G.R. No.

L-21601 December 28, 1968

NIELSON & COMPANY, INC., plaintiff-appellant,

vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

RESOLUTION

ZALDIVAR, J.:

Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion for
reconsideration is based on two sets of grounds — the first set consisting of four principal grounds,
and the second set consisting of five alternative grounds, as follows:

Principal Grounds:

1. The court erred in overlooking and failing to apply the proper law applicable to the agency
or management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920
of the new), by virtue of which said agency was effectively revoked and terminated in 1945
when, as stated in paragraph 20 of the complaint, "defendant voluntarily ... prevented plaintiff
from resuming management and operation of said mining properties."

2. The court erred in holding that paragraph II of the management contract (Exhibit C)
suspended the period of said contract.

3. The court erred in reversing the ruling of the trial judge, based on well-settled
jurisprudence of this Supreme Court, that the management agreement was only suspended
but not extended on account of the war.

4. The court erred in reversing the finding of the trial judge that Nielson's action had
prescribed, but considering only the first claim and ignoring the prescriptibility of the other
claims.

Alternative Grounds:

5. The court erred in holding that the period of suspension of the contract on account of the
war lasted from February 1942 to June 26, 1948.

6. Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as
damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the
management fee of P2,500.00 for the month of January, 1942; and (c) the full contract price
for the extended period of sixty months, since these damages were neither demanded nor
proved and, in any case, not allowable under the general law of damages.

7. Assuming arguendo that appellant is entitled to any relief, the court erred in ordering
appellee to issue and deliver to appellant shares of stock together with fruits thereof.

8. The court erred in awarding to appellant an undetermined amount of shares of stock

and/or cash, which award cannot be ascertained and executed without further litigation.
 9. The court erred in rendering judgment for attorney's fees.

We are going to dwell on these grounds in the order they are presented.

1. In its first principal ground Lepanto claims that its own counsel and this Court had overlooked the
real nature of the management contract entered into by and between Lepanto and Nielson, and the
law that is applicable on said contract. Lepanto now asserts for the first time and this is done in a
motion for reconsideration - that the management contract in question is a contract of agency such
that it has the right to revoke and terminate the said contract, as it did terminate the same, under the
law of agency, and particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the New
Civil Code).

We have taken note that Lepanto is advancing a new theory. We have carefully examined the
pleadings filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did
it assert the theory that it has the right to terminate the management contract because that contract
is one of agency which it could terminate at will. While it is true that in its ninth and tenth special
affirmative defenses, in its answer in the court below, Lepanto pleaded that it had the right to
terminate the management contract in question, that plea of its right to terminate was not based
upon the ground that the relation between Lepanto and Nielson was that of principal and agent but
upon the ground that Nielson had allegedly not complied with certain terms of the management
contract. If Lepanto had thought of considering the management contract as one of agency it could
have amended its answer by stating exactly its position. It could have asserted its theory of agency
in its memorandum for the lower court and in its brief on appeal. This, Lepanto did not do. It is the
rule, and the settled doctrine of this Court, that a party cannot change his theory on appeal — that is,
that a party cannot raise in the appellate court any question of law or of fact that was not raised in
the court below or which was not within the issue made by the parties in their pleadings (Section 19,
Rule 49 of the old Rules of Court, and also Section 18 of the new Rules of Court; Hautea vs.
Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884, February
29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo vs. Javier, 38 Phil. 424 and
Molina vs. Somes, 24 Phil 49).

At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the
proceedings, this Court cannot sustain the same.

Lepanto contends that the management contract in question (Exhibit C) is one of agency because:
(1) Nielson was to manage and operate the mining properties and mill on behalf, and for the
account, of Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto's
behalf, into contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of
the ores mined. All these, Lepanto claims, show that Nielson was, by the terms of the contract,
destined to execute juridical acts not on its own behalf but on behalf of Lepanto under the control of
the Board of Directors of Lepanto "at all times". Hence Lepanto claims that the contract is one of
agency. Lepanto then maintains that an agency is revocable at the will of the principal (Article 1733
of the Old Civil Code), regardless of any term or period stipulated in the contract, and it was in
pursuance of that right that Lepanto terminated the contract in 1945 when it took over and assumed
exclusive management of the work previously entrusted to Nielson under the contract. Lepanto
finally maintains that Nielson as an agent is not entitled to damages since the law gives to the
principal the right to terminate the agency at will.

Because of Lepanto's new theory We consider it necessary to determine the nature of the
management contract — whether it is a contract of agency or a contract of lease of services.
Incidentally, we have noted that the lower court, in the decision appealed from, considered the
management contract as a contract of lease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:

By the contract of agency, one person binds himself to render some service or do something
for the account or at the request of another.

Article 1544, defining contract of lease of service, provides:

In a lease of work or services, one of the parties binds himself to make or construct
something or to render a service to the other for a price certain.

In both agency and lease of services one of the parties binds himself to render some service to the
other party. Agency, however, is distinguished from lease of work or services in that the basis of
agency is representation, while in the lease of work or services the basis is employment. The lessor
of services does not represent his employer, while the agent represents his principal. Manresa, in his
"Commentarios al Codigo Civil Español" (1931, Tomo IX, pp. 372-373), points out that the element of
representation distinguishes agency from lease of services, as follows:

Nuestro art. 1.709 como el art. 1.984 del Codigo de Napoleon y cuantos textos legales
citamos en las concordancias, expresan claramente esta idea de la representacion, "hacer
alguna cosa por cuenta o encargo de otra" dice nuestro Codigo; "poder de hacer alguna
cosa para el mandante o en su nombre" dice el Codigo de Napoleon, y en tales palabras
aparece vivo y luminoso el concepto y la teoria de la representacion, tan fecunda en
ensenanzas, que a su sola luz es como se explican las diferencias que separan el mandato
del arrendamiento de servicios, de los contratos inominados, del consejo y de la gestion de
negocios.

En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se trabaja, en

verdad, para el dueno que remunera la labor, pero ni se le representa ni se obra en su
nombre....

On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil
Code has defined the contract of agency in more explicit terms, as follows:

By the contract of agency a person binds himself to render some service or to do

something in representation or on behalf of another, with the consent or authority of the
latter.

There is another obvious distinction between agency and lease of services. Agency is a preparatory
contract, as agency "does not stop with the agency because the purpose is to enter into other
contracts." The most characteristic feature of an agency relationship is the agent's power to bring
about business relations between his principal and third persons. "The agent is destined to execute
juridical acts (creation, modification or extinction of relations with third parties). Lease of services
contemplate only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil
Law," Vol. V, p. 277).

In the light of the interpretations we have mentioned in the foregoing paragraphs let us now
determine the nature of the management contract in question. Under the contract, Nielson had
agreed, for a period of five years, with the right to renew for a like period, to explore, develop and
operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may be found
therein and to market the metallic products recovered therefrom which may prove to be marketable,
as well as to render for Lepanto other services specified in the contract. We gather from the contract
that the work undertaken by Nielson was to take complete charge subject at all times to the general
control of the Board of Directors of Lepanto, of the exploration and development of the mining
claims, of the hiring of a sufficient and competent staff and of sufficient and capable laborers, of the
prospecting and development of the mine, of the erection and operation of the mill, and of the
benefication and marketing of the minerals found on the mining properties; and in carrying out said
obligation Nielson should proceed diligently and in accordance with the best mining practice. In
connection with its work Nielson was to submit reports, maps, plans and recommendations with
respect to the operation and development of the mining properties, make recommendations and
plans on the erection or enlargement of any existing mill, dispatch mining engineers and technicians
to the mining properties as from time to time may reasonably be required to investigate and make
recommendations without cost or expense to Lepanto. Nielson was also to "act as purchasing agent
of supplies, equipment and other necessary purchases by Lepanto, provided, however, that no
purchase shall be made without the prior approval of Lepanto; and provided further, that no
commission shall be claimed or retained by Nielson on such purchase"; and "to submit all requisition
for supplies, all constricts and arrangement with engineers, and staff and all matters requiring the
expenditures of money, present or future, for prior approval by Lepanto; and also to make contracts
subject to the prior approve of Lepanto for the sale and marketing of the minerals mined from said
properties, when said products are in a suitable condition for marketing." 1

It thus appears that the principal and paramount undertaking of Nielson under the management
contract was the operation and development of the mine and the operation of the mill. All the other
undertakings mentioned in the contract are necessary or incidental to the principal undertaking —
these other undertakings being dependent upon the work on the development of the mine and the
operation of the mill. In the performance of this principal undertaking Nielson was not in any way
executing juridical acts for Lepanto, destined to create, modify or extinguish business relations
between Lepanto and third persons. In other words, in performing its principal undertaking Nielson
was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law
of agency, but as one who was performing material acts for an employer, for a compensation.

It is true that the management contract provides that Nielson would also act as purchasing agent of
supplies and enter into contracts regarding the sale of mineral, but the contract also provides that
Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is
clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind
Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an
intermediary, not as an agent.

Lepanto contends that the management contract in question being one of agency it had the right to
terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find,
however, a proviso in the management contract which militates against this stand of Lepanto.
Paragraph XI of the contract provides:

Both parties to this agreement fully recognize that the terms of this Agreement are made
possible only because of the faith or confidence that the Officials of each company have in
the other; therefore, in order to assure that such confidence and faith shall abide and
continue, NIELSON agrees that LEPANTO may cancel this Agreement at any time upon
ninety (90) days written notice, in the event that NIELSON for any reason whatsoever, except
acts of God, strike and other causes beyond its control, shall cease to prosecute the
operation and development of the properties herein described, in good faith and in
accordance with approved mining practice.

It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that
Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement
by giving notice of termination ninety days in advance only in the event that Nielson should
prosecute in bad faith and not in accordance with approved mining practice the operation and
development of the mining properties of Lepanto. Lepanto could not terminate the agreement if
Nielson should cease to prosecute the operation and development of the mining properties by
reason of acts of God, strike and other causes beyond the control of Nielson.

The phrase "Both parties to this agreement fully recognize that the terms of this agreement are
made possible only because of the faith and confidence of the officials of each company have in the
other" in paragraph XI of the management contract does not qualify the relation between Lepanto
and Nielson as that of principal and agent based on trust and confidence, such that the contractual
relation may be terminated by the principal at any time that the principal loses trust and confidence
in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of
the management contract. Thus, in the annual report for 19362, submitted by Mr. C. A. Dewit,
President of Lepanto, to its stockholders, under date of March 15, 1937, we read the following:

To the stockholders

xxx xxx xxx

The incorporation of our Company was effected as a result of negotiations with Messrs.
Nielson & Co., Inc., and an offer by these gentlemen to Messrs. C. I. Cookes and V. L.
Lednicky, dated August 11, 1936, reading as follows:

Messrs. Cookes and Lednicky,

Present

Re: Mankayan Copper Mines

GENTLEMEN:

After an examination of your property by our engineers, we have decided to offer as

we hereby offer to underwrite the entire issue of stock of a corporation to be formed
for the purpose of taking over said properties, said corporation to have an authorized
capital of P1,750,000.00, of which P700,000.00 will be issued in escrow to the claim-
owners in exchange for their claims, and the balance of P1,050,000.00 we will sell to
the public at par or take ourselves.

The arrangement will be under the following conditions:

1. The subscriptions for cash shall be payable 50% at time of subscription and the
balance subject to the call of the Board of Directors of the proposed corporation.

2. We shall have an underwriting and brokerage commission of 10% of the

P1,050,000.00 to be sold for cash to the public, said commission to be payable from
the first payment of 50% on each subscription.

3. We will bear the cost of preparing and mailing any prospectus that may be
required, but no such prospectus will be sent out until the text thereof has been first
approved by the Board of Directors of the proposed corporation.
 4. That after the organization of the corporation, all operating contract be entered into
between ourselves and said corporation, under the terms which the property will be
developed and mined and a mill erected, under our supervision, our compensation to
be P2,000.00 per month until the property is put on a profitable basis and P2,500.00
per month plus 10% of the net profits for a period of five years thereafter.

5. That we shall have the option to renew said operating contract for an additional
period of five years, on the same basis as the original contract, upon the expiration
thereof.

It is understood that the development and mining operations on said property, and
the erection of the mill thereon, and the expenditures therefor shall be subject to the
general control of the Board of Directors of the proposed corporation, and, in case
you accept this proposition, that a detailed operating contract will be entered into,
covering the relationships between the parties.

Yours very truly,

(Sgd.) L. R. Nielson

Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took
subscriptions for One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our
Company and their underwriting and brokerage commission has been paid. More than fifty
per cent of these subscriptions have been paid to the Company in cash. The claim owners
have transferred their claims to the Corporation, but the P700,000.00 in stock which they are
to receive therefor, is as yet held in escrow.

Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the
Management of the property under the control of the Board of Directors. A modification in the
Management Contract was made with the consent of all the then stockholders, in virtue of
which the compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month
when mill construction began. The formal Management Contract was not entered into until
January 30, 1937.

xxx xxx xxx

Manila, March 15, 1937

(Sgd.) C. A. DeWitt President

We can gather from the foregoing statements in the annual report for 1936, and from the provision of
paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate
and manage its mines was principally in consideration of the know-how and technical services that
Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and
accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere
in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated
the management contract because it had lost its trust and confidence in Nielson.

The contention of Lepanto that it had terminated the management contract in 1945, following the
liberation of the mines from Japanese control, because the relation between it and Nielson was one
of agency and as such it could terminate the agency at will, is, therefore, untenable. On the other
hand, it can be said that, in asserting that it had terminated or cancelled the management contract in
1945, Lepanto had thereby violated the express terms of the management contract. The
management contract was renewed to last until January 31, 1947, so that the contract had yet
almost two years to go — upon the liberation of the mines in 1945. There is no showing that Nielson
had ceased to prosecute the operation and development of the mines in good faith and in
accordance with approved mining practice which would warrant the termination of the contract upon
ninety days written notice. In fact there was no such written notice of termination. It is an admitted
fact that Nielson ceased to operate and develop the mines because of the war — a cause beyond
the control of Nielson. Indeed, if the management contract in question was intended to create a
relationship of principal and agent between Lepanto and Nielson, paragraph XI of the contract
should not have been inserted because, as provided in Article 1733 of the old Civil Code, agency is
essentially revocable at the will of the principal — that means, with or without cause. But precisely
said paragraph XI was inserted in the management contract to provide for the cause for its
revocation. The provision of paragraph XI must be given effect.

In the construction of an instrument where there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect to all, 3 and if some stipulation of any
contract should admit of several meanings, it shall be understood as bearing that import which is
most adequate to render it effectual.4

It is Our considered view that by express stipulation of the parties, the management contract in
question is not revocable at the will of Lepanto. We rule that this management contract is not a
contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of services
as defined in Article 1544 of the same Code. This contract can not be unilaterally revoked by
Lepanto.

The first ground of the motion for reconsideration should, therefore, be brushed aside.

2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this
Court erred, in holding that paragraph 11 of the management contract suspended the period of said
contract, in holding that the agreement was not only suspended but was extended on account of the
war, and in holding that the period of suspension on account of the war lasted from February, 1942
to June 26, 1948. We are going to discuss these three grounds together because they are
interrelated.

In our decision we have dwelt lengthily on the points that the management contract was suspended
because of the war, and that the period of the contract was extended for a period equivalent to the
time when Nielson was unable to perform the work of mining and milling because of the adverse
effects of the war on the work of mining and milling.

It is the contention of Lepanto that the happening of those events, and the effects of those events,
simply suspended the performance of the obligations by either party in the contract, but did not
suspend the period of the contract, much less extended the period of the contract.

We have conscientiously considered the arguments of Lepanto in support of these three grounds,
but We are not persuaded to reconsider the rulings that We made in Our decision.

We want to say a little more on these points, however. Paragraph II of the management contract
provides as follows:

In the event of inundation, flooding of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, fire, 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. (Emphasis supplied)

A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of
any of the events enumerated therein, which adversely affects the work of mining and milling, the
agreement is deemed suspended for as long as Nielson is unable to perform its work of mining and
milling because of the adverse effects of the happening of the event on the work of mining and
milling. During the period when the adverse effects on the work of mining and milling exist, neither
party in the contract would be held liable for non-compliance of its obligation under the contract. In
other words, the operation of the contract is suspended for as long as the adverse effects of the
happening of any of those events had impeded or obstructed the work of mining and milling. An
analysis of the phraseology of the above-quoted paragraph II of the management contract readily
supports the conclusion that it is the agreement, or the contract, that is suspended. The phrase "the
same" can refer to no other than the term "Agreement" which immediately precedes it. The
"Agreement" may be wholly or partially suspended, and this situation will depend on whether the
event wholly or partially affected adversely the work of mining and milling. In the instant case, the
war had adversely affected — and wholly at that — the work of mining and milling. We have clearly
stated in Our decision the circumstances brought about by the war which caused the whole or total
suspension of the agreement or of the management contract.

LEPANTO itself admits that the management contract was suspended. We quote from the brief of
LEPANTO:

Probably, what Nielson meant was, it was prevented by Lepanto to assume again the
management of the mine in 1945, at the precise time when defendant was at the feverish
phase of rehabilitation and although the contract had already been suspended. (Lepanto's
Brief, p. 9).

... 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 (Lepanto's Brief, pp. 9-10).

Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or
force majeure, such as war, adversely affects the work of mining and milling. (Lepanto's
Brief, p. 49).

Lepanto is correct when it said that the obligations under the contract were suspended upon the
happening of any of the events enumerated in paragraph II of the management contract. Indeed,
those obligations were suspended because the contract itself was suspended. When we talk of a
contract that has been suspended we certainly mean that the contract temporarily ceased to be
operative, and the contract becomes operative again upon the happening of a condition — or when
a situation obtains — which warrants the termination of the suspension of the contract.

In Our decision We pointed out that the agreement in the management contract would be suspended
when two conditions concur, namely: (1) the happening of the event constituting a force majeure that
was reasonably beyond the control of Nielson, and (2) that the event constituting the force majeure
adversely affected the work of mining and milling. The suspension, therefore, would last not only
while the event constituting the force majeure continued to occur but also for as long as the adverse
effects of the force majeure on the work of mining and milling had not been eliminated. Under the
management contract the happening alone of the event constituting the force majeure which did not
affect adversely the work of mining and milling would not suspend the period of the contract. It is
only when the two conditions concur that the period of the agreement is suspended.

It is not denied that because of the war, in February 1942, the mine, the original mill, the original
power plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto,
were destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is
not denied that for the duration of the war Nielson could not undertake the work of mining and
milling. When the mines were liberated from the enemy in August, 1945, the condition of the mines,
the mill, the power plant and other installations, was not the same as in February 1942 when they
were ordered destroyed by the US army. Certainly, upon the liberation of the mines from the enemy,
the work of mining and milling could not be undertaken by Nielson under the same favorable
circumstances that obtained before February 1942. The work of mining and milling, as undertaken
by Nielson in January, 1942, could not be resumed by Nielson soon after liberation because of the
adverse effects of the war, and this situation continued until June of 1948. Hence, the suspension of
the management contract did not end upon the liberation of the mines in August, 1945. The mines
and the mill and the installations, laid waste by the ravages of war, had to be reconstructed and
rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse effects of the war
on the work of mining and milling had ended, because it was on that date that the operation of the
mines and the mill was resumed. The period of suspension should, therefore, be reckoned from
February 1942 until June 26, 1948, because it was during this period that the war and the adverse
effects of the war on the work of mining and milling had lasted. The mines and the installations had
to be rehabilitated because of the adverse effects of the war. The work of rehabilitation started soon
after the liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as stated in
Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948 marked the official
return to operation of this company at its properties at Mankayan, Mountain Province, Philippines"
(Exh. F-1).

Lepanto would argue that if the management contract was suspended at all the suspension should
cease in August of 1945, contending that the effects of the war should cease upon the liberation of
the mines from the enemy. This contention cannot be sustained, because the period of rehabilitation
was still a period when the physical effects of the war — the destruction of the mines and of all the
mining installations — adversely affected, and made impossible, the work of mining and milling.
Hence, the period of the reconstruction and rehabilitation of the mines and the installations must be
counted as part of the period of suspension of the contract.

Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the
mines because soon after the liberation of the mines Nielson insisted to resume the management
work, and that Nielson was under obligation to reconstruct the mill in the same way that it was under
obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to
resume its management work after liberation, but this was only for the purpose of restoring the
mines, the mill, and other installations to their operating and producing condition as of February
1942 when they were ordered destroyed. It is not shown by any evidence in the record, that Nielson
had agreed, or would have agreed, that the period of suspension of the contract would end upon the
liberation of the mines. This is so because, as found by this Court, the intention of the parties in the
management contract, and as understood by them, the management contract was suspended for as
long as the adverse effects of the force majeure on the work of mining and milling had not been
removed, and the contract would be extended for as long as it was suspended. Under the
management contract Nielson had the obligation to erect and operate the mill, but not to erect or
reconstruct the mill in case of its destruction by force majeure.

It is the considered view of this court that it would not be fair to Nielson to consider the suspension of
the contract as terminated upon the liberation of the mines because then Nielson would be placed in
a situation whereby it would have to suffer the adverse effects of the war on the work of mining and
milling. The evidence shows that as of January 1942 the operation of the mines under the
management of Nielson was already under beneficial conditions, so much so that dividends were
already declared by Lepanto for the years 1939, 1940 and 1941. To make the management contract
immediately operative after the liberation of the mines from the Japanese, at the time when the
mines and all its installations were laid waste as a result of the war, would be to place Nielson in a
situation whereby it would lose all the benefits of what it had accomplished in placing the Lepanto
mines in profitable operation before the outbreak of the war in December, 1941. The record shows
that Nielson started its management operation way back in 1936, even before the management
contract was entered into. As early as August 1936 Nielson negotiated with Messrs. C. I. Cookes
and V. L. Lednicky for the operation of the Mankayan mines and it was the result of those
negotiations that Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto,
and that after the formation of the corporation (Lepanto) Nielson immediately assumed the
management of the mining properties of Lepanto. It was not until January 30, 1937 when the
management contract in question was entered into between Lepanto and Nielson (Exhibit A).

A contract for the management and operation of mines calls for a speculative and risky venture on
the part of the manager-operator. The manager-operator invests its technical know-how, undertakes
back-breaking efforts and tremendous spade-work, so to say, in the first years of its management
and operation of the mines, in the expectation that the investment and the efforts employed might be
rewarded later with success. This expected success may never come. This had happened in the
very case of the Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various persons
and entities of different nationalities, including Lednicky himself, invested all their money and failed.
The manager-operator may not strike sufficient ore in the first, second, third, or fourth year of the
management contract, or he may not strike ore even until the end of the fifth year. Unless the
manager-operator strikes sufficient quantity of ore he cannot expect profits or reward for his
investment and efforts. In the case of Nielson, its corps of competent engineers, geologists, and
technicians begun working on the Mankayan mines of Lepanto since the latter part of 1936, and
continued their work without success and profit through 1937, 1938, and the earlier part of 1939. It
was only in December of 1939 when the efforts of Nielson started to be rewarded when Lepanto
realized profits and the first dividends were declared. From that time on Nielson could expect profit
to come to it — as in fact Lepanto declared dividends for 1940 and 1941 — if the development and
operation of the mines and the mill would continue unhampered. The operation, and the expected
profits, however, would still be subject to hazards due to the occurrence of fortuitous events, fires,
earthquakes, strikes, war, etc., constituting force majeure, which would result in the destruction of
the mines and the mill. One of these diverse causes, or one after the other, may consume the whole
period of the contract, and if it should happen that way the manager-operator would reap no profit to
compensate for the first years of spade-work and investment of efforts and know-how. Hence, in
fairness to the manager-operator, so that he may not be deprived of the benefits of the work he had
accomplished, the force majeure clause is incorporated as a standard clause in contracts for the
management and operation of mines.

The nature of the contract for the management and operation of mines justifies the interpretation of
the force majeure clause, that a period equal to the period of suspension due to force majeure
should be added to the original term of the contract by way of an extension. We, therefore, reiterate
the ruling in Our decision that the management contract in the instant case was suspended from
February, 1942 to June 26, 1948, and that from the latter date the contract had yet five years to go.

3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in
reversing the finding of the trial court that Nielson's action has prescribed, by considering only the
first claim and ignoring the prescriptibility of the other claims.
This ground of the motion for reconsideration has no merit.

In Our decision We stated that the claims of Nielson are based on a written document, and, as such,
the cause of action prescribes in ten years.5 Inasmuch as there are different claims which accrued on
different dates the prescriptive periods for all the claims are not the same. The claims of Nielson that
have been awarded by this Court are itemized in the dispositive part of the decision.

The first item of the awards in Our decision refers to Nielson's compensation in the sum of
P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in December,
1941. As we have stated in Our decision, this claim accrued on December 31, 1941, and the right to
commence an action thereon started on January 1, 1942. We declared that the action on this claim
did not prescribe although the complaint was filed on February 6, 1958 — or after a lapse of 16
years, 1 month and 5 days — because of the operation of the moratorium law.

We declared that under the applicable decisions of this Court 6 the moratorium period of 8 years, 2
months and 8 days should be deducted from the period that had elapsed since the accrual of the
cause of action to the date of the filing of the complaint, so that there is a period of less than 8 years
to be reckoned for the purpose of prescription.

This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945, which
provides as follows:

Enforcement of payments of all debts and other monetary obligations payable in the
Philippines, except debts and other monetary obligations entered into in any area after
declaration by Presidential Proclamation that such area has been freed from enemy
occupation and control, is temporarily suspended pending action by the Commonwealth
Government. (41 O.G. 56-57; Emphasis supplied)

Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or
before December 8, 1941) and those contracted subsequent to December 8, 1941 and during the
Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium
provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who
had not filed war damage claims with the United States War Damage Commission. In other words,
after the effectivity of Republic Act No. 342, the debt moratorium was limited: (1) to debts and other
monetary obligations which were contracted after December 8, 1941 and during the Japanese
occupation, and (2) to those pre-war (or pre-December 8, 1941) debts and other monetary
obligations where the debtors filed war damage claims. That was the situation up to May 18, 1953
when this Court declared Republic Act No. 342 unconstitutional.7 It has been held by this Court,
however, that from March 10, 1945 when Executive Order No. 32 was issued, to May 18, 1953 when
Republic Act No. 342 was declared unconstitutional — or a period of 8 years, 2 months and 8 days
— the debt moratorium was in force, and had the effect of suspending the period of prescription. 8

Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in
Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-
war obligations or those incurred prior to December 8, 1941," and that "the moratorium
was lifted and terminated with respect to obligations incurred after December 8, 1941."9

This Court has held that Republic Act No. 342 does not apply to debts contracted during the war and
did not lift the moratorium in relations thereto.10 In the case of Abraham, et al. vs. Intestate Estate of
Juan C. Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:
 Respondents, however, contend that Republic Act No. 342, which took effect on July 26,
1948, lifted the moratorium on debts contracted during the Japanese occupation. The court
has already held that Republic Act No. 342 did not lift the moratorium on debts contracted
during the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified
Executive Order No. 32 as to pre-war debts, making the protection available only to debtors
who had war damage claims (Sison v. Mirasol, G.R. No. L-4711, Oct. 3, 1952).

We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to
Nielson had not prescribed.

What we have stated herein regarding the non-prescription of the cause of action of the claim
involved in the first item in the award also holds true with respect to the second item in the award,
which refers to Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto admits
that this second item, like the first, is a monetary obligation. The right of action of Nielson regarding
this claim accrued on January 31, 1942.

As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not applicable.
That is the reason why in Our decision We did not discuss the question of prescription regarding
these items. The claims of Nielson involved in these items are based on the management contract,
and Nielson's cause of action regarding these claims prescribes in ten years. Corollary to Our ruling
that the management contract was suspended from February, 1942 until June 26, 1948, and that the
contract was extended for five years from June 26, 1948, the right of action of Nielson to claim for
what is due to it during that period of extension accrued during the period from June 26, 1948 till the
end of the five-year extension period or until June 26, 1953. And so, even if We reckon June 26,
1948 as the starting date of the ten-year period in connection with the prescriptibility of the claims
involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when the complaint
was filed on February 6, 1958 the ten-year prescriptive period had not yet lapsed.

In Our decision We have also ruled that the right of action of Nielson against Lepanto had not
prescribed because of the arbitration clause in the Management contract. We are satisfied that there
is evidence that Nielson had asked for arbitration, and an arbitration committee had been
constituted. The arbitration committee, however, failed to bring about any settlement of the
differences between Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely advised
Nielson that they were not entertaining any claim of Nielson. The complaint in this case was filed on
February 6, 1958.

4. In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in
awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the
management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the
extended period of 60 months, since the damages were never demanded nor proved and, in any
case, not allowable under the general law on damages."

We have stated in Our decision that the original agreement in the management contract regarding
the compensation of Nielson was modified, such that instead of receiving a monthly compensation of
P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding
month,11 Nielson would receive a compensation of P2,500.00 a month, plus (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.
It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by
Lepanto.12 Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of
P17,500.00. We have found that this amount was not paid to Nielson.

In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash
disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been
paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement
book that the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson & Co. Inc." The
entry does not make any reference to dividends or participation of Nielson in the profits. On the other
hand, in the photographic copy of page 89 of the 1941 cash disbursement book, also attached to the
motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941 which states "Accts.
Pay. Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be the participation of
Nielson in the profits based on dividends declared in April 1941 as shown in Exhibit L. But in the
same Exhibit L it is not stated that any dividend was declared in October 1941. On the contrary it is
stated in Exhibit L that dividends were declared in December 1941. We cannot entertain this piece of
evidence for several reasons: (1) because this evidence was not presented during the trial in the
court below; (2) there is no showing that this piece of evidence is newly discovered and that Lepanto
was not in possession of said evidence when this case was being tried in the court below; and (3)
according to Exhibit L cash dividends of P175,000.00 were declared in December, 1941, and so the
sum of P17,500.00 which appears to have been paid to Nielson in October 1941 could not be
payment of the equivalent of 10% of the cash dividends that were later declared in December, 1941.

As regards the management fee of Nielson corresponding to January, 1942, in the sum of
P2,500.00, We have also found that Nielson is entitled to be paid this amount, and that this amount
was not paid by Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid the
management fees of Nielson for November and December, 1941,13 it was not able to present any
evidence to show that the management fee of P2,500.00 for January, 1942 had been paid.

It having been declared in Our decision, as well as in this resolution, that the management contract
had been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the
cause of action of Nielson to claim for its compensation during that period of extension had not
prescribed, it follows that Nielson should be awarded the management fees during the whole period
of extension, plus the 10% of the value of the dividends declared during the said period of extension,
the 10% of the depletion reserve that was set up, and the 10% of any amount expended out of
surplus earnings for capital account.

5. In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred in
ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof.

In Our decision, We declared that pursuant to the modified agreement regarding the compensation
of Nielson which provides, among others, that Nielson would receive 10% of any dividends declared
and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto
during the period of extension of the contract.

It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00;
and on August 22, 1950, it declared stock dividends worth P2,000,000.00). In other words, during
the period of extension Lepanto had declared stock dividends worth P3,000,000.00. We held in Our
decision that Nielson is entitled to receive l0% of the stock dividends declared, or shares of stock
worth P300,000.00 at the par value of P0.10 per share. We ordered Lepanto to issue and deliver to
Nielson those shares of stocks as well as all the fruits or dividends that accrued to said shares.
In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as
compensation for its services under the management contract is a violation of the Corporation Law,
and that it was not, and it could not be, the intention of Lepanto and Nielson — as contracting parties
— that the services of Nielson should be paid in shares of stock taken out of stock dividends
declared by Lepanto. We have assiduously considered the arguments adduced by Lepanto in
support of its contention, as well as the answer of Nielson in this connection, and We have arrived at
the conclusion that there is merit in the contention of Lepanto.

Section 16 of the Corporation Law, in part, provides as follows:

No corporation organized under this Act shall create or issue bills, notes or other evidence of
debt, for circulation as money, and no corporation shall issue stock or bonds except in
exchange for actual cash paid to the corporation or for: (1) property actually received by it at
a fair valuation equal to the par or issued value of the stock or bonds so issued; and in case
of disagreement as to their value, the same shall be presumed to be the assessed value or
the value appearing in invoices or other commercial documents, as the case may be; and
the burden or proof that the real present value of the property is greater than the assessed
value or value appearing in invoices or other commercial documents, as the case may be,
shall be upon the corporation, or for (2) profits earned by it but not distributed among its
stockholders or members; Provided, however, That no stock or bond dividend shall be
issued without the approval of stockholders representing not less than two-thirds of all stock
then outstanding and entitled to vote at a general meeting of the corporation or at a special
meeting duly called for the purpose.

xxx xxx xxx

No corporation shall make or declare any dividend except from the surplus profits arising
from its business, or divide 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: Provided, That banking, savings and loan,
and trust corporations may receive deposits and issue certificates of deposit, checks, drafts,
and bills of exchange, and the like in the transaction of the ordinary business of banking,
savings and loan, and trust corporations. (As amended by Act No. 2792, and Act No. 3518;
Emphasis supplied.)

From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which
shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of
stock are given the special name "stock dividends" only if they are issued in lieu of undistributed
profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall
under the category of "stock dividends". A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a stockholder, or in payment of its
indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in
exchange of property, because services is equivalent to property. 14 Likewise a share of stock issued
in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of
stock thus issued should be part of the original capital stock of the corporation upon its organization,
or part of the stocks issued when the increase of the capitalization of a corporation is properly
authorized. In other words, it is the shares of stock that are originally issued by the corporation and
forming part of the capital that can be exchanged for cash or services rendered, or property; that is,
if the corporation has original shares of stock unsold or unsubscribed, either coming from the original
capitalization or from the increased capitalization. Those shares of stock may be issued to a person
who is not a stockholder, or to a person already a stockholder in exchange for services rendered or
for cash or property. But a share of stock coming from stock dividends declared cannot be issued to
one who is not a stockholder of a corporation.

A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the
corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend
paid in shares of stock instead of cash, and is properly payable only out of surplus profits. 15 So, a
stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money
to purchase additional shares of stock at par.16 When a corporation issues stock dividends, it shows
that the corporation's accumulated profits have been capitalized instead of distributed to the
stockholders or retained as surplus available for distribution, in money or kind, should opportunity
offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been transferred from surplus to
assets and no longer available for actual distribution. 17 Thus, it is apparent that stock dividends are
issued only to stockholders. This is so because only stockholders are entitled to dividends. They are
the only ones who have a right to a proportional share in that part of the surplus which is declared as
dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional
interest of each stockholder remains the same.18If a stockholder is deprived of his stock dividends -
and this happens if the shares of stock forming part of the stock dividends are issued to a non-
stockholder — then the proportion of the stockholder's interest changes radically. Stock dividends
are civil fruits of the original investment, and to the owners of the shares belong the civil fruits. 19

The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of
the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable
division among the holders of the capital stock. It means the fund actually set aside, and declared by
the directors of the corporation as dividends and duly ordered by the director, or by the stockholders
at a corporate meeting, to be divided or distributed among the stockholders according to their
respective interests.20

It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends
can not be issued to a person who is not a stockholder in payment of services rendered. And so, in
the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of
Lepanto for services it rendered under the management contract. We sustain the contention of
Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of
the stock dividends declared as the basis for determining the amount of compensation that should
be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And
this conclusion of Ours finds support in the record.

We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and
Nielson regarding the application and interpretation of certain provisions of the original contract
particularly with regard to the 10% participation of Nielson in the net profits, so that some
adjustments had to be made. In the minutes of the meeting of the Board of Directors of Lepanto on
August 21, 1940, We read the following:

The Chairman stated that he believed that it would be better to tie the computation of the
10% participation of Nielson & Company, Inc. to the dividend, because Nielson will then be
able to definitely compute its net participation by the amount of the dividends declared. In
addition to the dividend, we have been setting up a depletion reserve and it does not seem
fair to burden the 10% participation of Nielson with the depletion reserve, as the depletion
reserve should not be considered as an operating expense. After a prolonged discussion,
upon motion duly made and seconded, it was —
 RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement
with Nielson & Company, Inc., modifying Paragraph V of management contract of January
30, 1937, effective January 1, 1940, in such a way that Nielson & Company, Inc. shall
receive 10% of any dividends declared and paid, when and as paid during the period of the
contract and at the end of each year, 10% of any depletion reserve that may be set up and
10% of any amount expended during the year out of surplus earnings for capital account.
(Emphasis supplied.)

From the sentence, "The Chairman stated that he believed that it would be better to tie the
computation of the 10% participation of Nielson & Company, Inc., to the dividend, because Nielson
will then be able to definitely compute its net participation by the amount of the dividends declared"
the idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was
to make the value of the dividends declared — whether the dividends were in cash or in stock — as
the basis for determining the amount of compensation that should be paid to Nielson, in the
proportion of 10% of the cash value of the dividends so declared. It does not mean, however, that
the compensation of Nielson would be taken from the amount actually declared as cash dividend to
be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as
stock dividends, but from the other assets or funds of the corporation which are not burdened by the
dividends thus declared. In other words, if, for example, cash dividends of P300,000.00 are
declared, Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should not
be taken from the P300,000.00 to be distributed as cash dividends to the stockholders but from
some other funds or assets of the corporation which are not included in the amount to answer for the
cash dividends thus declared. This is so because if the P30,000.00 would be taken out from the
P300,000.00 declared as cash dividends, then the stockholders would not be getting P300,000.00
as dividends but only P270,000.00. There would be a dilution of the dividend that corresponds to
each share of stock held by the stockholders. Similarly, if there were stock dividends worth one
million pesos that were declared, which means an issuance of ten million shares at the par value of
ten centavos per share, it does not mean that Nielson would be given 100,000 shares. It only means
that Nielson should be given the equivalent of 10% of the aggregate cash value of those shares
issued as stock dividends. That this was the understanding of Nielson itself is borne out by the fact
that in its appeal brief Nielson urged that it should be paid "P300,000.00 being 10% of the
P3,000,000.00 stock dividends declared on November 28, 1949 and August 20, 1950...." 21

We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares
of stock worth P300,000.00 based on the stock dividends declared on November 28, 1949 and on
August 20, 1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is
entitled to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money
value of the stock dividends worth P3,000,000.00 which were declared on November 28, 1949 and
on August 20, 1950, with interest thereon at the rate of 6% from February 6, 1958.

6. In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in
awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not
be ascertained and executed without further litigation.

In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock
dividends in payment of its compensation under the management contract, We do not consider it
necessary to discuss this ground of the motion for reconsideration. The awards in the present case
are all reduced to specific sums of money.

7. In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in
rendering judgment or attorney's fees.
The matter of the award of attorney's fees is within the sound discretion of this Court. In Our decision
We have stated the reason why the award of P50,000.00 for attorney's fees is considered by this
Court as reasonable.

Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the
sense that instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten
centavos (P0.10) per share based on the stock dividends declared by Lepanto on November 28,
1949 and August 20, 1950, together with their fruits, Nielson should be awarded the sum of
P300,000.00 which is an amount equivalent to 10% of the cash value of the stock dividends thus
declared, as part of the compensation due Nielson under the management contract. The dispositive
portion of the decision should, therefore, be amended, to read as follows:

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 the appellant Nielson the
different amounts as specified hereinbelow:

(1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of the cash dividends
of December, 1941, with legal interest thereon from the date of the filing of the complaint;

(2) Two thousand five hundred pesos (P2,500.00) as management fee for January 1942, with legal
interest thereon from the date of the filing of the complaint;

(3) One hundred fifty thousand pesos (P150,000.00), representing management fees for the sixty-
month period of extension of the management contract, with legal interest thereon from the date of
the filing of the complaint;

(4) One million four hundred thousand pesos (P1,400,000.00), equivalent to 10% of the cash
dividends declared during the period of extension of the management contract, with legal interest
thereon from the date of the filing of the complaint;

(5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the stock
dividends declared on November 28, 1949 and August 20, 1950, with legal interest thereon from the
date of the filing of the complaint;

(6) Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos (P53,928.88),
equivalent to 10% of the depletion reserve set up during the period of extension, with legal interest
thereon from the date of the filing of the complaint;

(7) Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos
(P694,364.76), equivalent to 10% of the expenses for capital account during the period of extension,
with legal interest thereon from the date of the filing of the complaint;

(8) Fifty thousand pesos (P50,000.00) as attorney's fees; and

(9) The costs.

It is so ordered.

PHILIP TURNER and ELNORA G.R. No. 157479

TURNER,
 Petitioners, Present:

CARPIO
MORALES, Chairperson,
-versus - BRION,
BERSAMIN,
VILLARAMA, JR., and
ARANAL-SERENO, JJ.
LORENZO SHIPPING Promulgated:
CORPORATION,
Respondent. November 24, 2010

x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J.:

This case concerns the right of dissenting stockholders to demand payment of the
value of their shareholdings.

In the stockholders suit to recover the value of their shareholdings from the
corporation, the Regional Trial Court (RTC) upheld the dissenting stockholders,
herein petitioners, and ordered the corporation, herein respondent, to pay.
Execution was partially carried out against the respondent. On the respondents
petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and
dismissed the petitioners suit on the ground that their cause of action for collection
had not yet accrued due to the lack of unrestricted retained earnings in the books of
the respondent.

Thus, the petitioners are now before the Court to challenge the CAs decision
promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge
of Branch 46 of the Regional Trial Court of Manila, et al.[1]
 Antecedents

The petitioners held 1,010,000 shares of stock of the respondent, a domestic

corporation engaged primarily in cargo shipping activities. In June 1999, the
respondent decided to amend its articles of incorporation to remove the
stockholders pre-emptive rights to newly issued shares of stock. Feeling that the
corporate move would be prejudicial to their interest as stockholders, the
petitioners voted against the amendment and demanded payment of their shares at
the rate of P2.276/share based on the book value of the shares, or a total
of P2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners
unacceptable. It insisted that the market value on the date before the action to
remove the pre-emptive right was taken should be the value, or P0.41/share (or a
total of P414,100.00), considering that its shares were listed in the Philippine Stock
Exchange, and that the payment could be made only if the respondent had
unrestricted retained earnings in its books to cover the value of the shares, which
was not the case.
The disagreement on the valuation of the shares led the parties to constitute an
appraisal committee pursuant to Section 82 of the Corporation Code, each of them
nominating a representative, who together then nominated the third member who
would be chairman of the appraisal committee. Thus, the appraisal committee
came to be made up of Reynaldo Yatco, the petitioners nominee; Atty. Antonio
Acyatan, the respondents nominee; and Leo Anoche of the Asian Appraisal
Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation
of P2.54/share, for an aggregate value of P2,565,400.00 for the petitioners.[2]

Subsequently, the petitioners demanded payment based on the valuation of

the appraisal committee, plus 2%/month penalty from the date of their original
demand for payment, as well as the reimbursement of the amounts advanced as
professional fees to the appraisers.[3]

In its letter to the petitioners dated January 2, 2001, [4] the respondent refused the
petitioners demand, explaining that pursuant to the Corporation Code, the
dissenting stockholders exercising their appraisal rights could be paid only when
the corporation had unrestricted retained earnings to cover the fair value of the
shares, but that it had no retained earnings at the time of the petitioners demand,
as borne out by its Financial Statements for Fiscal Year 1999 showing a deficit
of P72,973,114.00 as of December 31, 1999.
Upon the respondents refusal to pay, the petitioners sued the respondent for
collection and damages in the RTC in Makati City on January 22, 2001. The case,
docketed as Civil Case No. 01-086, was initially assigned to Branch 132.[5]
On June 26, 2002, the petitioners filed their motion for partial summary judgment,
claiming that:

7) xxx the defendant has an accumulated unrestricted retained

earnings of ELEVEN MILLION NINE HUNDRED
SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY
(P11,975,490.00) PESOS, Philippine Currency, evidenced by
its Financial Statement as of the Quarter Ending March 31,
2002; xxx

8) xxx the fair value of the shares of the petitioners as fixed by

the Appraisal Committee is final, that the same cannot be
disputed xxx

9) xxx there is no genuine issue to material fact and therefore,

the plaintiffs are entitled, as a matter of right, to a summary
judgment. xxx [6]

The respondent opposed the motion for partial summary judgment, stating that the
determination of the unrestricted retained earnings should be made at the end
of the fiscal year of the respondent, and that the petitioners did not have a
cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however, the
Presiding Judge of Branch 133 transmitted the records to the Clerk of Court
for re-raffling to any of the RTCs special commercial courts
in Makati City due to the case being an intra-corporate dispute. Hence, Civil
Case No. 01-086 was re-raffled to Branch 142.

Nevertheless, because the principal office of the respondent was in

Manila, Civil Case No. 01-086 was ultimately transferred to Branch 46 of the RTC
in Manila, presided by Judge Artemio Tipon,[7] pursuant to the Interim Rules of
Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-
corporate cases to be brought in the RTC exercising jurisdiction over the place
where the principal office of the corporation was found.

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the
petitioners counsel did not attend, Judge Tipon issued an order,[8] granting
the petitioners motion for partial summary judgment, stating:

As to the motion for partial summary judgment, there is no question

that the 3-man committee mandated to appraise the shareholdings of
plaintiff submitted its recommendation on October 27, 2000 fixing the
fair value of the shares of stocks of the plaintiff at P2.54 per share.
Under Section 82 of the Corporation Code:

The findings of the majority of the appraisers shall be final,

and the award shall be paid by the corporation within thirty (30)
days after the award is made.

The only restriction imposed by the Corporation Code is

That no payment shall be made to any dissenting stockholder

unless the corporation has unrestricted retained earning in its
books to cover such payment.

The evidence submitted by plaintiffs shows that in its quarterly

financial statement it submitted to the Securities and Exchange
Commission, the defendant has retained earnings of P11,975,490 as
of March 21, 2002. This is not disputed by the defendant. Its only
argument against paying is that there must be unrestricted retained
earning at the time the demand for payment is made.

This certainly is a very narrow concept of the appraisal right of a

stockholder. The law does not say that the unrestricted retained earnings
must exist at the time of the demand. Even if there are no retained
earnings at the time the demand is made if there are retained earnings
later, the fair value of such stocks must be paid. The only restriction is
that there must be sufficient funds to cover the creditors after the
dissenting stockholder is paid. No such allegations have been made by
the defendant.[9]
On November 12, 2002, the respondent filed a motion for reconsideration.

On the scheduled hearing of the motion for reconsideration on November

22, 2002, the petitioners filed a motion for immediate execution and a motion to
strike out motion for reconsideration. In the latter motion, they pointed out that
the motion for reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for
reconsideration and granted the petitioners motion for immediate execution.[10]

Subsequently, on November 28, 2002, the RTC issued a writ of execution.[11]

Aggrieved, the respondent commenced a special civil action for certiorari in the
CA to challenge the two aforecited orders of Judge Tipon, claiming that:

A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN
GRANTING SUMMARY JUDGMENT TO THE SPOUSES TURNER,
BECAUSE AT THE TIME THE COMPLAINT WAS FILED, LSC HAD
NO RETAINED EARNINGS, AND THUS WAS COMPLYING WITH
THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE SPOUSES
TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF
THEIR LSC SHARES. ANY RETAINED EARNINGS MADE A YEAR
AFTER THE COMPLAINT WAS FILED ARE IRRELEVANT TO THE
SPOUSES TURNERS RIGHT TO RECOVER UNDER THE
COMPLAINT, BECAUSE THE WELL-SETTLED RULE,
REPEATEDLY BROUGHT TO JUDGE TIPONS ATTENTION, IS IF
NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS
COMMENCED THE SUIT CANNOT BE MAINTAINED,
ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED
THEREAFTER.

B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS
GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND
ISSUED THE QUESTIONED WRIT OF EXECUTION DIRECTING
THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN
FAVOR OF THE SPOUSES TURNER, BECAUSE THAT JUDGMENT
IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF
 THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT
OF EXECUTION UNDER THE SUPREME COURTS CATEGORICAL
HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF
APPEALS.

Upon the respondents application, the CA issued a temporary restraining

order (TRO), enjoining the petitioners, and their agents and representatives from
enforcing the writ of execution. By then, however, the writ of execution had been
partially enforced.

The TRO lapsed without the CA issuing a writ of preliminary injunction to

prevent the execution. Thereupon, the sheriff resumed the enforcement of the writ
of execution.

The CA promulgated its assailed decision on March 4, 2003,[12] pertinently

holding:
However, it is clear from the foregoing that the Turners appraisal
right is subject to the legal condition that no payment shall be made to
any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment. Thus, the Supreme
Court held that:

The requirement of unrestricted retained earnings to

cover the shares is based on the trust fund doctrine which
means that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of
corporate creditors. The reason is that creditors of a
corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of
assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Creditors of a
corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not
use the assets of the corporation to purchase its own stock.

In the instant case, it was established that there were no unrestricted

retained earnings when the Turners filed their Complaint. In a letter
dated 20 August 2000, petitioner informed the Turners that payment of
their shares could only be made if it had unrestricted earnings in its
books to cover the same. Petitioner reiterated this in a letter dated 2
January 2001 which further informed the Turners that its Financial
Statement for fiscal year 1999 shows that its retained earnings ending
December 31, 1999 was at a deficit in the amount of P72,973,114.00, a
matter which has not been disputed by private respondents. Hence, in
accordance with the second paragraph of sec. 82, BP 68 supra, the
Turners right to payment had not yet accrued when they filed their
Complaint on January 22, 2001, albeit their appraisal right already
existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines,
Inc., the Supreme Court declared that:

Now, before an action can properly be commenced all the

essential elements of the cause of action must be in existence,
that is, the cause of action must be complete. All valid
conditions precedent to the institution of the particular action,
whether prescribed by statute, fixed by agreement of the parties
or implied by law must be performed or complied with before
commencing the action, unless the conduct of the adverse party
has been such as to prevent or waive performance or excuse
non-performance of the condition.

It bears restating that a right of action is the right to presently

enforce a cause of action, while a cause of action consists of the
operative facts which give rise to such right of action. The right
of action does not arise until the performance of all conditions
precedent to the action and may be taken away by the running of
the statute of limitations, through estoppel, or by other
circumstances which do not affect the cause of
action. Performance or fulfillment of all conditions precedent
upon which a right of action depends must be sufficiently
alleged, considering that the burden of proof to show that a party
has a right of action is upon the person initiating the suit.

The Turners right of action arose only when petitioner had already
retained earnings in the amount of P11,975,490.00 on March 21, 2002;
such right of action was inexistent on January 22, 2001 when they filed
the Complaint.
 In the doctrinal case of Surigao Mine Exploration Co. Inc., vs.
Harris, the Supreme Court ruled:

Subject to certain qualifications, and except as otherwise

provided by law, an action commenced before the cause of
action has accrued is prematurely brought and should be
dismissed. The fact that the cause of action accrues after the
action is commenced and while it is pending is of no moment. It
is a rule of law to which there is, perhaps, no exception, either at
law or in equity, that to recover at all there must be some cause
of action at the commencement of the suit. There are reasons of
public policy why there should be no needless haste in bringing
up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned
before the public tribunals to answer complaints which are
groundless. An action prematurely brought is a groundless
suit. Unless the plaintiff has a valid and subsisting cause of
action at the time his action iscommenced, the defect cannot be
cured or remedied by the acquisition or accrual of one while the
action is pending, and a supplemental complaint or an
amendment setting up such after-accrued cause of action is not
permissible.

The afore-quoted ruling was reiterated in Young vs Court of

Appeals and Lao vs. Court of Appeals.

The Turners apprehension that their claim for payment may

prescribe if they wait for the petitioner to have unrestricted retained
earnings is misplaced. It is the legal possibility of bringing the action
that determines the starting point for the computation of the period of
prescription. Stated otherwise, the prescriptive period is to be reckoned
from the accrual of their right of action.

Accordingly, We hold that public respondent exceeded its

jurisdiction when it entertained the herein Complaint and issued the
assailed Orders. Excess of jurisdiction is the state of being beyond or
outside the limits of jurisdiction, and as distinguished from the entire
absence of jurisdiction, means that the act although within the general
power of the judge, is not authorized and therefore void, with respect to
 the particular case, because the conditions which authorize the exercise
of his general power in that particular case are wanting, and hence, the
judicial power is not in fact lawfully invoked.

We find no necessity to discuss the second ground raised in this

petition.

WHEREFORE, upon the premises, the petition is GRANTED. The

assailed Orders and the corresponding Writs of Garnishment
are NULLIFIED. Civil Case No. 02-104692 is hereby
ordered DISMISSED without prejudice to refiling by the private
respondents of the action for enforcement of their right to payment as
withdrawing stockholders.

SO ORDERED.

The petitioners now come to the Court for a review on certiorari of the CAs
decision, submitting that:

I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT GRANTED THE PETITION FOR CERTIORARI
WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT
ACT BEYOND ITS JURISDICTION AMOUNTING TO LACK OF
JURISDICTION IN GRANTING THE MOTION FOR PARTIAL
SUMMARY JUDGMENT AND IN GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF JUDGMENT;

II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN
THE PETITION FOR CERTIORARI MERELY SOUGHT THE
ANNULMENT OF THE ORDER GRANTING THE MOTION FOR
PARTIAL SUMMARY JUDGMENT AND OF THE ORDER
GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
THE JUDGMENT;

III.
THE HONORABLE COURT OF APPEALS HAS DECIDED
QUESTIONS OF SUBSTANCE NOT THEREFORE DETERMINED
 BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY
NOT IN ACCORD WITH LAW OR WITH JURISPRUDENCE.

Ruling

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in
entertaining the petitioners complaint in Civil Case No. 01-086, and in rendering
the summary judgment and issuing writ of execution.

A.
Stockholders Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to
demand payment of the fair value of his or her shares. This right, known as the
right of appraisal, is expressly recognized in Section 81 of the Corporation Code,
to wit:

Section 81. Instances of appraisal right. - Any stockholder of a

corporation shall have the right to dissent and demand payment of the
fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the

effect of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of
corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or

other disposition of all or substantially all of the corporate property and
assets as provided in the Code; and

3. In case of merger or consolidation. (n)

 Clearly, the right of appraisal may be exercised when there is a fundamental
change in the charter or articles of incorporation substantially prejudicing the rights
of the stockholders. It does not vest unless objectionable corporate action is taken.
[13]
It serves the purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation.[14]

Under the common law, there were originally conflicting views on whether a
corporation had the power to acquire or purchase its own stocks. In England, it was
held invalid for a corporation to purchase its issued stocks because such purchase
was an indirect method of reducing capital (which was statutorily restricted), aside
from being inconsistent with the privilege of limited liability to creditors. [15] Only a
few American jurisdictions adopted by decision or statute the strict English rule
forbidding a corporation from purchasing its own shares. In some American states
where the English rule used to be adopted, statutes granting authority to purchase
out of surplus funds were enacted, while in others, shares might be purchased even
out of capital provided the rights of creditors were not prejudiced. [16] The reason
underlying the limitation of share purchases sprang from the necessity of imposing
safeguards against the depletion by a corporation of its assets and against the
impairment of its capital needed for the protection of creditors.[17]

Now, however, a corporation can purchase its own shares, provided payment is
made out of surplus profits and the acquisition is for a legitimate corporate
purpose.[18] In the Philippines, this new rule is embodied in Section 41 of
the Corporation Code, to wit:

Section 41. Power to acquire own shares. - A stock corporation

shall have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation,

arising out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
 3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as

well as the implications of the right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted

against the proposed corporate action by making a written demand
on the corporation within 30 days after the date on which the vote
was taken for the payment of the fair value of his shares. The
failure to make the demand within the period is deemed a waiver
of the appraisal right.[19]

2. If the withdrawing stockholder and the corporation cannot agree

on the fair value of the shares within a period of 60 days from the
date the stockholders approved the corporate action, the fair value
shall be determined and appraised by three disinterested persons,
one of whom shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen. The findings and
award of the majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after the award is
made. Upon payment by the corporation of the agreed or awarded
price, the stockholder shall forthwith transfer his or her shares to
the corporation.[20]

3. All rights accruing to the withdrawing stockholders shares,

including voting and dividend rights, shall be suspended from the
time of demand for the payment of the fair value of the shares until
either the abandonment of the corporate action involved or the
purchase of the shares by the corporation, except the right of such
stockholder to receive payment of the fair value of the shares.[21]

4. Within 10 days after demanding payment for his or her shares, a

dissenting stockholder shall submit to the corporation the
certificates of stock representing his shares for notation thereon
that such shares are dissenting shares. A failure to do so shall, at
the option of the corporation, terminate his rights under this Title X
of the Corporation Code. If shares represented by the certificates
bearing such notation are transferred, and the certificates are
 consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall
have all the rights of a regular stockholder; and all dividend
distributions that would have accrued on such shares shall be paid
to the transferee.[22]

5. If the proposed corporate action is implemented or effected, the

corporation shall pay to such stockholder, upon the surrender of the
certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in anticipation of such
corporate action.[23]

Notwithstanding the foregoing, no payment shall be made to any dissenting

stockholder unless the corporation has unrestricted retained earnings in its books to
cover the payment. In case the corporation has no available unrestricted retained
earnings in its books, Section 83 of the Corporation Code provides that if the
dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings
to fund the payment of the shares of stocks of the withdrawing stockholders. Under
the doctrine, the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors, who are
preferred in the distribution of corporate assets. [24] The creditors of a corporation
have the right to assume that the board of directors will not use the assets of the
corporation to purchase its own stock for as long as the corporation has outstanding
debts and liabilities.[25] There can be no distribution of assets among the
stockholders without first paying corporate debts. Thus, any disposition of
corporate funds and assets to the prejudice of creditors is null and void.[26]

B.
Petitioners cause of action was premature

That the respondent had indisputably no unrestricted retained earnings in its books
at the time the petitioners commenced Civil Case No. 01-086 on January 22, 2001
proved that the respondents legal obligation to pay the value of the petitioners
shares did not yet arise. Thus, the CA did not err in holding that the petitioners had
no cause of action, and in ruling that the RTC did not validly render the partial
summary judgment.
A cause of action is the act or omission by which a party violates a right of another.
[27]
The essential elements of a cause of action are: (a) the existence of a legal right
in favor of the plaintiff; (b) a correlative legal duty of the defendant to respect such
right; and (c) an act or omission by such defendant in violation of the right of the
plaintiff with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant. [28] Although the
first two elements may exist, a cause of action arises only upon the occurrence of
the last element, giving the plaintiff the right to maintain an action in court for
recovery of damages or other appropriate relief.[29]
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action
must be based on a cause of action. Accordingly, Civil Case No. 01-086 was
dismissible from the beginning for being without any cause of action.

The RTC concluded that the respondents obligation to pay had accrued by its
having the unrestricted retained earnings after the making of the demand by the
petitioners. It based its conclusion on the fact that the Corporation Code did not
provide that the unrestricted retained earnings must already exist at the time of the
demand.

The RTCs construal of the Corporation Code was unsustainable, because

it did not take into account the petitioners lack of a cause of action against the
respondent. In order to give rise to any obligation to pay on the part of the
respondent, the petitioners should first make a valid demand that the respondent
refused to pay despite having unrestricted retained earnings. Otherwise, the
respondent could not be said to be guilty of any actionable omission that could
sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the
filing of the complaint cure the lack of cause of action in Civil Case No. 01-086.
The petitioners right of action could only spring from an existing cause of action.
Thus, a complaint whose cause of action has not yet accrued cannot be cured by an
amended or supplemental pleading alleging the existence or accrual of a cause of
action during the pendency of the action. [30] For, only when there is an invasion of
primary rights, not before, does the adjective or remedial law become operative.
[31]
Verily, a premature invocation of the courts intervention renders the complaint
without a cause of action and dismissible on such ground. [32] In short, Civil Case
No. 01-086, being a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings more
than sufficient to cover the petitioners claims on June 26, 2002 (when they
filed their motion for partial summary judgment) did not rectify the absence
of the cause of action at the time of the commencement of Civil Case No.
01-086. The motion for partial summary judgment, being a mere application
for relief other than by a pleading, [33] was not the same as the complaint in
Civil Case No. 01-086. Thereby, the petitioners did not meet the requirement
of the Rules of Court that a cause of action must exist at the commencement
of an action, which is commenced by the filing of the original complaint in
court.[34]
The petitioners claim that the respondents petition for certiorari sought only the
annulment of the assailed orders of the RTC (i.e., granting the motion for partial
summary judgment and the motion for immediate execution); hence, the CA had no
right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.

Although the respondents petition for certiorari targeted only the RTCs orders
granting the motion for partial summary judgment and the motion for immediate
execution, the CAs directive for the dismissal of Civil Case No. 01-086 was not an
abuse of discretion, least of all grave, because such dismissal was the only proper
thing to be done under the circumstances. According to Surigao Mine Exploration
Co., Inc. v. Harris:[35]

Subject to certain qualification, and except as otherwise provided by

law, an action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while the case is
pending is of no moment. It is a rule of law to which there is, perhaps no
exception, either in law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are reasons
of public policy why there should be no needless haste in bringing up
litigation, and why people who are in no default and against whom there
 is as yet no cause of action should not be summoned before the public
tribunals to answer complaints which are groundless. An action
prematurely brought is a groundless suit. Unless the plaintiff has a
valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued
cause of action is not permissible.

Lastly, the petitioners argue that the respondents recourse of a special action
for certiorari was the wrong remedy, in view of the fact that the granting of
the motion for partial summary judgment constituted only an error of law
correctible by appeal, not of jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of
jurisdiction, for it exceeded its jurisdiction by taking cognizance of the complaint
that was not based on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No.

74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et
al.

Costs of suit to be paid by the petitioners.

SO ORDERED.