had "misapprehended facts" and will not pass upon issues
which are, at bottom, issues of fact, no matter how cleverly disguised they might be as
"legal questions." The parties here had recourse to arbitration and chose the arbitrators
themselves; they must have had confidence in such arbitrators. The Court will not,
therefore, permit the parties to relitigate before it the issues of facts previously
presented and argued before the Arbitral Tribunal, save only where a clear showing
is made that, in reaching its factual conclusions, the Arbitral Tribunal committed an
error so egregious and hurtful to one party as to constitute a grave abuse of
discretion resulting in lack or loss of jurisdiction. Prototypical examples would be
factual conclusions of the Tribunal which resulted in deprivation of one or the other party
of a fair opportunity to present its position before the Arbitral Tribunal, and an award
obtained through fraud or the corruption of arbitrators. Any other more relaxed rule
would result in setting at naught the basic objective of a voluntary arbitration and would
reduce arbitration to a largely inutile institution. (emphases supplied)
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 141510

August 13, 2004

MANUEL L. MORATO, ANTONIO L. TAN, JR., JOSE THOMAS D. BELDIA, TRUMAN

E. BECKER and T.F. VENTURES, INC., petitioners,
vs.
HON. COURT OF APPEALS, HON. SIMEON P. BADILLO, JR., and YOSHITSUGU
MATSUURA, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition filed "under Rule 45 and/or Rule 65 of the 1997 Revised Rules of Civil
Procedure" of the Decision1 of the Court of Appeals in CA-G.R. SP No. 49930 and the
Resolution denying the motion for reconsideration thereon.
The Antecedents
On October 1, 1997, herein petitioners, Manuel L. Morato, Antonio L. Tan, Jr., Jose Thomas D.
Beldia, Truman E. Becker, T.F. Ventures, Inc., and Atty. Dennis G. Manicad filed a petition with
the Securities and Exchange Commission (SEC) against Alexander Poblador, Romeo F. Gaza,
Yusuke Fukuzumi, Florence R. Valmonte, Virgilio R. Lazaga, Reza M. Arabpour, Ruben P.
Jacinto and herein private respondent Yoshitsugu Matsuura, for declaration of nullity of
stockholders and directors meetings and damages. The petition was docketed as SEC Case No.
10-97-5778 and referred to the Securities Investigation and Clearing Department (SICD) of the
SEC for investigation and resolution. The petition was later amended to include a prayer for the
issuance of a temporary restraining order and a writ of preliminary injunction.2
The petitioners alleged therein, inter alia, that when petitioner T.F. Ventures, Inc. was organized
and registered on April 25, 1984, the following were the stockholders and the amount of their
respective subscriptions:

Name

Number
of
Shares

Amount of
Subscription

MANUEL
MORATO

23,500

2,350,000.00

ANTONIO L.
TAN, JR.

26,500

2,650,000.00

JOSE THOMAS
BELDIA

5,000

500,000.00

ALEXANDER
POBLADOR

5,000

500,000.00

TRUMAN

5,000

500,000.00

BECKER

YOSHITSUGU
MATSUURA

20,000

2,000,000.00

MASAO
OGURA

15,000

1,500,000.00

100,000

PHP
10,000,000.003

Total

Petitioner Atty. Manicad was the corporate secretary of T.F. Ventures, Inc., having been
appointed to the said office by the members of the board of directors of the said corporation on
August 7, 1996. On October 8, 1996, the SEC approved the amended Articles of Incorporation of
T.F. Ventures, Inc. increasing the authorized capitalization from P10,000,000 to P100,000,000, as
well as the subscription of Hiroshi Tanaka to P10,000,000 worth of shares. As of the said date,
the total number of shares issued and outstanding was 500,000, at P100.00/per share, totaling
P50,000,000. The stockholders on record and the number of shares subscribed by them,
respectively, were as follows:

Name

Number
of
Shares

Worth

MANUEL
MORATO

100,000 10,000,000.00

ANTONIO L.
TAN, JR.

150,000 15,000,000.00

JOSE THOMAS
BELDIA

25,000

2,500,000.00

ALEXANDER
POBLADOR

25,000

2,500,000.00

TRUMAN
BECKER

25,000

2,500,000.00

YOSHITSUGU
MATSUURA

50,000

5,000,000.00

MASAO
OGURA

25,000

2,500,000.00

HIROSHI
TANAKA

100,000 10,000,000.00

Total

500,000

PHP
50,000,000.004

Following a dispute by and between the herein petitioners, who constituted the majority of the
stockholders and directors of the petitioner corporation and respondent Matsuura, the latter had
all the corporate records carted away from Suite 2112 Makati Prime Citadel Building, P. Burgos
Street, Makati City, then the principal office of the corporation, to an unknown location. The said
office was then padlocked and abandoned. The petitioners, thereafter, secured a search warrant
against respondent Matsuura, his wife, and Jacinto, and were able to recover a substantial bulk of
the petitioner corporations records. Thereafter, in a Board Resolution dated April 30, 1997,
respondent Matsuura and Jacinto were charged with qualified theft. The Board of Directors of
the petitioner corporation then transferred the principal office address to its Project Site, the
Delta Sunrise Hotel, at 7835 Makati Ave., corner Eduque St., Makati City.
In September 1997, petitioners Morato, Becker and Beldia received a notice of stockholders
meeting from respondent Atty. Poblador, set at 10:00 a.m. on September 22, 1997. Atty. Poblador
had apparently illegally assumed and maliciously represented himself as corporate secretary
without proper authority from the Board of Directors. Stockholders, petitioners Tan5 and Ogura,6
who each owned a substantial number of shares of stock, were not formally notified of the said
meeting.

Petitioners Becker and Beldia then wrote Atty. Poblador, directing him to desist and refrain from
proceeding with his intended actions. The meetings of stockholders and directors were
nevertheless conducted on September 22, 1997 at 10:00 a.m. and 2:00 p.m., respectively.
According to the petitioners, Atty. Pobladors act of calling such stockholders meeting was
illegal and unauthorized for the following reasons: (a) the Board of Directors of T.F. Ventures,
Inc., by virtue of a Board Resolution dated August 7, 1996, had already appointed Atty. Manicad
as the new corporate secretary effective on the said date; (b) respondent Matsuura, even if he was
Chairman of the Board of the Directors, could not, on his own, call for a stockholders meeting,
as the authority to do so was vested in the president, petitioner Morato, or, in the event that no
annual stockholders meeting would be held on the 1st Tuesday of March, the Board of Directors
as stated in the by-laws;7 and, (c) the absence of the petitioner corporations legitimate and
existing stockholders on record negated the existence of a quorum.
According to the petitioners, the increase in the subscribed capital stock and issuance of the
outstanding number of shares therefor without proper authority from the SEC was made by the
petitioner corporation in violation of the Corporation Code and the Articles of Incorporation. The
election of the Board of Directors during the said meeting was illegal, considering that, except
for respondent Matsuura, the rest of the members of the Board of Directors elected in the said
meeting were not even shareholders as appearing in the books of the corporation, and as certified
by petitioner Atty. Manicad, the corporate secretary.
The petitioners prayed that, after due proceedings, judgment be rendered in their favor, viz:
A. Declaring the alleged NOTICE FOR ANNUAL STOCKHOLDERS MEETING as
well as the alleged "ANNUAL STOCKHOLDERS MEETING" conducted by the
Respondents on 22 September 1997 [at] 10:00 a.m. as NULL and VOID from the very
beginning, including the proceedings made therein, to include but not limited to the sham
ELECTION of the alleged Members of the Board of Directors and the appointment of the
EXTERNAL AUDITOR;
B. Declaring the alleged "ORGANIZATIONAL MEETING" of the renegade Board of
Directors conducted by the Respondents on 22 September 1997 at 2:00 p.m. as NULL
and VOID from the very beginning, including all proceedings made therein, to include
but not limited to the sham ELECTION of the alleged Officers of T.F. VENTURES,
INC.;
C. Declaring any or all acts of the Respondents conducted or made at or proceeding from
the alleged "ANNUAL STOCKHOLDERS MEETING" conducted by the Respondents
on 22 September 1997 at 10:00 A.M.] and "ORGANIZATIONAL MEETING" of the
renegade Board of Directors conducted by the Respondents on 22 September 1997 at
2:00 p.m. as NULL and VOID.8
The petitioners also prayed that the respondents be held, jointly and severally, liable to pay
damages and attorneys fees, as follows:

a) the sum of P25,000,000.00 representing the consequential damages suffered by

Petitioners;
b) the sum of P5,000,000.00 representing moral damages and the sum of P2,000,000.00
as and for exemplary damages;
c) attorneys fees in the amount of P200,000.00 and expenses of suit in an amount of not
less than P100,000.00 plus interest thereof from the date of the judgment;
d) cost of suit; and
e) interest on items (a) and (b) above from the date of filing of the Complaint until full
payment thereof.9
Traversing the material allegations of the amended petition, respondent Matsuura maintained in
his answer to the petition that the meeting of the stockholders on September 22, 1997 and the
election of the members of the Board of Directors on the said date were valid. He alleged that the
petitioners held their own renegade stockholders meeting on October 20, 1997 without notifying
him as Chairman of the Board. He further alleged that petitioner Tan, whose outstanding shares
had been assigned and transferred in his favor as early as January 20, 1997, was present and
participated in the said meeting. Respondent Matsuura also alleged that petitioner Tan, then
acting as the treasurer, falsely certified in the Treasurers Affidavit dated September 29, 1993 that
of the increase of P90,000,000 in the authorized capital stock, P40,000,000 was fully paid by the
stockholders. He alleged that the original treasurers affidavit notarized on September 29, 1997
was replaced under the same Doc. No. 457 in order to reach the required minimum deposit and
change the mode of payment of paid-in capital, from "cash" to "offset of liability," to enable the
petitioners to gain control of the corporation at practically zero cash outlay. Thereafter, the
"renegade board" headed by petitioner Morato and former stockholder and ex-treasurer petitioner
Tan concocted another Board Resolution on April 24, 1997, authorizing the opening of a new
and secret account, with petitioner Morato as the sole signatory for the purpose of cashing in
loan proceeds from another bank. Previous to that, the respondent further contends that petitioner
Tan had already committed several misappropriations of both money and property belonging to
the petitioner corporation.
Respondent Matsuura, thus, interposed the following affirmative defenses:
THE STOCKHOLDERS MEETING HELD AT THE PRINCIPAL OFFICE ON
SEPTEMBER 22, 1997 IS VALID, LEGAL AND MUST SUBSIST, THE SAME
HAVING BEEN CONDUCTED WITH DUE NOTICE TO ALL PARTIES
CONCERNED INCLUDING PAID AND UNPAID STOCKHOLDERS OF RECORD.
IN COMPARISON, THE STOCKHOLDERS MEETING OF OCTOBER 20, 1997
SPEARHEADED BY COMPLAINANTS, WHO DID NOT PAY THEIR
SUBSCRIPTION, AND WITHOUT NOTICE TO THE CHAIRMAN AND THE PAIDUP SUBSCRIBERS, IS PATENTLY ILLEGAL, VOID AND WITHOUT EFFECT.

COROLLARILY, ALL BOARD RESOLUTIONS PASSED BY THE UNPAID

SUBSCRIBERS AMONG THEMSELVES, WITHOUT NOTICE TO THE CHAIRMAN
AND THE OFFICIAL CORPORATE SECRETARY ON RECORD, ARE VOID AND
UNENFORCEABLE. THEREFORE, THE SAME MUST BE STRICKEN OUT.
MOST IMPORTANTLY, THE APPROVAL FOR THE APPLICATION FOR
INCREASED CAPITALIZATION IN THE AMOUNT OF P100,000,000.00 MUST BE
RECALLED FOR FAILURE OF CONSIDERATION (OF STOCKHOLDERS TO PAY
THEIR SUBSCRIPTIONS).10
The respondent prayed that, after due proceedings, judgment in his favor be rendered as follows:
a) To UPHOLD the VALIDITY of the stockholders meeting held on September 22, 1997
at the principal office of T.F. VENTURES, INC., and, consequently, lift the temporary
restraining order initially granted to complainants.
b) To DECLARE the stockholders meeting subsequently held by complainants on
October 20, 1997 as NULL AND VOID, as well as all Board Resolutions certified by one
Dennis Manicad as "Corporate Secretary" for being false, sham and consisting of ultra
vires acts.
c) To RECALL and NULLIFY the approval of application for increased capitalization in
the amount of P100,000,000.00 due to failure of consideration.
d) To ISSUE a TEMPORARY RESTRAINING ORDER against the private complainants
from further issuing board resolutions and any alleged corporate acts in behalf of T.F.
VENTURES, INC. and, thereafter, to issue a permanent WRIT OF PRELIMINARY
INJUNCTION against complainants.
e) To order complainants to pay MORAL DAMAGES in an amount not less than ONE
MILLION PESOS, Actual or Compensatory and Exemplary Damages as may be
determined by the Honorable Investigator, plus interests.
f) To order private complainants/petitioners to pay ATTORNEYS FEES amounting to
P200,000.00 and LITIGATION EXPENSES amounting to P100,000.00, plus interest.11
On October 14, 1997, Hearing Officer Manolito S. Soller issued an Order granting a temporary
restraining order prayed for by the petitioner.12 On November 12, 1997, an Order was issued
granting the writ of preliminary injunction prayed for by the petitioners on a bond of P400,000.13
In the meantime, respondent Matsuura wrote Director Otillo C. San Diego of the Examiners and
Appraisers Department of the SEC, requesting for an examination of the basis for the capital
increase of T.F. Ventures, Inc. from P10,000,000 to P100,000,000, alleging the commission of
devices, schemes and criminal acts. Thus:

The undersigned Chairman of the Board of T.F. VENTURES, INC., in his capacity as
such and as a stockholder, with the assistance of Counsel, most respectfully requests that
a reexamination of the basis for capital increase of T.F. VENTURES, INC. be conducted
in view of several anomalous transactions and spurious documents that were unearthed
only recently. The planned increase of the authorized shares to P100 Million was
approved in principle sometime in 1993, however, since only the undersigned and Mr.
Masao Ogura paid their increased shares, the plan was aborted. Whatever advances were
given by the Japanese investors, including Mr. Tanaka later on, were agreed to be treated
as credit of T.F. VENTURES, INC. It was discovered lately that a recommendation for
approval by Mr. Remigio Santiago was issued on August 3, 1996, a copy is attached
hereto as ANNEX "A," used as basis in approving the P100 Million capital increase.
Relative to [the] above recommendation, your attention is invited to verify the following
documents and bank certifications, to wit:
1. TREASURERS AFFIDAVIT dated September 29, 1993 signed by Antonio Tan, Jr.
who originally attested that out of the increased capital stock of P90 Million, P40 Million
has been subscribed and fully paid "by way of cash," a copy is attached hereto as ANNEX
"A-1." Undersigned was led to believe that all stockholders subscribing to additional
shares would, indeed, pay in cash, at the time the Memorandum of Agreement was
drawn. However, Mr. Tan erased and substituted the same Affidavit later on to reflect that
said increase in capital stock "has been actually paid-in by way of offset of liabilities," the
latter words having been superimposed, a copy is attached hereto as ANNEX "A-2,"
under the same notarial register.
2. In the second paragraph of ANNEX "A," on Verification and Comments, it was stated
therein that "cash received from the said subscribers were deposited on various dates
with the corporations accounts with China Banking Corporation under SA # 103-070331-8 and (Dollar) $ account # 103311-1; and United Coconut Planters bank under SAQ #
103-123370-5, $ account # 01-103-300364-0 and Unified Trust Placement." Upon
verification with China Bank, however, said Dollar Acct # 103311-1 is non-existent, the
only dollar account is #103-703171-1, as shown in the attached letter of the undersigned,
ANNEX "A-3" and the Certification of China Bank as ANNEX "A-4."
3. Moreover, in the same verification, the mention of "Unified (sic) Trust Placement"
pertained to P20 Million proceeds of loan from Masao Ogura for use in company
operations / construction, as shown in UCPB bank certification attached hereto as
ANNEX "A-5." The rights of Masao Ogura having been transferred to Yusuke Fukuzumi,
the latter filed a criminal complaint for ESTAFA against the stockholders who claimed
aforesaid proceeds as their "paid in capital." A copy of the demand letter of Mr.
Fukuzumi and the memorandum of criminal investigation is (sic) attached hereto as
ANNEXES "A-6" and "A-7."
4. In furtherance of their interest, then Treasurer Antonio Tan, Jr. coerced a newly hired
accountant to switch records, reclassify account names from "Buyers Deposit" to
"Deposit for Future Subscriptions" and sign spurious certificate to make it appear that the

unpaid subscribers have paid their subscriptions out of "Advances from Stockholders" for
the purpose of getting SEC approval. However, knowing the criminal consequence of his
acts, said Accountant Mr. Nestor Pangan, swore under oath that he executed the false
certificate under threat and intimidation, a copy of which is attached hereto as ANNEX
"B" and the admittedly false certificate submitted to this Office as ANNEX "B-1." And
finally, the approval by SEC on October 8, 1996 of the capital increase based on the
admittedly spurious documents, is attached hereto as ANNEX "B-2," described in
paragraph 17 of said Accountants Affidavit.
5. Verily, then Treasurer Antonio Tan [Jr.] filed a G.I.S. "as of September 1996" declaring
P10 Million authorized capital stock, adopting the same stand as the last G.I.S. filed on
March 1, 1994, except that he falsely claimed full payment of subscribed capital stock
and he miscomputed the shares of Alexander Poblador by placing P500,000, instead of
only P300,000. Notably, the 1996 G.I.S. was notarized on September 22, 1997 and filed
only on September 23, 1997, together with the 1997 G.I.S. declaring P100 Million
authorized capital, purposely to defeat the general stockholders meeting called on
September 22, 1997 by the Corporate Secretary Alexander Poblador with due notice to all
stockholders concerned. A copy of the March 1, 1994 G.I.S. is attached hereto as
ANNEX "C," the September 1996 G.I.S. as ANNEX "C-1," and the 1997 G.I.S. as
ANNEX "C-2."
6. Stressworthy is the fact that as of January 1997, then Treasurer Antonio Tan [Jr.] had
already transferred all his shares to the undersigned, a copy of the Deed of Trust is
attached hereto as ANNEX "D." Effectively therefore, he had no longer any personality
to act as a Director of the corporation and the 1997 G.I.S. reflecting P100 Million
capitalization is sham, illegal and void for lack of consideration; the same must be
cancelled.
WHEREFORE, after verification of the foregoing, it is most respectfully requested of this
Honorable Office to SET ASIDE the approval of the P100 Million capital increase for
failure of consideration, and REVERT to the status quo, which has an undisputed P10
Million authorized capital stock.14
The matter was docketed as CSI Case No. 97-11-31. The letter was later forwarded by the SEC
to the Prosecution and Enforcement Department (PED) which redocketed the matter as PED
Case No. 98-2231.
In a Letter15 dated February 27, 1998 to then SEC Chairman Perfecto R. Yasay, Jr., petitioners
Morato, Tan and Beldia, disclosed that they were not served any notice of the proceedings
conducted in PED Case No. 98-2231. They stated that the issue of the sufficiency of the
consideration of the increase in capital stock of the petitioner corporation had already been put in
issue in SEC Case No. 10-97-5778. They contended that when respondent Matsuura raised the
matter in his answer, he thereby resorted to forum shopping. The petitioners requested that the
proceedings in PED Case No. 98-2231 be held in abeyance, considering that the SICD had
acquired jurisdiction over their amended petition in SEC Case No. 10-97-5778 ahead of
respondent Matsuuras letter-complaint.

Chairman Yasay thereafter sent a Reply Letter16 dated March 13, 1998 to petitioners Morato, Tan
and Beldia, informing them that both cases, SEC Case No. 10-97-5778 and PED Case No. 982231, could proceed independently of each other. Yasay reasoned that the issue in the former
case involved the validity of the notice and stockholders meeting of T.F. Ventures, Inc. and the
organizational meeting of the members of the Board of Directors, while the latter case involved
the alleged anomalous transactions and spurious documents used in the increase of the
corporations capital stock. He added that under Section 8 of Presidential Decree (PD) No. 902A, the PED had the exclusive authority to investigate the matter before it for purposes of filing
and prosecuting the corresponding cases for violation of the Corporate Code, the Revised Penal
Code, and the rules and regulations enforced by the SEC.17
Petitioners Morato, Tan and Beldia filed a Motion to Suspend Proceedings and/or Consolidation
of Cases18 in PED Case No. 98-2231. They prayed that the PED suspend its investigation in the
said case until after the proceedings in the SICD in SEC Case No. 10-97-5778 shall have been
finally resolved; or, in the alternative, that the PED case be consolidated with SEC Case No. 1097-5778 pending in the SICD. They alleged that the issue in SEC Case No. 10-97-5778 was a
prejudicial question in PED Case No. 98-2231.
On April 27, 1998, Hearing Officer Atty. Simeon Badillo, Jr., issued an Order19 denying the
motion for lack of merit, ruling that the issue on prejudicial question had already been resolved
by the SEC Chairman.
Petitioners Morato, Tan and Beldia then filed a petition for review on certiorari with the SEC En
Banc, pursuant to Rule XV of the 1993 SEC Revised Rules of Procedure. The petition was
denied in an Order dated September 11, 1998, where the following matters were declared by the
SEC En Banc: (a) a petition for review on certiorari of an interlocutory order is a prohibited
pleading under Section 5, Rule I of the Rules of Practice and Procedure before the PED; (b) the
Hearing Officer did not commit any grave abuse of discretion amounting to excess or lack of
jurisdiction in denying the motion of the petitioners to suspend the proceedings in PED Case No.
98-2231; and, (c) respondent Matsuura was not guilty of forum shopping as there was no identity
of the issues or causes of action involved in the two cases pending before the SICD and PED,
respectively. The motion for reconsideration thereafter filed was, likewise, denied for lack of
merit in a Resolution dated November 24, 1998.
The petitioners elevated the matter to the CA by way of a petition for review under Rule 43 of
the Rules of Court, on the ground that the SEC erred in (a) disregarding the rules on
counterclaim and jurisdiction relative to the issue of increase in capitalization; (b) not finding the
respondent guilty of forum shopping; and, (c) denying their motion for suspension and/or
consolidation.
On October 13, 1999, the CA rendered a Decision20 dismissing the petition for lack of merit. The
CA ratiocinated that, in the first place, the petition for certiorari filed before the SEC En Banc is
a prohibited pleading under the 1993 SEC Revised Rules on Procedure. Secondly, the main
prayer in SEC Case No. 10-97-5778 was the annulment of the notice of annual stockholders
meeting, the resulting stockholders meeting pursuant to the said notice, and all corporate acts
thereafter taken by the respondent Matsuura and the officers elected in the said meeting. On the

other hand, the main prayer of respondent Matsuura in PED Case No. 98-2231 was the recall and
nullification, for failure of consideration, of the approval of the petitioners application for
increased capitalization from P10,000,000 to P100,000,000. The appellate court held that as the
two pending cases are poles apart, the resolution of one case would not affect the proceedings
and outcome of the other.
The petitioners motion for reconsideration of the said decision was denied by the appellate court
in its Resolution dated January 11, 2000.21
Hence, this petition.
The petitioners assail the decision and resolution of the CA, contending as follows:
I
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED AND ABUSED ITS
DISCRETION AMOUNTING TO LACK OR IN EXCESS OF JURISDICTION IN NOT
DECLARING THAT PRIVATE RESPONDENT IS GUILTY OF FORUM SHOPPING.
II
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED AND ABUSED (SIC)
DISCRETION AMOUNTING TO LACK OR IN EXCESS OF JURISDICTION IN
DISREGARDING THE SETTLED RULE ON COUNTERCLAIM VIS A VIS THE
QUESTION OF JURISDICTION IN A GIVEN CASE.
III
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING
THAT THE MOTION FOR SUSPENSION AND/OR CONSOLIDATION FILED
BEFORE THE PUBLIC RESPONDENT IS PROPER AND PROCEDURALLY
SANCTIONED.22
We note that the petitioners designated their recourse to this Court as an "appeal by way of
petition for review under Rule 45 and/or Rule 65 of the 1997 Rules of Civil Procedure, as
amended."23 We find the same to be highly irregular. The petitioners are mandated to state
categorically in their petition the Rule under which the same is filed, and not merely leave the
matter for the Courts determination. It must be borne in mind that the remedies under Rules 45
and 65 of the Rules of Court cannot be interchanged, for as we ruled in National Irrigation
Administration v. Court of Appeals:24
The appeal from a final disposition of the Court of Appeals is a petition for review under
Rule 45 and not a special civil action under Rule 65 of the Rules of Court, now Rule 45
and Rule 65, respectively, of the 1997 Rules of Civil Procedure. Rule 45 is clear that
decisions, final orders or resolutions of the Court of Appeals in any case, i.e., regardless
of the nature of the action or proceedings involved, may be appealed to this Court by

filing a petition for review, which would be but a continuation of the appellate process
over the original case.25
Prescinding from the petitioners procedural lapse, we shall treat the petition as one filed under
Rule 45 of the Rules of Court.
The petitioners posit that in filing a letter-petition in PED Case No. 98-2231 and raising the issue
of sufficiency of consideration for the petitioner corporations increase in capital stock despite
the pendency of SEC Case No. 10-97-5778 before the SICD, respondent Matsuura thereby
engaged in forum shopping. The petitioners point out that the respondent raised the same issue in
his answer to their complaint and, in so doing, submitted the issue to the SICD for resolution, to
the exclusion of the PED in PED Case No. 98-2231 which was filed much later with the SEC.
The petitioners further contend that the SICD had already acquired jurisdiction over SEC Case
No. 10-97-5778 when the respondent filed his letter-petition in PED Case No. 98-2231. Hence,
the petitioners conclude that the proceedings in the latter case should be suspended, pending the
resolution of the SICD case.
We rule against the petitioners.
We agree that when the respondent filed his letter-petition in PED Case No. 98-2231, the SICD
had already acquired jurisdiction over the complaint of the petitioners in SEC Case No. 10-975778. However, the respondents act of filing such letter-petition did not constitute forum
shopping. There is forum shopping where the elements of litis pendentia are present, and where a
final judgment in one case will amount to res judicata in the other. There is litis pendentia if the
following requisites are present: (a) identity of parties, or at least such parties represent the same
interests in both actions; (b) identity of the rights asserted and relief prayed for, the relief being
founded on the same facts; and, (c) the identity of the two preceding particulars is such that any
judgment rendered in the other action, will, regardless of which party is successful, amount to
res judicata in the action under consideration. The requisites of res judicata, on the other hand,
are as follows: (a) there must be a final judgment or order; (b) the court rendering the same must
have jurisdiction over the subject matter and the parties; (c) the judgment or order must be on the
merits; and, (d) there must be, between the two cases, identity of parties, identity of subject
matter and identity of causes of action.26 The test of identity of causes of action lies not in the
form of action but on whether the same facts or evidence would support and establish the former
and present causes of action.27 Causes of action which are separate and independent of each
other, although arising from the same contract, transaction or state of facts, may be sued
separately or at one time, being no bar to subsequent actions on others.28
In this case, SEC Case No. 10-97-5778 is pending before the SICD, which has exclusive
jurisdiction to investigate and resolve intra-corporate disputes. The respondents letter-petition,
on the other hand, was referred by the SEC to the PED, docketed as PED Case No. 98-2231,29
and is pending before the Prosecution and Enforcement Department of the SEC. We find no
identity of causes of action or identity of rights asserted by the parties in both cases.
Section 8 of P.D. No. 902-A, as amended, provides:

SECTION 6. The Prosecution and Enforcement Department shall have, subject to the
Commissions control and supervision, the exclusive authority to investigate, on
complaint or motu propio, any act or omission of the Board of Directors/Trustees of
corporations, or of partnerships, or other associations, or of their stockholders, officers or
partners, including any fraudulent devices, schemes or representations, in violation of any
law or rules and regulations administered and enforced by the Commission; to file and
prosecute in accordance with law and rules and regulations issued by the Commission
and in appropriate cases, the corresponding criminal or civil case before the Commission
or the proper court or body upon prima facie finding of violation of any laws or rules and
regulations administered and enforced by the Commission; and to perform such other
powers and functions as may be provided by law or duly delegated to it by the
Commission.
Prosecution under this Decree or any Act, Law, Rules and Regulations enforced and
administered by the Commission shall be without prejudice to any liability for violation
of any provision of the Revised Penal Code.
Under the said provision, the SEC, through the PED, is vested with authority to investigate,
either motu proprio or upon complaint, any act or omission, fraudulent schemes, devices or
misrepresentations in violation of any law, rules or regulations, administered and enforced by the
SEC, and to file and prosecute appropriate civil or criminal cases upon a prima facie finding of
violation of such laws, rules or regulations. The petitioners, in SEC Case No. 10-97-5778, sought
the nullification of the Notice for the Annual Stockholders Meeting, the stockholders meeting
and organizational meeting held on September 22, 1997, on their claim that the holding of the
same was in violation of the Corporation Code and the By-Laws of the petitioner corporation. In
his answer to the petition, the respondent asserted the validity of the said meeting and prayed, by
way of counterclaim, for the nullification of the October 20, 1997 meeting of the petitioners, and
for damages. In contrast, the respondent alleged in his letter-petition in PED Case No. 98-2231
that the petitioners were engaged in fraudulent schemes, devices or misrepresentations in
violation of the law, and SEC rules and regulations.30 The complainant Matsuura asked the PED
to investigate the complaint and file the corresponding administrative, civil or criminal cases
before the SEC, the proper court or body, for violation of the laws, rules or regulations
administered and enforced by the SEC. The fact that the SICD has not yet resolved SEC Case
No. 10-97-5778 does not constitute a bar to the resolution of PED Case No. 98-2231. The
proceedings in the said cases are independent and separate of each other and may thus proceed
separately. As correctly ruled by the SEC En Banc:
Clearly, the PED had jurisdiction to investigate said increase in capitalization allegedly
with failure of consideration and to determine whether or not the corporation and its
responsible officers are liable, criminally and administratively, for violating the
Corporation Code. The investigation conducted by the PED Hearing Officer Badillo in
PED Case No. 98-2231 can proceed independently from the SICD case SEC Case No.
10-97-5778 as the issues to be resolved are different. Whatever findings that may result
from said investigation may or may not result to the filing of the appropriate civil and
criminal action before the proper courts or tribunal; and may, likewise, result to the
suspension or revocation of the corporations certificate of registration if the allegations

of failure of consideration in the increase in capitalization is found to be true. These are

all within the exclusive jurisdiction of the PED.31
The ruling of the SEC En Banc is an affirmation of the following reply of Chairman Yasay:
In this regard, please be informed that the issue under SICD Case No. 10-97-5778 which
calls for the declaration of the alleged Notice for Annual Stockholders Meeting and the
Annual Stockholders Meeting and Organizational Meeting of the Board of Directors
conducted on September 22, 1997 as NULL and VOID, is an intra-corporate dispute
which falls under the jurisdiction of the SICD, while the investigation being conducted by
the PED is the alleged anomalous transaction and spurious documents used in the
increase in capital of T.F. Ventures, Inc., which is separate and distinct from each other.
Be advised further that under PD 902-A, as amended, "the Prosecution and Enforcement
Department shall have, subject to the Commissions control and supervision, the
exclusive authority to investigate, on complaint or motu proprio, any act or omission of
the Board of Directors/Trustees of corporations, or of partnerships, or of other
associations, or of their partnerships or of other associations, (sic) or of their
stockholders, officers or partners, including any fraudulent devices, schemes or
representations, in violation of any law or rules and regulations administered and
enforced by the Commission, to file and prosecute in accordance with law and rules and
regulations issued by the Commission and in appropriate case, file the corresponding
criminal or civil case before the Commission or the proper court or body upon prima
facie finding of violation of any laws or rules regulations (sic) administered and enforced
by the Commission; and to perform such other powers and functions as may be provided
by law or duly delegated to it by the Commission."
In view thereof, the PED, pursuant to the mandate of the law, can proceed with the
investigation, considering that the issues are different from the ones raised in the SICD
case.32
It is true that in his answer with counterclaim in SEC Case No. 10-97-5778, the respondent
raised the matter of the sufficiency of consideration for the increase in the petitioner
corporations capitalization. He even alleged that the petitioners were engaged in schemes and
devices, and were guilty of culpable acts and omissions in violation of pertinent rules and laws.
However, such allegation was made only for the purpose of defending the legality of the
September 22, 1997 stockholders meeting and the election of the Board of Directors, as well as
the nullity of the October 20, 1997 meeting spearheaded by the petitioners. By so doing, the
respondent did not thereby submit the matters complained of in his letter-petition in PED Case
No. 98-2231 to the SICD for resolution, since the latter has no jurisdiction to investigate and
resolve the same, or prosecute those guilty of such violations. In any event, if the respondent
failed to raise such matters in his answer to the amended petition of the petitioners, he would
have waived the said defenses. As provided for in Section 13, Rule IV of the 1993 SEC Revised
Rules of Procedure, defenses and objections not pleaded either in a motion to dismiss or in the
answer are deemed waived.33

We note that while this case was pending in this Court, Republic Act No. 8799, otherwise known
as the Securities Regulation Code, took effect on August 8, 2000. Section 5.2 of the law
provides:
5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction
or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise
of its authority may designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.
Among the powers and functions of the SEC which were transferred to the RTC include the
following: (a) jurisdiction and supervision over all corporations, partnerships or associations who
are the grantees of primary franchises and/or a license or permit issued by the Government; (b)
the approval, rejection, suspension, revocation or requirement for registration statements, and
registration and licensing applications; (c) the regulation, investigation or supervision of the
activities of persons to ensure compliance; (d) the supervision, monitoring, suspension or take
over the activities of exchanges, clearing agencies and other SROs; (e) the imposition of
sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto;
(f) the issuance of cease-and-desist orders to prevent fraud or injury to the investing public; (g)
the compulsion of the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision; and, (h) the exercise of such other powers
as may be provided by law as well as those which may be implied from, or which are necessary
or incidental to the carrying out of, the express powers granted the Commission to achieve the
objectives and purposes of these laws.
Under Section 1, Rule 1, of the Interim Rules of Procedure Governing Intra-Corporate
Controversies under Rep. Act No. 8799, the RTC is empowered to hear civil cases involving the
following:
(1) Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members
of any corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association relations,
between and among stockholders, members, or associates; and between, any or all of
them and the corporation, partnership, or association of which they are stockholders,
members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers, or
managers of corporations, partnerships, or associations;

(4) Derivative suits; and

(5) Inspection of corporate books.
(b) Prohibition against nuisance and harassment suits. Nuisance and harassment suits
are prohibited. In determining whether a suit is a nuisance or harassment suit, the court
shall consider, among others, the following:
(1) The extent of the shareholding or interest of the initiating stockholder or
member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation
to the relief sought.
In case of nuisance or harassment suits, the court may, motu proprio or upon motion,
forthwith dismiss the case.
However, Section 8 of P.D. No. 902-A, as amended, has already been repealed, as provided for in
Section 76 of Rep. Act No. 8799:
SEC. 76. Repealing Clause. The Revised Securities Act (Batas Pambansa Blg. 178), as
amended, in its entirety, and Sections 2, 4 and 8 of Presidential Decree 902-A, as
amended, are hereby repealed. All other laws, orders, rules and regulations, or parts
thereof, inconsistent with any provision of this Code are hereby repealed or modified
accordingly.
Thus, under the new law, the PED ceased to exist. However, the SEC retains jurisdiction to
continue with its investigation of the letter-petition of respondent Matsuura.
When Rep. Act No. 8799 took effect, SEC Case No. 10-97-5778 had not yet been submitted for
decision by the SEC. Hence, the said case should be transferred to the RTC of Makati City, to be
raffled to the appropriate branch thereof assigned to try such cases. Despite the repeal of Section
8 of P.D. No. 902-A and the abolition of the PED, the SEC may continue with its investigation of
the letter-petition of respondent Matsuura.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision of the Court
of Appeals dated October 13, 1999 and the Resolution dated January 11, 2000 are AFFIRMED
with MODIFICATIONS. Pursuant to Section 5.2 of Republic Act No. 8799, the Securities and
Exchange Commission is hereby DIRECTED to transfer SEC Case No. 10-97-5778 to the

Regional Trial Court of Makati City. The SEC may continue with its investigation of the letterpetition of respondent Matsuura formerly docketed as PED Case No. 98-2231.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 150869

June 9, 2005

LEONARDO M. ANDRES, LEONARDO C. ANDRES, FLORENTINO SANTOS,

DOMITILA MARCELO, ERLINDA ANDRES, ELVIRA SANTOS, RAFAEL AGRA and
CORAZON GAVINA AGRA, Petitioners,
vs.
JUSTICE SECRETARY SERAFIN R. CUEVAS, in his capacity as Secretary of Justice,
CITY PROSECUTOR OF MANDALUYONG, METRO-POLITAN TRIAL COURT OF
MANDALUYONG, BELEN G. SANTOS, JESUS SANTOS and MERCEDES S.
COLOMA, Respondents.
DECISION
CARPIO MORALES, J.:
Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to nullify the November 14, 2001 Resolution1 of the Court of Appeals (CA) in CA-G.R.
SP No. 57958 which denied the petition for certiorari2 filed by Leonardo M. Andres, Leonardo C.
Andres, Florentino Santos, Domitila Marcelo, Erlinda Andres, Elvira Santos, Rafael Agra and
Corazon Gavina Agra (petitioners).
Petitioners likewise pray for the issuance of a writ of preliminary injunction to enjoin the City
Prosecutor of Mandaluyong City from refiling the information for perjury against them or, in the
alternative, if an information for perjury has already been filed before the Metropolitan Trial
Court of Mandaluyong City, to order the withdrawal thereof.
The antecedents of the case are as follows:

On June 11, 1992, petitioners, along with Julita Andres, Jesus Andres, Rolando Andres and Alicia
Agra, as majority stockholders of the Rural Bank of Pandi, Bulacan, filed a Petition for
Injunction, Mandamus, Nullification of Transfer of Shares, Call for Special Election,
Accounting, Damages, Production of Corporate Records with prayer for Appointment of
Management Committee pendente lite, and Issuance of Writs of Attachment and Temporary
Restraining Order3 before the Securities and Exchange Commission (SEC) against private
respondents Mercedes Coloma, Belen Santos and Jesus Santos (private respondents), together
with Cecilia Andres, Ricaredo Andres, Richelle Marie Andres, Pia Marie Andres, Diane Angeli
Andres and Ricaredo Andres II, who were minority stockholders of said bank. The case was
docketed as SEC Case No. 4246.
In the petition before the SEC, petitioners alleged, inter alia, that respondents-minority
stockholders committed acts of mismanagement, fraud and conflict of interest as directors and
officers of the bank.
On account of the following specific allegations of petitioners in their petition before the SEC, to
wit:
5.0 Since respondents, particularly respondent Mercedes Coloma (who was manager of the bank
for 18 years) assumed their position, there has been no declaration of cash dividend to the
stockholders despite the big income of the bank as shown in its latest financial statement hereto
attached as Annex "X". In effect, petitioners are unlawfully deprived of income from their
investment. When asked to account for the undistributed profit, respondent Mercedes Coloma
however, finds her excuse by claiming that stock dividends were instead distributed. Sad to say
however, as far as petitioners can remember, no notice of such alleged declaration of stock
dividends was ever given to them. x x x
xxx
6.1 For having committed the aforesaid fraudulent acts, respondents are liable in their personal
capacity for whatever amount petitioners and the rural bank may have been unlawfully deprived
of. Unfortunately however, they are leaving the country anytime now and are about to dispose of
their property with intent to defraud herein petitioners, the Rural Bank of Pandi and the innocent
stockholders, depositors and borrowers thereof. x x x,4
private respondents filed a Complaint-Affidavit5 dated September 15, 1992, docketed as I.S. No.
95-674 before the Office of the City Prosecutor of Mandaluyong City, charging petitioners with
perjury for making willful and corrupt assertions of falsehood on material matters.
Private respondents likewise faulted petitioner Leonardo M. Andres for stating in the Affidavit of
Merit for a Writ of Attachment attached to the SEC Petition that "respondents are about to
dispose of their properties with intent to defraud the petitioners and their other creditors,"6 on
account of which affidavit, a writ of attachment was issued in SEC Case No. 4246, allegedly

causing damage to private respondents Mercedes S. Coloma and Jesus Santos in the amount of
P30 million and to private respondent Belen G. Santos in the amount of P20 million.
Attached to the complaint for perjury were Minutes of Board Meetings and Stockholders
Meetings approving declaration of dividends and proof of payment through Schedules of
Dividends, cashiers checks, and Planters Development Bank checks issued to stockholders
covering the period from May 3, 1981 to March 6, 1990,7 which documents, private respondents
averred, indicated that from March 3, 1981 to July 27, 1990, a total of P1,960,564.00 in stock
and cash dividends was declared and consequently received by all bank stockholders including
petitioners.8
In their Counter-Affidavit,9 petitioners stated that the questioned allegations in their SEC
petition, prepared by their counsel and couched in legal language, hence, not their choice, were
made in good faith in the course of an intracorporate controversy.
As adverted to above, an Information10 for perjury was filed against petitioners before the
Metropolitan Trial Court of Mandaluyong City, docketed as Criminal Case No. 57794. The
inculpatory portion of the Information reads, quoted verbatim:
That on or about the 11th day of June, 1992, in the City of Mandaluyong, Philippines, a place
within the jurisdiction of this Honorable Court, the above-named accused, conspiring and
confederating together and mutually helping and aiding one another, did, then and there willfully,
unlawfully and feloniously and knowingly make untruthful statements under oath upon a
material matter before a competent person authorized to administer an oath which the law so
requires, to with (sic) said accused subscribed and swore to a Petition before a Notary Public,
Atty. Emiliano R. Espiritu authorized to administer oath as required by law, wherein they stated,
among others, the following:
"x x x
5.0 Since respondents, particularly respondent Mercedes Coloma (who was manager of the bank
for 18 years) assumed their position, there has been no declaration of cash dividend to the
stockholders despite the big income of the bank as shown in its latest financial statement hereto
attached as Annex "X". In effect, petitioners are unlawfully deprived of income from their
investment. When asked to account for the undistributed profit, respondent Mercedes Coloma
however, finds her excuse by claiming that stock dividends were instead distributed. Sad to say
however, as far as petitioners can remember, [no] notice of such alleged declaration of stock
dividend was ever given to them"
"6.1 For having committed the aforesaid fraudulent acts, respondents are liable in their personal
capacity for whatever amount petitioners and the rural bank may have been unlawfully deprived
of. Unfortunately however, they are leaving the country anytime now and are about to dispose of

their property with intent to defraud herein petitioners, the Rural Bank of Pandi and the innocent
stockholders, depositors and borrowers thereof"
In paragraph 3 of Annex B, Leonardo M. Andres stated the following:
"x x x
Respondents are about to dispose of their properties with intent to defraud the petitioners and
their other creditors"
the said accused knowing fully well that the said material allegations or statements are false
because as established by evidence, said cash dividends and stocks were declared and
consequently received by all stockholders of the Rural Bank of Pandi (Bulacan), Inc., thereby
making a willful and deliberate assertion of falsehood.
CONTRARY TO LAW.11 (Underscoring in the original)
Petitioners appealed the Mandaluyong City Prosecutors resolution finding probable cause
against them for perjury, by Petition for Review dated November 13, 1995, before the
Department of Justice (DOJ).
By Resolution12 of August 16, 1996, the DOJ, through Assistant Chief State Prosecutor
Apolinario G. Exevea, dismissed the Petition.
Petitioners appealed13 to the Office of the Secretary of Justice.1awphi1
In the meantime, in the SEC case, after receiving ex-parte evidence for petitioners following
private respondents declaration in default for failure to file their Answer within the reglementary
period, the SEC, by Decision14 of October 7, 1997, found in favor of petitioners.
By Resolution15 of February 18, 1998, then Secretary of Justice Silvestre H. Bello III reversed
the August 16, 1996 DOJ Resolution and directed the withdrawal of the Information for perjury
against petitioners.
On private respondents Motion for Reconsideration, then Justice Secretary Serafin R. Cuevas,
by Resolution16 of January 20, 1999, reversed the February 18, 1998 Resolution of then Secretary
Bello and directed the refiling of the Information for perjury against the petitioners upon the
following ratiocination:
The sweeping allegation of respondents that there were no dividends distributed since Coloma
took over the management of the bank cannot be explained by their allegation in their counteraffidavit where they claim that the previous statement is merely on account of what they can
recall. This is not the way that they worded their fifth cause of action.

We agree with the motion that the statement alleging no dividends w[ere] distributed was to
make sure that the respondents petition with the SEC will be acted on favorably. With the
knowledge that this fact could be properly verified with the records at their disposal as majority
stockholders, the intent to assert a falsehood becomes apparent.17
Petitioners moved for a reconsideration of then Secretary Cuevas resolution which was, by
Resolution18 of January 26, 2000, denied. A copy of said Resolution was received by petitioners
on February 1, 2000.
On March 27, 2000, petitioners filed a petition for certiorari under Rule 65 of the Rules of Court
before the CA. The verification and certification against non-forum shopping appended to the
petition was signed only by petitioner Leonardo Andres.19
Petitioners subsequently filed, however, an Amended Petition20 on March 31, 2000 to which was
appended a verification and certification against non-forum shopping signed by all of them.21
By Resolution22 of April 7, 2000, the CA dismissed the original petition, ratiocinating that the
verification and certification of non-forum shopping attached thereto was signed by petitioner
Leonardo Andres only and that there was no showing that he was duly authorized by the other
petitioners to execute the same in accordance with Section 1 of Rule 65 of the Rules of Court.
Petitioners filed a Motion for Reconsideration23 dated April 17, 2000 which was denied for lack
of merit by the CA by Resolution of November 14, 2001.
Petitioners move to reconsider by submitting an amended petition embodying a new
certification against forum-shopping signed by all of them.
We have time and again ruled that subsequent compliance does not ipso facto warrant a
reconsideration. This is especially true now in view of hundred (sic), nay, thousands of petitions
filed with this Court, making it imperative for Us to enforce the Rules. While it is true that
litigation is not a game of technicalities, it is equally true that every case must be prosecuted in
accordance with the prescribed procedure to insure an orderly and speedy administration of
justice.
Moreover, We have earnestly looked into the substance of the petition by going over the
assailed Resolution of public respondent dated January 26, 2000, affirming the earlier
Resolution dated January 20, 1999 and ordering the refiling of the information for perjury
against petitioners. We find no grave abuse of discretion in both Resolutions.24 (Underscoring
in the original; emphasis supplied)
Petitioners thus come before this Court via petition for review on certiorari assigning to the CA
the following errors:
I

THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT

IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF THIS HONORABLE COURT.
II
THE COURT OF APPEALS HAS DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS IN ISSUING THE RESOLUTIONS DATED APRIL
7, 2000 AND NOVEMBER 14, 2001.25
Petitioners argue that they filed, as a matter of right pursuant to Section 2 of Rule 10 in relation
to Section 2 of Rule 1 of the Rules of Court, their Amended Petition containing a new
verification and certification of non-forum shopping signed by all of them within the
reglementary period under Section 4 of Rule 65 of the Rules of Court.26
Petitioners argument is well-taken.
Section 2 of Rule 10 of the Rules of Court provides:
SEC. 2. Amendments as a matter of right. A party may amend his pleading once as a matter of
right at any time before a responsive pleading is served or, in the case of a reply, at any time
within ten (10) days after it is served. (Underscoring supplied)
Under this provision, a party is given the right to file an amended pleading within the time and
upon the conditions specified and without the necessity of obtaining leave of court since a party
may amend his pleading once, whether a new cause of action or change in theory is introduced,
as a matter of right at any time before a responsive pleading is served.27
Moreover, amendment of pleadings is favored and should be liberally allowed in the furtherance
of justice in order to determine every case as far as possible on its merits without regard to
technicalities.28 This principle is generally recognized in order that the real controversies between
the parties are presented, their rights determined and the case decided on the merits without
unnecessary delay to prevent circuity of action and needless expense.29
No doubt this Court has held that the certificate of non-forum shopping should be signed by all
the petitioners or plaintiffs in a case, and that the signing by only one of them is insufficient and
constitutes a defect in the petition.30 For the attestation requires personal knowledge by the party
executing the same, and the lone signing petitioner cannot be presumed to have personal
knowledge of the filing or non-filing by his co-petitioners of any action or claim the same as or
similar to the current petition.31
In the case at bar, however, petitioners filed an Amended Petition filed within the 60-day
reglementary period for the filing of a petition for certiorari under Rule 65 of the Rules of Court.
As amended, the petition had complied with Sec. 1 of Rule 65. The CA maintained its dismissal
of the petition, however, when it denied petitioners motion for reconsideration.

In holding that petitioners merely substantially complied with the requirements for the
verification and certification of non-forum shopping, the CA indeed erred. As petitioners
contend,
x x x the appellate court inaccurately ruled in its Resolution dated November 14, 2001 that
"petitioners move(d) to reconsider [the April 7, 2000 Resolution] by embodying a new
certification against forum-shopping signed by all of them." On the strength of such wrong
premise, the Court of Appeals then dismissed the petition on the ground that "subsequent
compliance does not ipso facto warrant a reconsideration." The error of the Court of Appeals at
once becomes apparent in that: (i) the petitioners did not file a motion for reconsideration of the
April 7, 2000 by embodying a new certification. The record clearly shows that the new
certification had long been filed with and submitted to the Court of Appeals, as in fact, the same
had been filed with the said Court even before the issuance of the April 7, 2000 Resolution; and
hence, (ii) there was no "subsequent compliance" to speak of because the petitioners filed the
Amended Petition as a matter of right, the same having been filed well within the 60-day period
provided by the Rules.32 (Underscoring supplied)
The appellate courts procedural faux pas notwithstanding, on the merits, the petition fails.
In support of their prayer for injunctive relief, petitioners argue that the CA erred in affirming the
January 20, 1999 and January 26, 2000 Resolutions of then Secretary Cuevas ordering the
refiling of the information for perjury against them.
As a general rule, the Court will not issue writs of prohibition or injunction, preliminary or final,
to enjoin or restrain criminal prosecution.33 In extreme cases though, the following exceptions to
the rule have been recognized:
(1) when the injunction is necessary to afford adequate protection to the constitutional
rights of the accused;
(2) when it is necessary for the orderly administration of justice or to avoid oppression or
multiplicity of actions;
(3) when there is a prejudicial question which is subjudice;
(4) when the acts of the officer are without or in excess of authority;
(5) where the prosecution is under an invalid law; ordinance or regulation;
(6) when double jeopardy is clearly apparent;
(7) where the Court has no jurisdiction over the offense;
(8) where it is a case of persecution rather than prosecution;

(9) where the charges are manifestly false and motivated by the lust for vengeance; and
(10) when there is clearly no prima facie case against the accused and a motion to quash
on that ground has been denied.34
Petitioners have not shown, however, that the case at bar falls within any of the recognized
exceptions above set forth.
Consistent with its policy of non-interference in the conduct of preliminary investigations, and to
leave to the investigating prosecutor sufficient latitude of discretion in the exercise of
determination of what constitutes sufficient evidence as will establish probable cause for filing of
an information against a supposed offender,35 this Court finds no reason to disturb the finding of
the appellate court that no grave abuse of discretion attended then Justice Cuevas resolution
finding probable cause for perjury against petitioners to hale them into court.
Notatu dignum is petitioners ventilating before this Court the merits of their defenses. The issue
of whether they acted in good faith is best determined, however, during the trial proper.36 This is
not the occasion for the full and exhaustive display of their evidence. The presence or absence of
the elements of the crime is evidentiary in nature and is a matter of defense that may be passed
upon after a full-blown trial on the merits.37
In fine, the validity and merits of a partys defense or accusation, as well as admissibility of
testimonies and evidence, are better ventilated during trial proper than at the preliminary
investigation level.38
As for petitioners suggestion that the DOJ should have deferred to the primary and exclusive
jurisdiction of the SEC as what was involved was a dispute among stockholders of the bank, a
corporation duly registered with the SEC, and the allegedly perjurious statements were made by
them in connection with that case, the same is unavailing. Suffice it to state that the fact that the
parties involved in the controversy are all stockholders or that the parties involved are the
stockholders and the corporation does not necessarily place the dispute within the loop of
jurisdiction of the SEC.39
Apart from the fact that perjury and intracorporate disputes are two entirely different matters
with entirely different elements, the SEC has no jurisdiction over criminal cases like perjury.
At all events, under Section 5.2 of Republic Act No. 8799, 40 otherwise known as the Securities
Regulation Code, which amended Section 5 of Presidential Decree 902-A,41 whether the issue is
intracorporate or not is no longer material, the SEC having been divested of its jurisdiction
thereover.42
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
[G.R. No. 161276. January 31, 2005]
BORLONGAN vs. REYES
THIRD DIVISION
Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court dated JAN 31 2005.
G.R. No. 161276 (Teodoro C. Borlongan vs. Alberto V. Reyes, Ma. Dolores B. Yuviengco,
Candon B. Guerrero and Tomas S. Aure, Jr.)
At bar is this petition for review on certiorari filed by petitioner Teodoro C. Borlongan,
assailing the decision dated 18 September 2003[1] of the Court of Appeals in CA-G.R. SP No.
72234, reversing and setting aside the Orders dated 2 July 2002 and 30 July 2002 of the
Ombudsman in OMB-ADM-0-00-0867 which respectively declared herein respondents guilty of
simple neglect of duty, and denied both parties' separate motions for reconsideration.
In a complaint-affidavit filed with Office of the Ombudsman and thereat docketed as OMBADM-0-00-0867, petitioner Teodoro C. Borlongan, former president and chief executive officer
of Union Bank, Inc. (UBI), administratively charged herein respondent officials of the Bangko
Sentral ng Pilipinas (BSP), for allegedly falsifying statement of facts in the BSP Supervision
and Examination Sector (SES) reports and tendering incorrect and inaccurate reports and
opinions to conjure false grounds for the closure of UBI and Urbancorp Development Bank and
placing them under receivership, to the detriment of their shareholders, officers and employees.
In an Order dated 2 July 2002,[2]cralaw the Ombudsman found respondents guilty of simple
neglect of duty and imposed upon them the penalty of one (1) month and one (1) day suspension
without pay. In a subsequent Order dated 30 July 2002,[3]cralawthe Ombudsman denied both
parties' motions for reconsideration.
[1]
[2]
[3]

Therefrom, both parties interposed separate appellate recourses to the Court of Appeals.
Respondents were the first to appeal via a petition for review, which was docketed in the Court
of Appeals as CA-G.R. SP No. 72234 and raffled off to its 17th Division.
For his part, petitioner, also thru a petition for review, questioned before the Court of Appeals the
Ombudsman's absolution of the BSP Governor and its General Counsel from his affidavitcomplaint, and sought the imposition of a graver penalty against the herein respondents.
Docketed as CA-G.R. SP No. 72270, petitioner's appeal landed to the 5th Division of the
appellate court.
Initially, petitioner filed a motion to consolidate the two (2) cases. Later, however, he not only
withdrew said motion but even vigorously opposed the consolidation.
Unconsolidated, the two (2) cases proceeded separately. And, as it turned out, the two (2)
divisions of the Court of Appeals rendered conflicting decisions.
Thus, in a decision dated 13 August 2003,[4] the 5th Division modified the questioned orders of
the Ombudsman by finding the herein respondents, including the BSP Governor, guilty of gross
neglect of duty and imposing on each of them the penalty of one (1) year suspension without pay.
On the other hand, the 17th Division, in a decision dated 18 September 2003,[5]cralawreversed
and set aside the same assailed orders of the Ombudsman and dismissed the administrative
complaints against the herein respondents.
Petitioner filed a motion for reconsideration, imploring the 17th Division to set aside its
September 18,2003 decision for being inconsistent with the August 13, 2003 decision of the 5th
Division in CA-G.R. SP No. 72270.
In a Resolution dated 17 December 2003,[6]cralaw the 17th Division denied petitioner's motion for
reconsideration, and, in the process, castigated petitioner for his refusal to have the two (2) cases
consolidated:
Without a consolidation, there is no rule of law or jurisprudence that prevents us, the 17th
Division, from deciding SP 72234 according to our own independent judgment, any more than
the 5th Division can be prevented from ruling upon SP 72270 according to their own independent
judgment.
The records show that respondent had, indeed, filed with us a motion to consolidate SP 72270
with our SP 72234. But for reasons only known to him, he withdrew the motion for
[4]
[5]
[6]

consolidation. He even said that the 5th Division had eventually denied the consolidation of the
case with us, again for reasons we do not know.
Under these circumstances, without a consolidation, both divisions will have to decide their own
cases, and any resulting conflict in the decisions on similar issues of fact and law will have to be
resolved ultimately by the Supreme Court as the supreme arbiter of all justiciable controversies
in this jurisdiction.
But for the respondent to make it appear as if we are to blame for the conflict between the two
divisions of the Court, after the respondent refused to consolidate the cases before us, is absurd
and comical. Absurd, because he is saying in so many words that we should not exercise an
independent judgment in our case anymore after the 5th Division happened to decide its case
ahead of us and comical, because he has reduced the adjudicative process into a race between the
cases. If we had only known that this was the kind of ballgame he wanted us to observe, we
would have considered our case submitted for decision a long time ago, immediately after he
filed his comment, and bar the parties from filling replies, memoranda and other pleadings as a
waste of our time. This is how things would turn out if we pursued his line of thinking ad
absurdum.
To repeat, the respondent refused to have his case in the 5th Division consolidated before us. If he
is to fault anyone now for the consequence of this non-consolidation, he should point all his
fingers to himself.
Later, or on June 14, 2004, the former 5th Division of the Court of Appeals, this time acting as a
Special Division of Five in connection with the motions for reconsideration therein pending,
came out with an Amended Decision,[7]cralawamending the earlier decision of 12 August 2003
in CA-G.R. SP No. 72270 by dismissing the administrative complaint against all the respondents
therein. Petitioner elevated the same Amended Decision to this Court via a petition for review on
certiorari in G.R. No. 163765.
In a Resolution promulgated on July 26, 2004,[8]cralaw the Court, thru its Third Division, denied
the petition in G.R. No. 163765 "for failure of the petitioner to show that a reversible error had
been committed by the appellate court". In a subsequent Resolution promulgated on October 1,
2004, the Court denied petitioner's motion for reconsideration with finality "as no substantial
arguments were raised to warrant a reconsideration thereof".
Meanwhile, on February 13, 2004, petitioner filed the instant petition for review on certiorari,
this time assailing the 18 September 2003 decision of the 17th Decision of the Court of Appeals
in CA-G.R. SP No. 72234.

[7]
[8]

Perusal of the present petition reveals that it raises substantially the same issues already passed
upon by the two (2) Divisions of the Court of Appeals and by this Court, no less, in G.R. No.
163765.
Chanting the same tone, the recourse is unavailing.
In Philippine Retirement Authority vs. Rupa,[9]cralaw we laid down the standard definition of
simple neglect of duty, as a disregard of a duty resulting from carelessness or indifference.
Here, we find that neither gross nor simple neglect of duty characterized the acts of the
respondents. The subject SES reports prepared by respondents and submitted to the Monetary
Board were anything but haphazardly or negligently made. As it were, the reports were a
compendium of long years of monitoring by the BSP of a problem bank, and assembled over a
period of 15 hours after the respondents were instructed to do so. The data contained therein had
been patiently collected and analyzed.
Record reveals that UBI was being monitored by BSP officials for years. Respondent Dolores
Yuvienco had supervised the bank directly since 1999 as Director of DCB II
UBI had since given up its status as an expanded commercial bank and reverted to an ordinary
commercial bank because it could not meet the P3.5 billion minimum capital requirement for a
universal bank. For two (2) months prior to its closure, Urban Bank had been besieged by
liquidity problems, and its declaration of a bank holiday on April 25 only confirmed its
decreasing ability to meet obligations on time.
Section 30(a) of RA 7653, otherwise known as the New Central Bank Act, is relevant. Under that
law, the Monetary Board may execute measures such those taken in this case, summarily and
without need of prior hearing:
Sec. 30. Proceedings in Receivership and Liquidation. -Whenever, upon report of the head of the
supervising and examining department, the Monetary Board finds that the Bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, that this shall not include inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b)
or

has insufficient realizable asset, as determined by the Bangko Sentral to meet its liabilities;

(c)

cannot continue in business without involving probable losses to its creditors; or

(d) has willfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
[9]

hearing forbid the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the Banking institution. xxx.
(Emphasis supplied)
Pertinent, too, is Section 53 of Republic Act No. 8791,[10]cralaw since it underscores the
summary character of the MB's initiative of placing a bank under receivership. It provides that in
case a bank or quasi-bank notifies the BSP or publicly announces a bank holiday, or in any
manner suspends the payment of its deposit liabilities continuously for more than 30 days, the
MB may summarily and without need of prior hearing close such banking institution and place it
under receivership of the PDIC.
This authority is beyond review by the courts except on a petition for certiorari. Here, it is worth
to note even the Ombudsman found significant evidence to rationalize the decision of the
Monetary Board to place UBI under receivership.
Likewise, we agree with the appellate court's 17th Division in its ratiocination that it is illogical to
hold the respondents administratively liable for the preparation of reports that are, in their nature,
merely recommendatory and have to be acted upon by superior officials. The reports were not
the final action that creates right and duties and affects the interest and fortunes of third parties.
Courts do not interfere with any administrative measure prior to its completion or finality, and
when they do, what is actionable is not the recommendation but the decision of the official with
the competence under the law to issue it.[11]cralaw
The subject reports are only between the Monetary Board and the BSP officials who prepared
and endorsed them and may be rejected, modified or accepted by the Monetary Board. As far as
this case is concerned, the legal obligations of diligence and good faith that BSP officials owe to
the public under Section 16 of the New Central Act start with the official acts of the Monetary
Board which, rightly or wrong, are the cause of loss or injury to third parties, not any preparatory
report or recommendation.
As earlier noted, UBI's own top management, specifically Bartolome III, its chairman of the
Board, and the petitioner himself, its president, continually provided the BSP the picture of the
worsening situation of UBI in the four (4) weeks from March 20, 2000 to April 25, 2000, leading
to UBI's unilateral declaration of a bank holiday on April 25, 2000.[12]cralaw Their constant
reporting showed that UBI was "unable to pay its liabilities as they become due in the ordinary
course of business; (or that it) has insufficient realizable assets, as determined by the Bangko
Sentral, to meet its liabilities."[13]cralaw While other factors might have weighed in the analysis
of UBI's financial liquidity and in the preparation of the inevitable Supervisor and Examination
[10]
[11]
[12]
[13]

Sector (SES) reports, the MB considered the constant reports of UBI's own top management as
the best proof of its dire liquidity status.
Petitioner would have this Court review and reverse factual findings of the Court of Appeals.
This, of course, the Court cannot and will not do. Review of factual findings of the appellate
court is not a function ordinarily undertaken by this Court, the rule admitting only a few
exceptions recognized in decisional law. The principle is consistent with Rule 45 of the Rules of
Court which categorically provides that a petition for review on certiorari must raise "only
questions of law which must be distinctly set forth" in the petition. Even then, the review sought
will be denied if the questions raised are "too unsubstantial to require consideration" or if the
Court is not convinced of the existence of "special and important reasons" to warrant review, of
which none exists in this case.
All told, we find that no reversible error was committed by the 17th Division of Court of Appeals
when it reversed and set aside the July 2, 2002 and July 30, 2002 Orders of the Ombudsman in
OMB-ADM-0-00-0867.
WHEREFORE, the instant petition is hereby DENIED DUE COURSE.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 154342

July 14, 2004

MIGHTY CORPORATION and LA CAMPANA FABRICA DE TABACO, INC., petitioner,

vs.
E. & J. GALLO WINERY and THE ANDRESONS GROUP, INC., respondents.

DECISION

CORONA, J.:
In this petition for review on certiorari under Rule 45, petitioners Mighty Corporation and La
Campana Fabrica de Tabaco, Inc. (La Campana) seek to annul, reverse and set aside: (a) the
November 15, 2001 decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 65175 affirming
the November 26, 1998 decision,2 as modified by the June 24, 1999 order,3 of the Regional Trial
Court of Makati City, Branch 57 (Makati RTC) in Civil Case No. 93-850, which held petitioners
liable for, and permanently enjoined them from, committing trademark infringement and unfair
competition, and which ordered them to pay damages to respondents E. & J. Gallo Winery (Gallo
Winery) and The Andresons Group, Inc. (Andresons); (b) the July 11, 2002 CA resolution
denying their motion for reconsideration4 and (c) the aforesaid Makati RTC decision itself.
I.
The Factual Background
Respondent Gallo Winery is a foreign corporation not doing business in the Philippines but
organized and existing under the laws of the State of California, United States of America (U.S.),
where all its wineries are located. Gallo Winery produces different kinds of wines and brandy
products and sells them in many countries under different registered trademarks, including the
GALLO and ERNEST & JULIO GALLO wine trademarks.
Respondent domestic corporation, Andresons, has been Gallo Winerys exclusive wine importer
and distributor in the Philippines since 1991, selling these products in its own name and for its
own account.5
Gallo Winerys GALLO wine trademark was registered in the principal register of the Philippine
Patent Office (now Intellectual Property Office) on November 16, 1971 under Certificate of
Registration No. 17021 which was renewed on November 16, 1991 for another 20 years.6 Gallo
Winery also applied for registration of its ERNEST & JULIO GALLO wine trademark on
October 11, 1990 under Application Serial No. 901011-00073599-PN but the records do not
disclose if it was ever approved by the Director of Patents.7
On the other hand, petitioners Mighty Corporation and La Campana and their sister company,
Tobacco Industries of the Philippines (Tobacco Industries), are engaged in the cultivation,
manufacture, distribution and sale of tobacco products for which they have been using the
GALLO cigarette trademark since 1973. 8
The Bureau of Internal Revenue (BIR) approved Tobacco Industries use of GALLO 100s
cigarette mark on September 14, 1973 and GALLO filter cigarette mark on March 26, 1976, both
for the manufacture and sale of its cigarette products. In 1976, Tobacco Industries filed its
manufacturers sworn statement as basis for BIRs collection of specific tax on GALLO
cigarettes.9

On February 5, 1974, Tobacco Industries applied for, but eventually did not pursue, the
registration of the GALLO cigarette trademark in the principal register of the then Philippine
Patent Office.10
In May 1984, Tobacco Industries assigned the GALLO cigarette trademark to La Campana
which, on July 16, 1985, applied for trademark registration in the Philippine Patent Office.11 On
July 17, 1985, the National Library issued Certificate of Copyright Registration No. 5834 for La
Campanas lifetime copyright claim over GALLO cigarette labels.12
Subsequently, La Campana authorized Mighty Corporation to manufacture and sell cigarettes
bearing the GALLO trademark.13 BIR approved Mighty Corporations use of GALLO 100s
cigarette brand, under licensing agreement with Tobacco Industries, on May 18, 1988, and
GALLO SPECIAL MENTHOL 100s cigarette brand on April 3, 1989.14
Petitioners claim that GALLO cigarettes have been sold in the Philippines since 1973, initially
by Tobacco Industries, then by La Campana and finally by Mighty Corporation.15
On the other hand, although the GALLO wine trademark was registered in the Philippines in
1971, respondents claim that they first introduced and sold the GALLO and ERNEST & JULIO
GALLO wines in the Philippines circa 1974 within the then U.S. military facilities only. By
1979, they had expanded their Philippine market through authorized distributors and independent
outlets.16
Respondents claim that they first learned about the existence of GALLO cigarettes in the latter
part of 1992 when an Andresons employee saw such cigarettes on display with GALLO wines in
a Davao supermarket wine cellar section.17 Forthwith, respondents sent a demand letter to
petitioners asking them to stop using the GALLO trademark, to no avail.
II.
The Legal Dispute
On March 12, 1993, respondents sued petitioners in the Makati RTC for trademark and
tradename infringement and unfair competition, with a prayer for damages and preliminary
injunction.
Respondents charged petitioners with violating Article 6bis of the Paris Convention for the
Protection of Industrial Property (Paris Convention)18 and RA 166 (Trademark Law),19
specifically, Sections 22 and 23 (for trademark infringement),20 29 and 3021 (for unfair
competition and false designation of origin) and 37 (for tradename infringement).22 They claimed
that petitioners adopted the GALLO trademark to ride on Gallo Winerys GALLO and ERNEST
& JULIO GALLO trademarks established reputation and popularity, thus causing confusion,
deception and mistake on the part of the purchasing public who had always associated GALLO
and ERNEST & JULIO GALLO trademarks with Gallo Winerys wines. Respondents prayed for
the issuance of a writ of preliminary injunction and ex parte restraining order, plus P2 million as

actual and compensatory damages, at least P500,000 as exemplary and moral damages, and at
least P500,000 as attorneys fees and litigation expenses.23
In their answer, petitioners alleged, among other affirmative defenses, that: petitioners GALLO
cigarettes and Gallo Winerys wines were totally unrelated products; Gallo Winerys GALLO
trademark registration certificate covered wines only, not cigarettes; GALLO cigarettes and
GALLO wines were sold through different channels of trade; GALLO cigarettes, sold at P4.60
for GALLO filters and P3 for GALLO menthols, were low-cost items compared to Gallo
Winerys high-priced luxury wines which cost between P98 to P242.50; the target market of
Gallo Winerys wines was the middle or high-income bracket with at least P10,000 monthly
income while GALLO cigarette buyers were farmers, fishermen, laborers and other low-income
workers; the dominant feature of the GALLO cigarette mark was the rooster device with the
manufacturers name clearly indicated as MIGHTY CORPORATION while, in the case of Gallo
Winerys wines, it was the full names of the founders-owners ERNEST & JULIO GALLO or just
their surname GALLO; by their inaction and conduct, respondents were guilty of laches and
estoppel; and petitioners acted with honesty, justice and good faith in the exercise of their right to
manufacture and sell GALLO cigarettes.
In an order dated April 21, 1993,24 the Makati RTC denied, for lack of merit, respondents prayer
for the issuance of a writ of preliminary injunction,25 holding that respondents GALLO
trademark registration certificate covered wines only, that respondents wines and petitioners
cigarettes were not related goods and respondents failed to prove material damage or great
irreparable injury as required by Section 5, Rule 58 of the Rules of Court.26
On August 19, 1993, the Makati RTC denied, for lack of merit, respondents motion for
reconsideration. The court reiterated that respondents wines and petitioners cigarettes were not
related goods since the likelihood of deception and confusion on the part of the consuming
public was very remote. The trial court emphasized that it could not rely on foreign rulings cited
by respondents "because the[se] cases were decided by foreign courts on the basis of unknown
facts peculiar to each case or upon factual surroundings which may exist only within their
jurisdiction. Moreover, there [was] no showing that [these cases had] been tested or found
applicable in our jurisdiction."27
On February 20, 1995, the CA likewise dismissed respondents petition for review on certiorari,
docketed as CA-G.R. No. 32626, thereby affirming the Makati RTCs denial of the application
for issuance of a writ of preliminary injunction against petitioners.28
After trial on the merits, however, the Makati RTC, on November 26, 1998, held petitioners
liable for, and permanently enjoined them from, committing trademark infringement and unfair
competition with respect to the GALLO trademark:
WHEREFORE, judgment is rendered in favor of the plaintiff (sic) and against the
defendant (sic), to wit:
a. permanently restraining and enjoining defendants, their distributors, trade
outlets, and all persons acting for them or under their instructions, from (i) using

E & Js registered trademark GALLO or any other reproduction, counterfeit, copy

or colorable imitation of said trademark, either singly or in conjunction with other
words, designs or emblems and other acts of similar nature, and (ii) committing
other acts of unfair competition against plaintiffs by manufacturing and selling
their cigarettes in the domestic or export markets under the GALLO trademark.
b. ordering defendants to pay plaintiffs
(i) actual and compensatory damages for the injury and prejudice and
impairment of plaintiffs business and goodwill as a result of the acts and
conduct pleaded as basis for this suit, in an amount equal to 10% of
FOURTEEN MILLION TWO HUNDRED THIRTY FIVE THOUSAND
PESOS (PHP14,235,000.00) from the filing of the complaint until fully
paid;
(ii) exemplary damages in the amount of PHP100,000.00;
(iii) attorneys fees and expenses of litigation in the amount of
PHP1,130,068.91;
(iv) the cost of suit.
SO ORDERED."29
On June 24, 1999, the Makati RTC granted respondents motion for partial reconsideration and
increased the award of actual and compensatory damages to 10% of P199,290,000 or
P19,929,000.30
On appeal, the CA affirmed the Makati RTC decision and subsequently denied petitioners
motion for reconsideration.
III.
The Issues
Petitioners now seek relief from this Court contending that the CA did not follow prevailing laws
and jurisprudence when it held that: [a] RA 8293 (Intellectual Property Code of the Philippines
[IP Code]) was applicable in this case; [b] GALLO cigarettes and GALLO wines were identical,
similar or related goods for the reason alone that they were purportedly forms of vice; [c] both
goods passed through the same channels of trade and [d] petitioners were liable for trademark
infringement, unfair competition and damages.31
Respondents, on the other hand, assert that this petition which invokes Rule 45 does not involve
pure questions of law, and hence, must be dismissed outright.
IV.

Discussion
THE EXCEPTIONAL CIRCUMSTANCES
IN THIS CASE OBLIGE THE COURT TO REVIEW
THE CAS FACTUAL FINDINGS
As a general rule, a petition for review on certiorari under Rule 45 must raise only "questions of
law"32 (that is, the doubt pertains to the application and interpretation of law to a certain set of
facts) and not "questions of fact" (where the doubt concerns the truth or falsehood of alleged
facts),33 otherwise, the petition will be denied. We are not a trier of facts and the Court of
Appeals factual findings are generally conclusive upon us.34
This case involves questions of fact which are directly related and intertwined with questions of
law. The resolution of the factual issues concerning the goods similarity, identity, relation,
channels of trade, and acts of trademark infringement and unfair competition is greatly
dependent on the interpretation of applicable laws. The controversy here is not simply the
identity or similarity of both parties trademarks but whether or not infringement or unfair
competition was committed, a conclusion based on statutory interpretation. Furthermore, one or
more of the following exceptional circumstances oblige us to review the evidence on record:35
(1) the conclusion is grounded entirely on speculation, surmises, and conjectures;
(2) the inference of the Court of Appeals from its findings of fact is manifestly mistaken,
absurd and impossible;
(3) there is grave abuse of discretion;
(4) the judgment is based on a misapprehension of facts;
(5) the appellate court, in making its findings, went beyond the issues of the case, and the
same are contrary to the admissions of both the appellant and the appellee;
(6) the findings are without citation of specific evidence on which they are based;
(7) the facts set forth in the petition as well as in the petitioner's main and reply briefs are
not disputed by the respondents; and
(8) the findings of fact of the Court of Appeals are premised on the absence of evidence
and are contradicted [by the evidence] on record.36
In this light, after thoroughly examining the evidence on record, weighing, analyzing and
balancing all factors to determine whether trademark infringement and/or unfair competition has
been committed, we conclude that both the Court of Appeals and the trial court veered away
from the law and well-settled jurisprudence.
Thus, we give due course to the petition.

THE TRADEMARK LAW AND THE PARIS

CONVENTION ARE THE APPLICABLE LAWS,
NOT THE INTELLECTUAL PROPERTY CODE
We note that respondents sued petitioners on March 12, 1993 for trademark infringement and
unfair competition committed during the effectivity of the Paris Convention and the Trademark
Law.
Yet, in the Makati RTC decision of November 26, 1998, petitioners were held liable not only
under the aforesaid governing laws but also under the IP Code which took effect only on January
1, 1998,37 or about five years after the filing of the complaint:
Defendants unauthorized use of the GALLO trademark constitutes trademark
infringement pursuant to Section 22 of Republic Act No. 166, Section 155 of the IP
Code, Article 6bis of the Paris Convention, and Article 16 (1) of the TRIPS Agreement as
it causes confusion, deception and mistake on the part of the purchasing public.38
(Emphasis and underscoring supplied)
The CA apparently did not notice the error and affirmed the Makati RTC decision:
In the light of its finding that appellants use of the GALLO trademark on its cigarettes is
likely to create confusion with the GALLO trademark on wines previously registered and
used in the Philippines by appellee E & J Gallo Winery, the trial court thus did not err
in holding that appellants acts not only violated the provisions of the our trademark
laws (R.A. No. 166 and R.A. Nos. (sic) 8293) but also Article 6bis of the Paris
Convention.39 (Emphasis and underscoring supplied)
We therefore hold that the courts a quo erred in retroactively applying the IP Code in this case.
It is a fundamental principle that the validity and obligatory force of a law proceed from the fact
that it has first been promulgated. A law that is not yet effective cannot be considered as
conclusively known by the populace. To make a law binding even before it takes effect may lead
to the arbitrary exercise of the legislative power.40 Nova constitutio futuris formam imponere
debet non praeteritis. A new state of the law ought to affect the future, not the past. Any doubt
must generally be resolved against the retroactive operation of laws, whether these are original
enactments, amendments or repeals.41 There are only a few instances when laws may be given
retroactive effect,42 none of which is present in this case.
The IP Code, repealing the Trademark Law,43 was approved on June 6, 1997. Section 241 thereof
expressly decreed that it was to take effect only on January 1, 1998, without any provision for
retroactive application. Thus, the Makati RTC and the CA should have limited the consideration
of the present case within the parameters of the Trademark Law and the Paris Convention, the
laws in force at the time of the filing of the complaint.

DISTINCTIONS BETWEEN
TRADEMARK INFRINGEMENT
AND UNFAIR COMPETITION
Although the laws on trademark infringement and unfair competition have a common conception
at their root, that is, a person shall not be permitted to misrepresent his goods or his business as
the goods or business of another, the law on unfair competition is broader and more inclusive
than the law on trademark infringement. The latter is more limited but it recognizes a more
exclusive right derived from the trademark adoption and registration by the person whose goods
or business is first associated with it. The law on trademarks is thus a specialized subject distinct
from the law on unfair competition, although the two subjects are entwined with each other and
are dealt with together in the Trademark Law (now, both are covered by the IP Code). Hence,
even if one fails to establish his exclusive property right to a trademark, he may still obtain relief
on the ground of his competitors unfairness or fraud. Conduct constitutes unfair competition if
the effect is to pass off on the public the goods of one man as the goods of another. It is not
necessary that any particular means should be used to this end.44
In Del Monte Corporation vs. Court of Appeals,45 we distinguished trademark infringement from
unfair competition:
(1) Infringement of trademark is the unauthorized use of a trademark, whereas unfair
competition is the passing off of one's goods as those of another.
(2) In infringement of trademark fraudulent intent is unnecessary, whereas in unfair
competition fraudulent intent is essential.
(3) In infringement of trademark the prior registration of the trademark is a prerequisite to
the action, whereas in unfair competition registration is not necessary.
Pertinent Provisions on Trademark
Infringement under the Paris
Convention and the Trademark Law
Article 6bis of the Paris Convention,46 an international agreement binding on the Philippines and
the United States (Gallo Winerys country of domicile and origin) prohibits "the [registration] or
use of a trademark which constitutes a reproduction, imitation or translation, liable to create
confusion, of a mark considered by the competent authority of the country of registration or use
to be well-known in that country as being already the mark of a person entitled to the benefits of
the [Paris] Convention and used for identical or similar goods. [This rule also applies] when the
essential part of the mark constitutes a reproduction of any such well-known mark or an
imitation liable to create confusion therewith." There is no time limit for seeking the prohibition
of the use of marks used in bad faith.47
Thus, under Article 6bis of the Paris Convention, the following are the elements of trademark
infringement:

(a) registration or use by another person of a trademark which is a reproduction, imitation

or translation liable to create confusion,
(b) of a mark considered by the competent authority of the country of registration or use48
to be well-known in that country and is already the mark of a person entitled to the
benefits of the Paris Convention, and
(c) such trademark is used for identical or similar goods.
On the other hand, Section 22 of the Trademark Law holds a person liable for infringement
when, among others, he "uses without the consent of the registrant, any reproduction, counterfeit,
copy or colorable imitation of any registered mark or tradename in connection with the sale,
offering for sale, or advertising of any goods, business or services or in connection with which
such use is likely to cause confusion or mistake or to deceive purchasers or others as to the
source or origin of such goods or services, or identity of such business; or reproduce, counterfeit,
copy or colorably imitate any such mark or tradename and apply such reproduction, counterfeit,
copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or
advertisements intended to be used upon or in connection with such goods, business or
services."49 Trademark registration and actual use are material to the complaining partys cause
of action.
Corollary to this, Section 20 of the Trademark Law50 considers the trademark registration
certificate as prima facie evidence of the validity of the registration, the registrants ownership
and exclusive right to use the trademark in connection with the goods, business or services as
classified by the Director of Patents51 and as specified in the certificate, subject to the conditions
and limitations stated therein. Sections 2 and 2-A52 of the Trademark Law emphasize the
importance of the trademarks actual use in commerce in the Philippines prior to its registration.
In the adjudication of trademark rights between contending parties, equitable principles of
laches, estoppel, and acquiescence may be considered and applied.53
Under Sections 2, 2-A, 9-A, 20 and 22 of the Trademark Law therefore, the following constitute
the elements of trademark infringement:
(a) a trademark actually used in commerce in the Philippines and registered in the
principal register of the Philippine Patent Office
(b) is used by another person in connection with the sale, offering for sale, or advertising
of any goods, business or services or in connection with which such use is likely to cause
confusion or mistake or to deceive purchasers or others as to the source or origin of such
goods or services, or identity of such business; or such trademark is reproduced,
counterfeited, copied or colorably imitated by another person and such reproduction,
counterfeit, copy or colorable imitation is applied to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to be used upon or in connection with
such goods, business or services as to likely cause confusion or mistake or to deceive
purchasers,

(c) the trademark is used for identical or similar goods, and

(d) such act is done without the consent of the trademark registrant or assignee.
In summary, the Paris Convention protects well-known trademarks only (to be determined by
domestic authorities), while the Trademark Law protects all trademarks, whether well-known or
not, provided that they have been registered and are in actual commercial use in the Philippines.
Following universal acquiescence and comity, in case of domestic legal disputes on any
conflicting provisions between the Paris Convention (which is an international agreement) and
the Trademark law (which is a municipal law) the latter will prevail.54
Under both the Paris Convention and the Trademark Law, the protection of a registered
trademark is limited only to goods identical or similar to those in respect of which such
trademark is registered and only when there is likelihood of confusion. Under both laws, the time
element in commencing infringement cases is material in ascertaining the registrants express or
implied consent to anothers use of its trademark or a colorable imitation thereof. This is why
acquiescence, estoppel or laches may defeat the registrants otherwise valid cause of action.
Hence, proof of all the elements of trademark infringement is a condition precedent to any
finding of liability.
THE ACTUAL COMMERCIAL USE IN THE
PHILIPPINES OF GALLO CIGARETTE
TRADEMARK PRECEDED THAT OF
GALLO WINE TRADEMARK.
By respondents own judicial admission, the GALLO wine trademark was registered in the
Philippines in November 1971 but the wine itself was first marketed and sold in the country only
in 1974 and only within the former U.S. military facilities, and outside thereof, only in 1979. To
prove commercial use of the GALLO wine trademark in the Philippines, respondents presented
sales invoice no. 29991 dated July 9, 1981 addressed to Conrad Company Inc., Makati,
Philippines and sales invoice no. 85926 dated March 22, 1996 addressed to Andresons Global,
Inc., Quezon City, Philippines. Both invoices were for the sale and shipment of GALLO wines to
the Philippines during that period.55 Nothing at all, however, was presented to evidence the
alleged sales of GALLO wines in the Philippines in 1974 or, for that matter, prior to July 9,
1981.
On the other hand, by testimonial evidence supported by the BIR authorization letters, forms and
manufacturers sworn statement, it appears that petitioners and its predecessor-in-interest,
Tobacco Industries, have indeed been using and selling GALLO cigarettes in the Philippines
since 1973 or before July 9, 1981.56
In Emerald Garment Manufacturing Corporation vs. Court of Appeals,57 we reiterated our
rulings in Pagasa Industrial Corporation vs. Court of Appeals,58 Converse Rubber Corporation
vs. Universal Rubber Products, Inc.,59 Sterling Products International, Inc. vs. Farbenfabriken
Bayer Aktiengesellschaft,60 Kabushi Kaisha Isetan vs. Intermediate Appellate Court,61 and Philip

Morris vs. Court of Appeals,62 giving utmost importance to the actual commercial use of a
trademark in the Philippines prior to its registration, notwithstanding the provisions of the Paris
Convention:
xxx xxx xxx
In addition to the foregoing, we are constrained to agree with petitioner's contention that
private respondent failed to prove prior actual commercial use of its "LEE"
trademark in the Philippines before filing its application for registration with the
BPTTT and hence, has not acquired ownership over said mark.
Actual use in commerce in the Philippines is an essential prerequisite for the
acquisition of ownership over a trademark pursuant to Sec. 2 and 2-A of the Philippine
Trademark Law (R.A. No. 166) x x x
xxx xxx xxx
The provisions of the 1965 Paris Convention for the Protection of Industrial Property
relied upon by private respondent and Sec. 21-A of the Trademark Law (R.A. No. 166)
were sufficiently expounded upon and qualified in the recent case of Philip Morris,
Inc. v. Court of Appeals (224 SCRA 576 [1993]):
xxx xxx xxx
Following universal acquiescence and comity, our municipal law on
trademarks regarding the requirement of actual use in the Philippines must
subordinate an international agreement inasmuch as the apparent clash is
being decided by a municipal tribunal (Mortisen vs. Peters, Great Britain, High
Court of Judiciary of Scotland, 1906, 8 Sessions, 93; Paras, International Law and
World Organization, 1971 Ed., p. 20). Withal, the fact that international law has
been made part of the law of the land does not by any means imply the primacy of
international law over national law in the municipal sphere. Under the doctrine of
incorporation as applied in most countries, rules of international law are given a
standing equal, not superior, to national legislative enactments.
xxx xxx xxx
In other words, (a foreign corporation) may have the capacity to sue for
infringement irrespective of lack of business activity in the Philippines on
account of Section 21-A of the Trademark Law but the question of whether
they have an exclusive right over their symbol as to justify issuance of the
controversial writ will depend on actual use of their trademarks in the
Philippines in line with Sections 2 and 2-A of the same law. It is thus
incongruous for petitioners to claim that when a foreign corporation not licensed
to do business in the Philippines files a complaint for infringement, the entity
need not be actually using the trademark in commerce in the Philippines. Such a

foreign corporation may have the personality to file a suit for infringement but it
may not necessarily be entitled to protection due to absence of actual use of the
emblem in the local market.
xxx xxx xxx
Undisputably, private respondent is the senior registrant, having obtained several
registration certificates for its various trademarks "LEE," "LEE RIDERS," and
"LEESURES" in both the supplemental and principal registers, as early as 1969 to 1973.
However, registration alone will not suffice. In Sterling Products International, Inc.
v. Farbenfabriken Bayer Aktiengesellschaft (27 SCRA 1214 [1969]; Reiterated in
Kabushi Isetan vs. Intermediate Appellate Court (203 SCRA 583 [1991]) we declared:
xxx xxx xxx
A rule widely accepted and firmly entrenched because it has come down through
the years is that actual use in commerce or business is a prerequisite in the
acquisition of the right of ownership over a trademark.
xxx xxx xxx
The credibility placed on a certificate of registration of one's trademark, or its weight as
evidence of validity, ownership and exclusive use, is qualified. A registration certificate
serves merely as prima facie evidence. It is not conclusive but can and may be
rebutted by controverting evidence.
xxx xxx xxx
In the case at bench, however, we reverse the findings of the Director of Patents and the
Court of Appeals. After a meticulous study of the records, we observe that the
Director of Patents and the Court of Appeals relied mainly on the registration
certificates as proof of use by private respondent of the trademark "LEE" which, as
we have previously discussed are not sufficient. We cannot give credence to private
respondent's claim that its "LEE" mark first reached the Philippines in the 1960's
through local sales by the Post Exchanges of the U.S. Military Bases in the
Philippines (Rollo, p. 177) based as it was solely on the self-serving statements of Mr.
Edward Poste, General Manager of Lee (Phils.), Inc., a wholly owned subsidiary of
the H.D. Lee, Co., Inc., U.S.A., herein private respondent. (Original Records, p. 52)
Similarly, we give little weight to the numerous vouchers representing various
advertising expenses in the Philippines for "LEE" products. It is well to note that
these expenses were incurred only in 1981 and 1982 by LEE (Phils.), Inc. after it
entered into a licensing agreement with private respondent on 11 May 1981. (Exhibit
E)
On the other hand, petitioner has sufficiently shown that it has been in the business of
selling jeans and other garments adopting its "STYLISTIC MR. LEE" trademark

since 1975 as evidenced by appropriate sales invoices to various stores and retailers.
(Exhibit 1-e to 1-o)
Our rulings in Pagasa Industrial Corp. v. Court of Appeals (118 SCRA 526 [1982]) and
Converse Rubber Corp. v. Universal Rubber Products, Inc., (147 SCRA 154 [1987]),
respectively, are instructive:
The Trademark Law is very clear. It requires actual commercial use of the mark
prior to its registration. There is no dispute that respondent corporation was
the first registrant, yet it failed to fully substantiate its claim that it used in
trade or business in the Philippines the subject mark; it did not present proof
to invest it with exclusive, continuous adoption of the trademark which
should consist among others, of considerable sales since its first use. The
invoices submitted by respondent which were dated way back in 1957 show
that the zippers sent to the Philippines were to be used as "samples" and "of
no commercial value." The evidence for respondent must be clear, definite and
free from inconsistencies. "Samples" are not for sale and therefore, the fact of
exporting them to the Philippines cannot be considered to be equivalent to the
"use" contemplated by law. Respondent did not expect income from such
"samples." There were no receipts to establish sale, and no proof were presented
to show that they were subsequently sold in the Philippines.
xxx xxx xxx
For lack of adequate proof of actual use of its trademark in the Philippines prior to
petitioner's use of its own mark and for failure to establish confusing similarity
between said trademarks, private respondent's action for infringement must
necessarily fail. (Emphasis supplied.)
In view of the foregoing jurisprudence and respondents judicial admission that the actual
commercial use of the GALLO wine trademark was subsequent to its registration in 1971 and to
Tobacco Industries commercial use of the GALLO cigarette trademark in 1973, we rule that, on
this account, respondents never enjoyed the exclusive right to use the GALLO wine trademark to
the prejudice of Tobacco Industries and its successors-in-interest, herein petitioners, either under
the Trademark Law or the Paris Convention.
Respondents GALLO trademark
registration is limited to wines only
We also note that the GALLO trademark registration certificates in the Philippines and in other
countries expressly state that they cover wines only, without any evidence or indication that
registrant Gallo Winery expanded or intended to expand its business to cigarettes.63
Thus, by strict application of Section 20 of the Trademark Law, Gallo Winerys exclusive right to
use the GALLO trademark should be limited to wines, the only product indicated in its

registration certificates. This strict statutory limitation on the exclusive right to use trademarks
was amply clarified in our ruling in Faberge, Inc. vs. Intermediate Appellate Court:64
Having thus reviewed the laws applicable to the case before Us, it is not difficult to
discern from the foregoing statutory enactments that private respondent may be permitted
to register the trademark "BRUTE" for briefs produced by it notwithstanding petitioner's
vehement protestations of unfair dealings in marketing its own set of items which are
limited to: after-shave lotion, shaving cream, deodorant, talcum powder and toilet soap.
Inasmuch as petitioner has not ventured in the production of briefs, an item which is
not listed in its certificate of registration, petitioner cannot and should not be
allowed to feign that private respondent had invaded petitioner's exclusive domain.
To be sure, it is significant that petitioner failed to annex in its Brief the so-called
"eloquent proof that petitioner indeed intended to expand its mark BRUT to other
goods" (Page 27, Brief for the Petitioner; page 202, Rollo). Even then, a mere application
by petitioner in this aspect does not suffice and may not vest an exclusive right in its
favor that can ordinarily be protected by the Trademark Law. In short, paraphrasing
Section 20 of the Trademark Law as applied to the documentary evidence adduced
by petitioner, the certificate of registration issued by the Director of Patents can
confer upon petitioner the exclusive right to use its own symbol only to those goods
specified in the certificate, subject to any conditions and limitations stated therein. This
basic point is perhaps the unwritten rationale of Justice Escolin in Philippine Refining
Co., Inc. vs. Ng Sam (115 SCRA 472 [1982]), when he stressed the principle enunciated
by the United States Supreme Court in American Foundries vs. Robertson (269 U.S. 372,
381, 70 L ed 317, 46 Sct. 160) that one who has adopted and used a trademark on his
goods does not prevent the adoption and use of the same trademark by others for
products which are of a different description. Verily, this Court had the occasion to
observe in the 1966 case of George W. Luft Co., Inc. vs. Ngo Guan (18 SCRA 944
[1966]) that no serious objection was posed by the petitioner therein since the applicant
utilized the emblem "Tango" for no other product than hair pomade in which petitioner
does not deal.
This brings Us back to the incidental issue raised by petitioner which private respondent
sought to belie as regards petitioner's alleged expansion of its business. It may be recalled
that petitioner claimed that it has a pending application for registration of the emblem
"BRUT 33" for briefs (page 25, Brief for the Petitioner; page 202, Rollo) to impress upon
Us the Solomonic wisdom imparted by Justice JBL Reyes in Sta. Ana vs. Maliwat (24
SCRA 1018 [1968]), to the effect that dissimilarity of goods will not preclude relief if
the junior user's goods are not remote from any other product which the first user
would be likely to make or sell (vide, at page 1025). Commenting on the former
provision of the Trademark Law now embodied substantially under Section 4(d) of
Republic Act No. 166, as amended, the erudite jurist opined that the law in point "does
not require that the articles of manufacture of the previous user and late user of the mark
should possess the same descriptive properties or should fall into the same categories as
to bar the latter from registering his mark in the principal register." (supra at page 1026).

Yet, it is equally true that as aforesaid, the protective mantle of the Trademark Law
extends only to the goods used by the first user as specified in the certificate of
registration following the clear message conveyed by Section 20.
How do We now reconcile the apparent conflict between Section 4(d) which was
relied upon by Justice JBL Reyes in the Sta. Ana case and Section 20? It would seem
that Section 4(d) does not require that the goods manufactured by the second user
be related to the goods produced by the senior user while Section 20 limits the
exclusive right of the senior user only to those goods specified in the certificate of
registration. But the rule has been laid down that the clause which comes later shall be
given paramount significance over an anterior proviso upon the presumption that it
expresses the latest and dominant purpose. (Graham Paper Co. vs. National Newspapers
Asso. (Mo. App.) 193 S.W. 1003; Barnett vs. Merchant's L. Ins. Co., 87 Okl. 42; State ex
nel Atty. Gen. vs. Toledo, 26 N.E., p. 1061; cited by Martin, Statutory Construction Sixth
ed., 1980 Reprinted, p. 144). It ineluctably follows that Section 20 is controlling and,
therefore, private respondent can appropriate its symbol for the briefs it
manufactures because as aptly remarked by Justice Sanchez in Sterling Products
International Inc. vs. Farbenfabriken Bayer (27 SCRA 1214 [1969]):
"Really, if the certificate of registration were to be deemed as including goods
not specified therein, then a situation may arise whereby an applicant may be
tempted to register a trademark on any and all goods which his mind may
conceive even if he had never intended to use the trademark for the said
goods. We believe that such omnibus registration is not contemplated by our
Trademark Law." (1226).
NO LIKELIHOOD OF CONFUSION, MISTAKE
OR DECEIT AS TO THE IDENTITY OR SOURCE
OF PETITIONERS AND RESPONDENTS
GOODS OR BUSINESS
A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or
deceit as to the identity, source or origin of the goods or identity of the business as a consequence
of using a certain mark. Likelihood of confusion is admittedly a relative term, to be determined
rigidly according to the particular (and sometimes peculiar) circumstances of each case. Thus, in
trademark cases, more than in other kinds of litigation, precedents must be studied in the light of
each particular case. 65
There are two types of confusion in trademark infringement. The first is "confusion of goods"
when an otherwise prudent purchaser is induced to purchase one product in the belief that he is
purchasing another, in which case defendants goods are then bought as the plaintiffs and its
poor quality reflects badly on the plaintiffs reputation. The other is "confusion of business"
wherein the goods of the parties are different but the defendants product can reasonably (though
mistakenly) be assumed to originate from the plaintiff, thus deceiving the public into believing
that there is some connection between the plaintiff and defendant which, in fact, does not exist.66

In determining the likelihood of confusion, the Court must consider: [a] the resemblance between
the trademarks; [b] the similarity of the goods to which the trademarks are attached; [c] the likely
effect on the purchaser and [d] the registrants express or implied consent and other fair and
equitable considerations.
Petitioners and respondents both use "GALLO" in the labels of their respective cigarette and
wine products. But, as held in the following cases, the use of an identical mark does not, by
itself, lead to a legal conclusion that there is trademark infringement:
(a) in Acoje Mining Co., Inc. vs. Director of Patent,67 we ordered the approval of Acoje
Minings application for registration of the trademark LOTUS for its soy sauce even
though Philippine Refining Company had prior registration and use of such identical
mark for its edible oil which, like soy sauce, also belonged to Class 47;
(b) in Philippine Refining Co., Inc. vs. Ng Sam and Director of Patents,68 we upheld the
Patent Directors registration of the same trademark CAMIA for Ng Sams ham under
Class 47, despite Philippine Refining Companys prior trademark registration and actual
use of such mark on its lard, butter, cooking oil (all of which belonged to Class 47),
abrasive detergents, polishing materials and soaps;
(c) in Hickok Manufacturing Co., Inc. vs. Court of Appeals and Santos Lim Bun Liong,69
we dismissed Hickoks petition to cancel private respondents HICKOK trademark
registration for its Marikina shoes as against petitioners earlier registration of the same
trademark for handkerchiefs, briefs, belts and wallets;
(d) in Shell Company of the Philippines vs. Court of Appeals,70 in a minute resolution, we
dismissed the petition for review for lack of merit and affirmed the Patent Offices
registration of the trademark SHELL used in the cigarettes manufactured by respondent
Fortune Tobacco Corporation, notwithstanding Shell Companys opposition as the prior
registrant of the same trademark for its gasoline and other petroleum products;
(e) in Esso Standard Eastern, Inc. vs. Court of Appeals,71 we dismissed ESSOs complaint
for trademark infringement against United Cigarette Corporation and allowed the latter to
use the trademark ESSO for its cigarettes, the same trademark used by ESSO for its
petroleum products, and
(f) in Canon Kabushiki Kaisha vs. Court of Appeals and NSR Rubber Corporation,72 we
affirmed the rulings of the Patent Office and the CA that NSR Rubber Corporation could
use the trademark CANON for its sandals (Class 25) despite Canon Kabushiki Kaishas
prior registration and use of the same trademark for its paints, chemical products, toner
and dyestuff (Class 2).
Whether a trademark causes confusion and is likely to deceive the public hinges on "colorable
imitation"73 which has been defined as "such similarity in form, content, words, sound, meaning,
special arrangement or general appearance of the trademark or tradename in their overall

presentation or in their essential and substantive and distinctive parts as would likely mislead or
confuse persons in the ordinary course of purchasing the genuine article."74
Jurisprudence has developed two tests in determining similarity and likelihood of confusion in
trademark resemblance:75
(a) the Dominancy Test applied in Asia Brewery, Inc. vs. Court of Appeals76 and other
cases,77 and
(b) the Holistic or Totality Test used in Del Monte Corporation vs. Court of Appeals78 and
its preceding cases.79
The Dominancy Test focuses on the similarity of the prevalent features of the competing
trademarks which might cause confusion or deception, and thus infringement. If the competing
trademark contains the main, essential or dominant features of another, and confusion or
deception is likely to result, infringement takes place. Duplication or imitation is not necessary;
nor is it necessary that the infringing label should suggest an effort to imitate. The question is
whether the use of the marks involved is likely to cause confusion or mistake in the mind of the
public or deceive purchasers.80
On the other hand, the Holistic Test requires that the entirety of the marks in question be
considered in resolving confusing similarity. Comparison of words is not the only determining
factor. The trademarks in their entirety as they appear in their respective labels or hang tags must
also be considered in relation to the goods to which they are attached. The discerning eye of the
observer must focus not only on the predominant words but also on the other features appearing
in both labels in order that he may draw his conclusion whether one is confusingly similar to the
other.81
In comparing the resemblance or colorable imitation of marks, various factors have been
considered, such as the dominant color, style, size, form, meaning of letters, words, designs and
emblems used, the likelihood of deception of the mark or name's tendency to confuse82 and the
commercial impression likely to be conveyed by the trademarks if used in conjunction with the
respective goods of the parties.83
Applying the Dominancy and Holistic Tests, we find that the dominant feature of the GALLO
cigarette trademark is the device of a large rooster facing left, outlined in black against a gold
background. The roosters color is either green or red green for GALLO menthols and red for
GALLO filters. Directly below the large rooster device is the word GALLO. The rooster device
is given prominence in the GALLO cigarette packs in terms of size and location on the labels.84
The GALLO mark appears to be a fanciful and arbitrary mark for the cigarettes as it has no
relation at all to the product but was chosen merely as a trademark due to the fondness for
fighting cocks of the son of petitioners president. Furthermore, petitioners adopted GALLO, the
Spanish word for rooster, as a cigarette trademark to appeal to one of their target markets, the
sabungeros (cockfight aficionados).85

Also, as admitted by respondents themselves,86 on the side of the GALLO cigarette packs are the
words "MADE BY MIGHTY CORPORATION," thus clearly informing the public as to the
identity of the manufacturer of the cigarettes.
On the other hand, GALLO Winerys wine and brandy labels are diverse. In many of them, the
labels are embellished with sketches of buildings and trees, vineyards or a bunch of grapes while
in a few, one or two small roosters facing right or facing each other (atop the EJG crest,
surrounded by leaves or ribbons), with additional designs in green, red and yellow colors, appear
as minor features thereof.87 Directly below or above these sketches is the entire printed name of
the founder-owners, "ERNEST & JULIO GALLO" or just their surname "GALLO,"88 which
appears in different fonts, sizes, styles and labels, unlike petitioners uniform casque-font boldlettered GALLO mark.
Moreover, on the labels of Gallo Winerys wines are printed the words "VINTED AND
BOTTLED BY ERNEST & JULIO GALLO, MODESTO, CALIFORNIA."89
The many different features like color schemes, art works and other markings of both products
drown out the similarity between them the use of the word GALLO a family surname for
the Gallo Winerys wines and a Spanish word for rooster for petitioners cigarettes.
WINES AND CIGARETTES ARE NOT
IDENTICAL, SIMILAR, COMPETING OR
RELATED GOODS
Confusion of goods is evident where the litigants are actually in competition; but confusion of
business may arise between non-competing interests as well.90
Thus, apart from the strict application of Section 20 of the Trademark Law and Article 6bis of the
Paris Convention which proscribe trademark infringement not only of goods specified in the
certificate of registration but also of identical or similar goods, we have also uniformly
recognized and applied the modern concept of "related goods."91 Simply stated, when goods are
so related that the public may be, or is actually, deceived and misled that they come from the
same maker or manufacturer, trademark infringement occurs.92
Non-competing goods may be those which, though they are not in actual competition, are so
related to each other that it can reasonably be assumed that they originate from one manufacturer,
in which case, confusion of business can arise out of the use of similar marks.93 They may also be
those which, being entirely unrelated, cannot be assumed to have a common source; hence, there
is no confusion of business, even though similar marks are used.94 Thus, there is no trademark
infringement if the public does not expect the plaintiff to make or sell the same class of goods as
those made or sold by the defendant.95
In resolving whether goods are related,96 several factors come into play:
(a) the business (and its location) to which the goods belong

(b) the class of product to which the goods belong

(c) the product's quality, quantity, or size, including the nature of the package, wrapper or
container 97
(d) the nature and cost of the articles98
(e) the descriptive properties, physical attributes or essential characteristics with reference to
their form, composition, texture or quality
(f) the purpose of the goods99
(g) whether the article is bought for immediate consumption,100 that is, day-to-day household
items101
(h) the fields of manufacture102
(i) the conditions under which the article is usually purchased103 and
(j) the channels of trade through which the goods flow,104 how they are distributed, marketed,
displayed and sold.105
The wisdom of this approach is its recognition that each trademark infringement case presents its
own unique set of facts. No single factor is preeminent, nor can the presence or absence of one
determine, without analysis of the others, the outcome of an infringement suit. Rather, the court
is required to sift the evidence relevant to each of the criteria. This requires that the entire
panoply of elements constituting the relevant factual landscape be comprehensively examined.106
It is a weighing and balancing process. With reference to this ultimate question, and from a
balancing of the determinations reached on all of the factors, a conclusion is reached whether the
parties have a right to the relief sought.107
A very important circumstance though is whether there exists a likelihood that an appreciable
number of ordinarily prudent purchasers will be misled, or simply confused, as to the source of
the goods in question.108 The "purchaser" is not the "completely unwary consumer" but is the
"ordinarily intelligent buyer" considering the type of product involved.109 He is "accustomed to
buy, and therefore to some extent familiar with, the goods in question. The test of fraudulent
simulation is to be found in the likelihood of the deception of some persons in some measure
acquainted with an established design and desirous of purchasing the commodity with which that
design has been associated. The test is not found in the deception, or the possibility of deception,
of the person who knows nothing about the design which has been counterfeited, and who must
be indifferent between that and the other. The simulation, in order to be objectionable, must be
such as appears likely to mislead the ordinary intelligent buyer who has a need to supply and is
familiar with the article that he seeks to purchase."110
Hence, in the adjudication of trademark infringement, we give due regard to the goods usual
purchasers character, attitude, habits, age, training and education. 111

Applying these legal precepts to the present case, petitioners use of the GALLO cigarette
trademark is not likely to cause confusion or mistake, or to deceive the "ordinarily intelligent
buyer" of either wines or cigarettes or both as to the identity of the goods, their source and
origin, or identity of the business of petitioners and respondents.
Obviously, wines and cigarettes are not identical or competing products. Neither do they belong
to the same class of goods. Respondents GALLO wines belong to Class 33 under Rule 84[a]
Chapter III, Part II of the Rules of Practice in Trademark Cases while petitioners GALLO
cigarettes fall under Class 34.
We are mindful that product classification alone cannot serve as the decisive factor in the
resolution of whether or not wines and cigarettes are related goods. Emphasis should be on the
similarity of the products involved and not on the arbitrary classification or general description
of their properties or characteristics. But the mere fact that one person has adopted and used a
particular trademark for his goods does not prevent the adoption and use of the same trademark
by others on articles of a different description. 112
Both the Makati RTC and the CA held that wines and cigarettes are related products because: (1)
"they are related forms of vice, harmful when taken in excess, and used for pleasure and
relaxation" and (2) "they are grouped or classified in the same section of supermarkets and
groceries."
We find these premises patently insufficient and too arbitrary to support the legal conclusion that
wines and cigarettes are related products within the contemplation of the Trademark Law and the
Paris Convention.
First, anything - not only wines and cigarettes can be used for pleasure and relaxation and
can be harmful when taken in excess. Indeed, it would be a grave abuse of discretion to treat
wines and cigarettes as similar or related products likely to cause confusion just because they are
pleasure-giving, relaxing or potentially harmful. Such reasoning makes no sense.
Second, it is common knowledge that supermarkets sell an infinite variety of wholly unrelated
products and the goods here involved, wines and cigarettes, have nothing whatsoever in common
with respect to their essential characteristics, quality, quantity, size, including the nature of their
packages, wrappers or containers.113
Accordingly, the U.S. patent office and courts have consistently held that the mere fact that
goods are sold in one store under the same roof does not automatically mean that buyers are
likely to be confused as to the goods respective sources, connections or sponsorships. The fact
that different products are available in the same store is an insufficient standard, in and of itself,
to warrant a finding of likelihood of confusion.114
In this regard, we adopted the Director of Patents finding in Philippine Refining Co., Inc. vs. Ng
Sam and the Director of Patents:115

In his decision, the Director of Patents enumerated the factors that set respondents
products apart from the goods of petitioner. He opined and we quote:
"I have taken into account such factors as probable purchaser attitude and habits,
marketing activities, retail outlets, and commercial impression likely to be
conveyed by the trademarks if used in conjunction with the respective goods of
the parties, I believe that ham on one hand, and lard, butter, oil, and soap on
the other are products that would not move in the same manner through the
same channels of trade. They pertain to unrelated fields of manufacture,
might be distributed and marketed under dissimilar conditions, and are
displayed separately even though they frequently may be sold through the
same retail food establishments. Opposers products are ordinary day-to-day
household items whereas ham is not necessarily so. Thus, the goods of the parties
are not of a character which purchasers would likely attribute to a common origin.
The observations and conclusion of the Director of Patents are correct. The particular
goods of the parties are so unrelated that consumers, would not, in any probability
mistake one as the source of origin of the product of the other. (Emphasis supplied).
The same is true in the present case. Wines and cigarettes are non-competing and are totally
unrelated products not likely to cause confusion vis--vis the goods or the business of the
petitioners and respondents.
Wines are bottled and consumed by drinking while cigarettes are packed in cartons or packages
and smoked. There is a whale of a difference between their descriptive properties, physical
attributes or essential characteristics like form, composition, texture and quality.
GALLO cigarettes are inexpensive items while GALLO wines are not. GALLO wines are
patronized by middle-to-high-income earners while GALLO cigarettes appeal only to simple
folks like farmers, fishermen, laborers and other low-income workers.116 Indeed, the big price
difference of these two products is an important factor in proving that they are in fact unrelated
and that they travel in different channels of trade. There is a distinct price segmentation based on
vastly different social classes of purchasers.117
GALLO cigarettes and GALLO wines are not sold through the same channels of trade. GALLO
cigarettes are Philippine-made and petitioners neither claim nor pass off their goods as imported
or emanating from Gallo Winery. GALLO cigarettes are distributed, marketed and sold through
ambulant and sidewalk vendors, small local sari-sari stores and grocery stores in Philippine rural
areas, mainly in Misamis Oriental, Pangasinan, Bohol, and Cebu.118 On the other hand, GALLO
wines are imported, distributed and sold in the Philippines through Gallo Winerys exclusive
contracts with a domestic entity, which is currently Andresons. By respondents own testimonial
evidence, GALLO wines are sold in hotels, expensive bars and restaurants, and high-end grocery
stores and supermarkets, not through sari-sari stores or ambulant vendors.119
Furthermore, the Makati RTC and the CA erred in relying on Carling Brewing Company vs.
Philip Morris, Inc.120 to support its finding that GALLO wines and GALLO cigarettes are related

goods. The courts a quo should have taken into consideration the subsequent case of IDV North
America, Inc. and R & A Bailey Co. Limited vs. S & M Brands, Inc.:121
IDV correctly acknowledges, however, that there is no per se rule that the use of the same
mark on alcohol and tobacco products always will result in a likelihood of confusion.
Nonetheless, IDV relies heavily on the decision in John Walker & Sons, Ltd. vs. Tampa
Cigar Co., 124 F. Supp. 254, 256 (S.D. Fla. 1954), affd, 222 F. 2d 460 (5th Cir. 1955),
wherein the court enjoined the use of the mark "JOHNNIE WALKER" on cigars because
the fame of the plaintiffs mark for scotch whiskey and because the plaintiff advertised its
scotch whiskey on, or in connection with tobacco products. The court, in John Walker
& Sons, placed great significance on the finding that the infringers use was a
deliberate attempt to capitalize on the senior marks fame. Id. At 256. IDV also
relies on Carling Brewing Co. v. Philip Morris, Inc., 297 F. Supp. 1330, 1338 (N.D.
Ga. 1968), in which the court enjoined the defendants use of the mark "BLACK
LABEL" for cigarettes because it was likely to cause confusion with the plaintiffs
well-known mark "BLACK LABEL" for beer.
xxx xxx xxx
Those decisions, however, must be considered in perspective of the principle that
tobacco products and alcohol products should be considered related only in cases
involving special circumstances. Schenley Distillers, Inc. v. General Cigar Co.,
57C.C.P.A. 1213, 427 F. 2d 783, 785 (1970). The presence of special circumstances
has been found to exist where there is a finding of unfair competition or where a
famous or well-known mark is involved and there is a demonstrated intent to
capitalize on that mark. For example, in John Walker & Sons, the court was persuaded
to find a relationship between products, and hence a likelihood of confusion, because of
the plaintiffs long use and extensive advertising of its mark and placed great emphasis
on the fact that the defendant used the trademark Johnnie Walker with full knowledge of
its fame and reputation and with the intention of taking advantage thereof. John Walker
& Sons, 124 F. Supp. At 256; see Mckesson & Robbins, Inc. v. P. Lorillard Co., 1959 WL
5894, 120 U.S.P.Q. 306, 307 (1959) (holding that the decision in John Walker & Sons
was merely the law on the particular case based upon its own peculiar facts); see also
Alfred Dunhill, 350 F. Supp. At 1363 (defendants adoption of Dunhill mark was not
innocent). However, in Schenley, the court noted that the relation between tobacco and
whiskey products is significant where a widely known arbitrary mark has long been used
for diversified products emanating from a single source and a newcomer seeks to use the
same mark on unrelated goods. Schenley, 427 F.2d. at 785. Significantly, in Schenley, the
court looked at the industry practice and the facts of the case in order to determine the
nature and extent of the relationship between the mark on the tobacco product and the
mark on the alcohol product.
The record here establishes conclusively that IDV has never advertised BAILEYS
liqueurs in conjunction with tobacco or tobacco accessory products and that IDV has no
intent to do so. And, unlike the defendant in Dunhill, S & M Brands does not market bar
accessories, or liqueur related products, with its cigarettes. The advertising and

promotional materials presented a trial in this action demonstrate a complete lack of

affiliation between the tobacco and liqueur products bearing the marks here at issue.
xxx xxx xxx
Of equal significance, it is undisputed that S & M Brands had no intent, by adopting the
family name Baileys as the mark for its cigarettes, to capitalize upon the fame of the
BAILEYS mark for liqueurs. See Schenley, 427 F. 2d at 785. Moreover, as will be
discussed below, and as found in Mckesson & Robbins, the survey evidence refutes
the contention that cigarettes and alcoholic beverages are so intimately associated in
the public mind that they cannot under any circumstances be sold under the same
mark without causing confusion. See Mckesson & Robbins, 120 U.S.P.Q. at 308.
Taken as a whole, the evidence here demonstrates the absence of the special
circumstances in which courts have found a relationship between tobacco and alcohol
products sufficient to tip the similarity of goods analysis in favor of the protected mark
and against the allegedly infringing mark. It is true that BAILEYS liqueur, the worlds
best selling liqueur and the second best selling in the United States, is a well-known
product. That fact alone, however, is insufficient to invoke the special circumstances
connection here where so much other evidence and so many other factors disprove a
likelihood of confusion. The similarity of products analysis, therefore, augers against
finding that there is a likelihood of confusion. (Emphasis supplied).
In short, tobacco and alcohol products may be considered related only in cases involving special
circumstances which exist only if a famous mark is involved and there is a demonstrated intent to
capitalize on it. Both of these are absent in the present case.
THE GALLO WINE TRADEMARK IS NOT A
WELL-KNOWN MARK IN THE CONTEXT
OF THE PARIS CONVENTION IN THIS CASE
SINCE WINES AND CIGARETTES ARE NOT
IDENTICAL OR SIMILAR GOODS
First, the records bear out that most of the trademark registrations took place in the late 1980s
and the 1990s, that is, after Tobacco Industries use of the GALLO cigarette trademark in 1973
and petitioners use of the same mark in 1984.
GALLO wines and GALLO cigarettes are neither the same, identical, similar nor related goods,
a requisite element under both the Trademark Law and the Paris Convention.
Second, the GALLO trademark cannot be considered a strong and distinct mark in the
Philippines. Respondents do not dispute the documentary evidence that aside from Gallo
Winerys GALLO trademark registration, the Bureau of Patents, Trademarks and Technology
Transfer also issued on September 4, 1992 Certificate of Registration No. 53356 under the
Principal Register approving Productos Alimenticios Gallo, S.As April 19, 1990 application for
GALLO trademark registration and use for its "noodles, prepared food or canned noodles, ready

or canned sauces for noodles, semolina, wheat flour and bread crumbs, pastry, confectionery, ice
cream, honey, molasses syrup, yeast, baking powder, salt, mustard, vinegar, species and ice."122
Third and most important, pursuant to our ruling in Canon Kabushiki Kaisha vs. Court of
Appeals and NSR Rubber Corporation,123 "GALLO" cannot be considered a "well-known" mark
within the contemplation and protection of the Paris Convention in this case since wines and
cigarettes are not identical or similar goods:
We agree with public respondents that the controlling doctrine with respect to the
applicability of Article 8 of the Paris Convention is that established in Kabushi Kaisha
Isetan vs. Intermediate Appellate Court (203 SCRA 59 [1991]). As pointed out by the
BPTTT:
"Regarding the applicability of Article 8 of the Paris Convention, this Office
believes that there is no automatic protection afforded an entity whose
tradename is alleged to have been infringed through the use of that name as
a trademark by a local entity.
In Kabushiki Kaisha Isetan vs. The Intermediate Appellate Court, et. al., G.R. No.
75420, 15 November 1991, the Honorable Supreme Court held that:
The Paris Convention for the Protection of Industrial Property does
not automatically exclude all countries of the world which have signed
it from using a tradename which happens to be used in one country.
To illustrate if a taxicab or bus company in a town in the United
Kingdom or India happens to use the tradename Rapid
Transportation, it does not necessarily follow that Rapid can no
longer be registered in Uganda, Fiji, or the Philippines.
This office is not unmindful that in (sic) the Treaty of Paris for the Protection of
Intellectual Property regarding well-known marks and possible application thereof
in this case. Petitioner, as this office sees it, is trying to seek refuge under its
protective mantle, claiming that the subject mark is well known in this country at
the time the then application of NSR Rubber was filed.
However, the then Minister of Trade and Industry, the Hon. Roberto V. Ongpin,
issued a memorandum dated 25 October 1983 to the Director of Patents, a set of
guidelines in the implementation of Article 6bis of the Treaty of Paris. These
conditions are:
a) the mark must be internationally known;
b) the subject of the right must be a trademark, not a patent or copyright or
anything else;
c) the mark must be for use in the same or similar kinds of goods; and

d) the person claiming must be the owner of the mark (The Parties
Convention Commentary on the Paris Convention. Article by Dr. Bogsch,
Director General of the World Intellectual Property Organization,
Geneva, Switzerland, 1985)
From the set of facts found in the records, it is ruled that the Petitioner failed to
comply with the third requirement of the said memorandum that is the mark
must be for use in the same or similar kinds of goods. The Petitioner is using
the mark "CANON" for products belonging to class 2 (paints, chemical
products) while the Respondent is using the same mark for sandals (class 25).
Hence, Petitioner's contention that its mark is well-known at the time the
Respondent filed its application for the same mark should fail." (Emphasis
supplied.)
Consent of the Registrant and
Other air, Just and Equitable
Considerations
Each trademark infringement case presents a unique problem which must be answered by
weighing the conflicting interests of the litigants.124
Respondents claim that GALLO wines and GALLO cigarettes flow through the same channels
of trade, that is, retail trade. If respondents assertion is true, then both goods co-existed
peacefully for a considerable period of time. It took respondents almost 20 years to know about
the existence of GALLO cigarettes and sue petitioners for trademark infringement. Given, on
one hand, the long period of time that petitioners were engaged in the manufacture, marketing,
distribution and sale of GALLO cigarettes and, on the other, respondents delay in enforcing their
rights (not to mention implied consent, acquiescence or negligence) we hold that equity, justice
and fairness require us to rule in favor of petitioners. The scales of conscience and reason tip far
more readily in favor of petitioners than respondents.
Moreover, there exists no evidence that petitioners employed malice, bad faith or fraud, or that
they intended to capitalize on respondents goodwill in adopting the GALLO mark for their
cigarettes which are totally unrelated to respondents GALLO wines. Thus, we rule out
trademark infringement on the part of petitioners.
PETITIONERS ARE ALSO NOT LIABLE
FOR UNFAIR COMPETITION
Under Section 29 of the Trademark Law, any person who employs deception or any other means
contrary to good faith by which he passes off the goods manufactured by him or in which he
deals, or his business, or services for those of the one having established such goodwill, or who
commits any acts calculated to produce said result, is guilty of unfair competition. It includes the
following acts:

(a) Any person, who in selling his goods shall give them the general appearance of goods
of another manufacturer or dealer, either as to the goods themselves or in the wrapping of
the packages in which they are contained, or the devices or words thereon, or in any other
feature of their appearance, which would be likely to influence purchasers to believe that
the goods offered are those of a manufacturer or dealer other than the actual manufacturer
or dealer, or who otherwise clothes the goods with such appearance as shall deceive the
public and defraud another of his legitimate trade, or any subsequent vendor of such
goods or any agent of any vendor engaged in selling such goods with a like purpose;
(b) Any person who by any artifice, or device, or who employs any other means
calculated to induce the false belief that such person is offering the services of another
who has identified such services in the mind of the public;
(c) Any person who shall make any false statement in the course of trade or who shall
commit any other act contrary to good faith of a nature calculated to discredit the goods,
business or services of another.
The universal test question is whether the public is likely to be deceived. Nothing less than
conduct tending to pass off one mans goods or business as that of another constitutes unfair
competition. Actual or probable deception and confusion on the part of customers by reason of
defendants practices must always appear.125 On this score, we find that petitioners never
attempted to pass off their cigarettes as those of respondents. There is no evidence of bad faith or
fraud imputable to petitioners in using their GALLO cigarette mark.
All told, after applying all the tests provided by the governing laws as well as those recognized
by jurisprudence, we conclude that petitioners are not liable for trademark infringement, unfair
competition or damages.
WHEREFORE, finding the petition for review meritorious, the same is hereby GRANTED.
The questioned decision and resolution of the Court of Appeals in CA-G.R. CV No. 65175 and
the November 26, 1998 decision and the June 24, 1999 order of the Regional Trial Court of
Makati, Branch 57 in Civil Case No. 93-850 are hereby REVERSED and SET ASIDE and the
complaint against petitioners DISMISSED.
Costs against respondents.
SO ORDERED.