Young Auto Supply vs Court of Appeals

G.R. No. 104175 June 25, 1993

YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners, vs. THE HONORABLE COURT OF
APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG ROXAS, respondents.
Doctrine:
A corporation has no residence in the same sense in which this term is applied to a natural
person. But for practical purposes, a corporation is in a metaphysical sense a resident of
the place where its principal office is located AS STATED IN THE ARTICLES OF
INCORPORATION (Cohen v. Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio
System v. Antillon, 19 SCRA 379 [1967]). The Corporation Code precisely requires each
corporation to specify in its articles of incorporation the "place where the principal office
of the corporation is to be located which must be within the Philippines" (Sec. 14 [3]). The
purpose of this requirement is to fix the residence of a corporation in a definite place, instead
of allowing it to be ambulatory.

Actions cannot be filed against a corporation in any place where the corporation maintains
its branch offices. The Court ruled that to allow an action to be instituted in any place
where the corporation has branch offices, would create confusion and work untold
inconvenience to said entity. By the same token, a corporation cannot be allowed to file
personal actions in a place other than its principal place of business unless such a place
is also the residence of a co-plaintiff or a defendant
FACTS:
Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its president, Nelson Garcia and
Vicente Sy, sold all of their shares of stock in Consolidated Marketing & Development Corporation
(CMDC) to Roxas. The purchase price was P8,000,000.00 payable as follows: a downpayment of
P4,000,000.00 and the balance of P4,000,000.00 in four post dated checks of P1,000,000.00 each.
Immediately after the execution of the agreement, Roxas took full control of the four markets of
CMDC. However, the vendors held on to the stock certificates of CMDC as security pending full
payment of the balance of the purchase price.
The first check of P4,000,000.00, representing the down-payment, was honored by the drawee bank but
the four other checks representing the balance of P4,000,000.00 were dishonored. In the meantime,
Roxas sold one of the markets to a third party. Out of the proceeds of the sale, YASCO received
P600,000.00, leaving a balance of P3,400,000.00.
Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to the proceeds of
the sale of the CMDC shares to Nemesio Garcia. Petitioners filed a complaint against Roxas in the
Regional Trial Court, Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of
P3,400,00.00 or that full control of the three markets be turned over to YASCO and Garcia. The
complaint also prayed for the forfeiture of the partial payment of P4,600,000.00 and the payment of
attorney's fees and costs.
On August 22, 1988, Roxas filed a motion to dismiss on the grounds that: the complaint did
not state a cause of action due to non-joinder of indispensable parties; 2. The claim or demand
set forth in the complaint had been waived, abandoned or otherwise extinguished; and 3. The venue was
improperly laid.
After a hearing, wherein testimonial and documentary evidence were presented by both parties, the trial
court denied Roxas' motion to dismiss. The Court of Appeals sustained the findings of the trial court
with regard to the first two grounds raised in the motion to dismiss but ordered the dismissal of
the complaint on the ground of improper venue.
A subsequent motion for reconsideration by petitioner was to no avail. Petitioners now come before us,
alleging that the Court of Appeals erred in:
1. holding the venue should be in Pasay City, and not in Cebu City (where both
petitioners/plaintiffs are residents);
2. not finding that Roxas is estopped from questioning the choice of venue
ISSUE:
1. What is the proper venue of the action?
2. Whether Roxas is stopped from questioning the choice of venue
RULING:
The petition is meritorious. In holding that the venue was improperly laid in Cebu City, the Court of
Appeals relied on the address of YASCO, as appearing in the Deed of Sale dated October 28, 1987,
which is "No. 1708 Dominga Street, Pasay City." This was the same address written in YASCO's letters
and several commercial documents in the possession of Roxas. The appellate court held that Roxas
was led by petitioners to believe that their residence is in Pasay City and that he had relied upon
those representations.
The Court of Appeals erred in holding that the venue was improperly laid in Cebu City.
In the Regional Trial Courts, all personal actions are commenced and tried in the province or city
where the defendant or any of the defendants resides or may be found, or where the plaintiff or
any of the plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4, Revised Rules of Court].
There are two plaintiffs in the case at bench: a natural person and a domestic corporation. Both
plaintiffs aver in their complaint that they are residents of Cebu City, thus:
1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a domestic corporation duly organized and
existing under Philippine laws with principal place of business at M. J. Cuenco Avenue, Cebu City. It also
has a branch office at 1708 Dominga Street, Pasay City, Metro Manila.
Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business address at Young Auto
Supply Co., Inc., M. J. Cuenco Avenue, Cebu City. . . .
The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:
THIRD That the place where the principal office of the corporation is to be established or located is at
Cebu City, Philippines (as amended on December 20, 1980 and further amended on December 20,
1984)
A corporation has no residence in the same sense in which this term is applied to a natural
person. But for practical purposes, a corporation is in a metaphysical sense a resident of the place
where its principal office is located AS STATED IN THE ARTICLES OF INCORPORATION (Cohen v.
Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v. Antillon, 19 SCRA 379
[1967]). The Corporation Code precisely requires each corporation to specify in its articles of
incorporation the "place where the principal office of the corporation is to be located which must
be within the Philippines" (Sec. 14 [3]). The purpose of this requirement is to fix the residence of a
corporation in a definite place, instead of allowing it to be ambulatory.
In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this Court explained why actions
cannot be filed against a corporation in any place where the corporation maintains its branch
offices. The Court ruled that to allow an action to be instituted in any place where the corporation
has branch offices, would create confusion and work untold inconvenience to said entity. By the
same token, a corporation cannot be allowed to file personal actions in a place other than its
principal place of business unless such a place is also the residence of a co-plaintiff or a
defendant.
With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its principal
place of business is located, it becomes unnecessary to decide whether Garcia is also a resident of Cebu
City and whether Roxas was in estoppel from questioning the choice of Cebu City as the venue.
WHEREFORE, the petition is GRANTED.
REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court
of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY & DEVELOPMENT
CORPORATION and ADALIA F. ROBES, respondents.
G.R. No. 51765. March 3, 1997,
DOCTRINES:
Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit
the issuance of any stock dividend without the approval of stockholders, representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. These provisions underscore the fact that PAYMENT OF
DIVIDENDS TO A STOCKHOLDER IS NOT A MATTER OF RIGHT BUT A MATTER OF
CONSENSUS

While the stock certificate does allow redemption, THE OPTION TO DO SO WAS CLEARLY
VESTED IN THE PETITIONER BANK. The redemption therefore is clearly the type known as
 "OPTIONAL". Thus, except as otherwise provided in the stock certificate, the REDEMPTION
RESTS ENTIRELY WITH THE CORPORATION AND THE STOCKHOLDER IS WITHOUT
RIGHT TO EITHER COMPEL OR REFUSE THE REDEMPTION OF ITS STOCK. Furthermore,
the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and cannot be construed as having a
mandatory effect.

While redeemable shares may be redeemed regardless of the existence of unrestricted retained
earnings, this is SUBJECT TO THE CONDITION THAT THE CORPORATION HAS, AFTER
SUCH REDEMPTION, ASSETS IN ITS BOOKS TO COVER DEBTS AND LIABILITIES
INCLUSIVE OF CAPITAL STOCK. REDEMPTION, THEREFORE, MAY NOT BE MADE WHERE
THE CORPORATION IS INSOLVENT or IF SUCH REDEMPTION WILL CAUSE INSOLVENCY
OR INABILITY OF THE CORPORATION TO MEET ITS DEBTS AS THEY MATURE.

HERMOSISIMA, JR., J.:

FACTS:
Private respondent Corporation secured a loan from petitioner in the amount of P120,000.00. As part
of the proceeds of the loan, preferred shares of stocks were issued to private respondent
Corporation, through its officers then, private respondent Adalia F. Robes and one Carlos F.
Robes. In other words, instead of giving the legal tender totaling to the full amount of the loan,
which is P120,000.00, petitioner lent such amount partially in the form of money and partially in
the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of
P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the
name of private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed
his shares in favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
"The Preferred Stock shall have the following rights, preferences, qualifications and limitations, to
wit: 1. Of the right to RECEIVE A QUARTERLY DIVIDEND of One Per Centum (1%), cumulative and
participating.
xxx 2. That such preferred shares may be redeemed, by the system of drawing lots, at any time after
two (2) years from the date of issue at the option of the Corporation. x x x."
Private respondents proceeded against petitioner and filed a complaint anchored on
private respondents' alleged rights to collect dividends under the preferred shares in question and
to have petitioner redeem the same under the terms and conditions of the stock certificates.
Private respondents attached to their complaint, a letter-demand dated January 5, 1979 which,
significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss private respondents' Complaint on the following grounds: (1) that
the trial court had no jurisdiction over the subject-matter of the action; (2) that the action was
unenforceable under substantive law; and (3) that the action was barred by the statute of
limitations and/or laches. Petitioner's Motion to Dismiss was denied by the trial court.
The trial court rendered the herein assailed decision in favor of private respondents, ordering petitioner
to pay private respondents the face value of the stock certificates as redemption price, plus 1%
quarterly interest thereon until full payment.
From a further perusal of the pleadings, it appears that the provision of the stock certificates in
question to the effect that the PLAINTIFFS SHALL HAVE THE RIGHT TO RECEIVE A QUARTERLY
DIVIDEND OF One Per Centum (1%), cumulative and participating, CLEARLY AND
UNEQUIVOCABLY [SIC] INDICATES THAT THE SAME ARE 'INTEREST BEARING STOCKS' which
are STOCKS ISSUED BY A CORPORATION UNDER AN AGREEMENT TO PAY A CERTAIN RATE OF
INTEREST THEREON (5 Thompson, Sec. 3439). As such, plaintiffs become entitled to the payment
thereof as a matter of right without necessity of a prior declaration of dividend.
ON THE QUESTION OF THE REDEMPTION BY THE DEFENDANT OF SAID PREFERRED SHARES
OF STOCK, the very wordings of the terms and conditions in said stock certificates clearly allows
the same. To allow the herein defendant not to redeem said preferred shares of stock and/or pay
the interest due thereon despite the clear import of said provisions by the mere invocation of
alleged Central Bank Circulars prohibiting the same is tantamount to an impairment of the
obligation of contracts enshrined in no less than the fundamental law itself.
Moreover, defendant is considered in estoppel from taking shelter behind a General Banking Act provision
to the effect that it cannot buy its own shares of stocks considering that the very terms and conditions in
said stock certificates allowing their redemption are its own handiwork.
Hence, this petition.
ISSUES: Whether petitioner can be compelled to redeem the preferred shares issued to the private
respondent?
RULING: No. The petition is meritorious.
OVERVIEW ON THE NATURE OF PREFERRED SHARES AND THE REDEMPTION:
A PREFERRED SHARE OF STOCK, on one hand, is one which entitles the holder thereof to
certain preferences over the holders of common stock. The preferences are designed to induce
persons to subscribe for shares of a corporation.
Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which
gives the holder thereof preference in the distribution of the assets of the corporation in case of
liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to
the extent agreed upon before any dividends at all are paid to the holders of common stock. There
is no guaranty, however, that the share will receive any dividends.
Under the old Corporation Law in force at the time the contract between the petitioner and the
private respondents was entered into, it was provided that "no corporation shall make or declare any
dividend except from the surplus profits arising from its business, or distribute its capital stock or
property other than actual profits among its members or stockholders until after the payment of its debts
and the termination of its existence by limitation or lawful dissolution." Similarly, the present Corporation
Code[13] provides THAT THE BOARD OF DIRECTORS OF A STOCK CORPORATION MAY DECLARE
DIVIDENDS ONLY OUT OF UNRESTRICTED RETAINED EARNINGS. The Code, in Section 43,
adopting the change made in accounting terminology, SUBSTITUTED THE PHRASE UNRESTRICTED
RETAINED EARNINGS," WHICH MAY BE A MORE PRECISE TERM, IN PLACE OF "SURPLUS
PROFITS ARISING FROM ITS BUSINESS" IN THE FORMER LAW. Thus, the declaration of dividends
is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be.
PREFERENCES GRANTED TO PREFERRED STOCKHOLDERS, MOREOVER, DO NOT GIVE THEM
A LIEN UPON THE PROPERTY OF THE CORPORATION NOR MAKE THEM CREDITORS OF THE
CORPORATION, the right of the former being always subordinate to the latter. Dividends are thus
payable only when there are profits earned by the corporation and as a general rule, even if there are
existing profits, the board of directors has the discretion to determine whether or not dividends are to be
declared. Shareholders, both common and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts and liabilities are fully paid.
REDEEMABLE SHARES ARE SHARES, USUALLY PREFERRED, WHICH BY THEIR TERMS ARE
REDEEMABLE AT A FIXED DATE, or AT THE OPTION OF EITHER ISSUING CORPORATION, OR
THE STOCKHOLDER, OR BOTH AT A CERTAIN REDEMPTION PRICE. A redemption by the
corporation of its stock is, in a sense, a repurchase of it for cancellation.
The present Code allows redemption of shares even if there are no unrestricted retained earnings on
the books of the corporation. This is a new provision which in effect qualifies the general rule that
the corporation cannot purchase its own shares except out of current retained earnings. However,
while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings,
this is SUBJECT TO THE CONDITION THAT THE CORPORATION HAS, AFTER SUCH
REDEMPTION, ASSETS IN ITS BOOKS TO COVER DEBTS AND LIABILITIES INCLUSIVE OF
CAPITAL STOCK. REDEMPTION, THEREFORE, MAY NOT BE MADE WHERE THE CORPORATION
IS INSOLVENT or IF SUCH REDEMPTION WILL CAUSE INSOLVENCY OR INABILITY OF THE
CORPORATION TO MEET ITS DEBTS AS THEY MATURE.

MERITS OF THE CASE:

The petitioner argues that it cannot be compelled to redeem the preferred shares issued to the
private respondent. WE AGREE. Respondent judge, in ruling that petitioner must redeem the shares in
question, stated that:
"On the question of the redemption by the defendant of said preferred shares of stock, the very wordings
of the terms and conditions in said stock certificates clearly allows the same."
 What respondent Judge failed to recognize was that while the stock certificate does allow
redemption, THE OPTION TO DO SO WAS CLEARLY VESTED IN THE PETITIONER BANK. The
redemption therefore is clearly the type known as "OPTIONAL". Thus, except as otherwise provided in
the stock certificate, the REDEMPTION RESTS ENTIRELY WITH THE CORPORATION AND THE
STOCKHOLDER IS WITHOUT RIGHT TO EITHER COMPEL OR REFUSE THE REDEMPTION OF ITS
STOCK. Furthermore, the terms and conditions set forth therein use the word "may". It is a settled
doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as
having a mandatory effect.
The redemption of said shares cannot be allowed. As pointed out by the petitioner, the
Central Bank made a finding that said petitioner has been suffering from chronic reserve
deficiency,and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G. S.
Licaros of the Central Bank, to the President and Acting Chairman of the Board of the petitioner bank
prohibiting the latter from redeeming any preferred share, on the ground that said redemption would
reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of
preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank
Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a
banking institution that would have resulted in adverse repercussions, not only to its depositors
and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a
right granted by law to a corporate entity, may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment of the obligation of contracts. It has,
however, been settled that THE CONSTITUTIONAL GUARANTY OF NON-IMPAIRMENT OF
OBLIGATIONS OF CONTRACT IS LIMITED BY THE EXERCISE OF THE POLICE POWER OF THE
STATE, the reason being that PUBLIC WELFARE IS SUPERIOR TO PRIVATE RIGHTS . (mali ako sa
Constihuhubelles)
The respondent judge also stated that since the stock certificate granted the private respondents the right
to receive a quarterly dividend of one Per Centum (1%), cumulative and participating, it "clearly and
unequivocably (sic) indicates that the same are 'interest bearing stocks' or stocks issued by a corporation
under an agreement to pay a certain rate of interest thereon. As such, plaintiffs (private respondents
herein) become entitled to the payment thereof as a matter of right without necessity of a prior declaration
of dividend."[26] There is no legal basis for this observation. Both Sec. 16 of the Corporation Law and
Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the
approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the purpose. These provisions underscore the
fact that PAYMENT OF DIVIDENDS TO A STOCKHOLDER IS NOT A MATTER OF RIGHT BUT A
MATTER OF CONSENSUS. Furthermore, "interest bearing stocks", on which the corporation agrees
absolutely to pay interest before dividends are paid to common stockholders, is legal only when
construed as requiring payment of interest as dividends from net earnings or surplus only. Clearly, the
respondent judge, in compelling the petitioner to redeem the shares in question and to pay the
corresponding dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction
in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of
the law. WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED.
Castillo v Balinghasay [G.R. No. 150976. October 18, 2004]
CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES NAVARRO, MARIA
ANTONIA TEMPLO and MEDICAL CENTER PARAAQUE, INC., petitioners, vs. ANGELES
BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA, TERESITA
GAYANILO, RUSTICO JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN,
VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES, REYNALDO SAVET, SERAPIO
TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO VILLAREAL, respondents.
Doctrine: Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were
explicitly provided for, such that NO SHARE MAY BE DEPRIVED OF VOTING RIGHTS EXCEPT
THOSE CLASSIFIED AND ISSUED AS PREFERRED OR REDEEMABLE SHARES, unless otherwise
provided in this Code and that there shall always be a class or series of shares which have complete
voting rights. Section 6 of the Corporation Code being deemed written into Article VII of the Articles of
Incorporation of MCPI, it necessarily follows that unless Class B shares of MCPI stocks are clearly
categorized to be preferred or redeemable shares, the holders of said Class B shares may not be
deprived of their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of
evidence on record to show that Class B shares were categorized as either preferred or redeemable
shares. The only possible conclusion is that Class B shares fall under neither category and thus, under
the law, are allowed to exercise voting rights.

FACTS:
Petitioners and the respondents are stockholders of MCPI, with the former holding Class B shares
and the latter owning Class A shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat, Paraaque City. It was
organized sometime in September 1977. At the time of its incorporation, Act No. 1459, the old Corporation
Law was still in force and effect. Article VII of MCPIs original Articles of Incorporation, as approved by
the Securities and Exchange Commission (SEC) on October 26, 1977, reads as follows:
SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (P2,000,000.00)
PESOS, Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of P100
each share, whereby the ONE THOUSAND SHARES issued to, and subscribed by, the incorporating
stockholders shall be classified as Class A shares while the other ONE THOUSAND unissued
shares shall be considered as Class B shares. ONLY HOLDERS OF CLASS A SHARES CAN HAVE
THE RIGHT TO VOTE AND THE RIGHT TO BE ELECTED AS DIRECTORS OR AS CORPORATE
OFFICERS.
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read thus:
SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION (P5,000,000.00)
PESOS, divided as follows:
CLASS NO. OF SHARES PAR VALUE
A 1,000 P1,000.00
B 4,000 P1,000.00
Only holders of Class A shares have the right to vote and the right to be elected as directors or as
corporate officers.
The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment granted the
right to vote and to be elected as directors or corporate officers only to holders of Class A shares, holders
of Class B stocks were granted the same rights and privileges as holders of Class A stocks with
respect to the payment of dividends.

On September 9, 1992, Article VII was again amended to provide as follows:

SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO MILLION PESOS
(P32,000,000.00) divided as follows:
CLASS NO. OF SHARES PAR VALUE
A 1,000 P1,000.00
B 31,000 1,000.00
Except when otherwise provided by law, only holders of Class A shares have the right to vote and the
right to be elected as directors or as corporate officers. The SEC approved the foregoing amendment on
September 22, 1993.
On February 9, 2001, the shareholders of MCPI held their annual stockholders meeting and election for
directors. During the course of the proceedings, respondent Rustico Jimenez, citing Article VII, as
amended, and notwithstanding MCPIs history, declared over the objections of herein petitioners,
that no Class B shareholder was qualified to run or be voted upon as a director. In the past, MCPI
had seen holders of Class B shares voted for and serve as members of the corporate board and some
Class B share owners were in fact nominated for election as board members. Nonetheless, Jimenez went
on to announce that the candidates holding Class A shares were the winners of all seats in the corporate
board. The petitioners protested, claiming that Article VII was null and void for depriving them, as
Class B shareholders, of their right to vote and to be voted upon , in violation of the Corporation
Code (Batas Pambansa Blg. 68), as amended.
On March 22, 2001, after their protest was given short shrift, herein petitioners filed a Complaint for
Injunction, Accounting and Damages before the RTC of Paraaque City, Branch 258. Said complaint
was founded on two (2) principal causes of action, namely:
a. Annulment of the declaration of directors of the MCPI made during the February 9, 2001 Annual
Stockholders Meeting, and for the conduct of an election whereat all stockholders, irrespective of
the classification of the shares they hold, should be afforded their right to vote and be voted for;
and
b. STOCKHOLDERS DERIVATIVE SUIT CHALLENGING THE VALIDITY OF A CONTRACT entered
into by the Board of Directors of MCPI for the operation of the ultrasound unit.
Subsequently, the complaint was amended to implead MCPI as party-plaintiff for purposes only of the
second cause of action.
Before the trial court, the herein petitioners alleged that they were deprived of their right to vote and to be
voted on as directors at the annual stockholders meeting held on February 9, 2001, because
respondents had erroneously relied on Article VII of the Articles of Incorporation of MCPI, despite
Article VII being contrary to the Corporation Code, thus null and void. Additionally, respondents
were in estoppel, because in the past, petitioners were allowed to vote and to be elected as members of
the board. They further claimed that the privilege granted to the Class A shareholders was more in the
nature of a right granted to founders shares.
In their Answer, the respondents averred that the provisions of Article VII clearly and
categorically state that only holders of Class A shares have the exclusive right to vote and be
elected as directors and officers of the corporation. They denied that the exclusivity was intended
only as a privilege granted to founders shares, as no such proviso is found in the Articles of Incorporation.
The respondents further claimed that the exclusivity of the right granted to Class A holders
cannot be defeated or impaired by any subsequent legislative enactment, e.g. the New Corporation
Code, as the Articles of Incorporation is an intra-corporate contract between the corporation and
its members; between the corporation and its stockholders; and among the stockholders. They
submit that to allow Class B shareholders to vote and be elected as directors would constitute a
violation of MCPIs franchise or charter as granted by the State.
The RTC rendered the Partial Judgment in favor of defendants (election held on February 9, 2001 is
VALID as the holders of CLASS B shares are not entitled to vote and be voted for)
SO ORDERED.[6]

In finding for the respondents, the trial court ruled that corporations had the power to classify
their shares of stocks, such as voting and non-voting shares, conformably with Section 6[7] of the
Corporation Code of the Philippines. It pointed out that Article VII of both the original and amended
Articles of Incorporation clearly provided that only Class A shareholders could vote and be voted
for to the exclusion of Class B shareholders, the exception being in instances provided by law,
such as those enumerated in Section 6, paragraph 6 of the Corporation Code. The RTC found
merit in the respondents theory that the Articles of Incorporation, which defines the rights and
limitations of all its shareholders, is a contract between MCPI and its shareholders. It is thus the
law between the parties and should be strictly enforced as to them. It brushed aside the petitioners claim
that the Class A shareholders were in estoppel, as the election of Class B shareholders to the corporate
board may be deemed as a mere act of benevolence on the part of the officers.
ISSUE: Whether or not holders of Class B shares of the MCPI may be deprived of the right to vote and
be voted for as directors in MCPI?
RULING:
Before us, petitioners assert that Article VII of the Articles of Incorporation of MCPI, which
denied them voting rights, is null and void for being contrary to Section 6 of the Corporation
Code. They point out that Section 6 prohibits the deprivation of voting rights except as to preferred
and redeemable shares only. Hence, under the present law on corporations, all shareholders,
regardless of classification, other than holders of preferred or redeemable shares, are entitled to
vote and to be elected as corporate directors or officers. Since the Class B shareholders are not
classified as holders of either preferred or redeemable shares, then it necessarily follows that they are
entitled to vote and to be voted for as directors or officers.
The respondents, in turn, maintain that the grant of exclusive voting rights to Class A shares is clearly
provided in the Articles of Incorporation and is in accord with Section 5[9] of the Corporation Law (Act No.
1459), which was the prevailing law when MCPI was incorporated in 1977.
We find merit in the petition.
When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the phrase
except when otherwise provided by law was inserted in the provision governing the grant of
voting powers to Class A shareholders. This particular amendment is relevant for it speaks of a law
providing for exceptions to the exclusive grant of voting rights to Class A stockholders. Which law was the
amendment referring to? The determination of which law to apply is necessary. There are two laws being
cited and relied upon by the parties in this case. In this instance, the law in force at the time of the 1992
amendment was the Corporation Code (B.P. Blg. 68), not the Corporation Law (Act No. 1459),
which had been repealed by then.
WE FIND AND SO HOLD THAT THE LAW REFERRED TO IN THE AMENDMENT TO ARTICLE VII
REFERS TO THE CORPORATION CODE AND NO OTHER LAW. At the time of the incorporation of
MCPI in 1977, the right of a corporation to classify its shares of stock was sanctioned by Section 5
of Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of
classification of stock shares to corporations, but with a significant change. Under Section 6 of B.P.
Blg. 68, the requirements and restrictions on voting rights were explicitly provided for, such that
no share may be deprived of voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code and that there shall always be a class or
series of shares which have complete voting rights. Section 6 of the Corporation Code being deemed
written into Article VII of the Articles of Incorporation of MCPI, it necessarily follows that unless Class
B shares of MCPI stocks are clearly categorized to be preferred or redeemable shares, the holders
of said Class B shares may not be deprived of their voting rights. Note that there is nothing in the
Articles of Incorporation nor an iota of evidence on record to show that Class B shares were categorized
as either preferred or redeemable shares. The only possible conclusion is that Class B shares fall under
neither category and thus, under the law, are allowed to exercise voting rights.
One of the rights of a stockholder is the right to participate in the control and management
of the corporation that is exercised through his vote. The RIGHT TO VOTE IS A RIGHT INHERENT
IN AND INCIDENTAL TO THE OWNERSHIP OF CORPORATE STOCK, and AS SUCH IS A
PROPERTY RIGHT. The stockholder cannot be deprived of the right to vote his stock nor may the right
be essentially impaired, either by the legislature or by the corporation, without his consent, through
amending the charter, or the by-laws.
Neither do we find merit in respondents position that Section 6 of the Corporation Code cannot apply to
MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 148[12] of the
Corporation Code expressly provides that it shall apply to corporations in existence at the time of
the effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance.
When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors
and stockholders must have been aware of Section 6 of the Corporation Code and intended that Article
VII be construed in harmony with the Code, which was then already in force and effect. Since Section 6
of the Corporation Code expressly prohibits the deprivation of voting rights, except as to
preferred and redeemable shares, then Article VII of the Articles of Incorporation cannot be
construed as granting exclusive voting rights to Class A shareholders, to the prejudice of Class B
shareholders, without running afoul of the letter and spirit of the Corporation Code.
WHEREFORE, the petition is GRANTED.
G.R. No. 176579, June 28, 2011

WILSON P. GAMBOA, Petitioner, - versus - FINANCE SECRETARY MARGARITO B. TEVES, FINANCE

UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR
AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM
OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC
CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, CHAIR FE BARIN OF THE SECURITIES EXCHANGE COMMISSION, and PRESIDENT
FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE,Respondents. PABLITO V. SANIDAD an
ARNO V. SANIDAD, Petitioners-in-Intervention.

CARPIO, J.:

FACTS:

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the sale
of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate
of First Pacific Company Limited (First Pacific).

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone
Company (PLDT), are as follows:

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a
franchise and the right to engage in telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent of
the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated
by several persons. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by
virtue of three Deeds of Assignment executed by PTIC stockholders.

In 1986, the 111,415 shares of stock of PTIC held by PHI were sequestered by the
Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent
about 46.125 percent of the outstanding capital stock of PTIC, were later declared by this Court to
be owned by the Republic of the Philippines.

In 1999, FIRST PACIFIC, A BERMUDA-REGISTERED, HONG KONG-BASED INVESTMENT

FIRM, acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20 November
2006, the Inter-Agency Privatization Council (IPC) of the Philippine Government announced that it
would sell the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
through a public bidding. Only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First
Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC
itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares,
or 46.125 percent of the outstanding capital stock of PTIC, with the Philippine Government for the price of
P25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of
PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the
outstanding common shares of PLDT. With the sale, First Pacifics common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the common shareholdings of
foreigners in PLDT to about 81.47 percent. This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility to not more than 40
percent.

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P.
Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of
investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT
outstanding common shares. PHI, on the other hand, was incorporated in 1977, and became the owner of
111,415 PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds
of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares
held by PHI were sequestered by the PCGG, and subsequently declared by this Court as part of the ill-
gotten wealth of former President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to
the Republic of the Philippines in accordance with this Courts decision. The Philippine Government
decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the outstanding common shares
of stock of PLDT, and designated the Inter-Agency Privatization Council (IPC), composed of the
Department of Finance and the PCGG, as the disposing entity.

Parallax Capital Management LP emerged as the highest bidder with a bid of P25,217,556,000. The
government notified First Pacific, the majority owner of PTIC shares, of the bidding results and gave First
Pacific until 1 February 2007 to exercise its right of first refusal in accordance with PTICs Articles of
Incorporation. First Pacific announced its intention to match Parallaxs bid. The House of Representatives
(HR) Committee on Good Government conducted a public hearing on the particulars of the then
impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270 concluded that: (a) the auction of the
governments 111,415 PTIC shares bore due diligence, transparency and conformity with existing legal
procedures; and (b) First Pacifics intended acquisition of the governments 111,415 PTIC shares
resulting in First Pacifics 100% ownership of PTIC will not violate the 40 percent constitutional
limit on foreign ownership of a public utility since PTIC holds only 13.847 percent of the total
outstanding common shares of PLDT. On 28 February 2007, First Pacific completed the acquisition of
the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for
the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54
percent of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax offered the
highest bid amounting to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right
of first refusal by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on 28
February 2007, the sale was consummated when MPAH paid IPC P25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other
allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and
declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of
the 111,415 PTIC shares would result in an increase in First Pacifics common shareholdings in
PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMos common
shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56
percent which is over the 40 percent constitutional limit. Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7 percent to 37.0
percent of its common or voting- stockholdings, x x x. Hence, the consummation of the sale will put the
two largest foreign investors in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds largest
wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With the
completion of the sale, data culled from the official website of the New York Stock Exchange
(www.nyse.com) showed that those foreign entities, which own at least five percent of common equity, will
collectively own 81.47 percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT submitted
to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific and several other
foreign entities breached the constitutional limit of 40 percent ownership as early as 2003. x x x7

Petitioner raises the following issues:

(1) whether the consummation of the then impending sale of 111,415 PTIC shares to First Pacific
violates the constitutional limit on foreign ownership of a public utility;

(2) whether public respondents committed grave abuse of discretion in allowing the sale of the 111,415
PTIC shares to First Pacific; and

(3) whether the sale of common shares to foreigners in excess of 40 percent of the entire
subscribed common capital stock violates the constitutional limit on foreign ownership of a public
utility.

RULING:

In the present case, petitioner seeks primarily the interpretation of the term capital in Section 11,
Article XII of the Constitution. He prays that this Court declare that the term capital refers to common
shares only, and that such shares constitute the sole basis in determining foreign equity in a
public utility. Petitioner further asks this Court to declare any ruling inconsistent with such interpretation
unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the Constitution has far-
reaching implications to the national economy. In fact, a resolution of this issue will determine
whether Filipinos are masters, or second class citizens, in their own country.

Definition of the Term Capital in Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned
by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least sixty per centum of the capital of which is owned by such citizens, nor
shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the National Assembly when the public interest so requires.
The State shall encourage equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate
share in the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz

Section 8. No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or other entities organized under
the laws of the Philippines sixty per centum of the capital of which is owned by citizens of the Philippines,
nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. No franchise or right shall be granted to any individual, firm, or corporation, except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the public
interest so requires. (Emphasis supplied)

The 1987 Constitution provides for the Filipinization of public utilities by requiring that any
form of authorization for the operation of public utilities should be granted only to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least
sixty per centum of whose capital is owned by such citizens. The provision is [an express]
recognition of the sensitive and vital position of public utilities both in the national economy and for
national security. The evident purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the national interest. This specific
provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding
economic goal of the 1987 Constitution: to conserve and develop our patrimony and ensure a self-reliant
and independent national economy effectively controlled by Filipinos.

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a
corporation to be granted authority to operate a public utility, at least 60 percent of its capital
must be owned by Filipino citizens.

The crux of the controversy is the DEFINITION OF THE TERM CAPITAL. Does the term capital in
Section 11, Article XII of the Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to
common shares because such shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term capital in Section 11, Article XII of the Constitution
refers to the ownership of common capital stock subscribed and outstanding, which class of shares
alone, under the corporate set-up of PLDT, can vote and elect members of the board of directors.

It is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino citizens. This arose
from Presidential Decree No. 217,31 issued on 16 June 1973 by then President Ferdinand Marcos,
requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to pay for
the investment cost of installing the telephone line.

Respondents, on the other hand, do not offer any definition of the term capital in Section 11,
Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do
not dispute that more than 40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the affected
foreign common shareholders. Respondent Nazareno does not deny petitioners allegation of foreigners
dominating the common shareholdings of PLDT. Nazareno stressed mainly that the petition seeks to
divest foreign common shareholders purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares. Thus, the foreign natural and juridical
PLDT shareholders must be impleaded in this suit so that they can be heard. Essentially, Nazareno
invokes denial of due process on behalf of the foreign common shareholders.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of
record of PLDT, contended that the term capital in the 1987 Constitution refers to shares entitled to vote
or the common shares. Fernandez explained thus: The forty percent (40%) foreign equity limitation in
public utilities prescribed by the Constitution refers to ownership of shares of stock entitled to
vote, i.e., common shares, considering that it is through voting that control is being exercised. x x

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by
the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to
petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements between the foreign principals and the
Filipino owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the
Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word capital as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder and
it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot stand in the
face of a clear legislative policy as stated in the FIA which took effect in 1991 or way after said opinions
were rendered, and as clarified by the above-quoted Amendments. In this regard, suffice it to state that as
between the law and an opinion rendered by an administrative agency, the law indubitably prevails.
Moreover, said Opinions are merely advisory and cannot prevail over the clear intent of the framers of the
Constitution.

COURTS RULING:

We agree with petitioner and petitioners-in-intervention. THE TERM CAPITAL IN SECTION 11, ARTICLE
XII OF THE CONSTITUTION REFERS ONLY TO SHARES OF STOCK ENTITLED TO VOTE IN THE
ELECTION OF DIRECTORS, and thus in the present case only to COMMON SHARES, and NOT TO
THE TOTAL OUTSTANDING CAPITAL STOCK COMPRISING BOTH COMMON AND NON-VOTING
PREFERRED SHARES.

The Corporation Code of the Philippines classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or
series of shares, or both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as preferred or redeemable shares, unless otherwise
provided in this Code: Provided, further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of
the assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The
Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration less than the value of five (P5.00)
pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par
value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation. In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely investors in the corporation for income
in the same manner as bondholders. In fact, under the Corporation Code only preferred or redeemable
shares can be deprived of the right to vote. Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid.

Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in Section 11,
Article XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term capital shall include such
preferred shares because the right to participate in the control or management of the corporation
is exercised through the right to vote in the election of directors. In short, the term capital in Section
11, Article XII of the Constitution refers only to SHARES OF STOCK THAT CAN VOTE IN THE
ELECTION OF DIRECTORS.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of
Filipino citizens the control and management of public utilities. As revealed in the deliberations of the
Constitutional Commission, CAPITAL REFERS TO THE VOTING STOCK OR CONTROLLING
INTEREST OF A CORPORATION,

Thus, 60 percent of the capital assumes, or should result in, controlling interest in the corporation.
Reinforcing this interpretation of the term capital, as referring to controlling interest or shares
entitled to vote, is the definition of a Philippine national in the Foreign Investments Act of 1991, to
wit:

SEC. 3. Definitions. - As used in this Act:

a. The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad
and registered as doing business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to
the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of
Directors of each of both corporations must be citizens of the Philippines, in order that the corporation,
shall be considered a Philippine national. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing Rules and Regulations of the
Foreign Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or association
wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent
[60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a corporation
its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC] registered
enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent [60%] of the
members of the Board of Directors of each of both corporation must be citizens of the Philippines, in order
that the corporation shall be considered a Philippine national. The control test shall be applied for this
purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the basis
of outstanding capital stock whether fully paid or not, but only such stocks which are generally
entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-
Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of
the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such
higher percentage as Congress may prescribe, certain areas of investments. Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty
percent of the capital of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of
Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section 11, Article XII of the Constitution is
also used in the same context in numerous laws reserving certain areas of investments to Filipino
citizens.

To construe broadly the term capital as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos. A broad definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us assume that a
corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares
owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under
the broad definition of the term capital, such corporation would be considered compliant with the 40
percent constitutional limit on foreign equity of public utilities since the overwhelming majority, or more
than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999
percent of the equity, cannot vote in the election of directors and hence, have no control over the public
utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language
of the Constitution, to place the control of public utilities in the hands of Filipinos. It also renders illusory
the State policy of an independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the present
case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of
directors. PLDTs Articles of Incorporation expressly state that the holders of Serial Preferred
Stock shall not be entitled to vote at any meeting of the stockholders for the election of directors
or for any other purpose or otherwise participate in any action taken by the corporation or its
stockholders, or to receive notice of any meeting of stockholders.51

On the other hand, holders of common shares are granted the exclusive right to vote in the
election of directors. PLDTs Articles of Incorporation state that each holder of Common Capital Stock
shall have one vote in respect of each share of such stock held by him on all matters voted upon by the
stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the
election of directors and for all other purposes.

In short, only holders of common shares can vote in the election of directors, meaning only
common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who
have no voting rights in the election of directors, do not have any control over PLDT. In fact, under
PLDTs Articles of Incorporation, holders of common shares have voting rights for all purposes,
while holders of preferred shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common
shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS),54 which is a document
required to be submitted annually to the Securities and Exchange Commission,55 foreigners hold
120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares.

In other words, foreigners hold 64.27% of the total number of PLDTs common shares, while
Filipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is
clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the
allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article
XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per share
the SIP58 preferred shares earn a pittance in dividends compared to the common shares. PLDT declared
dividends for the common shares at P70.00 per share, while the declared dividends for the preferred
shares amounted to a measly P1.00 per share.59 So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend earning capacity
compared to common shares.

As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is
P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred
shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the
dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while
foreigners own only a minuscule 0.56% of the preferred shares.61 Worse, preferred shares constitute
77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%.62 This
undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the
common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the States grant of authority to operate a public utility. The undisputed
fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to x x x corporations x x x organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own
only 35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn;63 (5) preferred shares have
twice the par value of common shares; and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public
utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market
value of P2,328.00 per share,64 while PLDT preferred shares with a par value of P10.00 per share have
a current stock market value ranging from only P10.92 to P11.06 per share,65 is a glaring confirmation by
the market that control and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.

Indisputably, construing the term capital in Section 11, Article XII of the Constitution to include
both voting and non-voting shares will result in the abject surrender of our telecommunications
industry to foreigners, amounting to a clear abdication of the States constitutional duty to limit
control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the
constitutional provision reserving certain areas of investment to Filipino citizens, such as the exploitation
of natural resources as well as the ownership of land, educational institutions and advertising businesses.
The Court should never open to foreign control what the Constitution has expressly reserved to Filipinos
for that would be a betrayal of the Constitution and of the national interest. The Court must perform its
solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words of the
Constitution, a self-reliant and independent national economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the development of natural resources and ownership of
land, educational institutions and advertising business, is self-executing. There is no need for legislation
to implement these self-executing provisions of the Constitution.

This Court has held that the SEC has both regulatory and adjudicative functions.69 Under its regulatory
functions, the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully
neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be
compelled by mandamus to hear and decide a possible violation of any law it administers or enforces
when it is mandated by law to investigate such violation.

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where the required percentage of ownership of
the capital stock to be owned by citizens of the Philippines has not been complied with as required by
existing laws or the Constitution. Thus, the SEC is the government agency tasked with the statutory duty
to enforce the nationality requirement prescribed in Section 11, Article XII of the Constitution on the
ownership of public utilities. This Court, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, can direct the SEC to perform its statutory duty under the law, a duty
that the SEC has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the power and function
to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law. The SEC is
mandated under Section 5(d) of the same Code with the power and function to investigate x x x the
activities of persons to ensure compliance with the laws and regulations that SEC administers or
enforces. The GIS that all corporations are required to submit to SEC annually should put the SEC on
guard against violations of the nationality requirement prescribed in the Constitution and existing laws.
This Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of Section 11, Article XII
of the Constitution in view of the ownership structure of PLDTs voting shares, as admitted by
respondents and as stated in PLDTs 2010 GIS that PLDT submitted to SEC.
G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners, vs. FINANCE SECRETARY MARGARITO B. TEVES,

FINANCE UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF
THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS
CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI
SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC
CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents. PABLITO V.
SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

DOCTRINE: The Constitution expressly declares as State policy the development of an economy
"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves
the ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations AT LEAST 60 PERCENT OF
WHOSE CAPITAL WITH VOTING RIGHTS belongs to Filipinos. The FIAs implementing rules explain that
"[F]OR STOCKS TO BE DEEMED OWNED AND HELD BY PHILIPPINE CITIZENS OR PHILIPPINE
NATIONALS, MERE LEGAL TITLE IS NOT ENOUGH TO MEET THE REQUIRED FILIPINO
EQUITY. FULL BENEFICIAL OWNERSHIP OF THE STOCKS, COUPLED WITH APPROPRIATE
VOTING RIGHTS IS ESSENTIAL." In effect, the FIA clarifies, reiterates and confirms the interpretation
that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting
rights, as well as with full beneficial ownership. This is precisely because the right to vote in the
election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a
corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the
letter and intent of the Constitution. Any other meaning of the term "capital" openly invites alien
domination of economic activities reserved exclusively to Philippine nationals. Therefore, respondents
interpretation will ultimately result in handing over effective control of our national economy to foreigners
in patent violation of the Constitution, making Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment,
which gave Americans the same rights as Filipinos in the exploitation of natural resources, and in the
ownership and control of public utilities, in the Philippines. To do this the 1935 Constitution, which
contained the same 60 percent Filipino ownership and control requirement as the present 1987
Constitution, had to be amended to give Americans parity rights with Filipinos. There was bitter opposition
to the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one
of the American-controlled public utilities that became Filipino-controlled when the controlling American
stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July 1974. 63 No
economic suicide happened when control of public utilities and mining corporations passed to Filipinos
hands upon expiration of the Parity Amendment.

Movants interpretation of the term "capital" would bring us back to the same evils spawned by the Parity
Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without
any amendment to the present Constitution. Worse, movants interpretation opens up our national
economy toeffective control not only by Americans but also by all foreigners, be they Indonesians,
Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos
theoretical parity the same rights as Americans to exploit natural resources, and to own and control
public utilities, in the United States of America. Here, movants interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without any reciprocal
arrangements. That would mean that Indonesians, Malaysians and Chinese nationals could effectively
control our mining companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control
requirement for public utilities like PLOT. Any deviation from this requirement necessitates an amendment
to the Constitution as exemplified by the Parity Amendment. This Court has no power to amend the
Constitution for its power and duty is only to faithfully apply and interpret the Constitution.

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine
Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno
(Nazareno ),3and ( 4) the Securities and Exchange Commission (SEC) 4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe
SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Comment on
behalf of the State,6declaring expressly that it agrees with the Court's definition of the term "capital" in
Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the OSG
reiterated its position consistent with the Court's 28 June 2011 Decision. WE DENY THE MOTIONS FOR
RECONSIDERATION.

No change of any long-standing rule; thus, no redefinition of the term "capital."

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term
"capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never
been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987 Constitutions, until
now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining the term "capital"
in its 28 June 2011 Decision modified, reversed, or set aside the purported long-standing definition of the
term "capital," which supposedly refers to the total outstanding shares of stock, whether voting or non-
voting. The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of
the term "capital" as referring to both voting and non-voting shares (combined total of common
and preferred shares) are, in the first place, conflicting and inconsistent. There is no basis
whatsoever to the claim that the SEC and the DOJ have consistently and uniformly adopted a definition of

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the VOTING
CONTROL TEST, that is, using only the voting stock to determine whether a corporation is a Philippine
national. The Opinion states: Applying the foregoing, particularly the Control Test, MLRC is deemed as
a Philippine national because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is
owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to
the benefit of Philippine nationals. Still pursuant to the Control Test, MLRCs investment in 60% of
BFDCs outstanding capital stock entitled to vote shall be deemed as of Philippine nationality,
thereby qualifying BFDC to own private land.

Clearly, these DOJ and SEC opinions are compatible with the Courts interpretation of the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic
activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent
positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic
provisions of the Constitution.

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of the SEC, has adopted even the GRANDFATHER RULE in determining compliance
with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
diminish that right through the legal fiction of corporate ownership and control. But the
constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners
contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined
by ascertaining if 60% of the investing corporations outstanding capital stock is owned by
"Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such investing
corporation is in turn owned to some extent by another investing corporation, the same process must be
observed. One must not stop until the citizenships of the individual or natural stockholders of
layer after layer of investing corporations have been established, the very essence of the
Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In
one of the discussions on what is now Article XII of the present Constitution.

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in
favor of Filipino citizens in the Constitution to engage in certain economic activities applies not only to
voting control of the corporation, but also to the beneficial ownership of the corporation. Thus, in our
28 June 2011 Decision we stated:

MERE LEGAL TITLE IS INSUFFICIENT TO MEET THE 60 PERCENT FILIPINO OWNED "CAPITAL"
REQUIRED IN THE CONSTITUTION. FULL BENEFICIAL OWNERSHIP OF 60 PERCENT of the
outstanding capital stock, COUPLED WITH 60 PERCENT OF THE VOTING RIGHTS, IS REQUIRED.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is
"considered as non-Philippine national[s]." (Emphasis supplied)

BOTH THE VOTING CONTROL TEST AND THE BENEFICIAL OWNERSHIP TEST must be applied to
determine whether a corporation is a "Philippine national."

The Courts interpretation in these two cases of the terms "capital stock subscribed or paid," "capital
stock" and "capital" does not pertain to, and cannot control, the definition of the term "capital" as used in
Section 11, Article XII of the Constitution, or any of the economic provisions of the Constitution where the
term "capital" is found. The definition of the term "capital" found in the Constitution must not be taken out
of context. A careful reading of these two cases reveals that the terms "capital stock subscribed or paid,"
"capital stock" and "capital" were defined solely to determine the basis for computing the supervision and
regulation fees under Section 40(e) and (f) of the Public Service Act

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the
ideals that the Constitution intends to achieve. The Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane
society, and establish a Government that shall embody our ideals and aspirations, promote the common
good, conserve and develop our patrimony, and secure to ourselves and our posterity, the blessings of
independence and democracy under the rule of law and a regime of truth, justice, freedom, love, equality,
and peace, do ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the
development of a national economy "effectively controlled" by Filipinos:

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such citizens,
or such higher percentage as Congress may prescribe, certain areas of investments. The Congress
shall enact measures that will encourage the formation and operation of enterprises whose capital is
wholly owned by Filipinos. In the grant of rights, privileges, and concessions covering the national
economy and patrimony, the State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and
in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus, in
numerous laws Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or
R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or
R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned
by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of
authorization for the operation of public utilities shall be granted only to "citizens of the Philippines or
TO CORPORATIONS OR ASSOCIATIONS ORGANIZED UNDER THE LAWS OF THE PHILIPPINES AT
LEAST SIXTY PER CENTUM OF WHOSE CAPITAL IS OWNED BY SUCH CITIZENS." "The provision
is [an express] recognition of the sensitive and vital position of public utilities both in the national
economy and for national security."
The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino
citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned by Filipino
citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a public
utility. In the case of corporations or associations, at least 60 percent of their "capital" must be owned by
Filipino citizens. In other words, under Section 11, Article XII of the 1987 Constitution, to own and
operate a public utility a corporations capital must at least be 60 percent owned by Philippine
nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted
Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which defined a
"Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a CORPORATION ORGANIZED UNDER
THE LAWS OF THE PHILIPPINES of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation
organized abroad and registered as doing business in the Philippines under the Corporation Code of
which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned
by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a "Philippine national." (Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a
domestic corporation at least "60% of the capital stock outstanding and entitled to vote" is owned by
Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its
predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,25 which was
issued by then President Corazon C. Aquino. Article 15 of this Code states:

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a
Philippine national x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the
effect that such business or economic activity x x x would not conflict with the Constitution or laws of the
Philippines."27Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like
a public utility. This means, of course, that only a "Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987
was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code
of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent
(60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held
by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the corporation shall be
considered a Philippine national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a
Philippine national x x x shall do business x x x in the Philippines x x x without first securing a written
certificate from the Board of Investments to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines." 29 Thus, a "non-Philippine national"
cannot own and operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or
a domestic corporation "at least sixty percent (60%) of the capital stock outstanding and entitled
to vote"is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at
least 60% of its voting stock is owned by Filipino citizens. This definition of a "Philippine national" is
crucial in the present case because the FIA reiterates and clarifies Section 11, Article XII of the 1987
Constitution, which limits the ownership and operation of public utilities to Filipino citizens or to
corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of
business and area of investment. The FIA spells out the procedures by which non-Philippine nationals
can invest in the Philippines. Among the key features of this law is the concept of a negative list or the
Foreign Investments Negative List.32 Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative
List]. - The Foreign Investment Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the
Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the Department of
National Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or
distribution of firearms, ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and
similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of
dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam
bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign
Investment Negative List A consists of "areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws," where foreign equity participation in any
enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution
and other specific laws. In short, to own and operate a public utility in the Philippines one must be
a "Philippine national" as defined in the FIA. The FIA is abundant notice to foreign investors to
what extent they can invest in public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the
ownership and operation of public utilities, which the Constitution expressly reserves to Filipino citizens
and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of the FIA
reserves the ownership and operation of public utilities only to "Philippine nationals," defined in
Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a
corporation organized abroad and registered as doing business in the Philippines under the Corporation
Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus
Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the
passage of the present Foreign Investments Act of 1991, or for more than four decades, the statutory
definition of the term "Philippine national" has been uniform and consistent: it means a Filipino
citizen, or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise,
these same statutes have uniformly and consistently required that only "Philippine nationals"
could own and operate public utilities in the Philippines. The following exchange during the Oral
Arguments is revealing:

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of public utilities,
are reserved to corporations "at least sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A refers to
"activities reserved to Philippine nationals by mandate of the Constitution and specific laws." The FIA is
the basic statute regulating foreign investments in the Philippines. Government agencies tasked
with regulating or monitoring foreign investments, as well as counsels of foreign investors, should start
with the FIA in determining to what extent a particular foreign investment is allowed in the Philippines.
Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and
their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at
their own peril.

The SEC legal officers occasional but blatant disregard of the definition of the term "Philippine national" in
the FIA signifies their lack of integrity and competence in resolving issues on the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to
engage in certain economic activities applies not only to voting control of the corporation, but also to the
beneficial ownership of the corporation. To repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. FULL BENEFICIAL OWNERSHIP OF 60 PERCENT OF THE OUTSTANDING CAPITAL
STOCK, COUPLED WITH 60 PERCENT OF THE VOTING RIGHTS, IS REQUIRED . The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional mandate. Otherwise, the corporation is "considered as
non-Philippine national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by
"a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a
Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting
control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative
that such requirement apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital
stock35 consists of all classes of shares issued to stockholders, that is, common shares as well as
preferred shares, which may have different rights, privileges or restrictions as stated in the articles of
incorporation.36

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the
shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the Constitution must apply not only to shares with voting rights but also to shares without voting
rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to
vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a
partially nationalized industry, issues a mixture of common and preferred non-voting shares, at
least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares
must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the
constitutional command that the ownership and operation of public utilities shall be reserved exclusively to
corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in
voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as
mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in public
utilities always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinans worry
that foreigners, owning most of the non-voting shares, will exercise greater control over fundamental
corporate matters requiring two-thirds or majority vote of all shareholders.

VI.
Intent of the framers of the Constitution

It is clear from the following exchange that the term "capital" refers to controlling interest of a
corporation.

1987 Consti delibs: THUS, 60 PERCENT OF THE "CAPITAL" ASSUMES, OR SHOULD RESULT IN, A
"CONTROLLING INTEREST" IN THE CORPORATION.

The use of the term "capital" was intended to replace the word "stock" because associations without
stocks can operate public utilities as long as they meet the 60-40 ownership requirement in favor of
Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not change the
intent of the framers of the Constitution to reserve exclusively to Philippine nationals the "controlling
interest" in public utilities.

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding
capital stock, treated as a single class regardless of the actual classification of shares, grossly
contravenes the intent and letter of the Constitution that the "State shall develop a self-reliant and
independent national economyeffectively controlled by Filipinos.

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board
of directors, this situation does not guarantee Filipino control and does not in any way cure the violation of
the Constitution. The independence of the Filipino board members so elected by such foreign
shareholders is highly doubtful. As the OSG pointed out, quoting Justice George Sutherlands words
in Humphreys Executor v. US,44 "x x x it is quite evident that one who holds his office only during the
pleasure of another cannot be depended upon to maintain an attitude of independence against the latters
will." Allowing foreign shareholders to elect a controlling majority of the board, even if all the directors are
Filipinos, grossly circumvents the letter and intent of the Constitution and defeats the very purpose of our
nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads: The participation of foreign
investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the
common shares of PLDT, which class of shares exercises the sole right to vote in the election of
directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3) preferred shares,
99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends
that common shares earn;50 (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the
question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the 1987 Constitution. Such question indisputably calls for a presentation and
determination of evidence through a hearing, which is generally outside the province of the Courts
jurisdiction, but well within the SECs statutory powers. Thus, for obvious reasons, the Court limited its
decision on the purely legal and threshold issue on the definition of the term "capital" in Section 11, Article
XII of the Constitution and directed the SEC to apply such definition in determining the exact percentage
of foreign ownership in PLDT.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a
sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring new
foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision may result in
the following: (1) loss of more than P 630 billion in foreign investments in PSE-listed shares; (2) massive
decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors not
investing in PSE-listed shares.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application
and imposition of appropriate sanctions against PLDT if found violating Section 11, Article XII of the
Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated
Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after the SEC has
determined PLDTs violation, if any exists at the time of the commencement of the administrative
case or investigation, that the SEC may impose the statutory sanctions against PLDT. In other
words, once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriate
sanctions only if it finds after due hearing that, at the start of the administrative case or
investigation, there is an existing violation of Section 11, Article XII of the Constitution. Under
prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under Section
11, Article XII and the FIA can cure their deficiencies prior to the start of the administrative case or
investigation.

INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS and ASIA
INDUSTRIES, INC., respondents.

FACTS:

Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase Agreement[3] (the Agreement), sold to Asia
Industries, Inc. (private respondent) for and in consideration of the sum of P19,500,000.00 all its
RIGHT, TITLE AND INTEREST IN AND TO ALL THE OUTSTANDING SHARES OF STOCK OF
FARMACOR, INC. (FARMACOR).

Under paragraph 7 of the Agreement, petitioner as seller made warranties and representations
among which were (iv.) [t]he audited financial statements of FARMACOR at and for the year ended
December 31, 1977... and the audited financial statements of FARMACOR as of September 30, 1978
being prepared by S[ycip,] G[orres,] V[elayo and Co.]... fairly present or will present the financial
position of FARMACOR and the results of its operations as of said respective dates; said financial
statements show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of
said respective dates . . .; and (v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of
September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00).

The Agreement, as amended, provided that pending submission by SGV of FARMACORs audited
financial statements as of October 31, 1978, private respondent may retain the sum of
P7,500,000.00 out of the stipulated purchase price of P19,500,000.00; that from this retained amount of
P7,500,000.00, private respondent may deduct any shortfall on the Minimum Guaranteed Net
Worth of P12,000,000.00; and that if the amount retained is not sufficient to make up for the deficiency in
the Minimum Guaranteed Net Worth, petitioner shall pay the difference within 5 days from date of receipt
of the audited financial statements. Respondent paid petitioner a total amount of P 12,000,000.00:
P5,000,000.00 upon the signing of the Agreement, and P7,000,000.00 on November 2, 1978.

From the STATEMENT OF INCOME AND DEFICIT attached to the financial report[11] dated November
28, 1978 submitted by SGV, it appears that FARMACOR had, for the ten months ended October 31,
1978, a deficit of P11,244,225.00.[12] Since the stockholders equity amounted to P10,000,000.00,
FARMACOR had a net worth deficiency of P1,244,225.00. The guaranteed net worth shortfall thus
amounted to P13,244,225.00 after adding the net worth deficiency of P1,244,225.00 to the Minimum
Guaranteed Net Worth of P12,000,000.00.
The adjusted contract price, therefore, amounted to P6,225,775.00 which is the difference between
the contract price of P19,500,000.00 and the shortfall in the guaranteed net worth of
P13,224,225.00. PRIVATE RESPONDENT HAVING ALREADY PAID PETITIONER P12,000,000.00, IT
WAS ENTITLED TO A REFUND OF P5,744,225.00.

Petitioner thereafter proposed, by letter[13] of January 24, 1980, signed by its president, that
private respondents claim for refund be reduced to P4,093,993.00, it promising to pay the cost of
the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the amount of P759,570.00. To
the proposal respondent agreed. Petitioner, however, weiched on its promise. Petitioners total liability thus
stood at P4,853,503.00 (P4,093,993.00 plus P759,570.00)[14] exclusive of interest.[15]

On April 5, 1983, private respondent filed a complaint against petitioner with the Regional Trial Court of
Makati, one of two causes of action of which was for the recovery of above-said amount of
P4,853,503.00[17] plus interest. Denying private respondents claim, petitioner countered that
private respondent failed to pay the balance of the purchase price and accordingly set up a
counterclaim. Finding for private respondent, the trial court rendered a decision: WHEREFORE,
judgment is rendered in favor of plaintiff and against defendant (a) ordering the latter to pay to the former
the sum of P4,853,503.00[19] plus interest thereon at the legal rate from the filing of the complaint until
fully paid, the sum of P30,000.00 as attorneys fees and the costs of suit; and (b) dismissing the
counterclaim. The Court of Appeals affirmed the trial courts decision.

ISSUE: Whether the letter of the president of the petitioner is binding on the petitioner being ultra vires?

RULING:

Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of private
respondents claim for refund upon petitioners promise to pay the cost of NOCOSII
superstructures in the amount of P759,570.00) which WAS SIGNED BY ITS PRESIDENT HAS NO
LEGAL FORCE AND EFFECT AGAINST IT AS IT WAS NOT AUTHORIZED BY ITS BOARD OF
DIRECTORS, it CITING THE CORPORATION LAW WHICH PROVIDES THAT UNLESS THE ACT OF
THE PRESIDENT IS AUTHORIZED BY THE BOARD OF DIRECTORS, the same is not binding on it.

This Court is not persuaded. The January 24, 1980 letter signed by petitioners president is valid
and binding. The case of Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals instructs:

The general rule is that, in the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its
stockholders and members, having x x x powers, attributes and properties expressly authorized by law or
incident to its existence.

Being a juridical entity, a corporation may act through its board of directors, which exercises
almost all corporate powers, lays down all corporate business policies and is responsible for the
efficiency of management, as provided in Section 23 of the Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and
all property of such corporations controlled and held by the board of directors or trustees x x x.

Under this provision, the power and responsibility to decide whether the corporation should enter
into a contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However, JUST AS A NATURAL PERSON MAY
AUTHORIZE ANOTHER TO DO CERTAIN ACTS FOR AND ON HIS BEHALF, THE BOARD OF
DIRECTORS MAY VALIDLY DELEGATE SOME OF ITS FUNCTIONS AND POWERS TO OFFICERS,
COMMITTEES OR AGENTS. The authority of such individuals to bind the corporation is generally derived
from law, corporate by laws or authorization from the board, either expressly or impliedly by habit, custom
or acquiescence in the general course of business, viz:

A CORPORATE OFFICER OR AGENT MAY REPRESENT AND BIND THE CORPORATION in

transactions with third persons TO THE EXTENT THAT [THE] AUTHORITY TO DO SO HAS BEEN
CONFERRED UPON HIM, and THIS INCLUDES POWERS AS, IN THE USUAL COURSE OF THE
PARTICULAR BUSINESS, ARE INCIDENTAL TO, OR MAY BE IMPLIED FROM, THE POWERS
INTENTIONALLY CONFERRED, POWERS ADDED BY CUSTOM AND USAGE, as usually pertaining to
the particular officer or agent, and such apparent powers as the corporation has caused person dealing
with the officer or agent to believe that it has conferred.

xxx

[A]pparent authority is derived not merely from practice. Its existence may be ascertained through (1) the
general manner in which the corporation holds out an officer or agent as having the power to act or, in
other words the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in
his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope
of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or
in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the
vesting of a corporate officer with power to bind the corporation.

x x x (Emphasis and underscoring supplied)

As correctly argued by private respondent, an officer of a corporation who is authorized to

purchase the stock of another corporation HAS THE IMPLIED POWER to perform all other
obligations arising therefrom, such as payment of the shares of stock. By allowing its president to
sign the Agreement on its behalf, petitioner clothed him with apparent capacity to perform all acts which
are expressly, impliedly and inherently stated therein.

WHEREFORE, the instant petition is PARTLY GRANTED.

G.R. No. 147590 April 2, 2007

ANTONIO C. CARAG, Petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION, ISABEL G.

PANGANIBAN-ORTIGUERRA, as Executive Labor Arbiter, NAFLU, and MARIVELES APPAREL
CORPORATION LABOR UNION, Respondents.

FACTS:

National Federation of Labor Unions (NAFLU) and Mariveles Apparel Corporation Labor Union (MACLU)
(collectively, complainants), on behalf of all of MAC's rank and file employees, filed a complaint against
MAC for illegal dismissal brought about by its illegal closure of business. In their complaint dated 12
August 1993, complainants alleged the following:

That on July 8, 1993, without notice of any kind filed in accordance with pertinent provisions of
the Labor Code, [MAC], for reasons known only by herself [sic] ceased operations with the intention of
completely closing its shop or factory. Such intentions [sic] was manifested in a letter, allegedly
claimed by [MAC] as its notice filed only on the same day that the operations closed. That at the
time of closure, employees who have rendered one to two weeks work were not paid their
corresponding salaries/wages, which remain unpaid until time [sic] of this writing.

That there are other benefits than those above-mentioned which have been unpaid by [MAC] at
the time it decided to cease operations, benefits gained by the workers both by and under the CBA and by
operations [sic] of law.
In their position paper dated 3 January 1994, complainants moved to implead Carag and David, as
follows:

x x x x In the present case, it is unfortunate for respondents that the records and evidence clearly
demonstrate that the individual complainants are entitled to the reliefs prayed for in their complaint.
However, any favorable judgment the Honorable Labor Arbiter may render in favor of herein complainants
will go to naught should the Office fails [sic] to appreciate the glaring fact that the respondents [sic]
corporation is no longer existing as it suddenly stopped business operation since [sic] 8 July 1993. Under
this given circumstance, the complainants have no option left but to implead Atty. ANTONIO
CARAG, in his official capacity as Chairman of the Board along with MR. ARMANDO DAVID as
President. BOTH ARE ALSO OWNERS OF THE RESPONDENT CORPORATION with office address at
10th Floor, Gamon Centre, Alfaro Street, Salcedo Village[,] Makati[,] Metro Manila although they may be
collectively served with summons and other legal processes through counsel of record Atty. Joshua
Pastores of 8th Floor, Hanston Bldg., Emerald Avenue, Ortigas[,] Pasig, Metro Manila. This inclusion of
individual respondents as party respondents in the present case is to guarantee the satisfaction of any
judgment award on the basis of Article 212(c) of the Philippine Labor Code.

If the employer is an artificial person, it must have an officer who can be presumed to be
the employer, being "the person acting in the interest of the employer." The corporation is the
employer, only in the technical sense. (A.C. Ransom Labor Union CCLU VS. NLRC, G.R. 69494, June
10, 1986). Where the employer-corporation, AS IN THE PRESENT CASE, is no longer existing and
unable to satisfy the judgment in favor of the employee, the officer should be held liable for acting
on behalf of the corporation. (Gudez vs. NLRC, G.R. 83023, March 22, 1990). The responsible officer
of an employer can be held personally liable not to say even criminally liable for nonpayment of
backwages. This is the policy of the law. If it were otherwise, corporate employers would have devious
ways to evade paying backwages.

Atty. Joshua L. Pastores (Atty. Pastores), as counsel for respondents, submitted a position paper
dated 21 February 1994 and stated that complainants should not have impleaded Carag and David
because MAC is actually owned by a consortium of banks. Carag and David own shares in MAC only
to qualify them to serve as MAC's officers. Without any further proceedings, Arbiter Ortiguerra rendered
her Decision dated 17 June 1994 granting the motion to implead Carag and David. In the same Decision,
Arbiter Ortiguerra declared Carag and David solidarily liable with MAC to complainants.

ISSUE: Whether the director Carag is personally liable for the debts of the corporation?

RULING: We find the petition meritorious.

On the Liability of Directors for Corporate Debts

The rule is that a director is not personally liable for the debts of the corporation, which has a
separate legal personality of its own. Section 31 of the Corporation Code lays down the exceptions
to the rule, as follows:

Liability of directors, trustees or officers. - DIRECTORS OR TRUSTEES WHO WILLFULLY AND

KNOWINGLY VOTE FOR OR ASSENT TO PATENTLY UNLAWFUL ACTS OF THE CORPORATION or
who are GUILTY OF GROSS NEGLIGENCE OR BAD FAITH in DIRECTING THE AFFAIRS OF THE
CORPORATION OR ACQUIRE ANY PERSONAL OR PECUNIARY INTEREST IN CONFLICT WITH
THEIR DUTY AS SUCH DIRECTORS OR TRUSTEES shall be liable JOINTLY AND SEVERALLY FOR
ALL DAMAGES RESULTING THEREFROM suffered by the corporation, its stockholders or members
and other persons.
Section 31 makes a director personally liable for corporate debts if he willfully and knowingly
votes for or assents to patently unlawful acts of the corporation. Section 31 also makes a director
personally liable if he is GUILTY OF GROSS NEGLIGENCE OR BAD FAITH IN DIRECTING THE
AFFAIRS OF THE CORPORATION.

Complainants did not allege in their complaint that Carag wilfully and knowingly voted for or
assented to any patently unlawful act of MAC. Complainants did not present any evidence showing
that Carag wilfully and knowingly voted for or assented to any patently unlawful act of MAC. Neither did
Arbiter Ortiguerra make any finding to this effect in her Decision.

Complainants did not also allege that Carag is guilty of gross negligence or bad faith in directing
the affairs of MAC. Complainants did not present any evidence showing that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC. Neither did Arbiter Ortiguerra make any finding to
this effect in her Decision.

To hold a director personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be established clearly and
convincingly.24 Bad faith is never presumed.25 Bad faith does not connote bad judgment or negligence.
Bad faith imports a dishonest purpose. Bad faith means breach of a known duty through some ill motive
or interest.

Neither does bad faith arise automatically just because a corporation fails to comply with the
notice requirement of labor laws on company closure or dismissal of employees. The failure to
give notice is not an unlawful act because the law does not define such failure as unlawful. Such
failure to give notice is a violation of procedural due process but does not amount to an unlawful or
criminal act. Such procedural defect is called illegal dismissal because it fails to comply with mandatory
procedural requirements, but it is not illegal in the sense that it constitutes an unlawful or criminal act.

For a wrongdoing to make a director personally liable for debts of the corporation, the wrongdoing
approved or assented to by the director must be a patently unlawful act. Mere failure to comply with the
notice requirement of labor laws on company closure or dismissal of employees does not amount to a
patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes penalties
for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the
act.

Complainants did not allege or prove, and Arbiter Ortiguerra did not make any finding, that Carag
approved or assented to any patently unlawful act to which the law attaches a penalty for its commission.
On this score alone, Carag cannot be held personally liable for the separation pay of complainants.

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a
patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in
directing its affairs, or when there is a conflict of interest resulting in damages to the corporation,
its stockholders or other persons; (2) they consent to the issuance of watered down stocks or
when, having knowledge of such issuance, do not forthwith file with the corporate secretary their
written objection; (3) they agree to hold themselves personally and solidarily liable with the
corporation; or (4) they are made by specific provision of law personally answerable for their
corporate action.
We concur with the CA that these two respondents are not liable. Section 31 of the Corporation
Code (Batas Pambansa Blg. 68) provides:

"Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith ... shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders and other persons."

The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful
act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c)
they incur conflict of interest, resulting in damages to the corporation, its stockholders or other
persons.31 (Boldfacing in the original; boldfacing with underscoring supplied)

Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of Appeals to hold Carag personally
liable for the separation pay owed by MAC to complainants based alone on Article 212(e) of the Labor
Code. Article 212(e) does not state that corporate officers are personally liable for the unpaid salaries or
separation pay of employees of the corporation. The liability of corporate officers for corporate debts
remains governed by Section 31 of the Corporation Code. WHEREFORE, we GRANT the petition.

[G.R. No. 108905. October 23, 1997]

GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF APPEALS, GRACE VILLAGE
ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO, respondents.

MENDOZA, J.:

FACTS:

The question for decision in this case is the right of petitioners representative to sit in the board
of directors of respondent Grace Village Association, Inc. as a permanent member thereof.

Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and
secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association,
Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace
Village, while private respondents Alejandro G. Beltran and Ernesto L. Go were its president and
chairman of the committee on election, respectively, in 1990, when this suit was brought.

As adopted in 1968, the by-laws of the association provided in Article IV, as follows:

The annual meeting of the members of the Association shall be held on the first Sunday of
January in each calendar year at the principal office of the Association at 2:00 P.M. where they
shall elect by plurality vote and by secret balloting, the Board of Directors, composed of eleven
(11) members to serve for one (1) year until their successors are duly elected and have qualified.

It appears, that on December 20, 1975, a committee of the board of directors prepared a draft of an
amendment to the by-laws, reading as follows:[3]

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the second Thursday of January
of each year. Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled
to as many votes as he has acquired thru his monthly membership fees only computed on a ratio of TEN
(P10.00) PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the Association. The candidates
receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected
until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative
is a permanent Director of the ASSOCIATION.

THIS DRAFT WAS NEVER PRESENTED TO THE GENERAL MEMBERSHIP FOR APPROVAL.
Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, petitioner was
given a permanent seat in the board of directors of the association. On February 13, 1990, the
associations committee on election in a letter informed James Tan, principal of the school, that it
was the sentiment that all directors should be elected by members of the association because to
make a person or entity a permanent Director would deprive the right of voters to vote for fifteen
(15) members of the Board, and it is undemocratic for a person or entity to hold office in
perpetuity. For this reason, Tan was told that the proposal to make the Grace Christian High School
representative as a permanent director of the association, although previously tolerated in the past
elections should be reexamined. Following this advice, notices were sent to the members of the
association that the provision on election of directors of the 1968 by-laws of the association
would be observed.

Petitioner requested the chairman of the election committee to change the notice of election by following
the procedure in previous elections, claiming that the notice issued for the 1990 elections ran counter to
the practice in previous years and was in violation of the by-laws (of 1975) and unlawfully deprive[d]
Grace Christian High School of its vested right [to] a permanent seat in the board.[5]

As the association denied its request, the school brought suit for mandamus in the Home Insurance and
Guaranty Corporation to compel the board of directors of the association to recognize its right to a
permanent seat in the board. Petitioner based its claim on the following portion of the proposed
amendment which, it contended, had become part of the by-laws of the association as Article VI,
paragraph 2, thereof:

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving
the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their
successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent
Director of the ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on the validity of this provision
was sought by the association and that in reply to the query, the SEC rendered an opinion to the effect
that the practice of allowing unelected members in the board was contrary to the existing by-laws
of the association and to 92 of the Corporation Code (B.P. Blg. 68).

Private respondent association cited the SEC opinion in its answer. Additionally, the association
contended that the basis of the petition for mandamus was merely a proposed by-laws which has
not yet been approved by competent authority nor registered with the SEC or HIGC. It argued that
the by-laws which was registered with the SEC on January 16, 1969 should be the prevailing by-laws of
the association and not the proposed amended by-laws. In reply, petitioner maintained that the
amended by-laws is valid and binding and that the association was estopped from questioning the
by-laws. On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioners
action.

The hearing officer held that the amended by-laws, upon which petitioner based its claim, [was] merely a
proposed by-laws which, although implemented in the past, had not yet been ratified by the members of
the association nor approved by competent authority. The hearing officer rejected petitioners
contention that it had acquired a vested right to a permanent seat in the board of directors. The
appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated September
13, 1990. It cited the opinion of the SEC based on 92 of the Corporation Code which reads:

92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-
laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as
may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of the number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees
so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring
before the expiration of a particular term shall hold office only for the unexpired period.

Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on February 9,
1993, affirmed the decision of the HIGC. The Court of Appeals held that there was no valid amendment of
the associations by-laws because of failure to comply with the requirement of its existing by-laws,
prescribing the affirmative vote of the majority of the members of the association at a regular or special
meeting called for the adoption of amendment to the by-laws.

The proposed amendment to the by-laws was never approved by the majority of the members of the
association as required by these provisions of the law and by-laws. But petitioner contends that the
members of the committee which prepared the proposed amendment were duly authorized to do so and
that because the members of the association thereafter implemented the provision for fifteen years, the
proposed amendment for all intents and purposes should be considered to have been ratified by them.

Petitioner claims that it has acquired a vested right to a permanent seat in the board. Petitioner disputes
the ruling that the provision in question, giving petitioners representative a permanent seat in the board of
the association, is contrary to law. Petitioner claims that that is not so because there is really no provision
of law prohibiting unelected members of boards of directors of corporations.

RULING:

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980,[12] similarly
provides:

23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers
of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from among the members
of the corporation, who shall hold office for one (1) year and until their successors are elected and
qualified. (Emphasis added)

These provisions of the former and present corporation law leave no room for doubt as to their
meaning: the board of directors of corporations must be elected from among the stockholders or
members. There may be corporations in which there are unelected members in the board but it is
clear that in the examples cited by petitioner the unelected members sit as ex officio members,
i.e., by virtue of and for as long as they hold a particular office. But in the case of petitioner, there is no
reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right to
such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was
only in 1975 that a proposed amendment to the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been
questioned or challenged but, on the contrary, appears to have been implemented by the
members of the association cannot forestall a later challenge to its validity. Neither can it attain
validity through acquiescence because, if it is contrary to law, it is beyond the power of the
members of the association to waive its invalidity. For that matter the members of the association
may have formally adopted the provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law.

IT IS PROBABLE THAT, IN ALLOWING PETITIONERS REPRESENTATIVE TO SIT ON THE BOARD,

THE MEMBERS OF THE ASSOCIATION WERE NOT AWARE THAT THIS WAS CONTRARY TO LAW.
It should be noted that they did not actually implement the provision in question except perhaps insofar as
it increased the number of directors from 11 to 15, but certainly not the allowance of petitioners
representative as an unelected member of the board of directors. It is more accurate to say that the
members merely tolerated petitioners representative and tolerance cannot be considered
ratification.

Nor can petitioner claim a vested right to sit in the board on the basis of practice. Practice, no
matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less
tenable is petitioners claim that its right is coterminus with the existence of the association.[14]

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs. COURT OF APPEALS and
STEFANI SAO, respondents.

PANGANIBAN, J.:

Contracts entered into by a CORPORATE PRESIDENT WITHOUT EXPRESS PRIOR BOARD

APPROVAL BIND THE CORPORATION, when such officers apparent authority is established and
when these contracts are ratified by the corporation.

FACTS:

Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a
customs bonded warehouse at the old Manila International Airport in Pasay City.

To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the
corporation president, solicited a proposal from private respondent for the preparation of a
feasibility study. Private respondent submitted a letter-proposal dated October 17, 1986 (First
Contract hereafter) to Punsalan for the project.

Yours truly, CONFORME:

(S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR.
(T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR.
Consultant for President, PAIRCARGO
Industrial Engineering

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private respondents offer,
as another company priced a similar proposal at only P15,000.[9] However, Punsalan preferred
private respondents services because of the latters membership in the task force, which was
supervising the transition of the Bureau of Customs from the Marcos government to the Aquino
administration. On October 17, 1986, petitioner, through Punsalan, sent private respondent a letter,
confirming their agreement.

Accordingly, private respondent prepared a feasibility study for petitioner which eventually paid him the
balance of the contract price, although not according to the schedule agreed upon.[11]

On December 4, 1986, upon Punsalans request, private respondent sent petitioner another letter-
proposal (Second Contract hereafter), which reads:
Peoples Air Cargo & Warehousing Co., Inc.

Old MIA Compound, Metro Manila

Attention: Mr. ANTONIO PUN[S]ALAN, JR.

President

Dear Mr. Pun[s]alan:

This is to formalize our proposal for consultancy services to your company the scope of which is defined
in the attached service description.

The total service you have decided to avail xxx would be available upon signing of the conforme below
and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00) payable at the
schedule defined as follows (with the balance covered by post-dated cheques):

Downpayment upon signing conforme . . . P80,000.00

15 January 1987 . . . . . . . . . . . . . 53,333.00

30 January 1987 . . . . . . . . . . . . . 53,333.00

15 February 1987 . . . . . . . . . . . . . 53,333.00

28 February 1987 . . . . . . . . . . . . . 53,333.00

15 March1987 . . . . . . . . . . . . . 53,333.00

30 March 1987 . . . . . . . . . . . . . 53,333.00

With this package, you are assured of the highest service quality as our performance record shows we
always deliver no less.

Thank you very much.

Yours truly,

(S)STEFANI C. SAO

(T)STEFANI C. SAO

Industrial Engineering Consultant

CONFORME:

(S)ANTONIO C. PUNSALAN JR.

(T)PAIRCARGO CO. INC.

During the trial, the lower court observed that the Second Contract bore, at the lower right portion of the
letter, the following notations in pencil:

1. Operations Manual

2. Seminar/workshop for your employees

P400,000 - package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

The Manual has already been approved by the Commissioner but payment has not yet been made."

The lower left corner of the letter also contained the following notations:

1st letter - 4 Dec. 1986

2nd letter - 15 June 1987 with Hinanakit.

On January 10, 1987, Andy Villaceren, vice president of petitioner, received the operations manual
prepared by private respondent.[12] Petitioner submitted said operations manual to the Bureau of
Customs in connection with the formers application to operate a bonded warehouse; thereafter, in
May 1987, the Bureau issued to it a license to operate, enabling it to become one of the three
public customs bonded warehouses at the international airport.[13] Private respondent also
conducted, in the third week of January 1987 in the warehouse of petitioner, a three-day training seminar
for the latters employees.[14]

On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to then
Commissioner Alex Padilla, a position he held until he became technical assistant to then Commissioner
Miriam Defensor-Santiago on March 7, 1988.[15] Meanwhile, Punsalan sold his shares in petitioner-
corporation and resigned as its president in 1987.[16] On February 9, 1988, private respondent
filed a collection suit against petitioner. He alleged that he had prepared an operations manual for
petitioner, conducted a seminar-workshop for its employees and delivered to it a computer
program; but that, despite demand, petitioner refused to pay him for his services.

PETITIONER, IN ITS ANSWER, DENIED THAT PRIVATE RESPONDENT HAD PREPARED AN

OPERATIONS MANUAL AND A COMPUTER PROGRAM OR CONDUCTED A SEMINAR-WORKSHOP
FOR ITS EMPLOYEES. IT FURTHER ALLEGED THAT THE LETTER-AGREEMENT WAS SIGNED BY
PUNSALAN WITHOUT AUTHORITY, in collusion with [private respondent] in order to unlawfully get
some money from [petitioner], and despite his knowledge that a group of employees of the company had
been commissioned by the board of directors to prepare an operations manual.[17]

The trial court declared the Second Contract unenforceable or simulated. However, since private
respondent had actually prepared the operations manual and conducted a training seminar for
petitioner and its employees, the trial court awarded P60,000 to the former. Rejecting the finding of
the trial court that the December 4, 1986 contract was simulated or unenforceable, the CA ruled in favor
of its validity and enforceability. The Second Contract was declared valid and binding on the petitioner,
which was held liable to private respondent in the full amount of P400,000.

ISSUES:

The Issues

WON the subject letter-agreement for services was binding on the corporation simply because it was
entered into by its president?

II. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation
notwithstanding the lack of any board authority since it was the purported practice to allow the
president to enter into contracts of said nature (citing one previous instance of a similar contract)[;]
RULING:

Petitioner does not contest its liability; it merely disputes the amount of such accountability.
Hence, the resolution of this petition rests on the sole issue of the enforceability and validity of
the Second Contract, more specifically: (1) whether the president of the petitioner-corporation had
apparent authority to bind petitioner to the Second Contract; and (2) whether the said contract was
valid and not merely simulated.

The Courts Ruling

THE PETITION IS NOT MERITORIOUS.

First Issue: Apparent Authority of a Corporate President

PETITIONER ARGUES THAT THE DISPUTED CONTRACT IS UNENFORCEABLE, BECAUSE

PUNSALAN, ITS PRESIDENT, WAS NOT AUTHORIZED BY ITS BOARD OF DIRECTORS TO ENTER
INTO SAID CONTRACT.

THE GENERAL RULE IS THAT, IN THE ABSENCE OF AUTHORITY FROM THE BOARD OF
DIRECTORS, NO PERSON, NOT EVEN ITS OFFICERS, CAN VALIDLY BIND A CORPORATION.[21] A
corporation is a juridical person, separate and distinct from its stockholders and members, having xxx
powers, attributes and properties expressly authorized by law or incident to its existence.[22]

Being a juridical entity, a corporation may act through its board of directors, which exercises
almost all corporate powers, lays down all corporate business policies and is responsible for the
efficiency of management,[23] as provided in Section 23 of the Corporation Code of the
Philippines:

Under this provision, the power and the responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law.[24] However, just as a natural person may
authorize another to do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees or agents. The authority of
such individuals to bind the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit, custom or acquiescence in
the general course of business, viz.:

A CORPORATE OFFICER OR AGENT MAY REPRESENT AND BIND THE CORPORATION IN

TRANSACTIONS WITH THIRD PERSONS TO THE EXTENT THAT [THE] AUTHORITY TO DO SO
HAS BEEN CONFERRED UPON HIM, AND THIS INCLUDES POWERS WHICH HAVE BEEN
INTENTIONALLY CONFERRED, and ALSO SUCH POWERS AS, IN THE USUAL COURSE OF THE
PARTICULAR BUSINESS, ARE INCIDENTAL TO, OR MAY BE IMPLIED FROM, THE POWERS
INTENTIONALLY CONFERRED, POWERS ADDED BY CUSTOM AND USAGE, AS USUALLY
PERTAINING TO THE PARTICULAR OFFICER OR AGENT, AND SUCH APPARENT POWERS AS
THE CORPORATION HAS CAUSED PERSONS DEALING WITH THE OFFICER OR AGENT TO
BELIEVE THAT IT HAS CONFERRED.

Accordingly, the appellate court ruled in this case that the authority to act for and to bind a
corporation may be presumed from acts of recognition in other instances, wherein the power was in fact
exercised without any objection from its board or shareholders. PETITIONER HAD PREVIOUSLY
ALLOWED ITS PRESIDENT TO ENTER INTO THE FIRST CONTRACT WITH PRIVATE RESPONDENT
WITHOUT A BOARD RESOLUTION EXPRESSLY AUTHORIZING HIM; THUS, IT HAD CLOTHED ITS
PRESIDENT WITH APPARENT AUTHORITY TO EXECUTE THE SUBJECT CONTRACT.

Petitioners argument is not persuasive. APPARENT AUTHORITY IS DERIVED NOT MERELY FROM
PRACTICE. ITS EXISTENCE MAY BE ASCERTAINED THROUGH (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, THE APPARENT
AUTHORITY TO ACT IN GENERAL, WITH WHICH IT CLOTHES HIM; or (2) THE ACQUIESCENCE IN
HIS ACTS OF A PARTICULAR NATURE, WITH ACTUAL OR CONSTRUCTIVE KNOWLEDGE
THEREOF, WHETHER WITHIN OR BEYOND THE SCOPE OF HIS ORDINARY POWERS.[27] It
requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties.
[28] It is not the quantity of similar acts which establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation.

In the case at bar, PETITIONER, THROUGH ITS PRESIDENT ANTONIO PUNSALAN JR., ENTERED
INTO THE FIRST CONTRACT WITHOUT FIRST SECURING BOARD APPROVAL. DESPITE SUCH
LACK OF BOARD APPROVAL, PETITIONER DID NOT OBJECT TO OR REPUDIATE SAID
CONTRACT, THUS CLOTHING ITS PRESIDENT WITH THE POWER TO BIND THE CORPORATION.

The First Contract was consummated, implemented and paid without a hitch.

Hence, private respondent should not be faulted for believing that Punsalans conformity to the contract in
dispute was also binding on petitioner. It is familiar doctrine that if a corporation knowingly permits one of
its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be estopped from denying the agents authority.[30]

Furthermore, private respondent prepared an operations manual and conducted a seminar for the
employees of petitioner in accordance with their contract. Petitioner accepted the operations manual,
submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its
aforementioned actions, petitioner was given by the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendo then that the Second Contract was outside the usual powers of the
president, petitioners ratification of said contract and acceptance of benefits have made it binding,
nonetheless. The enforceability of contracts under Article 1403(2) is ratified by the acceptance of benefits
under them under Article 1405.

Inasmuch as a corporate president is often given general supervision and control over corporate
operations, the strict rule that said officer has no inherent power to act for the corporation is
slowly giving way to the realization that such officer has certain limited powers in the transaction
of the usual and ordinary business of the corporation.[31] In the absence of a charter or bylaw
provision to the contrary, the president is presumed to have the authority to act within the domain
of the general objectives of its business and within the scope of his or her usual duties.

Hence, it has been held in other jurisdictions that the president of a corporation possesses the power to
enter into a contract for the corporation, when the conduct on the part of both the president and the
corporation [shows] that he had been in the habit of acting in similar matters on behalf of the company
and that the company had authorized him so to act and had recognized, approved and ratified his former
and similar actions.[33] Furthermore, a party dealing with the president of a corporation is entitled to
assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the
scope of the powers of said corporation and that do not violate any statute or rule on public policy.[34]

MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners, - versus - ALFREDO M. JOSON,
Respondent.

G.R. No. 171993, December 12, 2011

PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II
Marketing, Inc. and Lucila V. Joson assailed the Decision[1] dated 20 June 2005 of the Court of Appeals
in CA-G.R. SP No. 76624 for reversing and setting aside the Resolution[2] of the National Labor Relations
Commission (NLRC) dated 15 October 2002, thereby affirming the Labor Arbiters Decision[3] dated 1
October 2001 finding herein respondent Alfredo M. Josons dismissal from employment as illegal. In the
questioned Decision, the Court of Appeals upheld the Labor Arbiters jurisdiction over the case on the
basis that respondent was not an officer but a mere employee of petitioner Marc II Marketing, Inc., thus,
totally disregarding the latters allegation of intra-corporate controversy. Nonetheless, the Court of Appeals
remanded the case to the NLRC for further proceedings to determine the proper amount of monetary
awards that should be given to respondent.

Assailed as well is the Court of Appeals Resolution[4] dated 7 March 2006 denying their Motion for
Reconsideration.

Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing
under and by virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling and
distributing in retail or wholesale for export or import household appliances and products and other items.
[5] It took over the business operations of Marc Marketing, Inc. which was made non-operational following
its incorporation and registration with the Securities and Exchange Commission (SEC). Petitioner Lucila
V. Joson (Lucila) is the President and majority stockholder of petitioner corporation. She was also the
former President and majority stockholder of the defunct Marc Marketing, Inc.

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator,
director and stockholder of petitioner corporation.

The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated,[6] respondent has already been engaged by
petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the General Manager of
petitioner corporation. It was formalized through the execution of a Management Contract[7] dated 16
January 1994 under the letterhead of Marc Marketing, Inc.[8] as petitioner corporation is yet to be
incorporated at the time of its execution. It was explicitly provided therein that respondent shall be entitled
to 30% of its net income for his work as General Manager. Respondent will also be granted 30% of its net
profit to compensate for the possible loss of opportunity to work overseas.[9]

Pending incorporation of petitioner corporation, respondent was designated as the General Manager of
Marc Marketing, Inc., which was then in the process of winding up its business. For occupying the said
position, respondent was among its corporate officers by the express provision of Section 1, Article IV[10]
of its by-laws.[11]

On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC.
Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge his
duties as General Manager but this time under petitioner corporation.

Pursuant to Section 1, Article IV[12] of petitioner corporations by-laws,[13] its corporate officers are as
follows: Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its Board of
Directors, however, may, from time to time, appoint such other officers as it may determine to be
necessary or proper.

Per an undated Secretarys Certificate,[14] petitioner corporations Board of Directors conducted a meeting
on 29 August 1994 where respondent was appointed as one of its corporate officers with the designation
or title of General Manager to function as a managing director with other duties and responsibilities that
the Board of Directors may provide and authorized.[15]

Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as
evidenced by an Affidavit of Non-Operation[16] dated 31 August 1998, due to poor sales collection
aggravated by the inefficient management of its affairs. On the same date, it formally informed respondent
of the cessation of its business operation. Concomitantly, respondent was apprised of the termination of
his services as General Manager since his services as such would no longer be necessary for the winding
up of its affairs.[17]

Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners
before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99.

In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with
petitioner corporation due to the feeling of hatred she harbored towards his family. The same was rooted
in the filing by petitioner Lucilas estranged husband, who happened to be respondents brother, of a
Petition for Declaration of Nullity of their Marriage.[18]

For the parties failure to settle the case amicably, the Labor Arbiter required them to submit their
respective position papers. Respondent complied but petitioners opted to file a Motion to Dismiss
grounded on the Labor Arbiters lack of jurisdiction as the case involved an intra-corporate controversy,
which jurisdiction belongs to the SEC [now with the Regional Trial Court (RTC)].[19] Petitioners similarly
raised therein the ground of prescription of respondents monetary claim.

On 5 September 2000, the Labor Arbiter issued an Order[20] deferring the resolution of petitioners Motion
to Dismiss until the final determination of the case. The Labor Arbiter also reiterated his directive for
petitioners to submit position paper. Still, petitioners did not comply. Insisting that the Labor Arbiter has no
jurisdiction over the case, they instead filed an Urgent Motion to Resolve the Motion to Dismiss and the
Motion to Suspend Filing of Position Paper.

In an Order[21] dated 15 February 2001, the Labor Arbiter denied both motions and declared final the
Order dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five days from receipt
thereof within which to file position paper, otherwise, their Motion to Dismiss will be treated as their
position paper and the case will be considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the requested
extension, petitioners still failed to submit the same. Accordingly, the case was submitted for resolution.

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal portion
reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring [respondents] dismissal

from employment illegal. Accordingly, [petitioners] are hereby ordered:

1. To reinstate [respondent] to his former or equivalent position without loss of seniority rights, benefits,
and privileges;
2. Jointly and severally liable to pay [respondents] unpaid wages in the amount of P450,000.00 per
month from [26 March 1996] up to time of dismissal in the total amount of P6,300,000.00;
3. Jointly and severally liable to pay [respondents] full backwages in the amount of P450,000.00 per
month from date of dismissal until actual reinstatement which at the time of promulgation amounted to
P21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of P100,000.00 and attorneys fees
in the amount of 5% of the total monetary award.[22] [Emphasis supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners Motion to Dismiss by finding the
ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners failed to
adduce evidence to prove that the present case involved an intra-corporate controversy. Also,
respondents money claim did not arise from his being a director or stockholder of petitioner corporation
but from his position as being its General Manager. The Labor Arbiter likewise held that respondent was
not a corporate officer under petitioner corporations by-laws. As such, respondents complaint clearly
arose from an employer-employee relationship, thus, subject to the Labor Arbiters jurisdiction.
The Labor Arbiter then declared respondents dismissal from employment as illegal. Respondent, being a
regular employee of petitioner corporation, may only be dismissed for a valid cause and upon proper
compliance with the requirements of due process. The records, though, revealed that petitioners failed to
present any evidence to justify respondents dismissal.

Aggrieved, petitioners appealed the aforesaid Labor Arbiters Decision to the NLRC.

In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to the
Secretarys Certificate, which evidenced petitioner corporations Board of Directors meeting in which a
resolution was approved appointing respondent as its corporate officer with designation as General
Manager. Therefrom, the NLRC reversed and set aside the Labor Arbiters Decision dated 1 October 2001
and dismissed respondents Complaint for want of jurisdiction.[23]

The NLRC enunciated that the validity of respondents appointment and termination from the position of
General Manager was made subject to the approval of petitioner corporations Board of Directors. Had
respondent been an ordinary employee, such board action would not have been required. As such, it is
clear that respondent was a corporate officer whose dismissal involved a purely intra-corporate
controversy. The NLRC went further by stating that respondents claim for 30% of the net profit of the
corporation can only emanate from his right of ownership therein as stockholder, director and/or corporate
officer. Dividends or profits are paid only to stockholders or directors of a corporation and not to any
ordinary employee in the absence of any profit sharing scheme. In addition, the question of remuneration
of a person who is not a mere employee but a stockholder and officer of a corporation is not a simple
labor problem. Such matter comes within the ambit of corporate affairs and management and is an intra-
corporate controversy in contemplation of the Corporation Code.[24]

When respondents Motion for Reconsideration was denied in another Resolution[25] dated 23 January
2003, he filed a Petition for Certiorari with the Court of Appeals ascribing grave abuse of discretion on the
part of the NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor
Arbiter has jurisdiction over the present controversy. It upheld the finding of the Labor Arbiter that
respondent was a mere employee of petitioner corporation, who has been illegally dismissed from
employment without valid cause and without due process. Nevertheless, it ordered the records of the
case remanded to the NLRC for the determination of the appropriate amount of monetary awards to be
given to respondent. The Court of Appeals, thus, decreed:

WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have
jurisdiction over the controversy. The records are REMANDED to the NLRC for further proceedings to
determine the appropriate amount of monetary awards to be adjudged in favor of [respondent]. Costs
against the [petitioners] in solidum.[26]

Petitioners moved for its reconsideration but to no avail.[27]

Petitioners are now before this Court with the following assignment of errors:

THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING
THAT THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER
WHICH IS COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL
COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL
THE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYER-
EMPLOYEE RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II
MARKETING, INC. [PETITIONER CORPORATION].

ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE
COURT OF APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE
ABUSE OF DISCRETION IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND
BACKWAGES BASED ON THE PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION
IN NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD
SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.
[28]

Petitioners fault the Court of Appeals for having sustained the Labor Arbiters finding that respondent was
not a corporate officer under petitioner corporations by-laws. They insist that there is no need to amend
the corporate by-laws to specify who its corporate officers are. The resolution issued by petitioner
corporations Board of Directors appointing respondent as General Manager, coupled with his assumption
of the said position, positively made him its corporate officer. More so, respondents position, being a
creation of petitioner corporations Board of Directors pursuant to its by-laws, is a corporate office
sanctioned by the Corporation Code and the doctrines previously laid down by this Court. Thus,
respondents removal as petitioner corporations General Manager involved a purely intra-corporate
controversy over which the RTC has jurisdiction.

Petitioners further contend that respondents claim for 30% of the net profit of petitioner corporation was
anchored on the purported Management Contract dated 16 January 1994. It should be noted, however,
that said Management Contract was executed at the time petitioner corporation was still nonexistent and
had no juridical personality yet. Such being the case, respondent cannot invoke any legal right therefrom
as it has no legal and binding effect on petitioner corporation. Moreover, it is clear from the Articles of
Incorporation of petitioner corporation that respondent was its director and stockholder. Indubitably,
respondents claim for his share in the profit of petitioner corporation was based on his capacity as such
and not by virtue of any employer-employee relationship.

Petitioners further avow that even if the present case does not pose an intra-corporate controversy, still,
the Labor Arbiters multi-million peso awards in favor of respondent were erroneous. The same was
merely based on the latters self-serving computations without any supporting documents.

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner
corporation. There was neither allegation nor iota of evidence presented to show that she acted with
malice and bad faith in her dealings with respondent. Moreover, the Labor Arbiter, in his Decision, simply
concluded that petitioner Lucila was jointly and severally liable with petitioner corporation without making
any findings thereon. It was, therefore, an error for the Court of Appeals to hold petitioner Lucila solidarily
liable with petitioner corporation.

From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has
jurisdiction over respondents dismissal as General Manager of petitioner corporation. Its resolution
necessarily entails the determination of whether respondent as General Manager of petitioner corporation
is a corporate officer or a mere employee of the latter.
While Article 217(a)2[29] of the Labor Code, as amended, provides that it is the Labor Arbiter who has the
original and exclusive jurisdiction over cases involving termination or dismissal of workers when the
person dismissed or terminated is a corporate officer, the case automatically falls within the province of
the RTC. The dismissal of a corporate officer is always regarded as a corporate act and/or an intra-
corporate controversy.[30]
Under Section 5[31] of Presidential Decree No. 902-A, intra-corporate controversies are those
controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members or associates; between any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and between such corporation,
partnership or association and the State insofar as it concerns their individual franchise or right to exist as
such entity. It also includes controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations.[32]

Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the controversy, the
status or relationship of the parties and the nature of the question that is the subject of their controversy
must be taken into consideration.[33]

In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential Decree
No. 902-A, corporate officers are those officers of a corporation who are given that character either by the
Corporation Code or by the corporations by-laws. Section 25[34] of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4)
such other officers as may be provided for in the by-laws.[35]

The aforesaid Section 25 of the Corporation Code, particularly the phrase such other officers as may be
provided for in the by-laws, has been clarified and elaborated in this Courts recent pronouncement in
Matling Industrial and Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling
provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama [citation omitted] the
first ruling on the matter, held that the only officers of a corporation were those given that character either
by the Corporation Code or by the [b]y-[l]aws; the rest of the corporate officers could be considered only
as employees or subordinate officials. Thus, it was held in Easycall Communications Phils., Inc. v. King
[citation omitted]:

An "office" is created by the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office and generally is employed not by the
action of the directors or stockholders but by the managing officer of the corporation who also determines
the compensation to be paid to such employee.

xxxx

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states
that the corporate officers are the President, Secretary, Treasurer and such other officers as may be
provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the context of PD No. 902-A are
exclusively those who are given that character either by the Corporation Code or by the corporations
[b]y[l]aws.

A different interpretation can easily leave the way open for the Board of Directors to circumvent the
constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the [b]y-[l]aws
of an enabling clause on the creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering the Corporation
Code, adopted a similar interpretation of Section 25 of the Corporation Code in its Opinion dated
November 25, 1993 [citation omitted], to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate
officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no
power to create other Offices without amending first the corporate [b]y-laws. However, the Board may
create appointive positions other than the positions of corporate Officers, but the persons occupying such
positions are not considered as corporate officers within the meaning of Section 25 of the Corporation
Code and are not empowered to exercise the functions of the corporate Officers, except those functions
lawfully delegated to them. Their functions and duties are to be determined by the Board of
Directors/Trustees.[36] [Emphasis supplied.]

A careful perusal of petitioner corporations by-laws, particularly paragraph 1, Section 1, Article IV,[37]
would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2) President; (3)
one or more Vice-President; (4) Treasurer; and (5) Secretary.[38] The position of General Manager was
not among those enumerated.

Paragraph 2, Section 1, Article IV of petitioner corporations by-laws, empowered its Board of Directors to
appoint such other officers as it may determine necessary or proper.[39] It is by virtue of this enabling
provision that petitioner corporations Board of Directors allegedly approved a resolution to make the
position of General Manager a corporate office, and, thereafter, appointed respondent thereto making him
one of its corporate officers. All of these acts were done without first amending its by-laws so as to include
the General Manager in its roster of corporate officers.

With the given circumstances and in conformity with Matling Industrial and Commercial Corporation v.
Coros, this Court rules that respondent was not a corporate officer of petitioner corporation because his
position as General Manager was not specifically mentioned in the roster of corporate officers in its
corporate by-laws. The enabling clause in petitioner corporations by-laws empowering its Board of
Directors to create additional officers, i.e., General Manager, and the alleged subsequent passage of a
board resolution to that effect cannot make such position a corporate office. Matling clearly enunciated
that the board of directors has no power to create other corporate offices without first amending the
corporate by-laws so as to include therein the newly created corporate office. Though the board of
directors may create appointive positions other than the positions of corporate officers, the persons
occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation
Code.[40] In view thereof, this Court holds that unless and until petitioner corporations by-laws is
amended for the inclusion of General Manager in the list of its corporate officers, such position cannot be
considered as a corporate office within the realm of Section 25 of the Corporation Code.

This Court considers that the interpretation of Section 25 of the Corporation Code laid down in Matling
safeguards the constitutionally enshrined right of every employee to security of tenure. To allow the
creation of a corporate officer position by a simple inclusion in the corporate by-laws of an enabling
clause empowering the board of directors to do so can result in the circumvention of that constitutionally
well-protected right.[41]

It is also of no moment that respondent, being petitioner corporations General Manager, was given the
functions of a managing director by its Board of Directors. As held in Matling, the only officers of a
corporation are those given that character either by the Corporation Code or by the corporate by-laws. It
follows then that the corporate officers enumerated in the by-laws are the exclusive officers of the
corporation while the rest could only be regarded as mere employees or subordinate officials.[42]
Respondent, in this case, though occupying a high ranking and vital position in petitioner corporation but
which position was not specifically enumerated or mentioned in the latters by-laws, can only be regarded
as its employee or subordinate official. Noticeably, respondents compensation as petitioner corporations
General Manager was set, fixed and determined not by the latters Board of Directors but simply by its
President, petitioner Lucila. The same was not subject to the approval of petitioner corporations Board of
Directors. This is an indication that respondent was an employee and not a corporate officer.

To prove that respondent was petitioner corporations corporate officer, petitioners presented before the
NLRC an undated Secretarys Certificate showing that corporations Board of Directors approved a
resolution making respondents position of General Manager a corporate office. The submission, however,
of the said undated Secretarys Certificate will not change the fact that respondent was an employee. The
certification does not amount to an amendment of the by-laws which is needed to make the position of
General Manager a corporate office.

Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in that
undated Secretarys Certificate and the latter itself were obvious fabrications, a mere afterthought. Here
we quote with conformity the Court of Appeals findings on this matter stated in this wise:

The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August 1994],
why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August 1999], when it
could have been the best evidence that [herein respondent] was a corporate officer? Secondly, why did
they report the [respondent] instead as [herein petitioner corporations] employee to the Social Security
System [(SSS)] on [11 October 1994] or a later date than their [29 August 1994] board resolution? Thirdly,
why is there no indication that the [respondent], the person concerned himself, and the [SEC] were
furnished with copies of said board resolution? And, lastly, why is the corporate [S]ecretarys [C]ertificate
not notarized in keeping with the customary procedure? That is why we called it manipulative evidence as
it was a shameless sham meant to be thrown in as a wild card to muddle up the [D]ecision of the Labor
Arbiter to the end that it be overturned as the latter had firmly pointed out that [respondent] is not a
corporate officer under [petitioner corporations by-laws]. Regrettably, the [NLRC] swallowed the bait hook-
line-and sinker. It failed to see through its nature as a belatedly manufactured evidence. And even on the
assumption that it were an authentic board resolution, it did not make [respondent] a corporate officer as
the board did not first and properly create the position of a [G]eneral [M]anager by amending its by-laws.

(2) The scope of the term officer in the phrase and such other officers as may be provided for in the by-
laws[] (Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of the corporation.
(SEC Opinion, [4 December 1991.]) If the by-laws enumerate the officers to be elected by the board, the
provision is conclusive, and the board is without power to create new offices without amending the by-
laws. (SEC Opinion, [19 October 1971.])

(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be classified as
an employee although he has always been considered as one of the principal officers of a corporation
[citing De Leon, H. S., The Corporation Code of the Philippines Annotated, 1993 Ed., p. 215.][43]
[Emphasis supplied.]

That respondent was also a director and a stockholder of petitioner corporation will not automatically
make the case fall within the ambit of intra-corporate controversy and be subjected to RTCs jurisdiction.
To reiterate, not all conflicts between the stockholders and the corporation are classified as intra-
corporate. Other factors such as the status or relationship of the parties and the nature of the question
that is the subject of the controversy[44] must be considered in determining whether the dispute involves
corporate matters so as to regard them as intra-corporate controversies.[45] As previously discussed,
respondent was not a corporate officer of petitioner corporation but a mere employee thereof so there
was no intra-corporate relationship between them. With regard to the subject of the controversy or issue
involved herein, i.e., respondents dismissal as petitioner corporations General Manager, the same did not
present or relate to an intra-corporate dispute. To note, there was no evidence submitted to show that
respondents removal as petitioner corporations General Manager carried with it his removal as its director
and stockholder. Also, petitioners allegation that respondents claim of 30% share of petitioner
corporations net profit was by reason of his being its director and stockholder was without basis, thus,
self-serving. Such an allegation was tantamount to a mere speculation for petitioners failure to
substantiate the same.

In addition, it was not shown by petitioners that the position of General Manager was offered to
respondent on account of his being petitioner corporations director and stockholder. Also, in contrast to
NLRCs findings, neither petitioner corporations by-laws nor the Management Contract stated that
respondents appointment and termination from the position of General Manager was subject to the
approval of petitioner corporations Board of Directors. If, indeed, respondent was a corporate officer
whose termination was subject to the approval of its Board of Directors, why is it that his termination was
effected only by petitioner Lucila, President of petitioner corporation? The records are bereft of any
evidence to show that respondents dismissal was done with the conformity of petitioner corporations
Board of Directors or that the latter had a hand on respondents dismissal. No board resolution
whatsoever was ever presented to that effect.

With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the
General Manager position, was not a corporate officer of petitioner corporation rather he was merely its
employee occupying a high-ranking position.

Accordingly, respondents dismissal as petitioner corporations General Manager did not amount to an
intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the
RTC.

Having established that respondent was not petitioner corporations corporate officer but merely its
employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now determine if
respondents dismissal from employment is illegal.

It was not disputed that respondent worked as petitioner corporations General Manager from its
incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his dismissal was
petitioner corporations cessation of business operations due to poor sales collection aggravated by the
inefficient management of its affairs.

In termination cases, the burden of proving just and valid cause for dismissing an employee from his
employment rests upon the employer. The latter's failure to discharge that burden would necessarily result
in a finding that the dismissal is unjustified.[46]

Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the
employment of an employee is the closing or cessation of operation of the establishment or undertaking.
Article 283 of the Labor Code, as amended, reads, thus:

ART. 283. Closure of establishment and reduction of personnel. The employer may also terminate the
employment of any employee due to the installation of labor saving-devices, redundancy, retrenchment to
prevent losses or the closing or cessation of operation of the establishment or undertaking unless the
closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the
workers and the Department of Labor and Employment at least one (1) month before the intended date
thereof. x x x In case of retrenchment to prevent losses and in cases of closures or cessation of
operations of establishment or undertaking not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or to at least one-half (1/2) month pay for every
year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole
year. [Emphasis supplied.]

From the afore-quoted provision, the closure or cessation of operations of establishment or undertaking
may either be due to serious business losses or financial reverses or otherwise. If the closure or
cessation was due to serious business losses or financial reverses, it is incumbent upon the employer to
sufficiently and convincingly prove the same. If it is otherwise, the employer can lawfully close shop
anytime as long as it was bona fide in character and not impelled by a motive to defeat or circumvent the
tenurial rights of employees and as long as the terminated employees were paid in the amount
corresponding to their length of service.[47]

Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid
cessation of business operations: (a) service of a written notice to the employees and to the Department
of Labor and Employment (DOLE) at least one month before the intended date thereof; (b) the cessation
of business must be bona fide in character; and (c) payment to the employees of termination pay
amounting to one month pay or at least one-half month pay for every year of service, whichever is higher.

In this case, it is obvious that petitioner corporations cessation of business operations was not due to
serious business losses. Mere poor sales collection, coupled with mismanagement of its affairs does not
amount to serious business losses. Nonetheless, petitioner corporation can still validly cease or close its
business operations because such right is legally allowed, so long as it was not done for the purpose of
circumventing the provisions on termination of employment embodied in the Labor Code.[48] As has been
stressed by this Court in Industrial Timber Corporation v. Ababon, thus:
Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It
would be stretching the intent and spirit of the law if a court interferes with management's prerogative to
close or cease its business operations just because the business is not suffering from any loss or
because of the desire to provide the workers continued employment.[49]

A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased
business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-
Operation dated 31 August 1998. There was also no showing that the cessation of its business operations
was done in bad faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner corporation
failed to comply with the one-month prior written notice rule. The records disclosed that respondent, being
petitioner corporations employee, and the DOLE were not given a written notice at least one month before
petitioner corporation ceased its business operations. Moreover, the records clearly show that
respondents dismissal was effected on the same date that petitioner corporation decided to stop and
cease its operation. Similarly, respondent was not paid separation pay upon termination of his
employment.

As respondents dismissal was not due to serious business losses, respondent is entitled to payment of
separation pay equivalent to one month pay or at least one-half month pay for every year of service,
whichever is higher. The rationale for this was laid down in Reahs Corporation v. National Labor Relations
Commission,[50] thus:

The grant of separation pay, as an incidence of termination of employment under Article 283, is a
statutory obligation on the part of the employer and a demandable right on the part of the employee,
except only where the closure or cessation of operations was due to serious business losses or financial
reverses and there is sufficient proof of this fact or condition. In the absence of such proof of serious
business losses or financial reverses, the employer closing his business is obligated to pay his employees
and workers their separation pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the
employer, the affected employee is entitled to separation pay. This is consistent with the state policy of
treating labor as a primary social economic force, affording full protection to its rights as well as its
welfare. The exception is when the closure of business or cessation of operations is due to serious
business losses or financial reverses duly proved, in which case, the right of affected employees to
separation pay is lost for obvious reasons.[51] [Emphasis supplied.]

As previously discussed, respondents dismissal was due to an authorized cause, however, petitioner
corporation failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern
Telecommunications Philippines, Inc.,[52] this Court made the following pronouncements, thus:
x x x there are two aspects which characterize the concept of due process under the Labor Code: one is
substantive whether the termination of employment was based on the provision of the Labor Code or in
accordance with the prevailing jurisprudence; the other is procedural the manner in which the dismissal
was effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

(d) In all cases of termination of employment, the following standards of due process shall be substantially
observed:

xxxx

For termination of employment as defined in Article 283 of the Labor Code, the requirement of due
process shall be deemed complied with upon service of a written notice to the employee and the
appropriate Regional Office of the Department of Labor and Employment at least thirty days before
effectivity of the termination, specifying the ground or grounds for termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the employees to
look for another employment and therefore ease the impact of the loss of their jobs and the corresponding
income, but more importantly, to give the Department of Labor and Employment (DOLE) the opportunity
to ascertain the verity of the alleged authorized cause of termination.[53] [Emphasis supplied].

The records of this case disclosed that there was absolutely no written notice given by petitioner
corporation to the respondent and to the DOLE prior to the cessation of its business operations. This is
evident from the fact that petitioner corporation effected respondents dismissal on the same date that it
decided to stop and cease its business operations. The necessary consequence of such failure to comply
with the one-month prior written notice rule, which constitutes a violation of an employees right to
statutory due process, is the payment of indemnity in the form of nominal damages.[54] In Culili v. Eastern
Telecommunications Philippines, Inc., this Court further held:
In Serrano v. National Labor Relations Commission [citation omitted], we noted that a job is more than the
salary that it carries. There is a psychological effect or a stigma in immediately finding ones self laid off
from work. This is exactly why our labor laws have provided for mandating procedural due process
clauses. Our laws, while recognizing the right of employers to terminate employees it cannot sustain, also
recognize the employees right to be properly informed of the impending severance of his ties with the
company he is working for. x x x.

x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon
employers who fail to comply with the procedural due process requirements in terminating its employees.
In Agabon v. National Labor Relations Commission [citation omitted], this Court reverted back to the
doctrine in Wenphil Corporation v. National Labor Relations Commission [citation omitted] and held that
where the dismissal is due to a just or authorized cause, but without observance of the due process
requirements, the dismissal may be upheld but the employer must pay an indemnity to the employee. The
sanctions to be imposed however, must be stiffer than those imposed in Wenphil to achieve a result fair to
both the employers and the employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon,
held that since there is a clear-cut distinction between a dismissal due to a just cause and a dismissal due
to an authorized cause, the legal implications for employers who fail to comply with the notice
requirements must also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but the
employer failed to comply with the notice requirement, the sanction to be imposed upon him should be
tempered because the dismissal process was, in effect, initiated by an act imputable to the employee; and
(2) if the dismissal is based on an authorized cause under Article 283 but the employer failed to comply
with the notice requirement, the sanction should be stiffer because the dismissal process was initiated by
the employer's exercise of his management prerogative.[55] [Emphasis supplied.]

Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In
conformity with this Courts ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu
Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v. Pacot,[56] this Court
fixed the amount of nominal damages to P50,000.00.

With respect to petitioners contention that the Management Contract executed between respondent and
petitioner Lucila has no binding effect on petitioner corporation for having been executed way before its
incorporation, this Court finds the same meritorious.

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this
Code commences to have corporate existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues a certificate of incorporation under its official
seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a
body politic and corporate under the name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance
with law. [Emphasis supplied.]

Logically, there is no corporation to speak of prior to an entitys incorporation. And no contract entered into
before incorporation can bind the corporation.

As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed
between respondent and petitioner Lucila months before petitioner corporations incorporation on 15
August 1994. Similarly, it was done when petitioner Lucila was still the President of Marc Marketing, Inc.
Undeniably, it cannot have any binding and legal effect on petitioner corporation. Also, there was no
evidence presented to prove that petitioner corporation adopted, ratified or confirmed the Management
Contract. It is for the same reason that petitioner corporation cannot be considered estopped from
questioning its binding effect now that respondent was invoking the same against it. In no way, then, can it
be enforced against petitioner corporation, much less, its provisions fixing respondents compensation as
General Manager to 30% of petitioner corporations net profit. Consequently, such percentage cannot be
the basis for the computation of respondents separation pay. This finding, however, will not affect the
undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from its
incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to conduct
further proceedings for the sole purpose of determining the compensation that respondent was actually
receiving during the period that he was the General Manager of petitioner corporation, this, for the proper
computation of his separation pay.
As regards petitioner Lucilas solidary liability, this Court affirms the same.

As a rule, corporation has a personality separate and distinct from its officers, stockholders and members
such that corporate officers are not personally liable for their official acts unless it is shown that they have
exceeded their authority. However, this corporate veil can be pierced when the notion of the legal entity is
used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation,
and to confuse legitimate issues. Under the Labor Code, for instance, when a corporation violates a
provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of
the corporation.[57]
Based on the prevailing circumstances in this case, petitioner Lucila, being the President of petitioner
corporation, acted in bad faith and with malice in effecting respondents dismissal from employment.
Although petitioner corporation has a valid cause for dismissing respondent due to cessation of business
operations, however, the latters dismissal therefrom was done abruptly by its President, petitioner Lucila.
Respondent was not given the required one-month prior written notice that petitioner corporation will
already cease its business operations. As can be gleaned from the records, respondent was dismissed
outright by petitioner Lucila on the same day that petitioner corporation decided to stop and cease its
business operations. Worse, respondent was not given separation pay considering that petitioner
corporations cessation of business was not due to business losses or financial reverses.
WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March
2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the
MODIFICATION finding respondents dismissal from employment legal but without proper observance of
due process. Accordingly, petitioner corporation, jointly and solidarily liable with petitioner Lucila, is hereby
ordered to pay respondent the following; (1) separation pay equivalent to one month pay or at least one-
half month pay for every year of service, whichever is higher, to be computed from the commencement of
employment until termination; and (2) nominal damages in the amount of P50,000.00.

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further
proceedings for the sole purpose of determining the compensation that respondent was actually receiving
during the period that he was the General Manager of petitioner corporation for the proper computation of
his separation pay.

Costs against petitioners.

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.

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 CGI

P5,275,041.00

Amount awarded above to Claimants

4,864,418.89

Total

10,159,459.89

Payments due CGI for 80% work accomplishment

P5,847,857.20

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 petitioner-spouses
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.
SECOND DIVISION

MEGAN SUGAR CORPORATION,

Petitioner, -versus- REGIONAL TRIAL COURT OF ILOILO, BRANCH 68, DUMANGAS, ILOILO; NEW
FRONTIER SUGAR CORPORATION and EQUITABLE PCI BANK,
Respondents.
G.R. No. 170352

Promulgated:

June 1, 2011
x-----------------------------------------------------------------------------------------x

DECISION

PERALTA, J.:

Before this Court is a petition for review on certiorari,[1] under Rule 45 of the Rules of Court, seeking to
set aside the August 23, 2004 Decision[2] and October 12, 2005 Resolution[3] of the Court of Appeals
(CA), in CA-G.R. SP No. 75789.

The facts of the case are as follows:

On July 23, 1993, respondent New Frontier Sugar Corporation (NFSC) obtained a loan from respondent
Equitable PCI Bank (EPCIB). Said loan was secured by a real estate mortgage over NFSCs land
consisting of ninety-two (92) hectares located in Passi City, Iloilo, and a chattel mortgage over NFSCs
sugar mill.

On November 17, 2000, because of liquidity problems and continued indebtedness to EPCIB, NFSC
entered into a Memorandum of Agreement[4] (MOA) with Central Iloilo Milling Corporation (CIMICO),
whereby the latter agreed to take-over the operation and management of the NFSC raw sugar factory and
facilities for the period covering crop years 2000 to 2003.

On April 19, 2002, NFSC filed a compliant for specific performance and collection[5] against CIMICO for
the latters failure to pay its obligations under the MOA.

In response, CIMICO filed with the Regional Trial Court (RTC) of Dumangas, Iloilo, Branch 68, a case
against NFSC for sum of money and/or breach of contract.[6] The case was docketed as Civil Case No.
02-243.
On May 10, 2002, because of NFSCs failure to pay its debt, EPCIB instituted extra-judicial foreclosure
proceedings over NFSCs land and sugar mill. During public auction, EPCIB was the sole bidder and was
thus able to buy the entire property and consolidate the titles in its name. EPCIB then employed the
services of Philippine Industrial Security Agency (PISA) to help it in its effort to secure the land and the
sugar mill.

On September 16, 2002, CIMICO filed with the RTC an Amended Complaint[7] where it impleaded PISA
and EPCIB. As a result, on September 25, 2002, upon the motion of CIMICO, the RTC issued a
restraining order, directing EPCIB and PISA to desist from taking possession over the property in dispute.
Hence, CIMICO was able to continue its possession over the property.

On October 3, 2002, CIMICO and petitioner Megan Sugar Corporation (MEGAN) entered into a MOA[8]
whereby MEGAN assumed CIMICOs rights, interests and obligations over the property. As a result of the
foregoing undertaking, MEGAN started operating the sugar mill on November 18, 2002.

On November 22, 2002, Passi Iloilo Sugar Central, Inc. (Passi Sugar) filed with the RTC a Motion for
Intervention claiming to be the vendee of EPCIB. Passi Sugar claimed that it had entered into a Contract
to Sell[9] with EPCIB after the latter foreclosed NFSCs land and sugar mill.

On November 29, 2002, during the hearing on the motion for intervention, Atty. Reuben Mikhail Sabig
(Atty. Sabig) appeared before the RTC and entered his appearance as counsel for MEGAN. Several
counsels objected to Atty. Sabigs appearance since MEGAN was not a party to the proceedings;
however, Atty. Sabig explained to the court that MEGAN had purchased the interest of CIMICO and
manifested that his statements would bind MEGAN.

On December 10, 2002, EPCIB filed a Motion for Delivery/Deposit of Mill Shares/Rentals.[10]

On December 11, 2002, Passi Sugar filed a Motion to Order Deposit of Mill Share Production of MEGAN
and/or CIMICO.[11] On the same day, NFSC filed a Motion to Order Deposit of Millers Share (37%) or the
Lease Consideration under the MOA between NFSC and CIMICO.[12]
On December 27, 2002, NFSC filed another Motion to Hold in Escrow Sugar Quedans or Proceeds of
Sugar Sales Equivalent to Millers Shares.[13]

On January 16, 2003, the RTC issued an Order[14] granting EPCIBs motion for the placement of millers
share in escrow. The dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the motions to place the mills share in escrow to the court is
hereby GRANTED.

Megan Sugar Corporation or its director-officer, Mr. Joey Concha, who is General Manager of Megan, is
ordered to deposit in escrow within five (5) days upon receipt of this order, the sugar quedans
representing the millers share to the Court starting from December 19, 2002 and thereafter, in every
Friday of the week pursuant to the Memorandum of Agreement executed by plaintiff CIMICO and
defendant NFSC.

SO ORDERED. [15]

On January 29, 2003, Atty. Sabig filed an Omnibus Motion for Reconsideration and Clarification.[16] On
February 19, 2003, the RTC issued an Order[17] denying said motion.

On February 27, 2003, EPCIB filed an Urgent Ex-Parte Motion for Execution,[18] which was granted by
the RTC in an Order[19] dated February 28, 2003.

Aggrieved by the orders issued by the RTC, MEGAN filed before the CA a petition for certiorari,[20] dated
March 5, 2003. In said petition, MEGAN argued mainly on two points; first, that the RTC erred when it
determined that MEGAN was subrogated to the obligations of CIMICO and; second, that the RTC had no
jurisdiction over MEGAN.

On August 23, 2004, the CA issued a Decision dismissing MEGANs petition, the dispositive portion of
which reads:
WHEREFORE, premises considered, the Petition for Certiorari is hereby DENIED and forthwith
DISMISSED for lack of merit. Cost against petitioner.

SO ORDERED.[21]

In denying MEGANs petition, the CA ruled that since Atty. Sabig had actively participated before the RTC,
MEGAN was already estopped from assailing the RTCs jurisdiction.

Aggrieved, MEGAN then filed a Motion for Reconsideration,[22] which was, however, denied by the CA in
Resolution dated October 12, 2005.

Hence, herein petition, with MEGAN raising the following issues for this Courts consideration, to wit:

I.
WHETHER OR NOT THE PETITIONER IS ESTOPPED FROM QUESTIONING THE ASSAILED
ORDERS BECAUSE OF THE ACTS OF ATTY. REUBEN MIKHAIL SABIG.

II.
WHETHER OR NOT THE REGIONAL TRIAL COURT HAD JURISDICTION TO ISSUE THE ORDERS
DATED JANUARY 16, 2003, FEBRUARY 19, 2003 AND FEBRUARY 28, 2003.[23]

The petition is not meritorious.

MEGAN points out that its board of directors did not issue a resolution authorizing Atty. Sabig to represent
the corporation before the RTC. It contends that Atty. Sabig was an unauthorized agent and as such his
actions should not bind the corporation. In addition, MEGAN argues that the counsels of the different
parties were aware of Atty. Sabigs lack of authority because he declared in court that he was still in the
process of taking over the case and that his voluntary appearance was just for the hearing of the motion
for intervention of Passi Sugar.

Both EPCIB and NFSC, however, claim that MEGAN is already estopped from assailing the authority of
Atty. Sabig. They contend that Atty. Sabig had actively participated in the proceedings before the RTC and
had even filed a number of motions asking for affirmative relief. They also point out that Jose Concha
(Concha), who was a member of the Board of Directors of MEGAN, accompanied Atty. Sabig during the
hearing. Lastly, EPCIB and NFSC contend that all the motions, pleadings and court orders were sent to
the office of MEGAN; yet, despite the same, MEGAN never repudiated the authority of Atty. Sabig.
After a judicial examination of the records pertinent to the case at bar, this Court agrees with the finding of
the CA that MEGAN is already estopped from assailing the jurisdiction of the RTC.

Relevant to the discussion herein is the transcript surrounding the events of the November 29, 2002
hearing of Passi Sugars motion for intervention, to wit:

ATTY. ARNOLD LEBRILLA:

Appearing as counsel for defendant PCI Equitable Bank, your Honor.

ATTY. CORNELIO PANES:

Also appearing as counsel for defendant New Frontier Sugar Corporation.

ATTY. ANTONIO SINGSON:

I am appearing, your Honor, as counsel for Passisugar.
ATTY. REUBEN MIKHAIL SABIG:
Appearing your Honor, for Megan Sugar, Inc.

ATTY. LEBRILLA: Your Honor, the counsel for the plaintiff CIMICO has not yet arrived.

ATTY. SABIG: Your Honor, we have been furnished of a copy of the motion. Ive talked to Atty. [Leonardo]
Jiz and he informed me that he cannot attend this hearing because we are in the process of taking over
this case. However, the Passisugar had intervened and we have to appear because we have been copy
furnished of the motion, and also, your Honor, since the motion will directly affect Megan and we are
appearing in this hearing despite the fact that we had not officially received the copy of the motion.
Anyway, your Honor, since we are in the process of taking over this case, Atty. Jiz told me that he cannot
appear today.

COURT: Here is the representative from CIMICO.

ATTY. PANES: Yes, your Honor, Atty. Gonzales is here.

ATTY. NELIA JESUSA GONZALES:

I am appearing in behalf of the plaintiff CIMICO, your Honor.

xxxx

COURT: Shall we tackle first your motion for intervention?

ATTY. SINGSON: Yes, your Honor.

ATTY. PANES: Yes, your Honor, and I would like to make a manifestation in relation to the appearance
made by Atty. Sabig. Megan is not, in anyway, a party [to] this case and if he must join, he can file a
motion for intervention. We would like to reiterate our stand that he cannot participate in any proceeding
before this Court particularly in this case.

COURT: Yes, that is right.

ATTY. SINGSON: Yes, your Honor, unless there is a substitution of the plaintiff.

ATTY. SABIG: I understand, your Honor, that we have been served a copy of this motion.

ATTY. PANES: A service copy of the motion is only a notice and it is not, in anyway, [a] right for him to
appear as a party.

COURT: Just a moment, Atty. Panes. Shall we allow Atty. Sabig to finish first?

ATTY. SABIG: This motion directly affects us and thats why were voluntarily appearing, just for this
hearing on the motion and not for the case itself, specifically for the hearing [on] this motion. Thats our
appearance for today because we have been served and we have to protect our interest. We are not
saying that we are taking over the case but there is a hearing for the motion in intervention and we have
been served a copy, thats why we appear voluntarily.

ATTY. LEBRILLA: Your Honor, please, for the defendant, we do not object to the appearance of the
counsel for Megan provided that the counsel could assure us that whatever he says [all through] in this
proceeding will [bind] his client, your Honor, as he is duly authorized by the corporation, under oath, your
Honor, that whatever he says here is binding upon the corporation.
ATTY. SABIG: Yes, your Honor.
COURT: But I thought all the while that your motion for intervention will implead Megan.

ATTY. SINGSON: We will not yet implead them, your Honor.

COURT: Why will you not implead them because they are now in possession of the mill?

ATTY. SINGSON: Thats why we want to be clarified. In what capacity is Megan entering into the picture?
Thats the point now that we would like to ask them. So, whatever statement youll be making here will bind
Megan?

ATTY. SABIG: Yes, your Honor. Specifically for the hearing because apparently, we have to voluntarily
appear since they furnished us a copy that would directly affect our rights.

xxxx

COURT: Are you saying that you are appearing now in behalf of Megan?

ATTY. SABIG: Yes, your Honor.

COURT: And whatever statement you made here will bind Megan?

ATTY. SABIG: Yes, your Honor.

xxxx

COURT: Thats why youre being asked now what interest [does] Megan have here?

ATTY. SABIG: We are already in possession of the mill, your Honor.

ATTY. SINGSON: You are in possession of the mill. [On] what authority are you in possession, this Megan
group?

ATTY. SABIG: We have a Memorandum of Agreement which we entered, your Honor, and they
transferred their [referring to CIMICO] rights to us.[24]

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice,
and its purpose is to forbid one to speak against his own act, representations, or commitments to the
injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel
springs from equitable principles and the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result. It has been applied by this Court
wherever and whenever special circumstances of a case so demand.[25]

Based on the events and circumstances surrounding the issuance of the assailed orders, this Court rules
that MEGAN is estopped from assailing both the authority of Atty. Sabig and the jurisdiction of the RTC.
While it is true, as claimed by MEGAN, that Atty. Sabig said in court that he was only appearing for the
hearing of Passi Sugars motion for intervention and not for the case itself, his subsequent acts, coupled
with MEGANs inaction and negligence to repudiate his authority, effectively bars MEGAN from assailing
the validity of the RTC proceedings under the principle of estoppel.

In the first place, Atty. Sabig is not a complete stranger to MEGAN. As a matter of fact, as manifested by
EPCIB, Atty. Sabig and his law firm SABIG SABIG & VINGCO Law Office has represented MEGAN in
other cases[26] where the opposing parties involved were also CIMICO and EPCIB. As such, contrary to
MEGANs claim, such manifestation is neither immaterial nor irrelevant,[27] because at the very least,
such fact shows that MEGAN knew Atty. Sabig.

MEGAN can no longer deny the authority of Atty. Sabig as they have already clothed him with apparent
authority to act in their behalf. It must be remembered that when Atty. Sabig entered his appearance, he
was accompanied by Concha, MEGANs director and general manager. Concha himself attended several
court hearings, and on December 17, 2002, even sent a letter[28] to the RTC asking for the status of the
case. A corporation may be held in estoppel from denying as against innocent third persons the authority
of its officers or agents who have been clothed by it with ostensible or apparent authority.[29]Atty. Sabig
may not have been armed with a board resolution, but the appearance of Concha made the parties
assume that MEGAN had knowledge of Atty. Sabigs actions and, thus, clothed Atty. Sabig with apparent
authority such that the parties were made to believe that the proper person and entity to address was Atty.
Sabig. Apparent authority, or what is sometimes referred to as the "holding out" theory, or doctrine of
ostensible agency, imposes liability, not as the result of the reality of a contractual relationship, but rather
because of the actions of a principal or an employer in somehow misleading the public into believing that
the relationship or the authority exists.[30]

Like the CA, this Court notes that MEGAN never repudiated the authority of Atty. Sabig when all the
motions, pleadings and court orders were sent not to the office of Atty. Sabig but to the office of MEGAN,
who in turn, would forward all of the same to Atty. Sabig, to wit:

x x x All the motions, pleadings and other notices in the civil case were mailed to Atty. Reuben Mikhail P.
Sabig, Counsel for Megan Sugar, NFSC Compound, Barangay Man-it, Passi, Iloilo City which is the
address of the Sugar Central being operated by Megan Sugar. The said address is not the real office
address of Atty. Sabig. As pointed out by private respondent Equitable PCI Bank, the office address of
Atty. Sabig is in Bacolod City. All orders, pleadings or motions filed in Civil Case 02-243 were received in
the sugar central being operated by Megan Central and later forwarded by Megan Sugar to Atty. Sabig
who is based in Bacolod City. We find it incredible that, granting that there was no authority given to said
counsel, the record shows that it was received in the sugar mill operated by Megan and passed on to Atty.
Sabig. At any stage, petitioner could have repudiated Atty. Sabig when it received the court pleadings
addressed to Atty. Sabig as their counsel.[31]

One of the instances of estoppel is when the principal has clothed the agent with indicia of authority as to
lead a reasonably prudent person to believe that the agent actually has such authority.[32] With the case
of MEGAN, it had all the opportunity to repudiate the authority of Atty. Sabig since all motions, pleadings
and court orders were sent to MEGANs office. However, MEGAN never questioned the acts of Atty. Sabig
and even took time and effort to forward all the court documents to him.

To this Courts mind, MEGAN cannot feign knowledge of the acts of Atty. Sabig, as MEGAN was aware
from the very beginning that CIMICO was involved in an on-going litigation. Such fact is clearly spelled
out in MEGANs MOA with CIMICO, to wit:

WHEREAS, CIMICO had filed a 2nd Amended Complaint for Sum of Money, Breach of Contract and
Damages with Preliminary Injunction with a Prayer for a Writ of Temporary Restraining Order against the
NEW FRONTIER SUGAR CORPORATION, pending before Branch 68 of the Regional Trial Court, based
in Dumangas, Iloilo, Philippines, entitled CENTRAL ILOILO MILLING CORPORATION (CIMICO) versus
NEW FRONTIER SUGAR CORPORATION (NFSC), EQUITABLE PCI BANK and PHILIPPINE
INDUSTRIAL SECURITY AGENCY docketed as CIVIL CASE NO. 02-243;[33]

Considering that MEGANs rights stemmed from CIMICO and that MEGAN was only to assume the last
crop period of 2002-2003 under CIMICOs contract with NFSC,[34] it becomes improbable that MEGAN
would just wait idly by for the final resolution of the case and not send a lawyer to protect its interest.
In addition, it bears to point out that MEGAN was negligent when it did not assail the authority of Atty.
Sabig within a reasonable time from the moment when the first adverse order was issued. To restate, the
January 16, 2003 RTC Order directed MEGAN to deposit a sizable number of sugar quedans. With such
an order that directly affects the disposition of MEGANs assets and one that involves a substantial
amount, it is inconceivable for Atty. Sabig or for Concha not to inform MEGANs board of such an order or
for one of the directors not to hear of such order thru other sources. As manifested by NFSC, MEGAN is a
family corporation and Concha is the son-in-law of Eduardo Jose Q. Miranda (Eduardo), the President of
MEGAN. Elizabeth Miranda, one of the directors, is the daughter of Eduardo. MEGANs treasurer, Ramon
Ortiz is a cousin of the Mirandas.[35] Thus, given the nature and structure of MEGANs board, it is
unimaginable that not a single director was aware of the January 16, 2003 RTC Order. However, far from
repudiating the authority of Atty. Sabig, Atty. Sabig even filed a Manifestation[36] that MEGAN will deposit
the quedans, as directed by the RTC, every Friday of the week.

MEGAN had all the opportunity to assail the jurisdiction of the RTC and yet far from doing so, it even
complied with the RTC Order. With the amount of money involved, it is beyond belief for MEGAN to claim
that it had no knowledge of the events that transpired. Moreover, it bears to stress that Atty. Sabig even
filed subsequent motions asking for affirmative relief, more important of which is his March 27, 2003
Urgent Ex-Parte Motion[37] asking the RTC to direct the Sugar Regulatory Administration (SRA) to
release certain quedans in favor of MEGAN on the premise that the same were not covered by the RTC
Orders. Atty. Sabig manifested that 30% of the value of the quedans will be deposited in court as payment
for accrued rentals. Noteworthy is the fact that Atty. Sabigs motion was favorably acted upon by the RTC.
Like the CA, this Court finds that estoppel has already set in. It is not right for a party who has affirmed
and invoked the jurisdiction of a court in a particular matter to secure an affirmative relief to afterwards
deny that same jurisdiction to escape a penalty.[38] The party is barred from such conduct not because
the judgment or order of the court is valid but because such a practice cannot be tolerated for reasons of
public policy.[39]

Lastly, this Court also notes that on April 2, 2003, Atty. Sabig again filed an Urgent Ex-Parte Motion[40]
asking the RTC to direct the SRA to release certain quedans not covered by the RTC Orders. The same
was granted by the RTC in an Order[41] dated April 2, 2003. Curiously, however, Rene Imperial, the Plant
Manager of MEGAN, also signed the April 2, 2003 RTC Order and agreed to the terms embodied therein.
If Atty. Sabig was not authorized to act in behalf of MEGAN, then why would MEGANs plant manager sign
an official document assuring the RTC that he would deliver 30% of the value of the quedans earlier
released to MEGAN pursuant to the March 27, 2003 Order?

The rule is that the active participation of the party against whom the action was brought, coupled with his
failure to object to the jurisdiction of the court or administrative body where the action is pending, is
tantamount to an invocation of that jurisdiction and a willingness to abide by the resolution of the case and
will bar said party from later on impugning the court or bodys jurisdiction.[42] Based on the preceding
discussion, this Court holds that MEGANs challenge to Atty. Sabigs authority and the RTCs jurisdiction
was a mere afterthought after having received an unfavorable decision from the RTC. Certainly, it would
be unjust and inequitable to the other parties if this Court were to grant such a belated jurisdictional
challenge.

WHEREFORE, premises considered, the petition is DENIED. The August 23, 2004 Decision and October
12, 2005 Resolution of the Court of Appeals, in CA-G.R. SP No. 75789, are AFFIRMED.

G.R. No. L-21601 December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,
vs. LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

ZALDIVAR, J.:
On February 6, 1958, plaintiff brought this action against defendant before the Court of First Instance of
Manila to recover certain sums of money representing damages allegedly suffered by the former in view
of the refusal of the latter to comply with the terms of a management contract entered into between them
on January 30, 1937, including attorney's fees and costs.
Defendant in its answer denied the material allegations of the complaint and set up certain special
defenses, among them, prescription and laches, as bars against the institution of the present action.
After trial, during which the parties presented testimonial and numerous documentary evidence, the
court a quorendered a decision dismissing the complaint with costs. The court stated that it did not find
sufficient evidence to establish defendant's counterclaim and so it likewise dismissed the same.
The present appeal was taken to this Court directly by the plaintiff in view of the amount involved in the
case.
The facts of this case, as stated in the decision appealed from, are hereunder quoted for purposes of this
decision:
It appears that the suit involves an operating agreement executed before World War II between
the plaintiff and the defendant whereby the former operated and managed the mining properties
owned by the latter for a management fee of P2,500.00 a month and a 10% participation in the
net profits resulting from the operation of the mining properties. For brevity and convenience,
hereafter the plaintiff shall be referred to as NIELSON and the defendant, LEPANTO.
The antecedents of the case are: The contract in question (Exhibit `C') was made by the parties
on January 30, 1937 for a period of five (5) years. In the latter part of 1941, the parties agreed to
renew the contract for another period of five (5) years, but in the meantime, the Pacific War broke
out in December, 1941.
In January, 1942 operation of the mining properties was disrupted on account of the war. In
February of 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and
mines, were destroyed upon orders of the United States Army, to prevent their utilization by the
invading Japanese Army. The Japanese forces thereafter occupied the mining properties,
operated the mines during the continuance of the war, and who were ousted from the mining
properties only in August of 1945.
After the mining properties were liberated from the Japanese forces, LEPANTO took possession
thereof and embarked in rebuilding and reconstructing the mines and mill; setting up new
organization; clearing the mill site; repairing the mines; erecting staff quarters and bodegas and
repairing existing structures; installing new machinery and equipment; repairing roads and
maintaining the same; salvaging equipment and storing the same within the bodegas; doing
police work necessary to take care of the materials and equipment recovered; repairing and
renewing the water system; and remembering (Exhibits "D" and "E"). The rehabilitation and
reconstruction of the mine and mill was not completed until 1948 (Exhibit "F"). On June 26, 1948
the mines resumed operation under the exclusive management of LEPANTO (Exhibit "F-l").
Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose
between NIELSON and LEPANTO over the status of the operating contract in question which as
renewed expired in 1947. Under the terms thereof, the management contract shall remain in
suspense in case fortuitous event or force majeure, such as war or civil commotion, adversely
affects the work of mining and milling.
"In the event of inundations, floodings of mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery
or other event or cause reasonably beyond the control of NIELSON and which adversely
affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and
without liability or breach of the terms of this Agreement, the same shall remain in
suspense, wholly or partially during the terms of such inability." (Clause II of Exhibit "C").
NIELSON held the view that, on account of the war, the contract was suspended during the war;
hence the life of the contract should be considered extended for such time of the period of
suspension. On the other hand, LEPANTO contended that the contract should expire in 1947 as
originally agreed upon because the period of suspension accorded by virtue of the war did not
operate to extend further the life of the contract.
No understanding appeared from the record to have been bad by the parties to resolve the
disagreement. In the meantime, LEPANTO rebuilt and reconstructed the mines and was able to
bring the property into operation only in June of 1948, . . . .
Appellant in its brief makes an alternative assignment of errors depending on whether or not the
management contract basis of the action has been extended for a period equivalent to the period of
suspension. If the agreement is suspended our attention should be focused on the first set of errors
claimed to have been committed by the court a quo; but if the contrary is true, the discussion will then be
switched to the alternative set that is claimed to have been committed. We will first take up the question
whether the management agreement has been extended as a result of the supervening war, and after this
question shall have been determined in the sense sustained by appellant, then the discussion of the
defense of laches and prescription will follow as a consequence.
The pertinent portion of the management contract (Exh. C) which refers to suspension should any event
constituting force majeure happen appears in Clause II thereof which we quote hereunder:
In the event of inundations, floodings of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery or other
event or cause reasonably beyond the control of NIELSON and which adversely affects the work
of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach
of the terms of this Agreement, the same shall remain in suspense, wholly or partially during the
terms of such inability.
A careful scrutiny of the clause above-quoted will at once reveal that in order that the management
contract may be deemed suspended two events must take place which must be brought in a satisfactory
manner to the attention of defendant within a reasonable time, to wit: (1) the event constituting the force
majeure must be reasonably beyond the control of Nielson, and (2) it must adversely affect the work of
mining and milling the company is called upon to undertake. As long as these two condition exist the
agreement is deem suspended.
Does the evidence on record show that these two conditions had existed which may justify the conclusion
that the management agreement had been suspended in the sense entertained by appellant? Let us go to
the evidence.
It is a matter that this Court can take judicial notice of that war supervened in our country and that the
mines in the Philippines were either destroyed or taken over by the occupation forces with a view to their
operation. The Lepanto mines were no exception for not was the mine itself destroyed but the mill, power
plant, supplies on hand, equipment and the like that were being used there were destroyed as well. Thus,
the following is what appears in the Lepanto Company Mining Report dated March 13, 1946 submitted by
its President C. A. DeWitt to the defendant: 1 "In February of 1942, our mill, power plant, supplies on hand,
equipment, concentrates on hand, and mine, were destroyed upon orders of the U.S. Army to prevent
their utilization by the enemy." The report also mentions the report submitted by Mr. Blessing, an official of
Nielson, that "the original mill was destroyed in 1942" and "the original power plant and all the installed
equipment were destroyed in 1942." It is then undeniable that beginning February, 1942 the operation of
the Lepanto mines stopped or became suspended as a result of the destruction of the mill, power plant
and other important equipment necessary for such operation in view of a cause which was clearly beyond
the control of Nielson and that as a consequence such destruction adversely affected the work of mining
and milling which the latter was called upon to undertake under the management contract. Consequently,
by virtue of the very terms of said contract the same may be deemed suspended from February, 1942 and
as of that month the contract still had 60 months to go.
On the other hand, the record shows that the defendant admitted that the occupation forces operated its
mining properties subject of the management contract, 2 and from the very report submitted by President
DeWitt it appears that the date of the liberation of the mine was August 1, 1945 although at the time there
were still many booby traps.3 Similarly, in a report submitted by the defendant to its stockholders dated
August 25, 1948, the following appears: "Your Directors take pleasure in reporting that June 26, 1948
marked the official return to operations of this Company of its properties in Mankayan, Mountain Province,
Philippines."4
It is, therefore, clear from the foregoing that the Lepanto mines were liberated on August 1, 1945, but
because of the period of rehabilitation and reconstruction that had to be made as a result of the
destruction of the mill, power plant and other necessary equipment for its operation it cannot be said that
the suspension of the contract ended on that date. Hence, the contract must still be deemed suspended
during the succeeding years of reconstruction and rehabilitation, and this period can only be said to have
ended on June 26, 1948 when, as reported by the defendant, the company officially resumed the mining
operations of the Lepanto. It should here be stated that this period of suspension from February, 1942 to
June 26, 1948 is the one urged by plaintiff.5
It having been shown that the operation of the Lepanto mines on the part of Nielson had been suspended
during the period set out above within the purview of the management contract, the next question that
needs to be determined is the effect of such suspension. Stated in another way, the question now to be
determined is whether such suspension had the effect of extending the period of the management
contract for the period of said suspension. To elucidate this matter, we again need to resort to the
evidence.
For appellant Nielson two witnesses testified, declaring that the suspension had the effect of extending
the period of the contract, namely, George T. Scholey and Mark Nestle. Scholey was a mining engineer
since 1929, an incorporator, general manager and director of Nielson and Company; and for some time
he was also the vice-president and director of the Lepanto Company during the pre-war days and, as
such, he was an officer of both appellant and appellee companies. As vice-president of Lepanto and
general manager of Nielson, Scholey participated in the negotiation of the management contract to the
extent that he initialed the same both as witness and as an officer of both corporations. This witness
testified in this case to the effect that the standard force majeure clause embodied in the management
contract was taken from similar mining contracts regarding mining operations and the understanding
regarding the nature and effect of said clause was that when there is suspension of the operation that
suspension meant the extension of the contract. Thus, to the question, "Before the war, what was the
understanding of the people in the particular trend of business with respect to the force majeure clause?",
Scholey answered: "That was our understanding that the suspension meant the extension of time lost." 6
Mark Nestle, the other witness, testified along similar line. He had been connected with Nielson since
1937 until the time he took the witness stand and had been a director, manager, and president of the
same company. When he was propounded the question: "Do you know what was the custom or usage at
that time in connection withforce majeure clause?", Nestle answered, "In the mining world the force
majeure clause is generally considered. When a calamity comes up and stops the work like in war, flood,
inundation or fire, etc., the work is suspended for the duration of the calamity, and the period of the
contract is extended after the calamity is over to enable the person to do the big work or recover his
money which he has invested, or accomplish what his obligation is to a third person ." 7
And the above testimonial evidence finds support in the very minutes of the special meeting of the Board
of Directors of the Lepanto Company issued on March 10, 1945 which was then chairmaned by Atty. C. A.
DeWitt. We read the following from said report:
The Chairman also stated that the contract with Nielson and Company would soon expire if the
obligations were not suspended, in which case we should have to pay them the retaining fee of
P2,500.00 a month. He believes however, that there is a provision in the contract suspending the
effects thereof in cases like the present, and that even if it were not there, the law itself would
suspend the operations of the contract on account of the war. Anyhow, he stated, we shall have
no difficulty in solving satisfactorily any problem we may have with Nielson and Company.8
Thus, we can see from the above that even in the opinion of Mr. DeWitt himself, who at the time was the
chairman of the Board of Directors of the Lepanto Company, the management contract would then expire
unless the period therein rated is suspended but that, however, he expressed the belief that the period
was extended because of the provision contained therein suspending the effects thereof should any of the
case of force majeure happen like in the present case, and that even if such provision did not exist the
law would have the effect of suspending it on account of the war. In substance, Atty. DeWitt expressed the
opinion that as a result of the suspension of the mining operation because of the effects of the war the
period of the contract had been extended.
Contrary to what appellant's evidence reflects insofar as the interpretation of the force majeure clause is
concerned, however, appellee gives Us an opposite interpretation invoking in support thereof not only a
letter Atty. DeWitt sent to Nielson on October 20, 1945, 9 wherein he expressed for the first time an opinion
contrary to what he reported to the Board of Directors of Lepanto Company as stated in the portion of the
minutes of its Board of Directors as quoted above, but also the ruling laid down by our Supreme Court in
some cases decided sometime ago, to the effect that the war does not have the effect of extending the
term of a contract that the parties may enter into regarding a particular transaction, citing in this
connection the cases of Victorias Planters Association v. Victorias Milling Company, 51 O.G.
4010; Rosario S. Vda. de Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150; and Lo Ching y So Young
Chong Co. v. Court of Appeals, et al., 81 Phil. 601.
To bolster up its theory, appellee also contends that the evidence regarding the alleged custom or usage
in mining contract that appellant's witnesses tried to introduce was incompetent because (a) said custom
was not specifically pleaded; (b) Lepanto made timely and repeated objections to the introduction of said
evidence; (c) Nielson failed to show the essential elements of usage which must be shown to exist before
any proof thereof can be given to affect the contract; and (d) the testimony of its witnesses cannot prevail
over the very terms of the management contract which, as a rule, is supposed to contain all the terms and
conditions by which the parties intended to be bound.
It is here necessary to analyze the contradictory evidence which the parties have presented regarding the
interpretation of the force majeure clause in the management contract.
At the outset, it should be stated that, as a rule, in the construction and interpretation of a document the
intention of the parties must be sought (Rule 130, Section 10, Rules of Court). This is the basic rule in the
interpretation of contracts because all other rules are but ancilliary to the ascertainment of the meaning
intended by the parties. And once this intention has been ascertained it becomes an integral part of the
contract as though it had been originally expressed therein in unequivocal terms (Shoreline Oil Corp. v.
Guy, App. 189, So., 348, cited in 17A C.J.S., p. 47). How is this intention determined?
One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties in
relation to the transaction under consideration (Article 1371, Civil Code). In this particular case, it is
worthy of note what Atty. C. A. DeWitt has stated in the special meeting of the Board of Directors of
Lepanto in the portion of the minutes already quoted above wherein, as already stated, he expressed the
opinion that the life of the contract, if not extended, would last only until January, 1947 and yet he said
that there is a provision in the contract that the war had the effect of suspending the agreement and that
the effect of that suspension was that the agreement would have to continue with the result that Lepanto
would have to pay the monthly retaining fee of P2,500.00. And this belief that the war suspended the
agreement and that the suspension meant its extension was so firm that he went to the extent that even if
there was no provision for suspension in the agreement the law itself would suspend it.
It is true that Mr. DeWitt later sent a letter to Nielson dated October 20, 1945 wherein apparently he
changed his mind because there he stated that the contract was merely suspended, but not extended, by
reason of the war, contrary to the opinion he expressed in the meeting of the Board of Directors already
adverted to, but between the two opinions of Atty. DeWitt We are inclined to give more weight and validity
to the former not only because such was given by him against his own interest but also because it was
given before the Board of Directors of Lepanto and in the presence, of some Nielson officials 10 who, on
that occasion were naturally led to believe that that was the true meaning of the suspension clause, while
the second opinion was merely self-serving and was given as a mere afterthought.
Appellee also claims that the issue of true intent of the parties was not brought out in the complaint, but
anent this matter suffice it to state that in paragraph No. 19 of the complaint appellant pleaded that the
contract was extended. 11 This is a sufficient allegation considering that the rules on pleadings must as a
rule be liberally construed.
It is likewise noteworthy that in this issue of the intention of the parties regarding the meaning and usage
concerning the force majeure clause, the testimony adduced by appellant is uncontradicted. If such were
not true, appellee should have at least attempted to offer contradictory evidence. This it did not do. Not
even Lepanto's President, Mr. V. E. Lednicky who took the witness stand, contradicted said evidence.
In holding that the suspension of the agreement meant the extension of the same for a period equivalent
to the suspension, We do not have the least intention of overruling the cases cited by appellee. We simply
want to say that the ruling laid down in said cases does not apply here because the material facts
involved therein are not the same as those obtaining in the present. The rule of stare decisis cannot be
invoked where there is no analogy between the material facts of the decision relied upon and those of the
instant case.
Thus, in Victorias Planters Association vs. Victorias Milling Company, 51 O.G. 4010, there was no
evidence at all regarding the intention of the parties to extend the contract equivalent to the period of
suspension caused by the war. Neither was there evidence that the parties understood the suspension to
mean extension; nor was there evidence of usage and custom in the industry that the suspension meant
the extension of the agreement. All these matters, however, obtain in the instant case.
Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87 Phil. 150, the issue referred to
the interpretation of a pre-war contract of lease of sugar cane lands and the liability of the lessee to pay
rent during and immediately following the Japanese occupation and where the defendant claimed the
right of an extension of the lease to make up for the time when no cane was planted. This Court, in
holding that the years which the lessee could not use the land because of the war could not be
discounted from the period agreed upon, held that "Nowhere is there any insinuation that the defendant-
lessee was to have possession of lands for seven years excluding years on which he could not harvest
sugar." Clearly, this ratio decidendi is not applicable to the case at bar wherein there is evidence that the
parties understood the "suspension clause by force majeure" to mean the extension of the period of
agreement.
Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals, et al., 81 Phil. 601, appellant
leased a building from appellee beginning September 13, 1940 for three years, renewable for two years.
The lessee's possession was interrupted in February, 1942 when he was ousted by the Japanese who
turned the same over to German Otto Schulze, the latter occupying the same until January, 1945 upon
the arrival of the liberation forces. Appellant contended that the period during which he did not enjoy the
leased premises because of his dispossession by the Japanese had to be deducted from the period of the
lease, but this was overruled by this Court, reasoning that such dispossession was merely a simple
"perturbacion de merohecho y de la cual no responde el arrendador" under Article 1560 of the old Civil
Code Art. 1664). This ruling is also not applicable in the instant case because in that case there was no
evidence of the intention of the parties that any suspension of the lease by force majeure would be
understood to extend the period of the agreement.
In resume, there is sufficient justification for Us to conclude that the cases cited by appellee are
inapplicable because the facts therein involved do not run parallel to those obtaining in the present case.

We shall now consider appellee's defense of laches. Appellee is correct in its contention that the defense
of laches applies independently of prescription. Laches is different from the statute of limitations.
Prescription is concerned with the fact of delay, whereas laches is concerned with the effect of delay.
Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be
enforced, this inequity being founded on some change in the condition of the property or the relation of
the parties. Prescription is statutory; laches is not. Laches applies in equity, whereas prescription applies
at law. Prescription is based on fixed time, laches is not. (30 C.J.S., p. 522; See also Pomeroy's Equity
Jurisprudence, Vol. 2, 5th ed., p. 177).

The question to determine is whether appellant Nielson is guilty of laches within the meaning
contemplated by the authorities on the matter. In the leading case of Go Chi Gun, et al. vs. Go Cho, et al.,
96 Phil. 622, this Court enumerated the essential elements of laches as follows:
(1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation of which complaint is made and for which the complaint seeks a remedy; (2) delay in
asserting the complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct and having been afforded an opportunity to institute a suit; (3) lack of
knowledge or notice on the part of the defendant that the complainant would assert the right on
which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is accorded
to the complainant, or the suit is not held barred.
Are these requisites present in the case at bar?
The first element is conceded by appellant Nielson when it claimed that defendant refused to pay its
management fees, its percentage of profits and refused to allow it to resume the management operation.
Anent the second element, while it is true that appellant Nielson knew since 1945 that appellee Lepanto
has refused to permit it to resume management and that since 1948 appellee has resumed operation of
the mines and it filed its complaint only on February 6, 1958, there being apparent delay in filing the
present action, We find the delay justified and as such cannot constitute laches. It appears that appellant
had not abandoned its right to operate the mines for even before the termination of the suspension of the
agreement as early as January 20, 1946 12 and even before March 10, 1945, it already claimed its right to
the extension of the contract,13 and it pressed its claim for the balance of its share in the profits from the
1941 operation14 by reason of which negotiations had taken place for the settlement of the claim 15 and it
was only on June 25, 1957 that appellee finally denied the claim. There is, therefore, only a period of less
than one year that had elapsed from the date of the final denial of the claim to the date of the filing of the
complaint, which certainly cannot be considered as unreasonable delay.
The third element of laches is absent in this case. It cannot be said that appellee Lepanto did not know
that appellant would assert its rights on which it based suit. The evidence shows that Nielson had been
claiming for some time its rights under the contract, as already shown above.
Neither is the fourth element present, for if there has been some delay in bringing the case to court it was
mainly due to the attempts at arbitration and negotiation made by both parties. If Lepanto's documents
were lost, it was not caused by the delay of the filing of the suit but because of the war.
Another reason why appellant Nielson cannot be held guilty of laches is that the delay in the filing of the
complaint in the present case was the inevitable of the protracted negotiations between the parties
concerning the settlement of their differences. It appears that Nielson asked for arbitration 16 which was
granted. A committee consisting of Messrs. DeWitt, Farnell and Blessing was appointed to act on said
differences but Mr. DeWitt always tried to evade the issue 17 until he was taken ill and died. Mr. Farnell
offered to Nielson the sum of P13,000.58 by way of compromise of all its claim arising from the
management contract18 but apparently the offer was refused. Negotiations continued with the exchange of
letters between the parties but with no satisfactory result. 19 It can be said that the delay due to protracted
negotiations was caused by both parties. Lepanto, therefore, cannot be permitted to take advantage of
such delay or to question the propriety of the action taken by Nielson. The defense of laches is an
equitable one and equity should be applied with an even hand. A person will not be permitted to take
advantage of, or to question the validity, or propriety of, any act or omission of another which was
committed or omitted upon his own request or was caused by his conduct (R. H. Stearns Co. vs. United
States, 291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry Prentiss & Co., 288 U.S. 73,
77 L. Ed., 626, 53 S. Ct., 283).
Had the action of Nielson prescribed? The court a quo held that the action of Nielson is already barred by
the statute of limitations, and that ruling is now assailed by the appellant in this appeal. In urging that the
court a quoerred in reaching that conclusion the appellant has discussed the issue with reference to
particular claims.
The first claim is with regard to the 10% share in profits of 1941 operations. Inasmuch as appellee
Lepanto alleges that the correct basis of the computation of the sharing in the net profits shall be as
provided for in Clause V of the Management Contract, while appellant Nielson maintains that the basis
should be what is contained in the minutes of the special meeting of the Board of Directors of Lepanto on
August 21, 1940, this question must first be elucidated before the main issue is discussed.
The facts relative to the matter of profit sharing follow: In the management contract entered into between
the parties on January 30, 1937, which was renewed for another five years, it was stipulated that Nielson
would receive a compensation of P2,500.00 a month plus 10% of the net profits from the operation of the
properties for the preceding month. In 1940, a dispute arose regarding the computation of the 10% share
of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics of the contract
was unfair to Nielson, authorized its President to enter into an agreement with Nielson modifying the
pertinent provision of the contract effective January 1, 1940 in such a way that Nielson shall receive (1)
10% of the dividends declared and paid, when and as paid, during the period of the contract and at the
end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount
expended during the year out of surplus earnings for capital account. 20 Counsel for the appellee admitted
during the trial that the extract of the minutes as found in Exhibit B is a faithful copy from the
original. 21 Mr. George Scholey testified that the foregoing modification was agreed upon. 22
Lepanto claims that this new basis of computation should be rejected (1) because the contract was clear
on the point of the 10% share and it was so alleged by Nielson in its complaint, and (2) the minutes of the
special meeting held on August 21, 1940 was not signed.
It appearing that the issue concerning the sharing of the profits had been raised in appellant's complaint
and evidence on the matter was introduced 23 the same can be taken into account even if no amendment
of the pleading to make it conform to the evidence has been made, for the same is authorized by Section
4, Rule 17, of the old Rules of Court (now Section 5, Rule 10, of the new Rules of Court).
Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter that
the period to be considered for the prescription of the claim regarding participation in the profits is only
four years, because the modification of the sharing embodied in the management contract is merely
verbal, no written document to that effect having been presented. This contention is untenable. The
modification appears in the minutes of the special meeting of the Board of Directors of Lepanto held on
August 21, 1940, it having been made upon the authority of its President, and in said minutes the terms of
the modification had been specified. This is sufficient to have the agreement considered, for the purpose
of applying the statute of limitations, as a written contract even if the minutes were not signed by the
parties (3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if adopted
by two persons may constitute a contract in writing even if the same is not signed by either of the parties
(3 A.L.R., 2d, pp. 812-813). Another authority says that an unsigned agreement the terms of which are
embodied in a document unconditionally accepted by both parties is a written contract (Corbin on
Contracts, Vol. 1, p. 85)
The modification, therefore, made in the management contract relative to the participation in the profits by
appellant, as contained in the minutes of the special meeting of the Board of Directors of Lepanto held on
August 21, 1940, should be considered as a written contract insofar as the application of the statutes of
limitations is concerned. Hence, the action thereon prescribes within ten (10) years pursuant to Section
43 of Act 190.
Coming now to the facts, We find that the right of Nielson to its 10% participation in the 1941 operations
accrued on December 21, 1941 and the right to commence an action thereon began on January 1, 1942
so that the action must be brought within ten (10) years from the latter date. It is true that the complaint
was filed only on February 6, 1958, that is sixteen (16) years, one (1) month and five (5) days after the
right of action accrued, but the action has not yet prescribed for various reasons which We will hereafter
discuss.
The first reason is the operation of the Moratorium Law, for appellant's claim is undeniably a claim for
money. Said claim accrued on December 31, 1941, and Lepanto is a war sufferer. Hence the claim was
covered by Executive Order No. 32 of March 10, 1945. It is well settled that the operation of the
Moratorium Law suspends the running of the statue of limitations (Pacific Commercial Co. vs. Aquino,
G.R. No. L-10274, February 27, 1957).
This Court has held that the Moratorium Law had been enforced for eight (8) years, two (2) months and
eight (8) days (Tioseco vs. Day, et al., L-9944, April 30, 1957; Levy Hermanos, Inc. vs. Perez, L-14487,
April 29, 1960), and deducting this period from the time that had elapsed since the accrual of the right of
action to the date of the filing of the complaint, the extent of which is sixteen (16) years, one (1) month
and five (5) days, we would have less than eight (8) years to be counted for purposes of prescription.
Hence appellant's action on its claim of 10% on the 1941 profits had not yet prescribed.
Another reason that may be taken into account in support of the no-bar theory of appellant is the
arbitration clause embodied in the management contract which requires that any disagreement as to any
amount of profits before an action may be taken to court shall be subject to arbitration. 24 This agreement
to arbitrate is valid and binding. 25 It cannot be ignored by Lepanto. Hence Nielson could not bring an
action on its participation in the 1941 operations-profits until the condition relative to arbitration had been
first complied with. 26 The evidence shows that an arbitration committee was constituted but it failed to
accomplish its purpose on June 25, 1957. 27From this date to the filing of the complaint the required
period for prescription has not yet elapsed.
Nielson claims the following: (1) 10% share in the dividends declared in 1941, exclusive of interest,
amounting to P17,500.00; (2) 10% in the depletion reserves for 1941; and (3) 10% in the profits for years
prior to 1948 amounting to P19,764.70.
With regard to the first claim, the Lepanto's report for the calendar year of 1954 28 shows that it declared a
10% cash dividend in December, 1941, the amount of which is P175,000.00. The evidence in this
connection (Exhibits L and O) was admitted without objection by counsel for Lepanto. 29 Nielson claims
10% share in said amount with interest thereon at 6% per annum. The document (Exhibit L) was even
recognized by Lepanto's President V. L. Lednicky, 30 and this claim is predicated on the provision of
paragraph V of the management contract as modified pursuant to the proposal of Lepanto at the special
meeting of the Board of Directors on August 21, 1940 (Exh. B), whereby it was provided that Nielson
would be entitled to 10% of any dividends to be declared and paid during the period of the contract.
With regard to the second claim, Nielson admits that there is no evidence regarding the amount set aside
by Lepanto for depletion reserve for 1941 31 and so the 10% participation claimed thereon cannot be
assessed.
Anent the third claim relative to the 10% participation of Nielson on the sum of P197,647.08, which
appears in Lepanto's annual report for 1948 32 and entered as profit for prior years in the statement of
income and surplus, which amount consisted "almost in its entirety of proceeds of copper concentrates
shipped to the United States during 1947," this claim should to denied because the amount is not
"dividend declared and paid" within the purview of the management contract.
The fifth assignment of error of appellant refers to the failure of the lower court to order Lepanto to pay its
management fees for January, 1942, and for the full period of extension amounting to P150,000.00, or
P2,500.00 a month for sixty (60) months, a total of P152,500.00 with interest thereon from the date
of judicial demand.
It is true that the claim of management fee for January, 1942 was not among the causes of action in the
complaint, but inasmuch as the contract was suspended in February, 1942 and the management fees
asked for included that of January, 1942, the fact that such claim was not included in a specific manner in
the complaint is of no moment because an appellate court may treat the pleading as amended to conform
to the evidence where the facts show that the plaintiff is entitled to relief other than what is asked for in
the complaint (Alonzo vs. Villamor, 16 Phil. 315). The evidence shows that the last payment made by
Lepanto for management fee was for November and December, 1941. 33 If, as We have declared, the
management contract was suspended beginning February 1942, it follows that Nielson is entitled to the
management fee for January, 1942.
Let us now come to the management fees claimed by Nielson for the period of extension. In this respect,
it has been shown that the management contract was extended from June 27, 1948 to June 26, 1953, or
for a period of sixty (60) months. During this period Nielson had a right to continue in the management of
the mining properties of Lepanto and Lepanto was under obligation to let Nielson do it and to pay the
corresponding management fees. Appellant Nielson insisted in performing its part of the contract but
Lepanto prevented it from doing so. Hence, by virtue of Article 1186 of the Civil Code, there was a
constructive fulfillment an the part of Nielson of its obligation to manage said mining properties in
accordance with the contract and Lepanto had the reciprocal obligation to pay the corresponding
management fees and other benefits that would have accrued to Nielson if Lepanto allowed it (Nielson) to
continue in the management of the mines during the extended period of five (5) years.
We find that the preponderance of evidence is to the effect that Nielson had insisted in managing the
mining properties soon after liberation. In the report 34 of Lepanto, submitted to its stockholders for the
period from 1941 to March 13, 1946, are stated the activities of Nielson's officials in relation to Nielson's
insistence in continuing the management. This report was admitted in evidence without objection. We find
the following in the report:
Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San Fernando (La Union) to await the
liberation of the mines. (Mr. Blessing was the Treasurer and Metallurgist of Nielson). Blessing with Clark
and Stanford went to the property on July 16 and found that while the mill site had been cleared of the
enemy the latter was still holding the area around the staff houses and putting up a strong defense. As a
result, they returned to San Fernando and later went back to the mines on July 26. Mr. Blessing made the
report, dated August 6, recommending a program of operation. Mr. Nielson himself spent a day in the
mine early in December, 1945 and reiterated the program which Mr. Blessing had outlined. Two or three
weeks before the date of the report, Mr. Coldren of the Nielson organization also visited the mine and told
President C. A. DeWitt of Lepanto that he thought that the mine could be put in condition for the delivery
of the ore within ten (10) days. And according to Mark Nestle, a witness of appellant, Nielson had several
men including engineers to do the job in the mines and to resume the work. These engineers were in fact
sent to the mine site and submitted reports of what they had done. 35
On the other hand, appellee claims that Nielson was not ready and able to resume the work in the mines,
relying mainly on the testimony of Dr. Juan Nabong, former secretary of both Nielson and Lepanto, given
in the separate case of Nancy Irving Romero vs. Lepanto Consolidated Mining Company (Civil Case No.
652, CFI, Baguio), to the effect that as far as he knew "Nielson and Company had not attempted to
operate the Lepanto Consolidated Mining Company because Mr. Nielson was not here in the Philippines
after the last war. He came back later," and that Nielson and Company had no money nor stocks with
which to start the operation. He was asked by counsel for the appellee if he had testified that way in Civil
Case No. 652 of the Court of First Instance of Baguio, and he answered that he did not confirm it fully.
When this witness was asked by the same counsel whether he confirmed that testimony, he said that
when he testified in that case he was not fully aware of what happened and that after he learned more
about the officials of the corporation it was only then that he became aware that Nielson had really sent
his men to the mines along with Mr. Blessing and that he was aware of this fact personally. He further said
that Mr. Nielson was here in 1945 and "he was going out and contacting his people." 36
Lepanto admits, in its own brief, that Nielson had really insisted in taking over the management and
operation of the mines but that it (Lepanto) unequivocally refuse to allow it. The following is what appears
in the brief of the appellee:
It was while defendant was in the midst of the rehabilitation work which was fully described
earlier, still reeling under the terrible devastation and destruction wrought by war on its mine that
Nielson insisted in taking over the management and operation of the mine. Nielson thus put
Lepanto in a position where defendant, under the circumstances, had to refuse, as in fact it did,
 Nielson's insistence in taking over the management and operation because, as was obvious, it
was impossible, as a result of the destruction of the mine, for the plaintiff to manage and operate
the same and because, as provided in the agreement, the contract was suspended by reason of
the war. The stand of Lepanto in disallowing Nielson to assume again the management of the
mine in 1945 was unequivocal and cannot be misinterpreted, infra.37
Based on the foregoing facts and circumstances, and Our conclusion that the management contract was
extended, We believe that Nielson is entitled to the management fees for the period of extension. Nielson
should be awarded on this claim sixty times its monthly pay of P2,500.00, or a total of P150,000.00.
In its sixth assignment of error Nielson contends that the lower court erred in not ordering Lepanto to pay
it (Nielson) the 10% share in the profits of operation realized during the period of five (5) years from the
resumption of its post-war operations of the Mankayan mines, in the total sum of P2,403,053.20 with
interest thereon at the rate of 6% per annum from February 6, 1958 until full payment. 38
The above claim of Nielson refers to four categories, namely: (1) cash dividends; (2) stock dividends; (3)
depletion reserves; and (4) amount expended on capital investment.
Anent the first category, Lepanto's report for the calendar year 1954 39 contains a record of the cash
dividends it paid up to the date of said report, and the post-war dividends paid by it corresponding to the
years included in the period of extension of the management contract are as follows:
POST-WAR
8 10% November 1949 P 200,000.00

9 10% July 1950 300,000.00

10 10% October 1950 500,000.00

11 20% December 1950 1,000,000.00

12 20% March 1951 1,000,000.00

13 20% June 1951 1,000,000.00

14 20% September 1951 1,000,000.00

15 40% December 1951 2,000,000.00

16 20% March 1952 1,000,000.00

17 20% May 1952 1,000,000.00

18 20% July 1952 1,000,000.00

19 20% September 1952 1,000,000.00

20 20% December 1952 1,000,000.00

21 20% March 1953 1,000,000.00

22 20% June 1953 1,000,000.00

TOTAL P14,000,000.00
According to the terms of the management contract as modified, appellant is entitled to 10% of the
P14,000,000.00 cash dividends that had been distributed, as stated in the above-mentioned report, or the
sum of P1,400,000.00.
With regard to the second category, the stock dividends declared by Lepanto during the period of
extension of the contract are: On November 28, 1949, the stock dividend declared was 50% of the
outstanding authorized capital of P2,000,000.00 of the company, or stock dividends worth P1,000,000.00;
and on August 22, 1950, the stock dividends declared was 66-2/3% of the standing authorized capital of
P3,000,000.00 of the company, or stock dividends worth P2,000,000.00. 40
Appellant's claim that it should be given 10% of the cash value of said stock dividends with interest
thereon at 6% from February 6, 1958 cannot be granted for that would not be in accordance with the
management contract which entitles Nielson to 10% of any dividends declared paid, when and as paid.
Nielson, therefore, is entitled to 10% of the stock dividends and to the fruits that may have accrued to said
stock dividends pursuant to Article 1164 of the Civil Code. Hence to Nielson is due shares of stock worth
P100,000.00, as per stock dividends declared on November 28, 1949 and all the fruits accruing to said
shares after said date; and also shares of stock worth P200,000.00 as per stock dividends declared on
August 20, 1950 and all fruits accruing thereto after said date.
Anent the third category, the depletion reserve appearing in the statement of income and surplus
submitted by Lepanto corresponding to the years covered by the period of extension of the contract, may
be itemized as follows:
In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion reserve set up was P11,602.80.
In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion reserve set up was P33,556.07.
In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the depletion reserve set up was
P84,963.30.
In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the depletion reserve set up was
P129,089.88.
In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the depletion reserve was
P147,141.54.
In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion reserve set up as P277,493.25.
Regarding the depletion reserve set up in 1948 it should be noted that the amount given was for the
whole year. Inasmuch as the contract was extended only for the last half of the year 1948, said amount of
P11,602.80 should be divided by two, and so Nielson is only entitled to 10% of the half amounting to
P5,801.40.
Likewise, the amount of depletion reserve for the year 1953 was for the whole year and since the contract
was extended only until the first half of the year, said amount of P277,493.25 should be divided by two,
and so Nielson is only entitled to 10% of the half amounting to P138,746.62. Summing up the entire
depletion reserves, from the middle of 1948 to the middle of 1953, we would have a total of P539,298.81,
of which Nielson is entitled to 10%, or to the sum of P53,928.88.
Finally, with regard to the fourth category, there is no figure in the record representing the value of the
fixed assets as of the beginning of the period of extension on June 27, 1948. It is possible, however, to
arrive at the amount needed by adding to the value of the fixed assets as of December 31, 1947 one-half
of the amount spent for capital account in the year 1948. As of December 31, 1947, the value of the fixed
assets was P1,061,878.8841 and as of December 31, 1948, the value of the fixed assets was
P3,270,408.07. 42 Hence, the increase in the value of the fixed assets for the year 1948 was
P2,208,529.19, one-half of which is P1,104,264.59, which amount represents the expenses for capital
account for the first half of the year 1948. If to this amount we add the fixed assets as of December 31,
1947 amounting to P1,061,878.88, we would have a total of P2,166,143.47 which represents the fixed
assets at the beginning of the second half of the year 1948.
There is also no figure representing the value of the fixed assets when the contract, as extended, ended
on June 26, 1953; but this may be computed by getting one-half of the expenses for capital account made
in 1953 and adding the same to the value of the fixed assets as of December 31, 1953 is
P9,755,840.41 43 which the value of the fixed assets as of December 31, 1952 is P8,463,741.82, the
difference being P1,292,098.69. One-half of this amount is P646,049.34 which would represent the
expenses for capital account up to June, 1953. This amount added to the value of the fixed assets as of
December 31, 1952 would give a total of P9,109,791.16 which would be the value of fixed assets at the
end of June, 1953.
The increase, therefore, of the value of the fixed assets of Lepanto from June, 1948 to June, 1953 is
P6,943,647.69, which amount represents the difference between the value of the fixed assets of Lepanto
in the year 1948 and in the year 1953, as stated above. On this amount Nielson is entitled to a share of
10% or to the amount of P694,364.76.
Considering that most of the claims of appellant have been entertained, as pointed out in this decision,
We believe that appellant is entitled to be awarded attorney's fees, especially when, according to the
undisputed testimony of Mr. Mark Nestle, Nielson obliged himself to pay attorney's fees in connection with
the institution of the present case. In this respect, We believe, considering the intricate nature of the case,
an award of fifty thousand (P50,000.00) pesos for attorney's fees would be reasonable.
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a
quo and enter in lieu thereof another, ordering the appellee Lepanto to pay appellant Nielson the different
amounts as specified hereinbelow:
(1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest
thereon from the date of the filing of the complaint;
(2) management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from the
date of the filing of the complaint;
(3) management fees for the sixty-month period of extension of the management contract, amounting to
P150,000.00, with legal interest from the date of the filing of the complaint;
(4) 10% share in the cash dividends during the period of extension of the management contract,
amounting to P1,400,000.00, with legal interest thereon from the date of the filing of the complaint;
(5) 10% of the depletion reserve set up during the period of extension, amounting to P53,928.88, with
legal interest thereon from the date of the filing of the complaint;
(6) 10% of the expenses for capital account during the period of extension, amounting to P694,364.76,
with legal interest thereon from the date of the filing of the complaint;
(7) to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto Consolidated Mining Co. at par
value equivalent to the total of Nielson's l0% share in the stock dividends declared on November 28, 1949
and August 22, 1950, together with all cash and stock dividends, if any, as may have been declared and
issued subsequent to November 28, 1949 and August 22, 1950, as fruits that accrued to said shares;
If sufficient shares of stock of Lepanto's are not available to satisfy this judgment, defendant-appellee
shall pay plaintiff-appellant an amount in cash equivalent to the market value of said shares at the time of
default (12 C.J.S., p. 130), that is, all shares of the stock that should have been delivered to Nielson
before the filing of the complaint must be paid at their market value as of the date of the filing of the
complaint; and all shares, if any, that should have been delivered after the filing of the complaint at the
market value of the shares at the time Lepanto disposed of all its available shares, for it is only then that
Lepanto placed itself in condition of not being able to perform its obligation (Article 1160, Civil Code);
(8) the sum of P50,000.00 as attorney's fees; and
(9) the costs. It is so ordered.
[G.R. No. 117897. May 14, 1997]

ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE
COMMISSION, petitioners, vs. COURT OF APPEALS and IGLESIA NI CRISTO, respondents.
DECISION
HERMOSISIMA, JR., J.:

The subject of this petition for review is the Decision of the public respondent Court of Appeals,[1] dated
October 28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission
(SEC, for short) in SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in
Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent
Iglesia Ni Cristo (INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP,
for short).

The following facts appear of record.

Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal
groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC
DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic
Center in Quezon City for the construction of a Mosque (prayer place), Madrasah (Arabic School), and
other religious infrastructures so as to facilitate the effective practice of Islamic faith in the area.[2]

Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchase
land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land,
with an area of 49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-
26520 (176616)[3] and RT-26521 (170567),[4] both registered in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its
Articles of Incorporation:

Senator Mamintal Tamano[5]

Congressman Ali Dimaporo

Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar[6]

According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name
of IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the
1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and
Congressman Al-Rashid Lucman flew to the Middle East to escape political persecution.

Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the
Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the
legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups,
came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the
Abbas Group as IDP board members to be null and void. The dispositive portion of the SEC Decision
reads:

WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners[7] and
respondents[8] as null and void for being violative of the Articles of Incorporation of petitioner corporation.
With the nullification of the election of the respondents, the approved by-laws which they certified to this
Commission as members of the Board of Trustees must necessarily be likewise declared null and void.
However, before any election of the members of the Board of Trustees could be conducted, there must be
an approved by-laws to govern the internal government of the association including the conduct of
election. And since the election of both petitioners and respondents have been declared null and void, a
vacuum is created as to who should adopt the by-laws and certify its adoption. To remedy this unfortunate
situation that the association has found itself in, the members of the petitioning corporation are hereby
authorized to prepare and adopt their by-laws for submission to the Commission. Once approved, an
election of the members of the Board of Trustees shall immediately be called pursuant to the approved
by-laws.

SO ORDERED.[9]

Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision,
and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the
Carpizo Group[10] attempted to submit a set of by-laws, the SEC found that, aside from Engineer Farouk
Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide members
of the IDP, thus rendering the adoption of the by-laws likewise null and void.

On April 20, 1989, without having been properly elected as new members of the Board of Trustees of IDP,
the Carpizo Group caused to be signed an alleged Board Resolution[11] of the IDP, authorizing the sale of
the subject two parcels of land to the private respondent INC for a consideration of P22,343,400.00,
which sale was evidenced by a Deed of Absolute Sale[12] dated April 20, 1989.

On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal
Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking
to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since the
group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an
action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of
the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to
clear the property of squatters and deliver complete and full physical possession thereof to INC. Likewise,
INC filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the
Register of Deeds of Quezon City the owners duplicate copy of TCT Nos. RT-26521 and RT-26520
covering the aforementioned two parcels of land, so that the sale in INCs favor may be registered and
new titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of
land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco claimed to
be in behalf of the Carpizo Group.

The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring,
inter alia:

xxx xxx xxx

2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against
Mr. Farouk Carpizo, et, al., who, through false schemes and machinations, succeeded in executing the
Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of
Sale is the subject of the case at bar;

3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether
or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence,
Intervenors legal interest in the instant case. A copy of the said case is hereto attached as Annex A;

4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally
represent the Islamic Directorate of the Philippines;

xxx xxx xxx.[13]

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way
of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC.[14]

Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioners motion to
intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being
raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the
SEC.[15]

Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo
Group but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered
Partial Judgment in Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its
obligation under the Deed of Sale of clearing the subject lots of squatters and of delivering the actual
possession thereof to INC.[16]

Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-
6937, treated INC as the rightful owner of the real properties and disposed as follows:

WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff[17] the owners
copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of
Absolute Sale in the latters name and the annotation of the mortgage executed in her favor by herein
defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to
plaintiff.

SO ORDERED.[18]
On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon to deliver the owners
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of
Quezon City for the purposes stated in the Order of March 2, 1992.[19]

Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R. No. SP-
27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on
October 28, 1992.[20]

Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No.
107751.

In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this
wise:

1. Declaring the by-laws submitted by the respondents[21] as unauthorized, and hence, null and void.

2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale
entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc.[22] null and void.

3. Declaring the election of the Board of Directors[23] of the corporation from 1986 to 1991 as null and
void;

4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of
the IDP null and void.

No pronouncement as to cost.

SO ORDERED.[24]

Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012,
but the same was denied on account of the fact that the decision of the case had become final and
executory, no appeal having been taken therefrom.[25]

INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil
action for certiorari, docketed as CA-G.R. SP No. 33295. On October 28, 1994, the court a quo
promulgated a Decision in CA-G.R. SP No. 33295 granting INCs petition. The portion of the SEC
Decision in SEC Case No. 4012 which declared the sale of the two (2) lots in question to INC as void was
ordered set aside by the Court of Appeals.

Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994,
submitting that the Court of Appeals gravely erred in:

1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;

2) Encouraging multiplicity of suits; and

3) Not applying the principles of estoppel and laches.[26]

While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No.
107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon
petition and affirmed the October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973
which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owners duplicate
copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City
so that the Deed of Absolute Sale in INCs favor may be properly registered.
Before we rule upon the main issue posited in this petition, we would like to point out that our disposition
in G.R. No. 107751 entitled, Ligon v. Court of Appeals, promulgated on June 1, 1995, in no wise
constitutes res judicata such that the petition under consideration would be barred if it were the case.
Quite the contrary, the requisites of res judicata do not obtain in the case at bench.

Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in
personam, to wit:

Effect of judgment. - The effect of a judgment or final order rendered by a court or judge of the
Philippines, having jurisdiction to pronounce the judgment or order, may be as follows:

xxx xxx xxx

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other
matter that could have been raised in relation thereto, conclusive between the parties and their
successors in interest by title subsequent to the commencement of the action or special proceeding,
litigating for the same thing and under the same title and in the same capacity;

(c) In any other litigation between the same parties or their successors in interest, that only is deemed to
have been adjudged in a former judgment which appears upon its face to have been so adjudged, or
which was actually and necessarily included therein or necessary thereto.

Section 49(b) enunciates the first concept of res judicata known as bar by prior judgment, whereas,
Section 49(c) is referred to as conclusiveness of judgment.

There is bar by former judgment when, between the first case where the judgment was rendered, and the
second case where such judgment is invoked, there is identity of parties, subject matter and cause of
action. When the three identities are present, the judgment on the merits rendered in the first constitutes
an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered
and the second case wherein such judgment is invoked, there is only identity of parties but there is no
identity of cause of action, the judgment is conclusive in the second case, only as to those matters
actually and directly controverted and determined, and not as to matters merely involved therein. This is
what is termed conclusiveness of judgment.[27]

Neither of these concepts of res judicata find relevant application in the case at bench. While there may
be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal
parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as
private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was
only made an ancillary party in G.R. No. 107751 as intervenor.[28] It was never originally a principal party
thereto. It must be noted that intervention is not an independent action, but is merely collateral, accessory,
or ancillary to the principal action. It is just an interlocutory proceeding dependent on or subsidiary to the
case between the original parties.[29] Indeed, the IDP-Tamano Group cannot be considered a principal
party in G.R. No. 107751 for purposes of applying the principle of res judicata since the contrary goes
against the true import of the action of intervention as a mere subsidiary proceeding without an
independent life apart from the principal action as well as the intrinsic character of the intervenor as a
mere subordinate party in the main case whose right may be said to be only in aid of the right of the
original party.[30] It is only in the present case, actually, where the IDP-Tamano Group became a principal
party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties
in both cases.

In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751,
was entitled, Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant,[31] the IDP can
not be considered essentially a formal party thereto for the simple reason that it was not duly represented
by a legitimate Board of Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a
case for Specific Performance with Damages, a mere action in personam, did not become final and
executory insofar as the true IDP is concerned since petitioner corporation, for want of legitimate
representation, was effectively deprived of its day in court in said case. Res inter alios judicatae nullum
aliis praejudicium faciunt. Matters adjudged in a cause do not prejudice those who were not parties to it.
[32] Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he is a
stranger.[33]

Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a bar by former
judgment will still not set in on the ground that the cause of action in the two cases are different. The
cause of action in G.R. No. 107751 is the surrender of the owners duplicate copy of the transfer
certificates of title to the rightful possessor thereof, whereas the cause of action in the present case is the
validity of the Carpizo Group-INC Deed of Absolute Sale.

Res Judicata in the form of conclusiveness of judgment cannot likewise apply for the reason that any
mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed
incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC
has the better right of possession over the owners duplicate copy of the TCTs covering the IDP property?
G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the
sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause
grave and irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of
Trustees.

In any case, while it is true that the principle of res judicata is a fundamental component of our judicial
system, it should be disregarded if its rigid application would involve the sacrifice of justice to technicality.
[34]

The main question though in this petition is: Did the Court of Appeals commit reversible error in setting
aside that portion of the SECs Decision in SEC Case No. 4012 which declared the sale of two (2) parcels
of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void?

We rule in the affirmative.

There can be no question as to the authority of the SEC to pass upon the issue as to who among the
different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly
falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of
Presidential Decree No. 902-A:

Section 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations,
partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued
by the government to operate in the Philippines xxx xxx.

xxxxxxxxx

Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:

xxxxxxxxx

c) Controversies in the selection or appointment of directors, trustees, officers, or managers of such

corporations, partnerships or associations. x x x.

If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare
who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it
adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null and void.[35] By this
ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of
Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind
of transaction including the sale or disposition of IDP property.

It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to
pass upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687,
[36] in a suit between the Carpizo Group and the Abbas Group, already declared the election of the
Carpizo Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the
Articles of Incorporation.[37] Nothing thus becomes more settled than that the IDP-Carpizo Group with
whom private respondent INC contracted is a fake Board.

Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora
property, allegedly in the name of the IDP, have to be struck down for having been done without the
consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the
essential requisites of contracts:

There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

All these elements must be present to constitute a valid contract. For, where even one is absent, the
contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and
where it is wanting, the contract is non-existent.[38] In this case, the IDP, owner of the subject parcels of
land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale
executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on
the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void
and produces no effect whatsoever.

The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Groups
failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or
substantially all assets of the corporation:

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees,
sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and
assets, including its goodwill, upon terms and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of money or other property or consideration,
as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation,
by the vote of at least two-thirds (2/3) of the members, in a stockholders or members meeting duly called
for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided
in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.

x x x x x x x x x.
The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence,
its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling
squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the
corporation should have been obtained. These twin requirements were not met as the Carpizo Group
which voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names
and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing
the negotiation for the sale were, from all indications, not bona fide members of the IDP as they were
made to appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation
including the eight (8) members of the Board of Trustees.[39]

All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent
INC was intrinsically void ab initio.

Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made
outside of its jurisdiction, the same not being an intra-corporate dispute.

The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale
null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack
of consent of the IDP, owner of the subject property. No end of substantial justice will be served if we
reverse the SECs conclusion on the matter, and remand the case to the regular courts for further litigation
over an issue which is already determinable based on what we have in the records.

It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board
of Trustees in Civil Case No. Q-90-6937, a case for Specific Performance with Damages between INC
and the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been
granted ample opportunity before the regional trial court to shed light on the true status of the Carpizo
Board and settled the matter as to the validity of the sale then and there. But INC, wanting to acquire the
property at all costs and threatened by the participation of the legitimate IDP Board in the civil suit, argued
for the denial of the motion averring, inter alia, that the issue sought to be litigated by the movant is intra-
corporate in nature and outside the jurisdiction of the regional trial court.[40] As a result, the motion for
intervention was denied. When the Decision in SEC Case No. 4012, came out nullifying the sale, INC
came forward, this time, quibbling over the issue that it is the regional trial court, and not the SEC, which
has jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot put a
premium on this clever legal maneuverings of private respondent which, if countenanced, would result in
a failure of justice.

Furthermore, the Court observed that the INC bought the questioned property from the Carpizo Group
without even seeing the owners duplicate copy of the titles covering the property. This is very strange
considering that the subject lot is a large piece of real property in Quezon City worth millions, and that
under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer for
value is that the vendee at least sees the owners duplicate copy of the title and relies upon the same.[41]
The private respondent presumably knowledgeable on the aforesaid working of the Torrens System, did
not take heed of this and nevertheless went through with the sale with undue haste. The unexplained
eagerness of INC to buy this valuable piece of land in Quezon City without even being presented with the
owners copy of the titles casts very serious doubt on the rightfulness of its position as vendee in the
transaction.

WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated
October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange
Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of
Quezon City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of
respondent Iglesia Ni Cristo, if one has already been made. If new titles have been issued in the name of
Iglesia Ni Cristo, the register of Deeds is hereby ordered to cancel the same, and issue new ones in the
name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to
private respondent whatever amount has been initially paid by INC as consideration for the property with
legal interest, if the same was actually received by IDP. Otherwise, INC may run after Engineer Farouk
Carpizo and his group for the amount of money paid.

SO ORDERED.