FIRST DIVISION

[A.C. No. 5804. July 1, 2003]

BENEDICTO HORNILLA and ATTY. FEDERICO D.

RICAFORT, complainants, vs. ATTY. ERNESTO S.
SALUNAT, respondent.

RESOLUTION
YNARES-SANTIAGO, J.:

On November 21, 1997, Benedicto Hornilla and Federico D. Ricafort filed

an administrative complaint with the Integrated Bar of the Philippines (IBP)
[1]

Commission on Bar Discipline, against respondent Atty. Ernesto S. Salunat

for illegal and unethical practice and conflict of interest. They alleged that
respondent is a member of the ASSA Law and Associates, which was the
retained counsel of the Philippine Public School Teachers Association
(PPSTA). Respondents brother, Aurelio S. Salunat, was a member of the
PPSTA Board which approved respondents engagement as retained counsel
of PPSTA.
Complainants, who are members of the PPSTA, filed an intra-corporate
case against its members of the Board of Directors for the terms 1992-1995
and 1995-1997 before the Securities and Exchange Commission, which was
docketed as SEC Case No. 05-97-5657, and a complaint before the Office of
the Ombudsman, docketed as OMB Case No. 0-97-0695, for unlawful
spending and the undervalued sale of real property of the
PPSTA. Respondent entered his appearance as counsel for the PPSTA
Board members in the said cases. Complainants contend that respondent was
guilty of conflict of interest because he was engaged by the PPSTA, of which
complainants were members, and was being paid out of its corporate funds
where complainants have contributed. Despite being told by PPSTA members
of the said conflict of interest, respondent refused to withdraw his appearance
in the said cases.
Moreover, complainants aver that respondent violated Rule 15.06 of the
[2]

Code of Professional Responsibility when he appeared at the meeting of the

PPSTA Board and assured its members that he will win the PPSTA cases.
 In his Answer, respondent stressed that he entered his appearance as
[3]

counsel for the PPSTA Board Members for and in behalf of the ASSA Law
and Associates. As a partner in the said law firm, he only filed a Manifestation
of Extreme Urgency in OMB Case No. 0-97-0695. On the other hand, SEC
[4]

Case No. 05-97-5657 was handled by another partner of the firm, Atty.
Agustin V. Agustin. Respondent claims that it was complainant Atty. Ricafort
who instigated, orchestrated and indiscriminately filed the said cases against
members of the PPSTA and its Board.
Respondent pointed out that his relationship to Aurelio S. Salunat was
immaterial; and that when he entered into the retainer contract with the
PPSTA Board, he did so, not in his individual capacity, but in representation of
the ASSA Law Firm. He denied that he ensured the victory of the PPSTA
Board in the case he was handling. He merely assured the Board that the
truth will come out and that the case before the Ombudsman will be dismissed
for lack of jurisdiction, considering that respondents therein are not public
officials, but private employees. Anent the SEC case, respondent alleged that
the same was being handled by the law firm of Atty. Eduardo de Mesa, and
not ASSA.
By way of Special and Affirmative Defenses, respondent averred that
complainant Atty. Ricafort was himself guilty of gross violation of his oath of
office amounting to gross misconduct, malpractice and unethical conduct for
filing trumped-up charges against him and Atty. De Mesa. Thus, he prayed
that the complaint against him be dismissed and, instead, complainant
Ricafort be disciplined or disbarred.
The complainant was docketed as CBD Case No. 97-531 and referred to
the IBP Commission on Bar Discipline. After investigation, Commissioner
Lydia A. Navarro recommended that respondent be suspended from the
practice of law for six (6) months. The Board of Governors thereafter adopted
Resolution No. XV-3003-230 dated June 29, 2002, approving the report and
recommendation of the Investigating Commissioner.
Respondent filed with this Court a Motion for Reconsideration of the above
Resolution of the IBP Board of Governors.
The pertinent rule of the Code of Professional Responsibility provides:

RULE 15.03. A lawyer shall not represent conflicting interests except by written
consent of all concerned given after a full disclosure of the facts.

There is conflict of interest when a lawyer represents inconsistent interests

of two or more opposing parties. The test is whether or not in behalf of one
client, it is the lawyers duty to fight for an issue or claim, but it is his duty to
oppose it for the other client. In brief, if he argues for one client, this argument
will be opposed by him when he argues for the other client. This rule covers
[5]

not only cases in which confidential communications have been confided, but
also those in which no confidence has been bestowed or will be used. Also, [6]

there is conflict of interests if the acceptance of the new retainer will require
the attorney to perform an act which will injuriously affect his first client in any
matter in which he represents him and also whether he will be called upon in
his new relation to use against his first client any knowledge acquired through
their connection. Another test of the inconsistency of interests is whether the
[7]

acceptance of a new relation will prevent an attorney from the full discharge of
his duty of undivided fidelity and loyalty to his client or invite suspicion of
unfaithfulness or double dealing in the performance thereof. [8]

In this jurisdiction, a corporations board of directors is understood to be

that body which (1) exercises all powers provided for under the Corporation
Code; (2) conducts all business of the corporation; and (3) controls and holds
all property of the corporation. Its members have been characterized as
[9]

trustees or directors clothed with a fiduciary character. It is clearly separate

[10]

and distinct from the corporate entity itself.

Where corporate directors have committed a breach of trust either by their
frauds, ultra vires acts, or negligence, and the corporation is unable or
unwilling to institute suit to remedy the wrong, a stockholder may sue on
behalf of himself and other stockholders and for the benefit of the corporation,
to bring about a redress of the wrong done directly to the corporation and
indirectly to the stockholders. This is what is known as a derivative suit, and
[11]

settled is the doctrine that in a derivative suit, the corporation is the real party
in interest while the stockholder filing suit for the corporations behalf is only
nominal party. The corporation should be included as a party in the suit. [12]

Having thus laid a suitable foundation of the basic legal principles

pertaining to derivative suits, we come now to the threshold question: can a
lawyer engaged by a corporation defend members of the board of
the same corporation in a derivative suit? On this issue, the following
disquisition is enlightening:

The possibility for conflict of interest here is universally recognized. Although early
cases found joint representation permissible where no conflict of interest was obvious,
the emerging rule is against dual representation in all derivative actions. Outside
counsel must thus be retained to represent one of the defendants. The cases and ethics
opinions differ on whether there must be separate representation from the outset or
merely from the time the corporation seeks to take an active role. Furthermore, this
restriction on dual representation should not be waivable by consent in the usual way;
the corporation should be presumptively incapable of giving valid
consent. (underscoring ours)
[13]

In other jurisdictions, the prevailing rule is that a situation wherein a lawyer

represents both the corporation and its assailed directors unavoidably gives
rise to a conflict of interest. The interest of the corporate client is paramount
and should not be influenced by any interest of the individual corporate
officials. The rulings in these cases have persuasive effect upon us. After
[14]

due deliberation on the wisdom of this doctrine, we are sufficiently convinced

that a lawyer engaged as counsel for a corporation cannot represent
members of the same corporations board of directors in a derivative suit
brought against them.To do so would be tantamount to representing
conflicting interests, which is prohibited by the Code of Professional
Responsibility.
In the case at bar, the records show that SEC Case No. 05-97-5657,
entitled Philippine Public School Teachers Assn., Inc., et al. v. 1992-1995
Board of Directors of the Philippine Public School Teachers Assn. (PPSTA), et
al., was filed by the PPSTA against its own Board of Directors. Respondent
admits that the ASSA Law Firm, of which he is the Managing Partner, was the
retained counsel of PPSTA. Yet, he appeared as counsel of record for the
respondent Board of Directors in the said case. Clearly, respondent was guilty
of conflict of interest when he represented the parties against whom his other
client, the PPSTA, filed suit.
In his Answer, respondent argues that he only represented the Board of
Directors in OMB Case No. 0-97-0695. In the said case, he filed a
Manifestation of Extreme Urgency wherein he prayed for the dismissal of the
complaint against his clients, the individual Board Members. By filing the said
pleading, he necessarily entered his appearance therein. Again, this [15]

constituted conflict of interests, considering that the complaint in the

Ombudsman, albeit in the name of the individual members of the PPSTA, was
brought in behalf of and to protect the interest of the corporation.
Therefore, respondent is guilty of representing conflicting
interests. Considering however, that this is his first offense, we find the
penalty of suspension, recommended in IBP Resolution No. XV-2002-230
dated June 29, 2002, to be too harsh. Instead, we resolve to admonish
respondent to observe a higher degree of fidelity in the practice of his
profession.
 ACCORDINGLY, respondent Atty. Ernesto Salunat is found GUILTY of
representing conflicting interests and is ADMONISHED to observe a higher
degree of fidelity in the practice of his profession. He is further WARNED that
a repetition of the same or similar acts will be dealt with more severely.
SO ORDERED.
 THIRD DIVISION

[G.R. No. 121171. December 29, 1998]

ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS,

JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T.
CABARRUS, JOSE MIGUEL CABARRUS, ALEJANDRO S.
PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M.
ANTONIO, as Minority Stock Holders of Marinduque Mining and
Industrial Corporation, respondents.

DECISION
KAPUNAN, J.:

The petition for review on certiorari before us seeks us to reverse and set aside the decision
of the Court of Appeals which denied due course to the petition for certiorari filed by the Asset
Privatization Trust (APT) assailing the order of the Regional Trial Court (RTC) Branch 62,
Makati City. The Makati RTCs order upheld and confirmed the award made by the Arbitration
Committee in favor of Marinduque Mining and Industrial Corporation (MMIC) and against the
Government, represented by herein petitioner APT for damages in the amount of P2.5 BILLION
(or approximately P4.5 BILLION, including interest).
Ironically, the staggering amount of damages was imposed on the Government for
exercising its legitimate right of foreclosure as creditor against the debtor MMIC as a
consequence of the latters failure to pay its overdue and unpaid obligation of P22 billion to the
Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP).

The antecedent facts of the case

The development, exploration and utilization of the mineral deposits in the Surigao Mineral
Reservation have been authorized by Republic Act No. 1828, as amended by Republic Acts No.
2077 and 4167, by virtue of which laws, a Memorandum of Agreement was drawn on July 3,
1968, whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board,
granted MMIC the exclusive right to explore, develop and exploit nickel, cobalt and other
minerals in the Surigao mineral reservation.[1] MMIC is a domestic corporation engaged in
mining with respondents Jesus S. Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by purchase of
MMIC debenture and extension of guarantees. Further, the Philippine Government obtained a
firm, commitment from the DBP and/or other government financing institutions to subscribed in
MMIC and issue guarantee/s for foreign loans or deferred payment arrangements secured from
the US Eximbank, Asian Development Bank, Kobe Steel, of amount not exceeding US$100
Million.[2]
DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were
based on the unutilized portion of the Government commitment. Thereafter, the Government
extended accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement[3] whereby
MMIC, as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP as mortgagees,
over all MMICs assets, subject of real estate and chattel mortgage executed by the mortgagor,
and additional assets described and identified, including assets of whatever kind, nature or
description, which the mortgagor may acquire whether in substitution of, in replenishment, or in
addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which
expressly includes the event that the MORTGAGOR shall fail to pay any amount secured by this
Mortgage Trust Agreement when due.[4]
Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the
enumerated events of defaults, circumstances by which the mortgagor may be declared in
default, the procedure therefor, waiver of period to foreclose, authority of Trustee before, during
and after foreclosure, including taking possession of the mortgaged properties.[5]
In various request for advances/remittances of loans of huge amounts, Deeds of
Undertakings, Promissory Notes, Loans Documents, Deeds of Real Estate Mortgages, MMIC
invariably committed to pay either on demand or under certain terms the loans and
accommodations secured from or guaranteed by both DBP and PNB.
By 1984, DBP and PNBs financial exposure both in loans and in equity in MMIC had
reached tremendous proportions, and MMIC was having a difficult time meeting its financial
obligations. MMIC had an outstanding loan with DBP in the amount of P13,792,607,565.92 as
of August 31, 1984 and in the amount of P8,789,028,249.38 as of July 15, 1984 or a total
Government exposure of Twenty Two Billion Six Hundred Sixty-Eight Million Five Hundred
Thirty-Seven Thousand Seven Hundred Seventy and 05/100 (P22,668,537,770.05), Philippine
Currency.[6] Thus, a financial restructuring plan (FRP) designed to reduce MMIC' interest
expense through debt conversion to equity was drafted by the Sycip Gorres Velayo accounting
firm.[7] On April 30, 1984, the FRP was approved by the Board of Directors of the
MMIC.[8] However, the proposed FRP had never been formally adopted, approved or ratified by
either PNB or DBP.[9]
In August and September 1984, as the various loans and advances made by DBP and PNB to
MMIC had become overdue and since any restructuring program relative to the loans was no
longer feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and
PNB as mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose
the mortgages in accordance with the Mortgage Trust Agreement.[10]
The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly
formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial
Corporation, and Island Cement Corporation. In 1986, these assets were transferred to the Asset
Privatization Trust (APT).[11]
 On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of
MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for
Annulment of Foreclosures, Specific Performance and Damages.[12] The suit, docketed as Civil
Case No. 9900, prayed that the court: (1) annul the foreclosure, restore the foreclosed assets to
MMIC, and require the banks to account for their use and operation in the interim; (2) direct the
banks to honor and perform their commitments under the alleged FRP; and (3) pay moral and
exemplary damages, attorneys fees, litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of the DBP
and PNBs interest in MMIC, mutually agreed to submit the case to arbitration by entering into a
Compromise and Arbitration Agreement, stipulating, inter alia:

NOW, THEREFORE, for and in consideration of the foregoing premises and the
mutual covenants contain herein, the parties agreed as follows:

1. Withdrawal and Compromise. The parties have agreed to withdraw their respective
claims from the Trial Court and to resolve their dispute through arbitration by praying
to the Trial Court to issue a Compromise Judgment based on this Compromise and
Arbitration Agreement.

In withdrawing their dispute form the court and in choosing to resolve it through
arbitration, the parties have agreed that:

(a) their respective money claims shall be reduced to purely money claims; and

(b) as successor and assignee of the PNB and DBP interest in MMIC and the MMIC
accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP in
respect of the controversy subject of Civil Case No. 9900 to be transferred to
arbitration and any arbitral award/order against either PNB and/or DBP shall be the
responsibility of, be discharged by and be enforceable against APT, the partied having
agreed to drop PNB and DBP from the arbitration.

2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900 shall be
submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in Civil Case No.
9900 shall, with the approval of the Trial Court of this Compromise and Arbitration Agreement,
be transferred and reduced to pure pecuniary/money claims with the parties waiving and
foregoing all other forms of reliefs which they prayed for or should have payed for in Civil Case
No. 9900.[13]

The Compromise and Arbitration Agreement limited the issues to the following:

5. Issues. The issues to be submitted for the Committees resolution shall be: (a) Whether
PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of the
MMIC or its directors; (b) Whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith.[14]
 This agreement was presented for approval to the trial court. On October 14, 1992, the
Makati RTC, Branch 62, issued an order, to wit:

WHEREFORE, this Court orders:

1. Substituting PNB and DBP with the Asset Privatization Trust as party
defendant.

2. Approving the Compromise and Arbitration Agreement dated October 6,

1992, attached as Annex C of the Omnibus Motion.

3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in
this case into pure money claims; and

4. The Complaint is hereby DISMISSED.[15]

The Arbitration Committee was composed of retired Supreme Court Justice Abraham
Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal
Elma as Members. On November 24, 1993, after conducting several hearings, the Arbitration
Committee rendered a majority decision in favor of MMIC, the pertinent portions of which read
as follows:

Since, as this Committee finds, there is no foreclosure at all was not legally and
validly done, the Committee holds and so declares that the loans of PNB and DBP to
MMIC, for the payment and recovery of which the void foreclosure sales were
undertaken, continue to remain outstanding and unpaid. Defendant APT as the
successor-in-interest of PNB and DBP to the said loans is therefore entitled and
retains the right, to collect the same from MMIC pursuant to and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that the latter may
duly and seasonably interpose. Such loans shall, however, be reduced by the amount
which APT may have realized from the sale of the seized assets of MMIC which by
agreement should no longer be returned even if the foreclosure were found to be null
and void.

The documentary evidence submitted and adopted by both parties (Exhibits 3, 3-B;
Exhibits 100; and also Exhibit ZZZ) as their exhibits would show that the total
outstanding obligation due to DBP and PNB as of the date of foreclosure
is P22,668,537,770.05, more or less.

Therefore, defendant APT can, and is still entitled to, collect the outstanding
obligations of MMIC to PNB and DBP amounting to P22,668.537,770.05, more or
less, with interest thereon as stipulated in the loan documents from the date of
foreclosure up to the time they are fully paid less the proportionate liability of DBP as
owner of 87% of the total capitalization of MMIC under the FRP. Simply put, DBP
shall share in the award of damages to, and in obligations of MMIC in proportion to
its 87% equity in the total capital stock of MMIC.

x x x.

As this Committee holds that the FRP is valid, DBPs equity in MMIC is raised to
87%. So pursuant to the above provision of the Compromise and Arbitration
Agreement, the 87% equity of DBP is hereby deducted from the actual damages
of P19,486,118,654.00 resulting in the net actual damages of P2,531,635,425.02 plus
interest.

DISPOSITION

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendant to pay to the Marinduque Mining and Industrial

Corporation, except the DBP, the sum of P2,531,635,425.02 with interest thereon at
the legal rate of six per cent (6%) per annum reckoned from August 3, 9, and 24,
1984, pari passu, as and for actual damages. Payment of these actual damages shall be
offset by APT from the outstanding and unpaid loans of the MMIC with DBP and
PNB, which have not been converted into equity.Should there be any balance due to
the MMIC after the offsetting, the same shall be satisfied from the funds representing
the purchase price of the sale of the shares of Island Cement Corporation in the
amount of P503,000,000.00 held under escrow pursuant to the Escrow Agreement
dated April 22, 1988 or to such subsequent escrow agreement that would supercede
[sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;

2. Ordering the defendant to pay to the Marinduque Mining and Industrial

Corporation, except the DBP, the sum of P13,000,000.00 as and for moral and
exemplary damages. Payment of these moral and exemplary damages shall be offset
by APT from the outstanding and unpaid loans of MMIC with DBP and PNB, which
have not been converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing the purchase
price of the sale of the shares of Island Cement Corporation in the of P503,000,000.00
held under escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such
subsequent escrow agreement that would supercede [sic] it pursuant to paragraph (9)
of the Compromise and Arbitration Agreement;

3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supercede it, pursuant to paragraph (9) of the Compromise and
Arbitration Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.

IT IS SO ORDERED.[16]

Motions for reconsiderations were filed by both parties, but the same were denied.
On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an
Application/Motion for Confirmation of Arbitration Award. Petitioner countered with an
Opposition and Motion to Vacate Judgment raising the following grounds:

1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the
proceedings in Civil Case No. 9900 which was dismissed upon motion of the
parties. In fact, the defendants in the said Civil Case No. 9900 were the Development
Bank of the Philippines and the Philippine National Bank (PNB);

2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission

shall be deemed a special proceedings and a party to the controversy which was
arbitrated may apply to the court having jurisdiction, (not necessarily with this
Honorable Court) for an order confirming the award;

3. The issues submitted for arbitration have been limited to two: (1) propriety of the
plaintiffs filing the derivative suit and (2) the regularity of the foreclosure
proceedings. The arbitration award sought to be confirmed herein far exceeded the
issues submitted and even granted moral damages to one of the herein plaintiffs;

4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the
award where the arbitrators exceeded their powers, or so imperfectly executed them,
that a mutual final and definite award upon the subject matter submitted to them was
not made.[17]

Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984, arguing
that a dismissal of Civil case No. 9900 was merely a qualified dismissal to pave the way for the
submission of the controversy to arbitration, and operated simply as a mere suspension of the
proceedings. They denied that the Arbitration Committee had exceeded its powers.
In an Order dated November 28, 1994, the trial court confirmed the award of the Arbitration
Committee. The dispositive portion of said order reads:
WHEREFORE, premises considered, and in the light of the parties [sic] Compromise
and Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated
July 26, 1994, and finally settled and clarified in the Separate Opinion dated
September 2, 1994 of Committee Member Elma, and the pertinent provisions of RA
876,also known as the Arbitration Law, this Court GRANTS PLAINTIFFS
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD, AND
JUDGMENT IS HEREBY RENDERED:

(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation
(MMIC, except the DBP, the sum of P3,811,757,425.00, as and for actual damages,
which shall be partially satisfied from the funds held under escrow in the amount
of P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988. The
Balance of the award, after the escrow funds are fully applied, shall be executed
against the APT;

(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum
of P13,000,000.00 as and moral and exemplary damages;

(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00
as and for moral damages; and

(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum
of P1,705,410.22 as arbitration costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2

of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committees decision, and with this Courts Confirmation, the issuance of the
Arbitration Committees Award shall henceforth be final and executory.

SO ORDERED.[18]

On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated
November 28, 1994. Private respondents, in turn, submitted their reply and opposition thereto.
On January 18, 1995, the trial court handed down its order denying APTs motion for
reconsideration for lack of merit and for having been filed out of time. The trial court declared
that considering that the defendant APT through counsel, officially and actually received a copy
of the Order of this Court dated November 28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant APT on December 27, 1994, or after the lapse of
21 days, was clearly filed beyond the 15-day reglementary period prescribed or provided for by
law for the filing of an appeal from final orders, resolutions, awards, judgments or decisions of
any court in all cases, and by necessary implication for the filling of a motion for reconsideration
thereof.
 On February 7, 1995, petitioner received private respondents motion for Execution and
Appointment of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with
temporary restraining order and/or preliminary injunction dated February 13, 1996 to annul and
declare as void the Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995
for having been issued without or in excess of jurisdiction and/or with grave abuse of
discretion.[19] As ground therefor, petitioner alleged that:
I

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION

MUCH LESS, HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL
AWARD CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900,
HAD PREVIOUSLY BEEN DISMISSED.
II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION

AND ACTED WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE
QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND
DENYING THE MOTION FOR RECONSIDERATION OF ORDER OF AWARD.
III

THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED

WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE
COUNTING OF THE PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM
THE DATE OF SERVICE OF THE COURTS COPY CONFIRMING THE AWARD, BUT
FROM RECEIPT OF A XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING
COUNSELS COPY THEREOF.[20]

On July 12, 1995, the Court of Appeals, through its fifth Division denied due course and
dismissed the petition for certiorari.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals the
following errors.

ASSIGNMENT OF ERRORS
I

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI

REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOULSY
DISMISSED CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO
CONFIRM THE ARBITRAL AWARD UNDER THE SAME CIVIL CASE
AND IN NOT RULING THAT THE APPLICATION FOR CONFIRMATION
 SHOULD HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF
AMONG THE DIFFERENT BRANCHES OF THE RTC.
II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT

PETITIONER WAS ESTOPPED FROM QUESTIONING THE ARBITRATION
AWARD, WHEN PETITIONER QUESTIONED THE JURISDICTION OF THE
RTC-MAKATI, BRANCH 62 AND AT THE SAME TIME MOVED TO
VACATE THE ARBITRAL AWARD.
III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

RESPONDENT TRIAL COURT SHOULD HAVE EITHER
DISMISSED/DENIED PRIVATE RESPONDENTS MOTION/PETITION FOR
CONFIRMATION OF ARBITRATION AWARD AND/OR SHOULD HAVE
CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL
AWARD.
IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS

PETITION FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER
CONFIRMING THE AWARD
V

THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF

WHEN TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION.[21]

The petition is impressed with merit.

I

The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award

The use of the term dismissed is not a mere semantic imperfection. The dispositive portion
of the Order of the trial court dated October 14, 1992 stated in no uncertain terms:
4. The Complaint is hereby DISMISSED.[22]
The term dismiss has a precise definition in law. To dispose of an action suit, or motion without
trial on the issues involved. Conclude, discontinue, terminate, quash.[23]
 Admittedly the correct procedure was for the parties to go back to the court where the case
was pending to have the award confirmed by said court. However, Branch 62 made
the fatal mistake of issuing a final order dismissing the case. While Branch 62 should have
merely suspended the case and not dismissed it,[24] neither of the parties questioned said
dismissal. Thus, both parties as well as said court are bound by such error.
It is erroneous then to argue, as private respondents do, that petitioner APT was charged
with the knowledge that the case was merely stayed until arbitration finished, as again, the order
of Branch 62 in very clear terms stated that the complaint was dismissed. By its own action,
Branch 62 had lost jurisdiction over the vase. It could not have validly reacquired jurisdiction
over the said case on mere motion of one of the parties. The Rules of Court is specific on how a
new case may be initiated and such is not done by mere motion in a particular branch of the
RTC. Consequently, as there was no pending action to speak of, the petition to confirm the
arbitral award should have been filed as a new case and raffled accordingly to one of the
branches of the Regional Trial Court.
II

Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.

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

Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.

The Court of Appeals in dismissing APTs petition for certiorari upheld the trial courts
denial of APTs motion for reconsideration of the trial courts order confirming the arbitral award,
on the ground that said motion was filed beyond the 15-day reglementary period; consequently,
the petition for certiorari could not be resorted to as substitute to the lost right of appeal.
We do not agree.
Section 29 of Republic Act No. 876,[28] provides that:

x x x An appeal may be taken from an order made in a proceeding under this Act,
or from a judgment entered upon an award through certiorari proceedings, but
such appeals shall be limited to question of law. x x x.

The aforequoted provision, however, does not preclude a party aggrieved by the arbitral
award from resorting to the extraordinary remedy of certiorari under Rule 65 of the Rules of
Court where, as in this case, the Regional Trial Court to which the award was submitted for
confirmation has acted without jurisdiction, or with grave abuse of discretion and there is no
appeal, nor any plain, speedy remedy in the course of law.
Thus, Section 1 of Rule 65 provides:

SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising
judicial functions, has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion and there is no appeal, nor any plain, speedy, and adequate
remedy in the ordinary course of law, a person aggrieved thereby may file a verified
petition in the proper court alleging the facts with certainty and praying that judgment
be rendered annulling or modifying the proceedings, as the law requires, of such
tribunal, board or officer.

In the instant case, the respondent court erred in dismissing the special civil action
for certiorari, it being from the pleadings and the evidence that the trial court lacked jurisdiction
and/or committed grave abuse of discretion in taking cognizance of private respondent motion to
confirm the arbitral award and, worse, in confirming said award which is grossly and patently
not in accord with the arbitration agreement, as will be hereinafter demonstrated.
IV

The nature and limits of the Arbitrators powers.

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as
to the law or as to the facts.[29] Courts are without power to amend or overrule merely because of
disagreement with matters of law or facts determined by the arbitrators.[30] They will not review
the findings of law and fact contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would make an award the
commencement, not the end, of litigation.[31] Errors of law and fact, or an erroneous decision of
matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly
and honestly made.[32] Judicial review of an arbitration is, thus, more limited than judicial review
of a trial.[33]
 Nonetheless, the arbitrators awards is not absolute and without exceptions. The arbitrators
cannot resolve issues beyond the scope of the submission agreement.[34] The parties to such an
agreement are bound by the arbitrators award only to the extent and in the manner prescribed by
the contract and only if the award is rendered in conformity thereto.[35] Thus, Sections 24 and 25
of the Arbitration Law provide grounds for vacating, rescinding or modifying an arbitration
award. Where the conditions described in Articles 2038,[36] 2039[37] and 2040[38] of the Civil Code
applicable to compromises and arbitration are attendant, the arbitration award may also be
annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:

x x x. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators awards is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039, and 2040 applicable to both compromises and
arbitration are obtaining, the arbitrators' award may be annulled or
rescinded. Additionally, under Sections 24 and 25, of the Arbitration Law, there are
grounds for vacating, modifying or rescinding an arbitrators award. Thus, if and when
the factual circumstances referred to in the above-cited provisions are present, judicial
review of the award is properly warranted.

Accordingly, Section 20 of R.A. 876 provides:

SEC. 20. Form and contents of award. The award must be made in writing and signed
and acknowledged by a majority of the arbitrators, if more than one; and by the sole
arbitrator, if there is only one. Each party shall be furnished with a copy of the
award. The arbitrators in their award may grant any remedy or relief which they deem
just and equitable and within the scope of the agreement of the parties, which shall
include, but not be limited to, the specific performance of a contract.

xxx

The arbitrators shall have the power to decide only those matters which have been
submitted to them. The terms of the award shall be confined to such
disputes. (Underscoring ours).

xxx.
Section 24 of the same law enumerating the grounds for vacating an award states:

SEC. 24. Grounds for vacating award. In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceedings:

(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in arbitrators or any of them; or

(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such
under section nine hereof, and willfully refrained from disclosing such
disqualifications or any other misbehavior by which the rights of any party have been
materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not
made. (Underscoring ours).

xxx.
Section 25 which enumerates the grounds for modifying the award provides:

SEC. 25. Grounds for modifying or correcting award In anyone of the following
cases, the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:

(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or

(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or

(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioners report, the defect could have been
amended or disregarded by the court.

x x x.
Finally, it should be stressed that while a court is precluded from overturning an award for
errors in determination of factual issues, nevertheless, if an examination of the record reveals no
support whatever for the arbitrators determinations, their award must be vacated.[40] In the same
manner, an award must be vacated if it was made in manifest disregard of the law.[41]
Against the backdrop of the foregoing provisions and principles, we find that the arbitrators
came out with an award in excess of their powers and palpably devoid of factual and legal basis.
V

There was no financial structuring program; foreclosure of mortgage was fully justified.
 The point need not be belabored that PNB and DBP had the legitimate right to foreclose of
the mortgages of MMIC whose obligations were past due. The foreclosure was not a wrongful
act of the banks and, therefore, could not be the basis of any award of damages. There was no
financial restructuring agreement to speak of that could have constituted an impediment to the
exercise of the banks right to foreclose.
As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote
a separate opinion:

1. The various loans and advances made by DBP and PNB to MMIC have become
overdue and remain unpaid. The fact that a FRP was drawn up is enough to establish
that MMIC has not been complying with the terms of the loan
agreement. Restructuring simply connotes that the obligations are past due that is why
it is restructurable;

2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it
only means that MMIC had been informed or notified that its obligations were past
due and that foreclosure is forthcoming;

3. At that stage, MMIC also knew that PNB-DBP had the option of either approving
the FRP or proceeding with the foreclosure. Cabarrus, who filed this case supposedly
in behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself opposed
the FRP;

4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith
but with honest and sincere belief that foreclosure was the only alternative; a decision
further explained by Dr. Placido Mapa who testified that foreclosure was, in the
judgment of PNB, the best move to save MMIC itself.

Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as Exh. 37-A for the
respondent, may I know from you, Dr. Mapa what you meant by that the decision to foreclose
was neither precipitate nor arbitrary?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty considerations of
the information that we have received, and listening to the prospects which reported to us that we
had assumed would be the premises of the financial rehabilitation plan was not materialized nor
expected to materialized.
Q : And this statement that it was premised upon the known fact that means, it was referring to the
decision to foreclose, was premised upon the known fact that the rehabilitation plan earlier
approved by the stockholders was no longer feasible, just what is meant by no longer feasible?
A : Because the revenue that they were counting on to make the rehabilitation plan possible, was not
anymore expected to be forthcoming because it will result in a short fall compared to the prices
that were actually taking place in the market.
 Q : And I supposed that was you were referring to when you stated that the production targets and
assumed prices of MMICs products, among other projections, used in the financial reorganization
program that will make it viable were not met nor expected to be met?
A : Yes.
xxx

Which brings me to my last point in this separate opinion. Was PNB and DBP
absolutely unjustified in foreclosing the mortgages?

In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of
this. When MMIC adopted a restructuring program for its loan, it only meant that
these loans were already due and unpaid. If these loans were restructurable because
they were already due and unpaid, they are likewise forecloseable. The option is with
the PNB-DBP on what steps to take.

The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option to
foreclose. Neither does it mean that the FRP is legally binding and implementable. It must be
pointed that said FRP will, in effect, supersede the existing and past due loans of MMIC with
PNB-DBP. It will become the new loan agreement between the lenders and the borrowers. As in
all other contracts, there must therefore be a meeting of minds of the parties; the PNB and DBP
must have to validly adopt and ratify such FRP before they can be bound by it; before it can be
implemented. In this case, not an iota of proof has been presented by the PLAINTIFFS showing
that PNB and DBP ratified and adopted the FRP. PLAINTIFFS simply relied on a legal doctrine
of promissory estoppel to support its allegation in this regard.[42]

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No.
385, which took effect on January 31, 1974. The decree requires government financial
institutions to foreclose collaterals for loans where the arrearages amount to 20% of the total
outstanding obligations. The pertinent provisions of said decree read as follows:

SEC. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree to foreclose the collaterals and/or
securities for any loan, credit, accommodations, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding obligations,
including interest and other charges, as appearing in the books of account and/or
related records of the financial institutions concerned. This shall be without prejudice
to the exercise by the government financial institutions of such rights and/or remedies
available to them under their respective contracts with their debtor, including the right
to foreclosure on loans, credits, accommodations and/or guarantees on which the
arrearages are less than twenty percent (20%).
SEC. 2. No restraining order, temporary or permanent injunction shall be issued by
the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1 hereof,
whether such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties, except after due hearing in which it is
established by the borrower and admitted by the government financial institution
concerned that twenty percent (20%) of the outstanding arrearages has been paid after
the filing of foreclosure proceedings. (Underscoring supplied.)

Private respondents thesis that the foreclosure proceedings were null and void because of
lack of publication in the newspaper is nothing more than a mere unsubstantiated allegation not
borne out by the evidence. In any case, a disputable presumption exists in favor of petitioner that
official duty has been regularly performed and ordinary course of business has been followed.[43]
VI

Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the
facts of the case, the arbitrators in making the award went beyond the arbitration agreement.
In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for
judgment in their favor:

1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of
MMIC null and void and directing said defendants to restore the foreclosed assets to
the possession of MMIC, to render an accounting of their use and/or operation of said
assets and to indemnify MMIC for the loss occasioned by its dispossession or the
deterioration thereof;

2. Directing the defendants DBP and PNB to honor and perform their commitments
under the financial reorganization plan which was approved at the annual stockholders
meeting of MMIC on 30 April 1984;

3. Condemning the defendants DBP and PNB, jointly and severally to pay the
plaintiffs actual damages consisting of the loss of value of their investment amounting
to not less than P80,000,000.00, the damnum emerges and lucrum cessans in such
amount as may be establish during the trial, moral damages in such amount as this
Honorable Court may deem just and equitable in the premises, exemplary damages in
such amount as this Honorable Court may consider appropriate for the purpose of
setting an example for the public good, attorneys fees and litigation expenses in such
amounts as may be proven during the trial, and the costs legally taxable in this
litigation.

Further, Plaintiffs pray for such other reliefs as may be just and equitable in the
premises.[44]
 Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties
clearly and explicitly defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative suit in
behalf of the MMIC or its directors;
(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of
the MMIC assets were proper, valid and in good faith.[45]
Item No. 8 of the Agreement provides for the period by which the Committee was to render
its decision, as well as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later than six (6)
months from the date of its constitution.

In the event the committee finds that PLAINTIFFS have the personality to file this
suit and extra-judicial foreclosure of the MMIC assets wrongful, it shall make an
award in favor of the PLAINTIFFS (excluding DBP), in an amount as may be
established or warranted by the evidence which shall be payable in Philippine Pesos at
the time of the award. Such award shall be paid by the APT or its successor-in-interest
within sixty (60) days from the date of the award in accordance with the provisions of
par. 9 hereunder. x x x. The PLAINTIFFS remedies under this Section shall be in
addition to other remedies that may be available to the PLAINTIFFS, all such
remedies being cumulative and not exclusive of each other.

On the other hand, in case the arbitration committee finds that PLAINTIFFS have no capacity to
sue and/or that the extra-judicial foreclosure is valid and legal, it shall also make an award in
favor of APT based on the counterclaims of DBP and PNB in an amount as may be established
or warranted by the evidence. This decision of the arbitration committee in favor of APT shall
likewise finally settle all issues regarding the foreclosure of the MMIC assets so that the funds
held in escrow mentioned in par. 9 hereunder will thus be released in full in favor of APT.[46]

The clear and explicit terms of the submission notwithstanding, the Arbitration Committee
clearly exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid
the FRP; (b) in awarding damages to MMIC which was not a party to the derivative suit; and (c)
in awarding moral damages to Jesus S. Cabarrus, Sr.

The arbiters overstepped their powers by declaring as valid proposed Financial Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its powers
when it ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the
validity of the foreclosure and to transform the reliefs prayed for therein into pure money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the
proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires the consent of the
parties thereto.[47] The contract must bind both contracting parties.[48] Private respondents even by
their own admission recognized that the FRP had yet not been carried out and that the loans of
MMIC had not yet been converted into equity.[49]
However, the arbitration Committee not only declared the FRP valid and effective, but also
converted the loans of MMIC into equity raising the equity of DBP to 87%.[50]
The Arbitration Committee ruled that there was a commitment to carry out the FRP [51] on the
ground of promissory estoppel.

Similarly, the principle of promissory estoppel applies in the present case considering
as we observed, the fact that the government (that is Alfredo Velayo) was the FRPs
proponent. Although the plaintiffs are agreed that the government executed no formal
agreement, the fact remains that the DBP itself which made representations that the
FRP constituted a way out for MMIC. The Committee believes that although the DBP
did not formally agree (assuming that the board and stockholders approvals were not
formal enough), it is bound nonetheless if only for its conspicuous representations.

Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs
equity (at that time) and as MMICs creditor-the DBP can not validly renege on its
commitments simply because at the same time, it held interest against the MMIC.

The fact, of course, is that as APT itself asserted, the FRP was being carried out
although apparently, it would supposedly fall short of its targets. Assuming that the
FRP would fail to meet its targets, the DBP-and so this Committee holds-can not, in
any event, brook any denial that it was bound to begin with, and the fact is that
adequate or not (the FRP), the government is still bound by virtue of its acts.

The FRP, of course, did not itself promise a resounding success, although it raised DBPs equity
in MMIC to 87%. It is not excuse, however, for the government to deny its commitments.[52]

Atty. Sison, however, did not agree and correctly observed that:

But the doctrine of promissory estoppel can hardly find application here. The nearest that there
can be said of any estoppel being present in this case is the fact that the board of MMIC was, at
the time the FRP was adopted, mostly composed of PNB and DBP representatives. But those
representatives, singly or collectively, are not themselves PNB or DBP. They are individuals
with personalities separate and distinct from the banks they represent. PNB and DBP have
different boards with different members who may have different decisions. It is unfair to impose
upon them the decision of the board of another company and thus pin them down on the
equitable principle of estoppel.Estoppel is a principle based on equity and it is certainly not
equitable to apply it in this particular situation. Otherwise the rights of entirely separate, distinct
and autonomous legal entities like PNB and DBP with thousands of stockholders will be
suppressed and rendered nugatory.[53]
 As a rule, a corporation exercises its powers, including the power to enter into contracts,
through its board of directors. While a corporation may appoint agents to enter into a contract in
its behalf, the agent, should not exceed his authority.[54] In the case at bar, there was no showing
that the representatives of PNB and DBP in MMIC even had the requisite authority to enter into
a debt-for-equity swap. And if they had such authority, there was no showing that the banks,
through their board of directors, had ratified the FRP.
Further, how could the MMIC be entitled to a big amount of moral damages when its credit
reputation was not exactly something to be considered sound and wholesome. Under Article
2217 of the Civil Code, moral damages include besmirched reputation which a corporation may
possibly suffer. A corporation whose overdue and unpaid debts to the Government alone reached
a tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to
brag about. As Atty. Sison in his separate opinion persuasively put it:

Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral
damages. While the Supreme Court may have awarded moral damages to a corporation for
besmirched reputation in Mambulao vs. PNB 22 SCRA 359, such ruling cannot find application
in this case. It must be pointed out that when the supposed wrongful act of foreclosure was done,
MMICs credit reputation was no longer a desirable one. The company then was already suffering
from serious financial crisis which definitely projects an image not compatible with good and
wholesome reputation. So it could not be said that there was a reputation besmirches by the act
of foreclosure.[55]

The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the derivative suit.

Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have been
impleaded as a party. It was not joined as a party plaintiff or party defendant at any stage of the
proceedings. As it is, the award of damages to MMIC, which was not a party before the
Arbitration Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest
while the stockholder filing suit for the corporations behalf is only nominal party. The
corporation should be included as a party in the suit.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation

wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest. x x x.[56]

It is a condition sine qua non that the corporation be impleaded as a party because-

x x x. Not only is the corporation an indispensible party, but it is also the present rule that it must
be served with process. The reason given is that the judgment must be made binding upon the
corporation and in order that the corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of action. In other words the
corporations must be joined as party because it is its cause of action that is being litigated and
because judgment must be a res ajudicata against it.[57]

The reasons given for not allowing direct individual suit are:

(1) x x x the universally recognized doctrine that a stockholder in a corporation has no

title legal or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of the stockholders. In other words, to allow
shareholders to sue separately would conflict with the separate corporate entity
principle;

(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme
Court held in the case of Evangelista v. Santos, that the stockholders may not directly
claim those damages for themselves for that would result in the appropriation by, and
the distribution among them of part of the corporate assets before the dissolution of
the corporation and the liquidation of its debts and liabilities, something which cannot
be legally done in view of section 16 of the Corporation Law xxx;

(3) the filing of such suits would conflict with the duty of the management to sue for
the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in a ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act.[58]

If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the corporation,
in view of the doctrine that a corporation has a personality separate and distinct from its
individual stockholders or members. DBPs alleged equity, even if it were indeed 87%, did not
give it ownership over any corporate property, including the monetary award, its right over said
corporate property being a mere expectancy or inchoate right.[59]Notably, the stipulation even had
the effect of prejudicing the other creditors of MMIC.

The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case before it
is a derivative suit, in which the aggrieved party or the real party in interest is supposedly the
MMIC, and at the same time award moral damages to an individual stockholder, to wit:

WHEREFORE, premises considered, judgment is hereby rendered:

xxx.
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to paragraph (9), Compromise and
Arbitration Agreement, as and for moral damages; x x x[60]

The majority decision of the Arbitration Committee sought to justify its award of moral
damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the
government were assets belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the
majority stockholder. It then acknowledge that Cabarrus had already recovered said assets in the
RTC, but that he won no more than actual damages. While the Committee cannot possibly speak
for the RTC, there is no doubt that Jesus S. Cabarrus, Sr., suffered moral damages on account of
that specific foreclosure, damages the Committee believes and so holds, he Jesus S. Cabarrus,
Sr., may be awarded in this proceeding.[61]
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the
majority stockholder, having been ventilated in a complaint he previously filed with the RTC,
from which he obtained actual damages, he was barred res judicata from filing a similar case in
another court, this time asking for moral damages which he failed to get from the earlier
case.[62] Worse, private respondents violated the rule against non-forum shopping.
It is a basic postulate that s corporation has a personality separate and distinct from its
stockholders.[63] The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if
wrong was committed in the foreclosure, it was done against the corporation. Another reason is
that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that would result in
the appropriation by, and the distribution to, him part of the corporations assets before the
dissolution of the corporation and the liquidation of its debts and liabilities. The Arbitration
Committee, therefore, passed upon matters not submitted to it. Moreover, said cause of action
had already been decided in a separate case. It is thus quite patent that the arbitration committee
exceeded the authority granted to it by the parties Compromise and Arbitration Agreement by
awarding moral damages to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral
damages to Jesus S. Cabarrus, Sr.:

It is clear and it cannot be disputed therefore that based on these stipulated issues,
the parties themselves have agreed that the basic ingredient of the causes of action in
this case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of MMIC.

Perforce this has to be so because it is the basic rule in Corporation Law that the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.
Register of Deeds, 6 SCRA 373, the rule has been reiterated that a stockholder is not
the co-owner of corporate property. Since the property or assets foreclosed belongs
[sic] to MMIC, the wrong committed, if any, is done against the corporation. There is
therefore no direct injury or direct violation of the rights of Cabarrus et al. There is no
way, legal or equitable, by which Cabarrus et al. could recover damages in their
personal capacities even assuming or just because the foreclosure is improper or
invalid. The Compromise and Arbitration Agreement itself and the elementary
principles of Corporation Law say so. Therefore, I am constrained to dissent from the
award of moral damages to Cabarrus.[64]

From the foregoing discussions, it is evident that, not only did the arbitration committee
exceed its powers or so imperfectly execute them, but also, its findings and conclusions are
palpably devoid of any factual basis and in manifest disregard of the law.
We do not find it necessary to remand this case to the RTC for appropriate action. The
pleadings and memoranda filed with this Court, as well as in the Court of Appeals, raised and
extensively discussed the issues on the merits.Such being the case, there is sufficient basis for us
to resolve the controversy between the parties anchored on the records and the pleadings before
us.[65]
WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the
Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January
19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the Arbitration Committee
is hereby VACATED.
SO ORDERED
 FIRST DIVISION

[G.R. No. 117847. October 7, 1998]

PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs.

COURT OF APPEALS and STEFANI SAO, respondents.

DECISION
PANGANIBAN, J.:

Contracts entered into by a corporate president without express prior board

approval bind the corporation, when such officers apparent authority is established and
when these contracts are ratified by the corporation.

The Case

This principle is stressed by the Court in rejecting the Petition for Review of the
February 28, 1994 Decision and the October 28, 1994 Resolution of the Court of
Appeals in CA-GR CV No. 30670.
In a collection case[1] filed by Stefani Sao against Peoples Aircargo and
Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay City, Branch 110,
rendered a Decision[2] dated October 26, 1990, the dispositive portion of which reads:[3]

WHEREFORE, in light of all the foregoing, judgment is hereby rendered,

ordering [petitioner] to pay [private respondent] the amount of sixty thousand
(P60,000.00) pesos representing payment of [private respondents] services in
preparing the manual of operations and in the conduct of a seminar for
[petitioner]. The Counterclaim is hereby dismissed.

Aggrieved by what he considered a minuscule award of P60,000, private

respondent appealed to the Court of Appeals[4] (CA) which, in its Decision promulgated
February 28, 1994, granted his prayer for P400,000, as follows:[5]

WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby

MODIFIED in that [petitioner] is ordered to pay [private respondent] the
amount of four hundred thousand pesos (P400,000.00) representing payment
of [private respondents] services in preparing the manual of operations and in
the conduct of a seminar for [petitioner].
 As no new ground was raised by petitioner, reconsideration of the above-mentioned
Decision was denied in the Resolution promulgated on October 28, 1994.

The Facts

Petitioner is a domestic corporation, which was organized in the middle of 1986 to

operate a customs bonded warehouse at the old Manila International Airport in Pasay
City.[6]
To obtain a license for the corporation from the Bureau of Customs, Antonio
Punsalan Jr., the corporation president, solicited a proposal from private respondent for
the preparation of a feasibility study.[7]Private respondent submitted a letter-proposal
dated October 17, 1986 (First Contract hereafter) to Punsalan, which is reproduced
hereunder:[8]

Dear Mr. Punsalan:

With reference to your request for professional engineering consultancy

services for your proposed MIA Warehousing Project may we offer the
following outputs and the corresponding rate and terms of agreement:

====================================

Project Feasibility Study consisting of

Market Study

Technical Study

Financial Feasibility Study

Preparation of pertinent documentation requirements for the

application

=====================================================

The above services will be provided for a fee of [p]esos

350,000.00 payable according to the following schedule:

=====================================================

Fifty percent (50%) .upon confirmation of the agreement

 Twenty-five percent (25%)..15 days after the confirmation of the
agreement

Twenty-five percent (25%)..upon submission of the specified

outputs

The outputs will be completed and submitted within 30 days upon

confirmation of the agreement and receipt by us of the first fifty percent
payment.

---------------------------------------------------------------------------------------------

Thank you.

Yours truly, CONFORME:

(S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR.

(T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR.

Consultant for President, PAIRCARGO

Industrial Engineering

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private

respondents offer, as another company priced a similar proposal at
only P15,000.[9] However, Punsalan preferred private respondents services because of
the latters membership in the task force, which was supervising the transition of the
Bureau of Customs from the Marcos government to the Aquino administration.[10]
On October 17, 1986, petitioner, through Punsalan, sent private respondent a letter,
confirming their agreement as follows:

Dear Mr. Sao:

With regard to the services offered by your company in your letter dated 13
October 1986, for the preparation of the necessary study and documentations
to support our Application for Authority to Operate a public Customs Bonded
Warehouse located at the old MIA Compound in Pasay City, please be
informed that our company is willing to hire your services and will pay the
amount of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as
follows:

P100,000.00 - upon signing of the agreement;

 150,000.00 - on or before October 31, 1986, with the favorable
Recommendation of the CBW on our
application.

100,000.00 - upon receipt of the study in final form.

Very truly yours,

(S)ANTONIO C. PUNSALAN

(T)ANTONIO C. PUNSALAN

President

CONFORME & RECEIVED from PAIRCARGO, the

amount of ONE HUNDRED THOUSAND PESOS

(P100,000.00), this 17th day of October,

1986 as 1st installment payment of the

service agreement dated October 13, 1986.

(S)STEFANI C. SAO

(T)STEFANI C. SAO

Accordingly, private respondent prepared a feasibility study for petitioner which

eventually paid him the balance of the contract price, although not according to the
schedule agreed upon.[11]
On December 4, 1986, upon Punsalans request, private respondent sent petitioner
another letter-proposal (Second Contract hereafter), which reads:

Peoples Air Cargo & Warehousing Co., Inc.

Old MIA Compound, Metro Manila

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

President

Dear Mr. Pun[s]alan:

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

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

Downpayment upon signing conforme . . . P80,000.00

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

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

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

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

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

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

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

Thank you very much.

Yours truly,

(S)STEFANI C. SAO

(T)STEFANI C. SAO

Industrial Engineering Consultant

CONFORME:

(S)ANTONIO C. PUNSALAN JR.

(T)PAIRCARGO CO. INC.

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

2. Seminar/workshop for your employees

P400,000 - package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

The Manual has already been approved by the Commissioner but

payment has not yet been made."

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

1st letter - 4 Dec. 1986

2nd letter - 15 June 1987 with

Hinanakit.

On January 10, 1987, Andy Villaceren, vice president of petitioner, received the
operations manual prepared by private respondent.[12] Petitioner submitted said
operations manual to the Bureau of Customs in connection with the formers application
to operate a bonded warehouse; thereafter, in May 1987, the Bureau issued to it a
license to operate, enabling it to become one of the three public customs bonded
warehouses at the international airport.[13] Private respondent also conducted, in the third
week of January 1987 in the warehouse of petitioner, a three-day training seminar for
the latters employees.[14]
On March 25, 1987, private respondent joined the Bureau of Customs as special
assistant to then Commissioner Alex Padilla, a position he held until he became
technical assistant to then Commissioner Miriam Defensor-Santiago on March 7,
1988.[15] Meanwhile, Punsalan sold his shares in petitioner-corporation and resigned as
its president in 1987.[16]
On February 9, 1988, private respondent filed a collection suit against petitioner. He
alleged that he had prepared an operations manual for petitioner, conducted a seminar-
workshop for its employees and delivered to it a computer program; but that, despite
demand, petitioner refused to pay him for his services.
Petitioner, in its answer, denied that private respondent had prepared an operations
manual and a computer program or conducted a seminar-workshop for its employees. It
further alleged that the letter-agreement was signed by Punsalan without authority, in
collusion with [private respondent] in order to unlawfully get some money from
[petitioner], and despite his knowledge that a group of employees of the company had
been commissioned by the board of directors to prepare an operations manual. [17]
 The trial court declared the Second Contract unenforceable or simulated. However,
since private respondent had actually prepared the operations manual and conducted a
training seminar for petitioner and its employees, the trial court awarded P60,000 to the
former, on the ground that no one should be unjustly enriched at the expense of another
(Article 2142, Civil Code). The trial court determined the amount in light of the evidence
presented by defendant on the usual charges made by a leading consultancy firm on
similar services.[18]

The Ruling of the Court of Appeals

To Respondent Court, the pivotal issue of private respondents appeal was the
enforceability of the Second Contract. It noted that petitioner did not appeal the Decision
of the trial court, implying that it had agreed to pay the P60,000 award. If the contract
was valid and enforceable, then petitioner should be held liable for the full amount
stated therein, not P60,000 as held by the lower court.
Rejecting the finding of the trial court that the December 4, 1986 contract was
simulated or unenforceable, the CA ruled in favor of its validity and
enforceability. According to the Court of Appeals, the evidence on record shows that the
president of petitioner-corporation had entered into the First Contract, which was similar
to the Second Contract. Thus, petitioner had clothed its president with apparent
authority to enter into the disputed agreement. As it had also become the practice of the
petitioner-corporation to allow its president to negotiate and execute contracts
necessary to secure its license as a customs bonded warehouse without prior board
approval, the board itself, by its acts and through acquiescence, practically laid aside
the normal requirement of prior express approval. The Second Contract was declared
valid and binding on the petitioner, which was held liable to private respondent in the full
amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before us.[19]

The Issues

Instead of alleging reversible errors, petitioner imputes grave abuse of discretion to

the Court of Appeals, viz.:[20]

I. xxx [I]n ruling that the subject letter-agreement for services was binding on
the corporation simply because it was entered into by its president[;]

II. xxx [I]n ruling that the subject letter-agreement for services was binding on
the corporation notwithstanding the lack of any board authority since it was
the purported practice to allow the president to enter into contracts of said
nature (citing one previous instance of a similar contract)[;] and
III. xxx [I]n ruling that the subject letter-agreement for services was a valid
contract and not merely simulated."

The Court will overlook the lapse of petitioner in alleging

grave abuse of discretion as its ground for seeking a reversal of the assailed
Decision. Although the Rules of Court specify reversible errors as grounds for a petition
for review under Rule 45, the Court will lay aside for the nonce this procedural lapse
and consider the allegations of grave abuse as statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the amount of such
accountability. Hence, the resolution of this petition rests on the sole issue of the
enforceability and validity of the Second Contract, more specifically: (1) whether the
president of the petitioner-corporation had apparent authority to bind petitioner to the
Second Contract; and (2) whether the said contract was valid and not merely simulated.

The Courts Ruling

The petition is not meritorious.

First Issue: Apparent Authority of a Corporate President

Petitioner argues that the disputed contract is unenforceable, because Punsalan, its
president, was not authorized by its board of directors to enter into said contract.
The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation.[21] A corporation is a juridical
person, separate and distinct from its stockholders and members, having xxx powers,
attributes and properties expressly authorized by law or incident to its existence. [22]
Being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies and is
responsible for the efficiency of management,[23] as provided in Section 23 of the
Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in

this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees x x x.

Under this provision, the power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, bylaws, or relevant provisions of
law.[24] However, just as a natural person may authorize another to do certain acts for
and on his behalf, the board of directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the
board, either expressly or impliedly by habit, custom or acquiescence in the general
course of business, viz.: [25]

A corporate officer or agent may represent and bind the corporation in

transactions with third persons to the extent that [the] authority to do so has
been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe
that it has conferred.

Accordingly, the appellate court ruled in this case that the authority to act for and to
bind a corporation may be presumed from acts of recognition in other instances,
wherein the power was in fact exercised without any objection from its board or
shareholders. Petitioner had previously allowed its president to enter into the First
Contract with private respondent without a board resolution expressly authorizing him;
thus, it had clothed its president with apparent authority to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to the subject
contract does not constitute corporate practice, which Webster defines as frequent or
customary action. It cites Board of Liquidators v. Kalaw,[26] in which the practice of
NACOCO allowing its general manager to negotiate and execute contract in its copra
trading activities for and on its behalf, without prior board approval,
wasinferred from sixty contracts not one, as in the present case -- previously entered
into by the corporation without such board resolution.
Petitioners argument is not persuasive. Apparent authority is derived not merely
from practice. Its existence may be ascertained through (1) the general manner in which
the corporation holds out an officer or agent as having the power to act or, in other
words, the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or beyond the scope of his ordinary powers. [27] It requires
presentation of evidence of similar act(s) executed either in its favor or in favor of other
parties.[28] It is not the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the corporation.
In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered
into the First Contract without first securing board approval. Despite such lack of board
approval, petitioner did not object to or repudiate said contract, thus clothing its
president with the power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong -- senior vice president, treasurer and
major stockholder of petitioner. Testifying on the First Contract, he said:[29]
 A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr. Sao is very influential with
the Collector of Customs[s]. Because the Collector of Custom[s] will be the one to
approve our project study and I objected to that, sir.And I said it [was an exorbitant]
price. And Mr. Punsalan he is the [p]resident, so he [gets] his way.
Q: And so did the company eventually pay this P350,000.00 to Mr. Sao?
A: Yes, sir.
The First Contract was consummated, implemented and paid without a hitch.
Hence, private respondent should not be faulted for believing that Punsalans
conformity to the contract in dispute was also binding on petitioner. It is familiar doctrine
that if a corporation knowingly permits one of its officers, or any other agent, to act
within the scope of an apparent authority, it holds him out to the public as possessing
the power to do those acts; and thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the agents
authority.[30]
Furthermore, private respondent prepared an operations manual and conducted a
seminar for the employees of petitioner in accordance with their contract. Petitioner
accepted the operations manual, submitted it to the Bureau of Customs and allowed the
seminar for its employees. As a result of its aforementioned actions, petitioner was
given by the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendo then that the Second Contract was outside the usual
powers of the president, petitioners ratification of said contract and acceptance of
benefits have made it binding, nonetheless. The enforceability of contracts under Article
1403(2) is ratified by the acceptance of benefits under them under Article 1405.
Inasmuch as a corporate president is often given general supervision and control
over corporate operations, the strict rule that said officer has no inherent power to act
for the corporation is slowly giving way to the realization that such officer has certain
limited powers in the transaction of the usual and ordinary business of the
corporation.[31] In the absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual duties.[32]
Hence, it has been held in other jurisdictions that the president of a corporation
possesses the power to enter into a contract for the corporation, when the conduct on
the part of both the president and the corporation [shows] that he had been in the habit
of acting in similar matters on behalf of the company and that the company had
authorized him so to act and had recognized, approved and ratified his former and
similar actions.[33] Furthermore, a party dealing with the president of a corporation is
entitled to assume that he has the authority to enter, on behalf of the corporation, into
contracts that are within the scope of the powers of said corporation and that do not
violate any statute or rule on public policy.[34]

Second Issue: Alleged Simulation of the First Contract

 As an alternative position, petitioner seeks to pare down its liabilities by limiting its
exposure from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner
capitalizes on the badges of fraud cited by the trial court in declaring said contract either
simulated or unenforceable, viz.:

xxx The October 1986 transaction with [private respondent] involved

P350,000. The same was embodied in a letter which bore therein not only
the conformity of [petitioners] then President Punsalan but also drew a
letter-confirmation from the latter for, indeed, he was clothed with authority
to enter into the contract after the same was brought to the attention and
consideration of [petitioner]. Not only that, a [down payment] was made. In
the alleged agreement of December 4, 1986 subject of the present case,
the amount is even bigger-P400,000.00. Yet, the alleged letter-agreement
drew no letter of confirmation. And no [down payment] and postdated
checks were given. Until the filing of the present case in February 1988,
no written demand for payment was sent to [petitioner]. [Private
respondents] claim that he sent one in writing, and one was sent by his
counsel who manifested that [h]e was looking for a copy in [his] files fails
in light of his failure to present any such copy. These and the following
considerations, to wit:

1) Despite the fact that no [down payment] and/or postdated checks [partial
payments] (as purportedly stipulated in the alleged contract) [was given,
private respondent] went ahead with the services[;]

2) [There was a delay in the filing of the present suit, more than a year after
[private respondent] allegedly completed his services or eight months after the
alleged last verbal demand for payment made on Punsalan in June 1987;

3) Does not Punsalans writing allegedly in June 1987 on the alleged letter-
agreement of your employees[,] when it should have been our employees, as
he was then still connected with [petitioner], indicate that the letter-agreement
was signed by Punsalan when he was no longer connected with [petitioner]
or, as claimed by [petitioner], that Punsalan signed it without [petitioners]
authority and must have been done in collusion with plaintiff in order to
unlawfully get some money from [petitioner]?

4) If, as [private respondent] claims, the letter was returned by Punsalan after
affixing thereon his conformity, how come xxx when Punsalan allegedly visited
[private respondent] in his office at the Bureau of Customs, in June 1987,
Punsalan brought (again?) the letter (with the pencil [notation] at the left
bottom portion allegedly already written)?
5) How come xxx [private respondent] did not even keep a copy of the alleged
service contract allegedly attached to the letter-agreement?

6) Was not the letter-agreement a mere draft, it bearing the corrections made
by Punsalan of his name (the letter n is inserted before the last letter o in
Antonio) and of the spelling of his family name (Punsalan, not Punzalan)?

7) Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in nature, and the
Court eschews factual examination in a petition for review under Rule 45 of the Rules of
Court.[35] This rule, however, admits of exceptions, one of which is a conflict between the
factual findings of the lower and of the appellate courts[36] as in the case at bar.
After judicious deliberation, the Court agrees with the appellate court that the
alleged badges of fraud mentioned earlier have not affected in any manner the
perfection of the Second Contract or proved the alleged simulation thereof. First, the
lack of payment (whether down, partial or full payment), even after completion of private
respondents obligations, imports only a defect in the performance of the contract on the
part of petitioner. Second, the delay in the filing of action was not fatal to private
respondents cause. Despite the lapse of one year after private respondent completed
his services or eight months after the alleged last demand
for payment in June 1987, the action was still filed within the allowable period,
considering that an action based on a written contract prescribes only after ten years
from the time the right of action accrues.[37] Third, a misspelling in the contract does not
establish vitiation of consent, cause or object of the contract. Fourth, a confirmation
letter is not an essential element of a contract; neither is it necessary to perfect
one. Fifth, private respondents failure to implead the corporate president does not
establish collusion between them. Petitioner could have easily filed a third-party claim
against Punsalan if it believed that it had recourse against the latter. Lastly, the mere fact
that the contract price was six times the alleged going rate does not invalidate it. [38] In
short, these badges do not establish simulation of said contract.
A fictitious and simulated agreement lacks consent which is essential to a valid and
enforceable contract.[39] A contract is simulated if the parties do not intend to be bound at
all (absolutely simulated),[40] or if the parties conceal their true agreement (relatively
simulated).[41] In the case at bar, petitioner received from private respondent a letter-offer
containing the terms of the former, including a stipulation of the consideration for the
latters services. Punsalans conformity, as well as the receipt and use of the operations
manual, shows petitioners consent to or, at the very least, ratification of the contract. To
repeat, petitioner even submitted the manual to the Bureau of Customs and allowed
private respondent to conduct the seminar for its employees. Private respondent heard
no objection from the petitioner, until he claimed payment for the services he had
rendered.
Contemporaneous and subsequent acts are also principal factors in the
determination of the will of the contracting parties.[42] The circumstances outlined above
do not establish any intention to simulate the contract in dispute. On the contrary, the
legal presumption is always on the validity of contracts. A corporation, by accepting
benefits of a transaction entered into without authority, has ratified the agreement and
is, therefore, bound by it.[43]
WHEREFORE, the petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
 SECOND DIVISION

[G.R. No. 149252. April 28, 2005]

DONALD KWOK, petitioner, vs. PHILIPPINE CARPET

MANUFACTURING CORPORATION, respondent.

DECISION
CALLEJO, SR., J.:

This is a petition for review of the Decision[1] of the Court of Appeals (CA)
in CA-G.R. SP No. 60232 dismissing Donald Kwoks petition for review
on certiorari and affirming the majority Decision of the National Labor
Relations Commission (NLRC), as well as its resolution in NLRC NCR Case
No. 00-12-07454-96 dismissing the motion for reconsideration of the said
decision.

The Antecedents

In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim,

along with some other stockholders, established a corporation, the respondent
Philippine Carpet Manufacturing Corporation (PCMC). The petitioner became
its general manager, executive vice-president and chief operations officer.
Lim, on the other hand, was its president and chairman of the board of
directors. When the petitioner retired 36 years later or on October 31, 1996,
he was receiving a monthly salary of P160,000.00.[2] He demanded the cash
equivalent of what he believed to be his accumulated vacation and sick leave
credits during the entire length of his service with the respondent corporation,
i.e., from November 16, 1965 to October 31, 1996, in the total amount
of P7,080,546.00 plus interest.[3] However, the respondent corporation refused
to accede to the petitioners demands, claiming that the latter was not entitled
thereto.[4]
The petitioner filed a complaint against the respondent corporation for the
payment of his accumulated vacation and sick leave credits before the NLRC.
He claimed that Lim made a verbal promise to give him unlimited sick leave
and vacation leave benefits and its cash conversion upon his retirement or
resignation without the need for any application therefor. In addition, Lim also
promised to grant him other benefits, such as golf and country club
membership; the privilege to charge the respondent corporations account; 6%
profit-sharing in the net income of the respondent corporation (while Lim got
4%); and other corporate perquisites. According to the petitioner, all of these
promises were complied with, except for the grant of the cash equivalent of
his accumulated vacation and sick leave credits upon his retirement.[5]
The respondent corporation denied all these, claiming that upon the
petitioners retirement, he received the amount of P6,902,387.19 representing
all the benefits due him. Despite this, the petitioner again
demanded P7,080,546.00, which demand was without factual and legal basis.
The respondent corporation asserted that the chairman of its board of
directors and its president/vice-president had unlimited discretion in the use of
their time, and had never been required to file applications for vacation and
sick leaves; as such, the said officers were not entitled to vacation and sick
leave benefits. The respondent corporation, likewise, pointed out that even if
the petitioner was entitled to the said additional benefits, his claim had already
prescribed. It further averred that it had no policy to grant vacation and sick
leave credits to the petitioner.[6]
In his Affidavit[7] dated May 19, 1998, Lim denied making any such verbal
promise to his son-in-law on the grant of unlimited vacation and sick leave
credits and the cash conversion thereof. Lim averred that the petitioner had
received vacation and sick leave benefits from 1994 to 1996. Moreover,
assuming that he did make such promise to the petitioner, the same had not
been confirmed or approved via resolution of the respondent corporations
board of directors.
It was further pointed out that as per the Memorandum dated November 6,
1981, only regular employees and managerial and confidential employees
falling under Category I were entitled to vacation and sick leave credits. The
petitioner, whose position did not fall under Category I, was, thus, not entitled
to the benefits under the said memorandum. The respondent corporation
alleged that this was admitted by the petitioner himself and affirmed by Raoul
Rodrigo, its incumbent executive vice-president and general manager.
In a Decision[8] dated November 27, 1998, the Labor Arbiter ruled in favor
of the petitioner. The fallo of the decision reads:

WHEREFORE, all the foregoing premises being considered, judgment is hereby

rendered ordering the respondent company to pay complainant the sum
of P7,080,546.00, plus ten percent (10%) thereof as and for attorneys fees.

SO ORDERED.[9]
 Undaunted, the respondent corporation appealed the decision to the
NLRC, alleging that:
I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS COVERED
BY THE NOVEMBER 6, 1981 MEMORANDUM ON VACATION AND SICK LEAVE
CREDITS.[10]
II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS
DISCRIMINATORY NOT TO GRANT KWOK THESE BENEFITS.[11]
III. KWOKS CLAIMS ARE BASELESS.[12]
IV. KWOKS CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE BARRED BY
PRESCRIPTION.[13]
V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.[14]

The respondent corporation averred that based on the petitioners

memorandum, his admissions and the contract of employment, the petitioner
was not entitled to the cash conversion of his sick and vacation leave credits.
While the respondent corporation conceded that the petitioner may have been
entitled to unlimited sick and vacation leave benefits during his employment, it
maintained that no such promise was made by Lim to convert the same; even
assuming that such verbal promise was made, the respondent corporation
was not bound thereby since the petitioner failed to adduce the written
conformity of its board of directors. The respondent corporation insisted that
the claims of the petitioner were barred under Article 291 of the Labor Code.
For his part, the petitioner made the following averments in his
memorandum:

The non-performance by PCMC of this particular promise to convert in cash all of his
unused cash (sic) and sick leave credits was precipitated by the falling out of the
marriage between Mr. Kwok and his wife, the daughter of Mr. Lim. In fact, even
while Mr. Kwok was still the Executive Vice-President and General Manager of
PCMC, when the falling out of the said marriage became apparent, the other benefits
or perquisites which Mr. Kwok used to enjoy were immediately curtailed by Mr. Lim
to the prejudice of Mr. Kwok.[15]

On November 29, 1999, the NLRC, by majority vote, rendered judgment

granting the appeal, reversing and setting aside the decision of the Labor
Arbiter.[16] The NLRC ordered the dismissal of the complaint. Commissioner
Angelita A. Gacutan filed a dissenting opinion.[17]
Aggrieved, the petitioner filed a petition for review with the CA, on the
following grounds:
I
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION
OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT DECLARED THAT THE VERBAL
PROMISE OF MR. LIM TO PETITIONER WAS UNENFORCEABLE.

II

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION

OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT RULED THAT THE VERBAL PROMISE
BY MR. LIM TO PETITIONER WAS NOT BINDING AS IT WAS NOT
APPROVED BY THE BOARD OF DIRECTORS.

III

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION

OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT IGNORED STRONG EVIDENCE THAT
PCMC CLOTHED MR. LIM WITH AWESOME POWERS TO GRANT BENEFITS
TO ITS EMPLOYEES INCLUDING PETITIONER AND RATIFIED THE SAME
BY ITS SILENCE AND WHEN IT IGNORED TOO EXISTING JURISPRUDENCE
ON THE MATTER.

IV

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION

OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT IGNORED STRONG AND CLEAR
EVIDENCE THAT IN PCMC THE GIVING OF BENEFITS TO PETITIONER,
THOUGH NOT IN WRITING, WAS A PREVALENT PRACTICE.

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION

OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT RULED THAT THE MEMORANDUM
DATED APRIL 26, 1997 APPLICABLE TO MR. RAOUL RODRIGO WAS ALSO
APPLICABLE TO PETITIONER.[18]

On February 28, 2001, the CA rendered judgment affirming the decision of

the NLRC and dismissing the petition.[19] The petitioners motion for
reconsideration thereof was denied by the appellate court, per its
Resolution[20] dated July 17, 2001.
 The petitioner, thus, filed the instant petition for review on certiorari with
this Court, assailing the decision and resolution of the CA on the following
claims:
I

The Hon. Court of Appeals, contrary to law, gravely erred and disregarded established
jurisprudence in ruling that petitioner has not adduced sufficient evidence to support
his claim that he was, indeed, promised the cash conversion of his unused vacation
and sick leave credits upon retirement.[21]

II

The Hon. Court of Appeals gravely erred in ruling that even if private respondents
(sic) Mr. Lim did make him such promise, the same cannot be enforced.[22]

III

The Hon. Court of Appeals gravely erred and disregarded clear jurisprudence on the
matter when it ruled that there is no showing that private respondent, thru its board of
directors either recognized, approved or ratified the promise made by Mr. Lim to
petitioner.[23]

As gleaned from his Memorandum, the petitioner posits that he had

adduced substantial evidence to prove that Lim, as president and chairman of
the respondent corporations board of directors, made a verbal promise to give
him the cash conversion of his accumulated vacation and sick leave credits
upon his retirement (that is, benefits at par with the number of days to which
the officer next in rank to him was entitled). According to the petitioner, his
claim is fortified by the fact that his successor, Raoul Rodrigo, has unlimited
vacation and sick leave credits. The petitioner further asserts that he would
not have accepted the positions in the respondent corporation without such
benefit, especially since his subordinates were also enjoying the same. He
posits that he was entitled to the said privilege because of his rank. He,
likewise, claims that, in contrast to the evidence he has presented, the
respondent corporation failed to adduce proof of its affirmative allegations.
The petitioner further argues that his complaint was not time-barred since
he filed it on December 5, 1996. Even if this were so, he is, nevertheless,
entitled to the cash value of his vacation and sick leave credits for three years
before his retirement. Moreover, the evidence on record shows that officers
belonging to Category I had been granted the cash conversion of their earned
leave credits after the lapse of three years.
 The respondent corporation, for its part, asserts that the petitioner failed to
adduce substantial evidence to the claims in his complaint. Even if Lim had
made such verbal promise to the petitioner, the same is not binding on the
respondent corporation absent its conformity through board resolution.
Moreover, the petitioner is not covered by the Memorandum dated November
6, 1981 because he had unlimited leave credits; hence, it cannot be gainsaid
that he still had unused leave credits to be converted. According to the
respondent corporation, the petitioner himself admitted that he was not
included in the Memorandum dated November 6, 1981; and even assuming
that he was covered by the said memorandum, the fact that his complaint was
filed only in 1996 precludes him from claiming the cash conversion of such
leave credits for the years 1966 to 1993.

The Courts Ruling

The petition has no merit.

The threshold issue in this case is factual whether or not the petitioner is
entitled, based on the documentary and testimonial evidence on record, to the
cash value of his vacation and sick leave credits in the total amount
of P7,080,546.00. The resolution of the issue is riveted to our resolution of
whether the petitioners mainly testimonial evidence of an alleged verbal
promise made by a corporate officer to grant him the privilege of converting
accumulated vacation and sick leave credits after retirement or separation
from employment is entitled to probative weight.
Under Rule 45 of the Rules of Court, only questions of law may be raised
under a petition for review on certiorari. The Court, not being a trier of facts, is
not wont to reexamine and reevaluate the evidence of the parties, whether
testimonial or documentary. Moreover, the findings of facts of the CA on
appeal from the NLRC are, more often than not, given conclusive effect by the
Court. The Court may delve into and resolve factual issues only in exceptional
circumstances, such as when the findings of facts of the Labor Arbiter, on one
hand, and those of the NLRC and the CA, on the other, are capricious and
arbitrary; or when the CA has reached an erroneous conclusion based on
arbitrary findings of fact; and when substantial justice so requires. In this case,
however, the petitioner failed to convince the Court that the factual findings of
the CA which affirmed the findings of the NLRC on appeal, as well as its
conclusions based on the said findings, are capricious and arbitrary.
While the petitioner was unequivocal in claiming that the respondent
corporation, through its president and chairman of the board of directors,
obliged itself, as a matter of policy, to grant him the cash value of his vacation
and sick leave credits upon his retirement, he was burdened to prove his
claim by substantial evidence.[24] The petitioner failed to discharge this burden.
We agree with the petitioners contention that for a contract to be binding
on the parties thereto, it need not be in writing unless the law requires that
such contract be in some form in order that it may be valid or enforceable or
that it be executed in a certain way, in which case that requirement is absolute
and independent.[25] Indeed, corporate policies need not be in writing.
Contracts entered into by a corporate officer or obligations or prestations
assumed by such officer for and in behalf of such corporation are binding on
the said corporation only if such officer acted within the scope of his authority
or if such officer exceeded the limits of his authority, the corporation has
ratified such contracts or obligations.
In the present case, the petitioner relied principally on his testimony to
prove that Lim made a verbal promise to give him vacation and sick leave
credits, as well as the privilege of converting the same into cash upon
retirement. The Court agrees that those who belong to the upper corporate
echelons would have more privileges. However, the Court cannot presume
the existence of such privileges or benefits. The petitioner was burdened to
prove not only the existence of such benefits but also that he is entitled to the
same, especially considering that such privileges are not inherent to the
positions occupied by the petitioner in the respondent corporation, son-in-law
of its president or not.
In dismissing the petition before it, the CA disbelieved the petitioners
testimony and gave credence and probative weight to the collective
testimonies of the respondent corporations witnesses, who were its
employees and officers, including Lim, whom the petitioner presented as a
hostile witness. We agree with the appellate courts encompassing synthesis
and analysis of the evidence on record:

Except for his bare assertions, petitioner has not adduced sufficient evidence to
support his claim that he was, indeed, promised the cash conversion of his unused
vacation and sick leaves upon retirement. Petitioner harps on what he calls the
prevalent practice in PCMC of giving him benefits, such as the use of golf and
country club facilities, salary increases, the use of the company vehicle and driver,
and sharing in PCMCs annual net income, without either a written contract or a Board
resolution to back it up. Respondent PCMC denies all these, however. According to
respondent, petitioners share in the income of the company is actually part of the
consultancy fee which PCMC pays DK Management Services, Inc., a firm owned by
petitioners company. PCMC adds that the yearly salary increases of corporate officers
were always with the prior approval of the Board.

Nevertheless, assuming that petitioner was, indeed, given the benefits which he so
claimed, it does not necessarily follow that among those is the cash conversion of his
accumulated leaves. It is a basic rule in evidence that each party must prove his
affirmative allegation. Since the burden of proof lies with the party who asserts an
affirmative allegation, the plaintiff or complainant has to prove his affirmative
allegations in the complaint and the defendant or respondent has to prove the
affirmative allegations in his affirmative defenses and counterclaim. Petitioner, in the
case at bar, has failed to discharge this burden.[26]

The CA made short shift of the claim of the petitioner that per
Memorandum dated November 6, 1981, he was not entitled to the benefits of
the company policy of commutation of leave credits. Indeed, the company
policy of conversion into equivalent cash of unused vacation and sick leave
credits applied only to its regular employees. The petitioner failed to offer
evidence to rebut the testimony of Nel Gopez, Chief Accountant of the
respondent, that the petitioner was not among the regular employees covered
by the policy for the simple reason that he had unlimited vacation leave
benefits. As stated by the CA, the petitioner no less corroborated the
testimony of Gopez, thus:

ATTY. PIMENTEL

And, so you mention[ed] earlier that the policy on vacation leave benefits
apply for category one employee(s) and rank-and-file employee(s)?

WITNESS (Mr. Nel Gopez)

Yes.

ATTY. PIMENTEL

And who are considered category one employee(s)?

WITNESS

Category One employees are from the rank and of Senior Vice-President
and Assistant General Manager and below, up to the level of department
managers.
ATTY. PIMENTEL

How about the complainant, Mr. Kwok, does he falling (sic) to the
category one?

WITNESS

As far as I can remember, he is (sic) not belong to category one employee.

ATTY. PIMENTEL

Therefore, he is not entitled to the lump sum benefit?

WITNESS

Yes, Maam.

ATTY. PIMENTEL

And would you know, Mr. Witness, why he is (sic) not given the
conversion of the vacation leave benefits at the time category one
employees sectors (sic) are given?

WITNESS

Because he has, as far as I can remember, he has unlimited vacation leave.

This was corroborated by petitioner himself when he testified in this wise:

ATTY. PIMENTEL

Mr. Witness, you occupied the position of Executive Vice-President and

General Manager. You agree with me that this position or this office of
Executive Vice-President and General Manager are not covered by this
policy.

WITNESS (Donald Kwok)

Yes, it is not covered by this policy.

ATTY. PIMENTEL

So this policy applies to persons below you and your father-in-law?

WITNESS

Yes, right.

ATTY. PIMENTEL

And this policy does not apply to you?

WITNESS

As far as Im concerned, it does not apply for (sic) me.

In all respects, therefore, petitioner, by virtue of his position as Executive Vice-

President, is not covered by the November 6, 1981 Memorandum granting PCMC
employees the conversion of their unused vacation and sick leaves into cash.[27]

We have reviewed the records and found no evidence to controvert the

following findings of the CA and its ratiocinations on its resolution of the
petitioners submissions:

Second, even assuming that petitioner is included among the regular employees of
PCMC referred to in said memorandum, there is no evidence that he complied with
the cut-off dates for the filing of the cash conversion of vacation and sick leaves. This
being so, we find merit in respondents argument that petitioners money claims have
already been barred by the three-year prescriptive period under Article 291 of the
Labor Code, as amended.

Third, and this is of primordial importance, there is no proof that petitioner has filed
vacation and sick leaves with PCMCs personnel department. Without a record of
petitioners absences, there is no way to determine the actual number of leave credits
he is entitled to. The P7,080,546.00 figure arrived at by petitioner supposedly
representing the cash equivalent of his earned sick and vacation leaves is thus totally
baseless.

And, fourth, even assuming that PCMC President Patricio Lim did promise petitioner
the cash conversion of his leaves, we agree with respondent that this cannot bind the
company in the absence of any Board resolution to that effect. We must stress that the
personal act of the company president cannot bind the corporation. As explicitly
stated by the Supreme Court in Peoples Aircargo and Warehousing Co., Inc. v. Court
of Appeals:
The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. A corporation is a
juridical person, separate and distinct from its stockholders and members, having xxx
powers, attributes and properties expressly authorized by law or incident to its
existence.

the power and the responsibility to decide whether the corporation should enter into a
contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of law.

Anent the third assigned error, petitioner maintains that the PCMC Board of Directors
has granted its President, Patricio Lim, awesome powers to grant benefits to its
employees, adding that the Board has always given its consent to the way Lim ran the
affairs of the company especially on matters relating to the benefits that its corporate
officers enjoyed.

True, jurisprudence holds that the president of a corporation possesses the power to
enter into a contract for the corporation when the conduct on the part of both the
president and corporation [shows] that he had been in the habit of acting in similar
matters on behalf of the company and that the company had authorized him so to act
and had recognized, approved and ratified his former and similar actions.

In the case at bar, however, there is no showing that PCMC had either recognized,
approved or ratified the cash conversion of petitioners leave credits as purportedly
promised to him by Lim. On the contrary, PCMC has steadfastly maintained that the
Company, through the Board, has long adopted the policy of granting its earlier
mentioned corporate officers unlimited leave benefits denying them the privilege of
converting their unused vacation or sick leave benefits into their cash equivalent.

As to the last assigned error, petitioner faults the NLRC for holding as applicable to
petitioner, the April 26, 1997 Memorandum issued by PCMC to Raoul Rodrigo,
Donald Kwoks successor as company executive vice-president. The said memo
granted Rodrigo unlimited sick and vacation leave credits but disallowed the cash
conversion thereof. Before he became executive vice-president, Rodrigo was senior
vice-president and enjoyed the commutation of his unused vacation and sick leaves.

We note that the April 26, 1997 memo was issued to Rodrigo when petitioner was
already retired from PCMC. While said memorandum was particularly directed to
Rodrigo, however, this does not necessarily mean that petitioner, as former executive
vice-president, was then not prohibited from converting his earned vacation and sick
leaves into cash since he was not issued a similar memo. On the contrary, the memo
simply affirms the long-standing company practice of excluding PCMCs top two
positions, that of president and executive vice-president, from the commutation of
leaves. As heretofore discussed, among the perks of those occupying these posts is the
privilege of having unlimited leaves, which is totally incompatible with the concept of
converting unused leave credits into their cash equivalents.[28]

We are not convinced by the petitioners claim that Lim capriciously

deprived him of his entitlement to the cash conversion of his accumulated
vacation and sick leave credits simply because of his estrangement from his
wife, who happens to be Lims daughter. The petitioner did not adduce any
evidence to show that he appealed to the respondent corporations board of
directors for the implementation of the said privilege which was allegedly
granted to him. Even if Lim was the president and chairman of the respondent
corporations board of directors, the rest of the membership of the board could
have overruled him and granted to the petitioner his claim if, indeed, the latter
was entitled thereto. Indeed, even the petitioner admitted that, after his
retirement, the board of directors granted to him salary increase for two years
prior to his retirement. If the claim of the petitioner had been approved by the
board of directors, for sure, it would have approved the same despite his
falling out with the daughter of Lim.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of
merit. Costs against the petitioner.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-18287 March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellee,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.

-----------------------------

G.R. No. L-18155 March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellant,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellee.

Vicente J. Francisco for plaintiff-appellee.

The Government Corporate Counsel for defendant-appellant.

REYES, J.B.L., J.:

Appeal by the Government Service Insurance System from the decision of the Court of First
Instance of Rizal (Hon. Angel H. Mojica, presiding), in its Civil Case No. 2088-P, entitled "Trinidad J.
Francisco, plaintiff, vs. Government Service Insurance System, defendant", the dispositive part of
which reads as follows:

WHEREFORE, judgment is hereby rendered: (a) Declaring null and void the consolidation in
the name of the defendant, Government Service Insurance System, of the title of the VIC-
MARI Compound; said title shall be restored to the plaintiff; and all payments made by the
plaintiff, after her offer had been accepted by the defendant, must be credited as
amortizations on her loan; and (b) Ordering the defendant to abide by the terms of the
contract created by plaintiff's offer and it's unconditional acceptance, with costs against the
defendant.

The plaintiff, Trinidad J. Francisco, likewise appealed separately (L-18155), because the trial court
did not award the P535,000.00 damages and attorney's fees she claimed. Both appeals are,
therefore, jointly treated in this decision.

The following facts are admitted by the parties: On 10 October 1956, the plaintiff, Trinidad J.
Francisco, in consideration of a loan in the amount of P400,000.00, out of which the sum of
P336,100.00 was released to her, mortgaged in favor of the defendant, Government Service
Insurance System (hereinafter referred to as the System) a parcel of land containing an area of
18,232 square meters, with twenty-one (21) bungalows, known as Vic-Mari Compound, located at
Baesa, Quezon City, payable within ten (10) years in monthly installments of P3,902.41, and with
interest of 7% per annum compounded monthly.
On 6 January 1959, the System extrajudicially foreclosed the mortgage on the ground that up to that
date the plaintiff-mortgagor was in arrears on her monthly installments in the amount of P52,000.00.
Payments made by the plaintiff at the time of foreclosure amounted to P130,000.00. The System
itself was the buyer of the property in the foreclosure sale.

On 20 February 1959, the plaintiff's father, Atty. Vicente J. Francisco, sent a letter to the general
manager of the defendant corporation, Mr. Rodolfo P. Andal, the material portion of which recited as
follows:

Yesterday, I was finally able to collect what the Government owed me and I now propose to
pay said amount of P30,000 to the GSIS if it would agree that after such payment the
foreclosure of my daughter's mortgage would be set aside. I am aware that the amount of
P30,000 which I offer to pay will not cover the total arrearage of P52,000 but as regards the
balance, I propose this arrangement: for the GSIS to take over the administration of the
mortgaged property and to collect the monthly installments, amounting to about P5,000, due
on the unpaid purchase price of more than 31 lots and houses therein and the monthly
installments collected shall be applied to the payment of Miss Francisco's arrearage until the
same is fully covered. It is requested, however, that from the amount of the monthly
installments collected, the sum of P350.00 be deducted for necessary expenses, such as to
pay the security guard, the street-caretaker, the Meralco Bill for the street lights and sundry
items.

It will be noted that the collectible income each month from the mortgaged property, which as
I said consists of installments amounting to about P5,000, is more than enough to cover the
monthly amortization on Miss Francisco's loan. Indeed, had she not encountered difficulties,
due to unforeseen circumstances, in collecting the said installments, she could have paid the
amortizations as they fell due and there would have been really no need for the GSIS to
resort to foreclosure.

The proposed administration by the GSIS of the mortgaged property will continue even after
Miss Francisco's account shall have been kept up to date. However, once the arrears shall
have been paid, whatever amount of the monthly installments collected in excess of the
amortization due on the loan will be turned over to Miss Francisco.

I make the foregoing proposal to show Francisco's sincere desire to work out any fair
arrangement for the settlement of her obligation. I trust that the GSIS, under the
broadminded policies of your administration, would give it serious consideration.

Sincerely,.

s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO

On the same date, 20 February 1959, Atty. Francisco received the following telegram:.

VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.

GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF

FORECLOSED PROPERTY OF YOUR DAUGHTER
 ANDAL"

On 28 February 1959, Atty. Francisco remitted to the System, through Andal, a check for
P30,000.00, with an accompanying letter, which reads:

I am sending you herewith BPI Check No. B-299484 for Thirty Thousand Pesos
(P30,000.00) in accordance with my letter of February 20th and your reply thereto of the
same date, which reads:

GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED

PROPERTY OF YOUR DAUGHTER

xxx xxx xxx

The defendant received the amount of P30,000.00, and issued therefor its official receipt No.
1209874, dated 4 March 1959. It did not, however, take over the administration of the compound. In
the meantime, the plaintiff received the monthly payments of some of the occupants thereat; then on
4 March 1960, she remitted, through her father, the amount of P44,121.29, representing the total
monthly installments that she received from the occupants for the period from March to December
1959 and January to February 1960, minus expenses and real estate taxes. The defendant also
received this amount, and issued the corresponding official receipt.

Remittances, all accompanied by letters, corresponding to the months of March, April, May, and
June, 1960 and totalling P24,604.81 were also sent by the plaintiff to the defendant from time to
time, all of which were received and duly receipted for.

Then the System sent three (3) letters, one dated 29 January 1960, which was signed by its
assistant general manager, and the other two letters, dated 19 and 26 February 1960, respectively,
which were signed by Andal, asking the plaintiff for a proposal for the payment of her indebtedness,
since according to the System the one-year period for redemption had expired.

In reply, Atty. Francisco sent a letter, dated 11 March 1960, protesting against the System's request
for proposal of payment and inviting its attention to the concluded contract generated by his offer of
20 February 1959, and its acceptance by telegram of the same date, the compliance of the terms of
the offer already commenced by the plaintiff, and the misapplication by the System of the
remittances she had made, and requesting the proper corrections.

By letter, dated 31 May 1960, the defendant countered the preceding protest that, by all means, the
plaintiff should pay attorney's fees of P35,644.14, publication expenses, filing fee of P301.00, and
surcharge of P23.64 for the foreclosure work done; that the telegram should be disregarded in view
of its failure to express the contents of the board resolution due to the error of its minor employees in
couching the correct wording of the telegram. A copy of the excerpts of the resolution of the Board of
Directors (No. 380, February 20, 1959) was attached to the letter, showing the approval of
Francisco's offer —

... subject to the condition that Mr. Vicente J. Francisco shall pay all expenses incurred by
the GSIS in the foreclosure of the mortgage.

Inasmuch as, according to the defendant, the remittances previously made by Atty. Francisco were
allegedly not sufficient to pay off her daughter's arrears, including attorney's fees incurred by the
defendant in foreclosing the mortgage, and the one-year period for redemption has expired, said
defendant, on 5 July 1960, consolidated the title to the compound in its name, and gave notice
thereof to the plaintiff on 26 July 1960 and to each occupant of the compound.

Hence, the plaintiff instituted the present suit, for specific performance and damages. The defendant
answered, pleading that the binding acceptance of Francisco's offer was the resolution of the Board,
and that Andal's telegram, being erroneous, should be disregarded. After trial, the court below found
that the offer of Atty. Francisco, dated 20 February 1959, made on behalf of his daughter, had been
unqualifiedly accepted, and was binding, and rendered judgment as noted at the start of this opinion.

The defendant-appellant corporation assigns six (6) errors allegedly committed by the lower court, all
of which, however, are resolvable on the single issue as to whether or not the telegram generated a
contract that is valid and binding upon the parties.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts.
1äwphï1.ñët

We find no reason for altering the conclusion reached by the court below that the offer of
compromise made by plaintiff in the letter, Exhibit "A", had been validly accepted, and was binding
on the defendant. The terms of the offer were clear, and over the signature of defendant's general
manager, Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted.
There was nothing in the telegram that hinted at any anomaly, or gave ground to suspect its veracity,
and the plaintiff, therefore, can not be blamed for relying upon it. There is no denying that the
telegram was within Andal's apparent authority, but the defense is that he did not sign it, but that it
was sent by the Board Secretary in his name and without his knowledge. Assuming this to be true,
how was appellee to know it? Corporate transactions would speedily come to a standstill were every
person dealing with a corporation held duty-bound to disbelieve every act of its responsible officers,
no matter how regular they should appear on their face. This Court has observed in Ramirez vs.
Orientalist Co., 38 Phil. 634, 654-655, that —

In passing upon the liability of a corporation in cases of this kind it is always well to keep in
mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and he
must necessarily rely upon the external manifestations of corporate consent. The integrity of
commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law; and we would be sorry to
announce a doctrine which would permit the property of a man in the city of Paris to be
whisked out of his hands and carried into a remote quarter of the earth without recourse
against the corporation whose name and authority had been used in the manner disclosed in
this case. As already observed, it is familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to do acts within the scope of an apparent authority,
and thus holds him out to the public as possessing power to do those acts, the corporation
will, as against any one who has in good faith dealt with the corporation through such agent,
be estopped from denying his authority; and where it is said "if the corporation permits" this
means the same as "if the thing is permitted by the directing power of the corporation."

It has also been decided that —

A very large part of the business of the country is carried on by corporations. It certainly is
not the practice of persons dealing with officers or agents who assume to act for such
entities to insist on being shown the resolution of the board of directors authorizing the
particular officer or agent to transact the particular business which he assumes to conduct. A
 person who knows that the officer or agent of the corporation habitually transacts certain
kinds of business for such corporation under circumstances which necessarily show
knowledge on the part of those charged with the conduct of the corporate business assumes,
as he has the right to assume, that such agent or officer is acting within the scope of his
authority. (Curtis Land & Loan Co. vs. Interior Land Co., 137 Wis. 341, 118 N.W. 853, 129
Am. St. Rep. 1068; as cited in 2 Fletcher's Encyclopedia, Priv. Corp. 263, perm. Ed.)

Indeed, it is well-settled that —

If a private corporation intentionally or negligently clothes its officers or agents with apparent
power to perform acts for it, the corporation will be estopped to deny that such apparent
authority is real, as to innocent third persons dealing in good faith with such officers or
agents. (2 Fletcher's Encyclopedia, Priv. Corp. 255, Perm. Ed.)

Hence, even if it were the board secretary who sent the telegram, the corporation could not evade
the binding effect produced by the telegram..

The defendant-appellant does not disown the telegram, and even asserts that it came from its
offices, as may be gleaned from the letter, dated 31 May 1960, to Atty. Francisco, and signed "R. P.
Andal, general manager by Leovigildo Monasterial, legal counsel", wherein these phrases occur:
"the telegram sent ... by this office" and "the telegram we sent your" (emphasis supplied), but it
alleges mistake in couching the correct wording. This alleged mistake cannot be taken seriously,
because while the telegram is dated 20 February 1959, the defendant informed Atty. Francisco of
the alleged mistake only on 31 May 1960, and all the while it accepted the various other remittances,
starting on 28 February 1959, sent by the plaintiff to it in compliance with her performance of her part
of the new contract.

The inequity of permitting the System to deny its acceptance become more patent when account is
taken of the fact that in remitting the payment of P30,000 advanced by her father, plaintiff's letter to
Mr. Andal quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of
the terms of the allegedly unauthorized telegram, for as Ballentine says:

Knowledge of facts acquired or possessed by an officer or agent of a corporation in the

course of his employment, and in relation to matters within the scope of his authority, is
notice to the corporation, whether he communicates such knowledge or not. (Ballentine, Law
on Corporations, section 112.)

since a corporation cannot see, or know, anything except through its officers.

Yet, notwithstanding this notice, the defendant System pocketed the amount, and kept silent about
the telegram not being in accordance with the true facts, as it now alleges. This silence, taken
together with the unconditional acceptance of three other subsequent remittances from plaintiff,
constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393).

ART. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a
tacit ratification if, with knowledge of the reason which renders the contract voidable and
such reason having ceased, the person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right.

Nowhere else do the circumstances call more insistently for the application of the equitable maxim
that between two innocent parties, the one who made it possible for the wrong to be done should be
the one to bear the resulting loss..
The defendant's assertion that the telegram came from it but that it was incorrectly worded renders
unnecessary to resolve the other point on controversy as to whether the said telegram constitutes an
actionable document..

Since the terms offered by the plaintiff in the letter of 20 February 1959 (Exhibit "A") provided for
the setting aside of the foreclosure effected by the defendant System, the acceptance of the offer left
the account of plaintiff in the same condition as if no foreclosure had taken place. It follows, as the
lower court has correctly held, that the right of the System to collect attorneys' fees equivalent to
10% of the due (P35,694.14) and the expenses and charges of P3,300.00 may no longer be
enforced, since by the express terms of the mortgage contract, these sums were collectible only "in
the event of foreclosure."

The court a quo also called attention to the unconscionability of defendant's charging the attorney's
fees, totalling over P35,000.00; and this point appears well-taken, considering that the foreclosure
was merely extra-judicial, and the attorneys' work was limited to requiring the sheriff to effectuate the
foreclosure. However, in view of the parties' agreement to set the same aside, with the
consequential elimination of such incidental charges, the matter of unreasonableness of the counsel
fees need not be labored further.

Turning now to the plaintiff's separate appeal (Case G.R. No. L-18155): Her prayer for an award of
actual or compensatory damages for P83,333.33 is predicated on her alleged unrealized profits due
to her inability to sell the compound for the price of P750,000.00 offered by one Vicente Alunan,
which sale was allegedly blocked because the System consolidated the title to the property in its
name. Plaintiff reckons the amount of P83,333.33 by placing the actual value of the property at
P666,666.67, a figure arrived at by assuming that the System's loan of P400,000.00 constitutes 60%
of the actual value of the security. The court a quo correctly refused to award such actual or
compensatory damages because it could not determine with reasonable certainty the difference
between the offered price and the actual value of the property, for lack of competent evidence.
Without proof we cannot assume, or take judicial notice, as suggested by the plaintiff, that the
practice of lending institutions in the country is to give out as loan 60% of the actual value of the
collateral. Nor should we lose sight of the fact that the price offered by Alunan was payable in
installments covering five years, so that it may not actually represent true market values.

Nor was there error in the appealed decision in denying moral damages, not only on account of the
plaintiff's failure to take the witness stand and testify to her social humiliation, wounded feelings,
anxiety, etc., as the decision holds, but primarily because a breach of contract like that of defendant,
not being malicious or fraudulent, does not warrant the award of moral damages under Article 2220
of the Civil Code (Ventanilla vs. Centeno, L-14333, 28 Jan. 1961; Fores vs. Miranda, L-12163, 4
March 1959).

There is no basis for awarding exemplary damages either, because this species of damages is only
allowed in addition to moral, temperate, liquidated, or compensatory damages, none of which have
been allowed in this case, for reasons herein before discussed (Art. 2234, Civil Code; Velayo vs.
Shell Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs. Aragon and Lorza, L-5164, Jan. 27,
1953, 49 O.G. No. 2, 515).

As to attorneys' fees, we agree with the trial court's stand that in view of the absence of gross and
evident bad faith in defendant's refusal to satisfy the plaintiff's claim, and there being none of the
other grounds enumerated in Article 2208 of the Civil Code, such absence precludes a recovery.
The award of attorneys' fees is essentially discretionary in the trial court, and no abuse of discretion
has been shown.
FOR THE FOREGOING REASONS, the appealed decision is hereby affirmed, with costs against
the defendant Government Service Insurance System, in G.R. No.L-18287.
SECOND DIVISION

WOODCHILD HOLDINGS, INC., G.R. No. 140667

Petitioner,
Present:
PUNO, J., Chairman,
AUSTRIA-MARTINEZ,
- versus - CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

ROXAS ELECTRIC AND Promulgated:

CONSTRUCTION COMPANY, INC.,
Respondent. August 12, 2004
x--------------------------------------------------x
DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision[1] of the Court of Appeals
in CA-G.R. CV No. 56125 reversing the Decision[2] of the Regional Trial Court of
Makati, Branch 57, which ruled in favor of the petitioner.

The Antecedents

The respondent Roxas Electric and Construction Company, Inc. (RECCI),

formerly the Roxas Electric and Construction Company, was the
owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by
Transfer Certificate of Title (TCT) No. 78085 and Lot No. 491-A-3-B-2 covered
by TCT No. 78086. A portion of Lot No. 491-A-3-B-1 which abutted Lot No. 491-
A-3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo, Rizal.
 At a special meeting on May 17, 1991, the respondents Board of Directors
approved a resolution authorizing the corporation, through its president, Roberto B.
Roxas, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an area of
7,213 square meters, at a price and under such terms and conditions which he
deemed most reasonable and advantageous to the corporation; and to execute, sign
and deliver the pertinent sales documents and receive the proceeds of the sale for
and on behalf of the company.[3]

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-
B-2 covered by TCT No. 78086 on which it planned to construct its warehouse
building, and a portion of the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-
foot container van would be able to readily enter or leave the property. In a Letter
to Roxas dated June 21, 1991, WHI President Jonathan Y. Dy offered to buy Lot
No. 491-A-3-B-2 under stated terms and conditions for P1,000 per square meter or
at the price of P7,213,000.[4] One of the terms incorporated in Dys offer was the
following provision:

5. This Offer to Purchase is made on the representation and warranty of the

OWNER/SELLER, that he holds a good and registrable title to the property,
which shall be conveyed CLEAR and FREE of all liens and encumbrances,
and that the area of 7,213 square meters of the subject property already
includes the area on which the right of way traverses from the main lot (area)
towards the exit to the Sumulong Highway as shown in the location plan
furnished by the Owner/Seller to the buyer. Furthermore, in the event that the
right of way is insufficient for the buyers purposes (example: entry of a 45-
foot container), the seller agrees to sell additional square meter from his
current adjacent property to allow the buyer to full access and full use of the
property.[5]

Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a
month later or on July 1, 1991, Roxas, as President of RECCI, as vendor, and Dy,
as President of WHI, as vendee, executed a contract to sell in which RECCI bound
and obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT No. 78086
for P7,213,000.[6] On September 5, 1991, a Deed of Absolute Sale[7] in favor of
WHI was issued, under which Lot No. 491-A-3-B-2 covered by TCT No. 78086
was sold for P5,000,000, receipt of which was acknowledged by Roxas under the
following terms and conditions:

The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the
beneficial use of and a right of way from Sumulong Highway to the property
herein conveyed consists of 25 square meters wide to be used as the latters egress
from and ingress to and an additional 25 square meters in the corner of Lot No.
491-A-3-B-1, as turning and/or maneuvering area for Vendees vehicles.

The Vendor agrees that in the event that the right of way is insufficient for the
Vendees use (ex entry of a 45-foot container) the Vendor agrees to sell additional
square meters from its current adjacent property to allow the Vendee full access
and full use of the property.

The Vendor hereby undertakes and agrees, at its account, to defend the title of the
Vendee to the parcel of land and improvements herein conveyed, against all
claims of any and all persons or entities, and that the Vendor hereby warrants the
right of the Vendee to possess and own the said parcel of land and improvements
thereon and will defend the Vendee against all present and future claims and/or
action in relation thereto, judicial and/or administrative. In particular, the Vendor
shall eject all existing squatters and occupants of the premises within two (2)
weeks from the signing hereof. In case of failure on the part of the Vendor to eject
all occupants and squatters within the two-week period or breach of any of the
stipulations, covenants and terms and conditions herein provided and that of
contract to sell dated 1 July 1991, the Vendee shall have the right to cancel the
sale and demand reimbursement for all payments made to the Vendor with
interest thereon at 36% per annum.[8]

On September 10, 1991, the Wimbeco Builders, Inc. (WBI) submitted its quotation
for P8,649,000 to WHI for the construction of the warehouse building on a portion
of the property with an area of 5,088 square meters.[9] WBI proposed to start the
project on October 1, 1991 and to turn over the building to WHI on February 29,
1992.[10]

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company,

Inc. confirmed its lease agreement with WHI of a 5,000-square-meter portion of
the warehouse yet to be constructed at the rental rate of P65 per square
meter. Ponderosa emphasized the need for the warehouse to be ready for
occupancy before April 1, 1992.[11] WHI accepted the offer. However, WBI failed
to commence the construction of the warehouse in October 1, 1991 as planned
because of the presence of squatters in the property and suggested a renegotiation
of the contract after the squatters shall have been evicted.[12] Subsequently, the
squatters were evicted from the property.

On March 31, 1992, WHI and WBI executed a Letter-Contract for the
construction of the warehouse building for P11,804,160.[13] The contractor started
construction in April 1992 even before the building officials of Antipolo City
issued a building permit on May 28, 1992. After the warehouse was finished, WHI
issued on March 21, 1993 a certificate of occupancy by the building
official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as lessee,
executed a contract of lease over a portion of the property for a monthly rental
of P300,000 for a period of three years from March 1, 1993 up to February 28,
1996.[14]

In the meantime, WHI complained to Roberto Roxas that the vehicles of

RECCI were parked on a portion of the property over which WHI had been
granted a right of way. Roxas promised to look into the matter. Dy and Roxas
discussed the need of the WHI to buy a 500-square-meter portion of Lot No. 491-
A-3-B-1 covered by TCT No. 78085 as provided for in the deed of absolute
sale.However, Roxas died soon thereafter. On April 15, 1992, the WHI wrote the
RECCI, reiterating its verbal requests to purchase a portion of the said lot as
provided for in the deed of absolute sale, and complained about the latters failure
to eject the squatters within the three-month period agreed upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085 for its beneficial use within 72 hours from notice
thereof, otherwise the appropriate action would be filed against it. RECCI rejected
the demand of WHI. WHI reiterated its demand in a Letter dated May 29,
1992. There was no response from RECCI.
 On June 17, 1992, the WHI filed a complaint against the RECCI with the
Regional Trial Court of Makati, for specific performance and damages, and
alleged, inter alia, the following in its complaint:

5. The current adjacent property referred to in the aforequoted paragraph of the

Deed of Absolute Sale pertains to the property covered by Transfer Certificate of
Title No. N-78085 of the Registry of Deeds of Antipolo, Rizal, registered in the
name of herein defendant Roxas Electric.

6. Defendant Roxas Electric in patent violation of the express and valid terms of
the Deed of Absolute Sale unjustifiably refused to deliver to Woodchild Holdings
the stipulated beneficial use and right of way consisting of 25 square meters and
55 square meters to the prejudice of the plaintiff.

7. Similarly, in as much as the 25 square meters and 55 square meters alloted to

Woodchild Holdings for its beneficial use is inadequate as turning and/or
maneuvering area of its 45-foot container van, Woodchild Holdings manifested its
intention pursuant to para. 5 of the Deed of Sale to purchase additional square
meters from Roxas Electric to allow it full access and use of the purchased
property, however, Roxas Electric refused and failed to merit Woodchild
Holdings request contrary to defendant Roxas Electrics obligation under the Deed
of Absolute Sale (Annex A).

8. Moreover, defendant, likewise, failed to eject all existing squatters and

occupants of the premises within the stipulated time frame and as a consequence
thereof, plaintiffs planned construction has been considerably delayed for seven
(7) months due to the squatters who continue to trespass and obstruct the subject
property, thereby Woodchild Holdings incurred substantial losses amounting
to P3,560,000.00 occasioned by the increased cost of construction materials and
labor.

9. Owing further to Roxas Electrics deliberate refusal to comply with its

obligation under Annex A, Woodchild Holdings suffered unrealized income
of P300,000.00 a month or P2,100,000.00 supposed income from rentals of the
subject property for seven (7) months.

10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas
Electric to comply with its obligations and warranties under the Deed of Absolute
Sale but notwithstanding such demand, defendant Roxas Electric refused and
failed and continue to refuse and fail to heed plaintiffs demand for compliance.

Copy of the demand letter dated April 15, 1992 is hereto attached as Annex B and
made an integral part hereof.
 11. Finally, on 29 May 1991, Woodchild Holdings made a letter request
addressed to Roxas Electric to particularly annotate on Transfer Certificate of
Title No. N-78085 the agreement under Annex A with respect to the beneficial
use and right of way, however, Roxas Electric unjustifiably ignored and
disregarded the same.

Copy of the letter request dated 29 May 1992 is hereto attached as Annex C and
made an integral part hereof.

12. By reason of Roxas Electrics continuous refusal and failure to comply with
Woodchild Holdings valid demand for compliance under Annex A, the latter was
constrained to litigate, thereby incurring damages as and by way of attorneys fees
in the amount of P100,000.00 plus costs of suit and expenses of litigation.[15]

The WHI prayed that, after due proceedings, judgment be rendered in its
favor, thus:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of

Woodchild Holdings and ordering Roxas Electric the following:

a) to deliver to Woodchild Holdings the beneficial use of the

stipulated 25 square meters and 55 square meters;

b) to sell to Woodchild Holdings additional 25 and 100 square

meters to allow it full access and use of the purchased property
pursuant to para. 5 of the Deed of Absolute Sale;

c) to cause annotation on Transfer Certificate of Title No. N-78085

the beneficial use and right of way granted to Woodchild
Holdings under the Deed of Absolute Sale;

d) to pay Woodchild Holdings the amount of P5,660,000.00,

representing actual damages and unrealized income;

e) to pay attorneys fees in the amount of P100,000.00; and

f) to pay the costs of suit.

Other reliefs just and equitable are prayed for.[16]

In its answer to the complaint, the RECCI alleged that it never authorized its
former president, Roberto Roxas, to grant the beneficial use of any portion of Lot
No. 491-A-3-B-1, nor agreed to sell any portion thereof or create a lien or burden
thereon. It alleged that, under the Resolution approved on May 17, 1991, it merely
authorized Roxas to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086. As
such, the grant of a right of way and the agreement to sell a portion of Lot No. 491-
A-3-B-1 covered by TCT No. 78085 in the said deed are ultra vires. The RECCI
further alleged that the provision therein that it would sell a portion of Lot No.
491-A-3-B-1 to the WHI lacked the essential elements of a binding contract.[17]

In its amended answer to the complaint, the RECCI alleged that the delay in
the construction of its warehouse building was due to the failure of the WHIs
contractor to secure a building permit thereon.[18]

During the trial, Dy testified that he told Roxas that the petitioner was
buying a portion of Lot No. 491-A-3-B-1 consisting of an area of 500 square
meters, for the price of P1,000 per square meter.

On November 11, 1996, the trial court rendered judgment in favor of the
WHI, the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered directing defendant:

(1) To allow plaintiff the beneficial use of the existing right of way plus the
stipulated 25 sq. m. and 55 sq. m.;

(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m.
to allow said plaintiff full access and use of the purchased property pursuant to
Par. 5 of their Deed of Absolute Sale;

(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way
granted by their Deed of Absolute Sale;

(4) To pay plaintiff the amount of P5,568,000 representing actual damages and
plaintiffs unrealized income;

(5) To pay plaintiff P100,000 representing attorneys fees; and

To pay the costs of suit.

SO ORDERED.[19]
 The trial court ruled that the RECCI was estopped from disowning the
apparent authority of Roxas under the May 17, 1991 Resolution of its Board of
Directors. The court reasoned that to do so would prejudice the WHI which
transacted with Roxas in good faith, believing that he had the authority to bind the
WHI relating to the easement of right of way, as well as the right to purchase a
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.

The RECCI appealed the decision to the CA, which rendered a decision on
November 9, 1999 reversing that of the trial court, and ordering the dismissal of
the complaint. The CA ruled that, under the resolution of the Board of Directors of
the RECCI, Roxas was merely authorized to sell Lot No. 491-A-3-B-2 covered by
TCT No. 78086, but not to grant right of way in favor of the WHI over a portion of
Lot No. 491-A-3-B-1, or to grant an option to the petitioner to buy a portion
thereof. The appellate court also ruled that the grant of a right of way and an option
to the respondent were so lopsided in favor of the respondent because the latter
was authorized to fix the location as well as the price of the portion of its property
to be sold to the respondent. Hence, such provisions contained in the deed of
absolute sale were not binding on the RECCI. The appellate court ruled that the
delay in the construction of WHIs warehouse was due to its fault.

The Present Petition

The petitioner now comes to this Court asserting that:

I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF
ABSOLUTE SALE (EXH. C) IS ULTRA VIRES.

II.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE
RULING OF THE COURT A QUO ALLOWING THE PLAINTIFF-APPELLEE
THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY PLUS THE
STIPULATED 25 SQUARE METERS AND 55 SQUARE METERS BECAUSE
 THESE ARE VALID STIPULATIONS AGREED BY BOTH PARTIES TO
THE DEED OF ABSOLUTE SALE (EXH. C).

III.
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF
APPEALS TO RULE THAT THE STIPULATIONS OF THE DEED OF
ABSOLUTE SALE (EXH. C) WERE DISADVANTAGEOUS TO THE
APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY
WITHOUT DUE PROCESS.

IV.
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY
WITHOUT DUE PROCESS BY THE ASSAILED DECISION.

V.
THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF
THE APPELLANT TO EVICT THE SQUATTERS ON THE LAND AS
AGREED IN THE DEED OF ABSOLUTE SALE (EXH. C).

VI.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE
RULING OF THE COURT A QUO DIRECTING THE DEFENDANT TO PAY
THE PLAINTIFF THE AMOUNT OF P5,568,000.00 REPRESENTING
ACTUAL DAMAGES AND PLAINTIFFS UNREALIZED INCOME AS WELL
AS ATTORNEYS FEES.[20]

The threshold issues for resolution are the following: (a) whether the respondent is
bound by the provisions in the deed of absolute sale granting to the petitioner
beneficial use and a right of way over a portion of Lot
No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to
the petitioner to buy a portion thereof, and, if so, whether such agreement is
enforceable against the respondent; (b) whether the respondent failed to eject the
squatters on its property within two weeks from the execution of the deed of
absolute sale; and, (c) whether the respondent is liable to the petitioner for
damages.

On the first issue, the petitioner avers that, under its Resolution of May 17, 1991,
the respondent authorized Roxas, then its president, to grant a right of way over a
portion of Lot No. 491-A-3-B-1 in favor of the petitioner, and an option for the
respondent to buy a portion of the said property. The petitioner contends that when
the respondent sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it
(respondent) was well aware of its obligation to provide the petitioner with a
means of ingress to or egress from the property to the Sumulong Highway, since
the latter had no adequate outlet to the public highway. The petitioner asserts that it
agreed to buy the property covered by TCT No. 78085 because of the grant by the
respondent of a right of way and an option in its favor to buy a portion of the
property covered by TCT No. 78085. It contends that the respondent never
objected to Roxas acceptance of its offer to purchase the property and the terms
and conditions therein; the respondent even allowed Roxas to execute the deed of
absolute sale in its behalf. The petitioner asserts that the respondent even received
the purchase price of the property without any objection to the terms and
conditions of the said deed of sale. The petitioner claims that it acted in good faith,
and contends that after having been benefited by the said sale, the respondent is
estopped from assailing its terms and conditions. The petitioner notes that the
respondents Board of Directors never approved any resolution rejecting the deed of
absolute sale executed by Roxas for and in its behalf. As such, the respondent is
obliged to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 with
an area of 500 square meters at the price of P1,000 per square meter, based on its
evidence and Articles 649 and 651 of the New Civil Code.

For its part, the respondent posits that Roxas was not so authorized under the May
17, 1991 Resolution of its Board of Directors to impose a burden or to grant a right
of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a
portion thereof to the petitioner. Hence, the respondent was not bound by such
provisions contained in the deed of absolute sale. Besides, the respondent
contends, the petitioner cannot enforce its right to buy a portion of the said
property since there was no agreement in the deed of absolute sale on the price
thereof as well as the specific portion and area to be purchased by the petitioner.

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,[21] we held
that:

A corporation is a juridical person separate and distinct from its stockholders or

members. Accordingly, the property of the corporation is not the property of its
stockholders or members and may not be sold by the stockholders or members
without express authorization from the corporations board of directors. Section 23
of BP 68, otherwise known as the Corporation Code of the Philippines, provides:

SEC. 23. The Board of Directors or Trustees. Unless otherwise

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

Indubitably, a corporation may act only through its board of directors or,
when authorized either by its by-laws or by its board resolution, through its
officers or agents in the normal course of business. The general principles of
agency govern the relation between the corporation and its officers or agents,
subject to the articles of incorporation, by-laws, or relevant provisions of law. [22]

Generally, the acts of the corporate officers within the scope of their authority are
binding on the corporation. However, under Article 1910 of the New Civil Code,
acts done by such officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly, or is estopped from
denying them:

Art. 1910. The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is
not bound except when he ratifies it expressly or tacitly.

Thus, contracts entered into by corporate officers beyond the scope of

authority are unenforceable against the corporation unless ratified by the
corporation.[23]
 In BA Finance Corporation v. Court of Appeals,[24] we also ruled that
persons dealing with an assumed agency, whether the assumed agency be a general
or special one, are bound at their peril, if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and extent of authority, and
in case either is controverted, the burden of proof is upon them to establish it.
In this case, the respondent denied authorizing its then president Roberto B. Roxas
to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create
a lien or burden thereon. The petitioner was thus burdened to prove that the
respondent so authorized Roxas to sell the same and to create a lien thereon.

Central to the issue at hand is the May 17, 1991 Resolution of the Board of
Directors of the respondent, which is worded as follows:

RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell
to any interested buyer, its 7,213-sq.-meter property at the Sumulong Highway,
Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price
and on terms and conditions which he deems most reasonable and advantageous
to the corporation;

FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the

corporation, be, as he is hereby authorized to execute, sign and deliver the
pertinent sales documents and receive the proceeds of sale for and on behalf of the
company.[25]

Evidently, Roxas was not specifically authorized under the said resolution to grant
a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to
agree to sell to the petitioner a portion thereof. The authority of Roxas, under the
resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include
the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create
or convey real rights thereon. Neither may such authority be implied from the
authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner on such
terms and conditions which he deems most reasonable and advantageous. Under
paragraph 12, Article 1878 of the New Civil Code, a special power of attorney is
required to convey real rights over immovable property.[26] Article 1358 of the
New Civil Code requires that contracts which have for their object the creation of
real rights over immovable property must appear in a public document. [27] The
petitioner cannot feign ignorance of the need for Roxas to have been specifically
authorized in writing by the Board of Directors to be able to validly grant a right of
way and agree to sell a portion of Lot No. 491-A-3-B-1. The rule is that if the act
of the agent is one which requires authority in writing, those dealing with him are
charged with notice of that fact.[28]

Powers of attorney are generally construed strictly and courts will not infer
or presume broad powers from deeds which do not sufficiently include property or
subject under which the agent is to deal.[29] The general rule is
that the power of attorney must be pursued within legal strictures, and the agent
can neither go beyond it; nor beside it. The act done must be legally identical with
that authorized to be done.[30] In sum, then, the consent of the respondent to the
assailed provisions in the deed of absolute sale was not obtained; hence, the
assailed provisions are not binding on it.

We reject the petitioners submission that, in allowing Roxas to execute the

contract to sell and the deed of absolute sale and failing to reject or disapprove the
same, the respondent thereby gave him apparent authority to grant a right of way
over Lot No. 491-A-3-B-1 and to grant an option for the respondent to sell a
portion thereof to the petitioner. Absent estoppel or ratification, apparent authority
cannot remedy the lack of the written power required under the statement of
frauds.[31] In addition, the petitioners fallacy is its wrong assumption of the
unproved premise that the respondent had full knowledge of all the terms and
conditions contained in the deed of absolute sale when Roxas executed it.

It bears stressing that apparent authority is based on estoppel and can arise
from two instances: first, the principal may knowingly permit the agent to so hold
himself out as having such authority, and in this way, the principal becomes
estopped to claim that the agent does not have such authority; second, the principal
may so clothe the agent with the indicia of authority as to lead a reasonably
prudent person to believe that he actually has such authority. [32] There can be no
apparent authority of an agent without acts or conduct on the part of the principal
and such acts or conduct of the principal must have been known and relied upon in
good faith and as a result of the exercise of reasonable prudence by a third person
as claimant and such must have produced a change of position to its detriment. The
apparent power of an agent is to be determined by the acts of the principal and not
by the acts of the agent.[33]

For the principle of apparent authority to apply, the petitioner was burdened
to prove the following: (a) the acts of the respondent justifying belief in the agency
by the petitioner; (b) knowledge thereof by the respondent which is sought to be
held; and, (c) reliance thereon by the petitioner consistent with ordinary care and
prudence.[34] In this case, there is no evidence on record of specific acts made by
the respondent[35] showing or indicating that it had full knowledge of any
representations made by Roxas to the petitioner that the respondent had authorized
him to grant to the respondent an option to buy a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085, or to create a burden or lien thereon, or that the
respondent allowed him to do so.

The petitioners contention that by receiving and retaining the P5,000,000

purchase price of Lot No. 491-A-3-B-2, the respondent effectively and impliedly
ratified the grant of a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to
grant to the petitioner an option to sell a portion thereof, is barren of merit. It bears
stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the
latter had taken possession of the property. As such, the respondent had the right to
retain the P5,000,000, the purchase price of the property it had sold to the
petitioner. For an act of the principal to be considered as an implied ratification of
an unauthorized act of an agent, such act must be inconsistent with any other
hypothesis than that he approved and intended to adopt what had been done in his
name.[36] Ratification is based on waiver the intentional relinquishment of a known
right. Ratification cannot be inferred from acts that a principal has a right to do
independently of the unauthorized act of the agent. Moreover, if a writing is
required to grant an authority to do a particular act, ratification of that act must also
be in writing.[37] Since the respondent had not ratified the unauthorized acts of
Roxas, the same are unenforceable.[38] Hence, by the respondents retention of the
amount, it cannot thereby be implied that it had ratified the unauthorized acts of its
agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in dismissing its
complaint for damages against the respondent on its finding that the delay in the
construction of its warehouse was due to its (petitioners) fault. The petitioner
asserts that the CA should have affirmed the ruling of the trial court that the
respondent failed to cause the eviction of the squatters from the property on or
before September 29, 1991; hence, was liable for P5,660,000. The respondent, for
its part, asserts that the delay in the construction of the petitioners warehouse was
due to its late filing of an application for a building permit, only on May 28, 1992.

The petitioners contention is meritorious. The respondent does not deny that
it failed to cause the eviction of the squatters on or before September 29,
1991. Indeed, the respondent does not deny the fact that when the petitioner wrote
the respondent demanding that the latter cause the eviction of the squatters on
April 15, 1992, the latter were still in the premises. It was only after receiving the
said letter in April 1992 that the respondent caused the eviction of the squatters,
which thus cleared the way for the petitioners contractor to commence the
construction of its warehouse and secure the appropriate building permit therefor.

The petitioner could not be expected to file its application for a building
permit before April 1992 because the squatters were still occupying the
property. Because of the respondents failure to cause their eviction as agreed upon,
the petitioners contractor failed to commence the construction of the warehouse in
October 1991 for the agreed price of P8,649,000. In the meantime, costs of
construction materials spiraled. Under the construction contract entered into
between the petitioner and the contractor, the petitioner was obliged to
pay P11,804,160,[39] including the additional work costing P1,441,500, or a net
increase of P1,712,980.[40] The respondent is liable for the difference between the
original cost of construction and the increase thereon, conformably to Article 1170
of the New Civil Code, which reads:

Art. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner contravene the tenor
thereof, are liable for damages.

The petitioner, likewise, lost the amount of P3,900,000 by way of unearned

income from the lease of the property to the Ponderosa Leather Goods
Company. The respondent is, thus, liable to the petitioner for the said amount,
under Articles 2200 and 2201 of the New Civil Code:

Art. 2200. Indemnification for damages shall comprehend not only the
value of the loss suffered, but also that of the profits which the obligee failed to
obtain.

Art. 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the natural and
probable consequences of the breach of the obligation, and which the parties have
foreseen or could have reasonably foreseen at the time the obligation was
constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-
performance of the obligation.

In sum, we affirm the trial courts award of damages and attorneys fees to the
petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby

rendered AFFIRMING the assailed Decision of the Court of Appeals WITH
MODIFICATION. The respondent is ordered to pay to the petitioner the amount
of P5,612,980 by way of actual damages and P100,000 by way of attorneys
fees. No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 11897 September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.

Jose Moreno Lacalle for appellant Fernandez.

Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.

STREET, J.:

The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands,
and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit, was engaged in
the business of maintaining and conducting a theatre in the city of Manila for the exhibition of
cinematographic films. Under the articles of incorporation the company is authorized to manufacture,
buy, or otherwise obtain all accessories necessary for conducting such a business. The plaintiff J. F.
Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in the
business of marketing films for a manufacturer or manufacturers, there engaged in the production or
distribution of cinematographic material. In this enterprise the plaintiff was represented in the city of
Manila by his son, Jose Ramirez.

In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became
apprised of the fact that the plaintiff in Paris had control of the agencies for two different marks of
films, namely, the "Eclair Films" and the "Milano Films;" and negotiations were begun with said
officials of the Orientalist Company by Jose Ramirez, as agent of the plaintiff, for the purpose of
placing the exclusive agency of these films in the hands of the Orientalist Company. The defendant
Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was
chiefly active in this matter, being moved by the suggestions and representations of Vicente
Ocampo, manage of the Oriental Theater, to the effect that the securing of the said films was
necessary to the success of the corporation.

Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in
the hands of Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the terms upon which
the plaintiff would undertake to supply from Paris the aforesaid films. This officer was declared to be
good until the end of July; and as only about for the Orientalist Company to act on the matter
speedily, if it desired to take advantage of said offer. Accordingly, Ramon J. Fernandez, on July 30,
had an informal conference with all the members of the company's board of directors except one,
and with approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in
Manila, accepting the offer contained in the memorandum of July 4th for the exclusive agency of
the Eclair films. A few days later, on August 5, he addressed another letter couched in the same
terms, likewise accepting the office of the exclusive agency for the Milano Films.

The memorandum offer contained a statement of the price at which the films would be sold, the
quantity which the representative of each was required to take and information concerning the
manner and intervals of time for the respective shipments. The expenses of packing, transportation
and other incidentals were to be at the cost of the purchaser. There was added a clause in which J.
F. Ramirez described his function in such transactions as that of a commission agent and stated that
he would see to the prompt shipment of the films, would pay the manufacturer, and take care that
the films were insured — his commission for such services being fixed at 5 per cent.

What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez
to Jose Ramirez is in the following terms:

We willingly accepted the officer under the terms communicated by your father in his letter
dated at Paris on July 4th of the present year.

These communications were signed in the following form, in which it will be noted the separate
signature of R. J. Fernandez, as an individual, is placed somewhat below and to the left of the
signature of the Orientalist Company as singed by R. J. Fernandez, in the capacity of treasurer:

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,
Treasurer,

R. J. FERNANDEZ.

Both of these letters also contained a request that Jose Ramirez should at once telegraph to his
father in Paris that his offer had been accepted by the Orientalist Company and instruct him to make
a contract with the film companies, according to the tenor of the offer, and in the capacity of
attorney-in-fact for the Orientalist Company. The idea behind the latter suggestion apparently was
that the contract for the films would have to be made directly between the film-producing companies
and the Orientalist Company; and it seemed convenient, in order to save time, that the Orientalist
Company should clothed J. F. Ramirez with full authority as its attorney-in-fact. This idea was never
given effect; and so far as the record shows, J. F. Ramirez himself procured the films upon his own
responsibility, as he indicated in the officer of July 4 that he would do, with the result that the only
contracting parties in this case are J. F. Ramirez of the one part, and the Orientalist Company, with
Ramon J. Fernandez of the other.

In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each
shipment being attached to the proper bill of lading. It appears that the Orientalist Company was
without funds to meet these obligations and the first few drafts were dealt with in the following
manner: The drafts, upon presented through the bank, were accepted in the name of the Orientalist
Company by its president B. Hernandez, and were taken up by the latter with his own funds. As the
drafts had thus been paid by B. Hernandez, the films which had been procured by he payment of
said drafts were treated by him as his own property; and they in fact never came into the actual
possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films
to the Orientalist Company and they were exhibited by it in the Oriental Theater under an
arrangement which was made between him and the theater's manager.

During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila
several remittances of films from Paris, and it is these shipments which have given occasion for the
present action. All of the drafts accompanying these films were drawn, as on former occasions, upon
the Orientalist Company; and all were accepted in the name of B. Hernandez, except the last, which
was accepted by B. Hernandez individually. None of the drafts thus accepted were taken up by the
drawee or by B. Hernandez when they fell due; and it was finally necessary for the plaintiff himself to
take them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist
Company, and Ramon J. Fernandez. As the films which accompanied the dishonored were liable to
deteriorate, the court, upon application of the plaintiff, and apparently without opposition on the part
of the defendants, appointed a receiver who took charge of the films and sold them. The amount
realized from this sale was applied to the satisfaction of the plaintiff's claim and was accordingly
delivered to him in part payment thereof. At trial judgment was given for the balance due to the
plaintiff, namely P6,018.93, with interest from May 19, 1914, the date of the institution of the action.
In the judgment of the trial court the Orientalist Company was declared to be a principal debtor and
Ramon J. Fernandez was declared to be liable subsidiarily as guarantor. From this judgment both of
the parties defendant appealed.

In this Court neither of the parties appellant make any question with respect to the right of the
plaintiff to recover from somebody the amount awarded by the lower court; but each of the
defendants insists the other is liable for the whole. It results that the real contention upon this appeal
is between the two defendants.

It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by
the Orientalist Company that the judgment has already been executed as against the company is
exclusively and primarily liable the entire indebtedness, the question as to the liability of Ramon J.
Fernandez would be academic. But if the latter is liable as principal obligor for the whole or any part
of the debt, it will be necessary to modify the judgment in order to adjust the rights of the defendants
in accordance with such finding.

It will be noted that the action is primarily founded upon the liability created by the letters dated July
30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters
mentioned are copied into the complaint as the foundation of the action. The action is not based
upon the dishonored drafts which were accepted by B. Hernandez in the name of the Orientalist
Company; and although these drafts, as well as the last draft, which was accepted by B. Hernandez
individually, have been introduced in evidence, this was evidently done for the purpose of proving
the amount of damages which the plaintiff was entitled to recover.

In the discussion which is to follow we shall consider, first, the question of the liability of the
corporation upon the contracts contained in the letters of July 30 and August 5, 1913, and, secondly
the question of the liability of Ramon J. Fernandez, based upon his personal signature to the same
documents.

As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The
action, as already stated, is based upon documents purporting to be signed by the Orientalist
Company, and copies of the documents are set out in the complaint. It was therefore incumbent
upon the corporation, if it desired to question the authority of Fernandez to bind it, to deny the due
execution of said contracts under oath, as prescribed in section 103 of the Code of Civil procedure.
Said section, in the part pertinent to the situation now under consideration, reads as follows:

When an action is brought upon a written instrument and the complaint contains or has
annexed or has annexed a copy of such instrument, the genuineness and due execution of
the instrument shall be deemed admitted, unless specifically denied under oath in the
answer.

No sworn answer denying the genuineness and due execution of the contracts in question or
questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was filed in this
case; but evidence was admitted without objection from the plaintiff, tending to show that Ramon J.
Fernandez had no such authority. This evidence consisted of extracts from the minutes of the
proceedings of the company's board of directors and also of extracts from the minutes of the
proceedings of the company's stockholders, showing that the making of this contract had been under
consideration in both bodies and that the authority to make the same had been withheld by the
stockholders. It therefore becomes necessary for us to consider whether the administration resulting
from the failure of the defendant company to deny the execution of the contracts under oath is
binding upon it for all purposes of this lawsuit, or whether such failure should be considered a mere
irregularity of procedure which was waived when the evidence referred to was admitted without
objection from the plaintiff. The proper solution of this problem makes it necessary to consider
carefully the principle underlying the provision above quoted.

That the situation was one in which an answer under oath denying the authority of the agent should
have been interposed, supposing that the company desired to contest this point, is not open to
question. In the case of Merchant vs. International Banking Corporation, (6 Phil. Rep., 314), it
appeared that one Brown has signed the name of the defendant bank as guarantor of a promissory
note. The bank was sued upon this guaranty and at the hearing attempted to prove that Brown had
no authority to bind the bank by such contract. It was held that buy failing to deny the contract under
oath, the bank had admitted the genuineness and due execution thereof, and that this admission
extended not only to the authenticity of the signature of Brown but also to his authority. Said Justice
Willard: "The failure of the defendant to deny the genuineness and due execution of this guaranty
under oath was an admission not only of the signature of Brown, but also his authority to make the
contract in behalf of the defendant and of the power the contract in behalf of the defendant and of
the power of the defendant to enter into such a contract.

The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be
seen by reference to the following, among other authorities:

The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation
upon an appeal bond. The name of the company had been affixed to the obligation by an agent, and
no sufficient affidavit was filed by the corporation questioning its signature or the authority of the
agent to bind the company. It was held that the plaintiff did not have to prove the due execution of
the bond and that the corporation as to be taken as admitting the authority of the agent to make the
signature. Among other things the court said: "But it is said that the authority of Barrett to execute
the bond is distinguishable from the signing and, although the signature must be denied under oath,
the authority of the agent need not be. Upon this we observe that the statute manifestly refers to the
legal effect of the signature, rather than the manual act of singing. If the name of the obligor, in a
bond, is subscribed by one in his presence, and by his direction, the effect is the same as if his
name should be signed with his own hand, and under such circumstances we do not doubt that the
obligor must deny his signature under oath, in order to put the obligee to proof of the fact. Quit facit
per aliam facit per se, and when the name is signed by one thereunto authorized, it is as much as
the signature of the principal as if written with his own hand. Therefore, if the principal would deny
the authority of the agent, as the validity of the signature is thereby directly attacked, the denial must
be under oath.

In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note
purporting to have been given by on A. B., as the treasurer of the defendant company. Said the
court: "Under the Judiciary Act of 1799, requiring the defendant to deny on oath an instrument of
writing, upon which he is sued, the plea in this case should have been verified.

If the person who signed this note for the company, and upon which they are sued, was not
authorized to make it, let them say so upon oath, and the onus is then on the plaintiff to overcome
the plea."
It should be noted that the provision contained in section 103 of our Code of Civil Procedure is
embodied in some form or other in the statutes of probably all of the American States, and it is not
by any means peculiar to the laws of California, though it appears to have been taken immediately
from the statutes of that State. (Secs. 447, 448, California Code of Civil Procedure.)

There is really a broader question here involved than that which relates merely to the formality of
verifying the answer with an affidavit. This question arises from the circumstance that the answer of
the corporation does not in any was challenge the authority of Ramon J. Fernandez to bind it by the
contracts in question and does not set forth, as a special defense, any such lack of authority in him.
Upon well-established principles of pleading lack of authority in an officer of a corporation to bind it
by a contract executed by him in its name is a defense which should be specially pleaded — and this
quite apart from the requirement, contained in section 103, that the answer setting up such defense
should be verified by oath. But is should not here escape observation that section 103 also requires
— in denial contemplated in that section shall be specific. An attack on the instrument in general
terms is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)

In the first edition of a well-known treatise on the laws of corporations we find the following
proposition:

If an action is brought against a corporation upon a contract alleged to be its contract, if it

desires to set up the defense that the contract was executed by one not authorized as its
agent, it must plead non est factum. (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)

Again, says the same author:

A corporation can not avail itself of the defense that it had no power to enter into the
obligation to enforce which the suit is brought, unless it pleads that defense. This principle
applies equally where the defendant intends to challenge the power of its officer or agent to
execute in its behalf the contract upon which the action brought and where it intends to
defend on the ground of total want of power in the corporation to make such a contract.
(Opus citat. sec. 7619.)

In Simon vs. Calfee (80 Ark., 65), it was said:

Though the power of the officers of a business corporation to issue negotiable paper in its
name is not presumed, such corporation can not avail itself of a want of power in its officers
to bind it unless the defense was made on such ground.

The rule has been applied where the question was whether corporate officer, having admitted power
to make a contract, had in the particular instance exceeded that authority, (Merill vs. Consumers'
Coal Co., 114 N.Y., 216); and it has been held that where the answer in a suit against a corporation
on its note relies simply on the want of power of the corporation to issue notes, the defendant can
not afterwards object that the plaintiff has not shown that the officer executing the note were
empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated.
In dealing with corporations the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that authority and thereby held him out
as a person competent to bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the
actual authority may never have been granted. The public is not supposed nor required to know the
transactions which happen around the table where the corporate board of directors or the
stockholders are from time to time convoked. Whether a particular officer actually possesses the
authority which he assumes to exercise is frequently known to very few, and the proof of it usually is
not readily accessible to the stranger who deals with the corporation on the faith of the ostensible
authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an
officer of a corporation has made a contract in its name, that the corporation should be required, if it
denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the
fact that the agent's authority is contested; and he is given an opportunity to adduce evidence
showing either that the authority existed or that the contract was ratified and approved.

We are of the opinion that the failure of the defendant corporation to make any issue in its answer
with regard to the authority of Ramon J. Fernandez to bind it, and particularly its failure to deny
specifically under oath the genuineness and due execution of the contracts sued upon, have the
effect of elimination the question of his authority from the case, considered as a matter of mere
pleading. The statute (sec. 103) plainly says that if a written instrument, the foundation of the suit, is
not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an admission
made in a pleading can not be controverted by the party making such admission; and all proof
submitted by him contrary thereto or inconsistent therewith should simply be ignored by the court,
whether objection is interposed by the opposite party or not. We can see no reason why a
constructive admission, created by the express words of the statute, should be considered to have
less effect than any other admission.

The parties to an action are required to submit their respective contentions to the court in their
complaint and answer. These documents supply the materials which the court must use in order to
discover the points of contention between the parties; and where the statute says that the due
execution of a document which supplies the foundation of an action is to be taken as admitted
unless denied under oath, the failure of the defendant to make such denial must be taken to operate
as a conclusive admission, so long as the pleadings remain that form.

It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances
between the allegations of a pleading and the proof shall be disregarded and the facts shall be found
according to the evidence. The same section, however, recognizes the necessity for an amendment
of the pleadings. And judgment must be in conformity with the case made in conformity with the case
made in the pleadings and established by the proof, and relief can not be granted that is
substantially inconsistent with either. A party can no more succeed upon a case proved but not
alleged than upon a case alleged but nor proved. This rule of course operates with like effect upon
both parties, and applies equality to the defendants special defense as to the plaintiffs cause of
action.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to
permit the answer of the defendant to be amended; and if we believed that the interests of justice so
required, we would either exercise that authority or remand the cause for a new trial in court below.
As will appear further on in this opinion, however, we think that the interests of justice will best be
promoted by deciding the case, without more ado, upon the issues presented in the record as it now
stands.

That we may not appear to have overlooked the matter, we will observe that two cases are cited
from California in which the Supreme Court of the State has held that where a release is pleaded by
way of defense and evidence tending to destroy its effect is introduced without objection, the
circumstance that it was not denied under oath is immaterial. In the earlier of these cases,
Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a railroad company to
recover damages for the death of the plaintiff's minor son, alleged to have been killed by the
negligence of the defendant. The defendant company pleaded by way of defense a release
purporting to be signed by the plaintiff, and in its answer inserted a copy of the release. The
execution of the release was not denied under oath; but at the trial evidence was submitted on
behalf of the plaintiff tending to show that at the time he signed the release, he was incompetent by
reason of drunkenness to bind himself thereby. It was held that inasmuch as this evidence had been
submitted by the plaintiff without objection, it was proper for the court to consider it. We do not
question the propriety of that decision, especially as the issue had been passed upon by a jury; but
we believe that the decision would have been more soundly planted if it had been said that the
incapacity of the plaintiff, due to his drunken condition, was a matter which did not involve either the
genuineness or due execution of the release. Like the defenses of fraud, coercion, imbecility, and
mistake, it was a matter which could be proved under the general issue and did not have to be set
up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar explanation
can, we think, be given of the case of Clark vs. Child in which the rule declared in the earlier case
was followed. With respect to both decisions which we merely observe that upon point of procedure
which they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.

We shall now consider the liability of the defendant company on the merits just as if that liability had
been properly put in issue by a specific answer under oath denying the authority of Fernandez go to
bind it. Upon this question it must at the outset be premised that Ramon J. Fernandez, as treasurer,
had no independent authority to bind the company by signing its name to the letters in question. It is
declared by signing its name to the letters in question. It is declared in section 28 of the Corporation
Law that corporate power shall be exercised, and all corporate business conducted by the board of
directors; and this principle is recognized in the by-laws of the corporation in question which contain
a provision declaring that the power to make contracts shall be vested in the board of directors. It is
true that it is also declared in the same by-laws that the president shall have the power, and it shall
be his duty, to sign contract; but this has reference rather to the formality of reducing to proper form
the contract which are authorized by the board and is not intended to confer an independent power
to make contract binding on the corporation.

The fact that the power to make corporate contract is thus vested in the board of directors does not
signify that a formal vote of the board must always be taken before contractual liability can be fixed
upon a corporation; for the board can create liability, like an individual, by other means than by a
formal expression of its will. In this connection the case of Robert Gair Co. vs. Columbia Rice
Packing Co. (124 La., 194) is instructive. If there appeared that the secretary of the defendant
corporation had signed an obligation on its behalf binding it as guarantor of the performance of an
important contract upon which the name of another corporation appeared as principal. The
defendant company set up by way of defense that is secretary had no authority to bind it by such an
engagement. The court found that the guaranty was given with the knowledge and consent of the
president and directors, and that this consent of the president and directors, and that this consent
was given with as much observance of formality as was customary in the transaction of the business
of the company. It was held that, so far as the authority of the secretary was concerned, the contract
was binding. In discussing this point, the court quoted with approval the following language form one
of its prior decisions:

The authority of the subordinate agent of a corporation often depends upon the course of
dealings which the company or its director have sanctioned. It may be established
sometimes without reference to official record of the proceedings of the board, by proof of
the usage which the company had permitted to grow up in business, and of the
acquiescence of the board charged with the duty of supervising and controlling the
company's business.
It appears in evidence, in the case now before us, that on July 30, the date upon which the letter
accepting the offer of the Eclair films was dispatched the board of directors of the Orientalist
Company convened in special session in the office of Ramon J. Fernandez at the request of the
latter. There were present the four members, including the president, who had already signified their
consent to the making of the contract. At this meeting, as appears from the minutes, Fernandez
informed the board of the offer which had been received from the plaintiff with reference to the
importation of films. The minutes add that terms of this offer were approved; but at the suggestion of
Fernandez it was decided to call a special meeting of the stockholders to consider the matter and
definite action was postponed.

The stockholders meeting was convoked upon September 18, 1913, upon which occasion
Fernandez informed those present of the offer in question and of the terms upon which the films
could be procured. He estimated that the company would have to make an outlay of about P5,500
per month, if the offer for the two films should be accepted by it.

The following extracts from the minutes of this meeting are here pertinent:

Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for
the purpose of avoiding that other importers should get ahead of the corporation in this
regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr. Papa met for the purpose of
considering the acceptance of the offer together with the responsibilities attached thereto,
made to the corporation by the film manufacturers of Eclair and Milano of Paris and Italy
respectively, inasmuch as the first shipment of films was then expected to arrive.

At the same time he informed the said stockholders that he had already made arrangements
with respect to renting said films after they have been once exhibited in the Cine Oriental,
and that the corporation could very well meet the expenditure involved and net a certain
profit, but that, if we could enter into a contract with about nine cinematographs, big gains
would be obtained through such a step.

The possibility that the corporation might not see fit to authorize the contract, or might for lack of
funds be unable to make the necessary outlay, was foreseen; and in such contingency the
stockholders were informed, that the four gentlemen above mentioned (Hernandez, Fernandez,
Monroy, and Papa) "would continue importing said films at their own account and risk, and shall be
entitled only to a compensation of 10 per cent of their outlay in importing the films, said payment to
be made in shares of said corporation, inasmuch as the corporation is lacking available funds for the
purpose, and also because there are 88 shares of stock remaining still unsold."

In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the
Eclair and Milano films should be accepted, if the corporation could obtain the money with which to
meet the expenditure involved, and to this end appointed a committee to apply to the bank for a
credit. The evidence shows that an attempt was made, on behalf of the corporation, to obtain a
credit of P10,000 from the Bank of the Philippine Islands for the purpose indicated, but the bank
declined to grant his credit. Thereafter another special meeting of the shareholders of the defendant
corporation was called at which the failure of their committee to obtain a credit from the bank was
made known. A resolution was thereupon passed to the effect that the company should pay to
Hernandez, Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in
importing the films, said payment to be made in shares of the company in accordance with the
suggestion made at the previous meeting. At the time this meeting was held three shipment of the
films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of
September 18, and especially from the first paragraph above quoted, that this body was then
cognizant that the officer had already been accepted in the name of the Orientalist Company and
that the films which were then expected to arrive were being imported by virtue of such acceptance.
Certainly four members of the board of directors there present were aware of this fact, as the letter
accepting the offer had been sent with their knowledge and consent. In view of this circumstance, a
certain doubt arises whether they meant to utilize the financial assistance of the four so-called
importers in order that the corporation might bet the benefit of the contract for the films, just as it
would have utilized the credit of the bank if such credit had been extended. If such was the intention
of the stockholders their action amounted to a virtual, though indirect, approval of the contract. It is
not however, necessary to found the judgment on this interpretation of the stockholders proceedings,
inasmuch as we think for reasons presently to be stated, that the corporation is bound, and we will
here assume that in the end the contract were not approved by the stockholders.

It will be observed that Ramon J. Fernandez was the particular officer and member of the board of
directors who was most active in the effort to secure the films for the corporation. The negotiations
were conducted by him with the knowledge and consent of other members of the board; and the
contract was made with their prior approval. As appears from the papers in this record, Fernandez
was the person to who keeping was confided the printed stationery bearing the official style of the
corporation, as well as rubber stencil with which the name of the corporation could be signed to
documents bearing its name.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of
the board of directors of the Orientalist Company, we find that upon October 27, 1913, after
Fernandez had departed from the Philippine Islands, to be absent for many months, said board
adopted a resolution conferring the following among other powers on Vicente Ocampo, the manager
of the Oriental theater, namely:

(1) To rent a box for the films in the "Kneeler Building."

(4) To be in charge of the films and of the renting of the same.

(5) To advertise in the different newspapers that we are importing films to be exhibited in the
Cine Oriental.

(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for
the payment thereof.

(7) To buy a book and cards for indexing the names of the films.

(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R.
Acuña to enter into agreements with cinematograph proprietors in the provinces for the
purpose of renting films from us.

It thus appears that the board of directors, before the financial inability of the corporation to proceed
with the project was revealed, had already recognized the contract as being in existence and had
proceeded to take the steps necessary to utilize the films. Particularly suggestive is the direction
given at this meeting for the publication of announcements in the newspapers to the effect that the
company was engaged in importing films. In the light of all the circumstances of the case, we are of
the opinion that the contracts in question were thus inferentially approved by the company's board of
directors and that the company is bound unless the subsequent failure of the stockholders to
approve said contracts had the effect of abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the stockholders, whatever its
character, must be ignored. The functions of the stockholders of a corporation are, it must be
remembered, of a limited nature. The theory of a corporation is that the stockholders may have all
the profits but shall turn over the complete management of the enterprise to their representatives
and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing
directors, making by-laws, and exercising certain other special powers defined by-law. In conformity
with this idea it is settled that contract between a corporation and third person must be made by the
director and not by the stockholders. The corporation, in such matters, is represented by the former
and not by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely
accordant with the provisions of section 28 of our Corporation Law already referred to. It results that
where a meeting of the stockholders is called for the purpose of passing on the propriety of making a
corporate contract, its resolutions are at most advisory and not in any wise binding on the board.

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the
situation as it presents itself to the third party with whom the contract is made. Naturally he can have
little or no information as to what occurs in corporate meetings; and he must necessarily rely upon
the external manifestations of corporate consent. The integrity of commercial transactions can only
be maintained by holding the corporation strictly to the liability fixed upon it by its agents in
accordance with law, and we would be sorry to announce a doctrine which would permit the property
of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the
earth without recourse against the corporations whose name and authority had been used in the
manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officer, or any other agent, to do acts within the scope of an apparent
authority, and thus hold him out to the public as possessing power to do those acts, the corporation
will as against any one who has in good faith dealt with the corporation through such agent, be
estopped from denying his authority; and where it is said "if the corporation permits" this means the
same as "if the thing is permitted by the directing power of the corporation."

It being determined that the corporation is bound by the contract in question, it remains to consider
the character of the liability assumed by R. J. Fernandez, in affixing his personal signature to said
contract. The question here is whether Fernandez is liable jointly with the Orientalists Company as a
principal obligor, or whether his liability is that of a guarantor merely.

As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is
not in line with the signature of the Orientalist Company, but is set off to the left of the company's
signature and somewhat who sign contracts in some capacity other than that of principal obligor to
place their signature alone would justify a court in holding that Fernandez here took upon himself the
responsibility of a guarantor rather than that of a principal obligor. We do, however, think, that the
form in which the contract is signed raises a doubt as to what the real intention was; and we feel
justified, in looking to the evidence to discover that intention. In this connection it is entirely clear,
from the testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter was
intended to be that of guarantor. There is, to be sure, a certain difference between these witnesses
as to the nature of this guaranty, inasmuch as Fernandez would have us believe that his name was
signed as a guaranty that the contract would be approved by the corporation, while Ramirez says
that the name was put on the contract for the purpose of guaranteeing, not the approval of the
contract, but its performance. We are convinced that the latter was the real intention of the
contracting parties.

We are not unmindful of the force of that rule of law which declares that oral evidence is admissible
to show the character in which the signature was affixed. This conclusion is perhaps supported by
the language of the second paragraph of article 1281 of the Civil Code, which declares that if the
words of a contract should appear contrary to the evident intention of the parties, the intention shall
prevail. But the conclusion reached is, we think, deducible from the general principle that in case of
ambiguity parol evidence is admissible to show the intention of the contracting parties.

It should be stated in conclusion that as the issues in this case have been framed, the only question
presented to this court is: To what extent are the signatory parties to the contract liable to the plaintiff
J. F. Ramirez? No contentious issue is raised directly between the defendants, the Orientalist
Company and Ramon H. Fernandez; nor does the present the present action involve any question
as to the undertaking of Fernandez and his three associates to effect the importation of the films
upon their own account and risk. Whether they may be bound to hold the company harmless is a
matter upon which we express no opinion.
 THIRD DIVISION

G.R. No. L-53820 June 15, 1992

YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner,

vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT CORPORATION, represented by its President-Chairman,
CONSTANCIO B. MALAGNA, respondents.

DAVIDE, JR., J.:

Assailed in this petition for review is the decision of the respondent Court of Appeals in C.A.-G.R. No. 61072-R, 1 promulgated on 21
December 1979, reversing the decision 2 of the then Court of First Instance (now Regional Trial Court) of Leyte dated 20 November 1975 in
Civil Case No. 5064 entitled "Yao Ka Sin Trading versus Prime White Cement Corporation."

The root of this controversy is the undated letter-offer of Constancio B. Maglana, President and Chairman of the Board of private respondent
Prime White Cement Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which describes
itself as "a business concern of single proprietorship," 3 and is represented by its manager, Mr. Henry Yao; the letter reads as follows:

PRIME WHITE CEMENT CORPORATION

602 Cardinal Life Building
Herran Street, Manila

Yao Ka Sin
Tacloban City

Gentlemen:

We have the pleasure to submit hereby our firm offer to you under the following quotations, terms, and conditions, to
wit:

1). Commodity — Prime White Cement

2). Price — At your option: a) P24.30 per 94 lbs. bag net, FOB Cebu City; and b) P23.30 per 94
lbs. bag net, FOB Asturias Cebu.

3). Quality — As fully specified in certificate No. 224-73 by Bureau of Public Works, Republic of
the Philippines.

4). Quantity — Forty-five Thousand (45,000) bags at 94 lbs. net per bag withdrawable in
guaranteed monthly quantity of Fifteen Thousand (15,000) bags minimum effective from June,
1973 to August 1973.

5). Delivery Schedule — Shipment be made within four (4) days upon receipt of your shipping
instruction.

6). Bag/Container — a) All be made of Standard Kraft (water resistant paper, 4 ply, with bursting
strength of 220 pounds, and b) Breakage allowance — additional four percent (4%) over the
quantity of each shipment.

7). Terms of Payment — Down payment of PESOS: TWO HUNDRED FORTY THREE
THOUSAND (P243,000.00) payable on the signing of this contract and the balance to be paid
upon presentation of corresponding shipping documents.

It is understood that in the event of a delay in our shipment, you hold the option to discount any price differential
resulting from a lower market price vis-a-vis the contract price. In addition, grant (sic) you the option to extend this
contract until the complete delivery of Forty Five Thousand (45,000) bags of 94 lbs. each is made by us. You are also
hereby granted the option to renew this contract under the same price, terms and conditions.

Please countersign on the space provided for below as your acknowledgement and confirmation of the above
transaction. Thank You.
 Very truly yours,

PRIME WHITE CEMENT

CORPORATION
BY: (SGD) CONSTANCIO B.
MAGLANA

President & Chairman

CONFORME:

YAO KA SIN TRADING

BY: (SGD) HENRY YAO

WITNESSES:

(SGD) T. CATINDIG (SGD) ERNESTO LIM

RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance of the above offer, the sum of Pesos: TWO
HUNDRED FORTY THREE THOUSAND ONLY (P243,000.00) in the form of Producers' Bank of the Philippines Check
No. C-153576 dated June 7, 1973.

PRIME WHITE CEMENT

CORPORATION
BY:

(SGD) CONSTANCIO B.
MAGLANA
President & Chairman 4

This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and signed on 7 June 1973 in the office of Mr. Teodoro Catindig,
Senior Vice-President of the Consolidated Bank and Trust Corporation (Solid Bank). 5

The principal issue raised in this case is whether or not the aforesaid letter-offer, as accepted by YKS, is a contract that binds the PWCC.
The trial court rule in favor of the petitioner, but the respondent Court held otherwise.

The records disclose the following material operative facts:

In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the signing of Exhibit "A", the Board of Directors of PWCC
disapproved the same; the rejection is evidenced by the following Minutes (Exhibit "10"):

the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not because of the alledged letter-contract adhered
to by them, but must be understood as a new and separate contract, and has in no way to do with the letter-offer which
they (sic) as consummated is by this resolution totally disapproved and is unacceptable to the corporation.

On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the disapproval of Exhibit "A". Pursuant, however, to its decision with
respect to the 10,000 bags of cement, it is issued the corresponding Delivery Order (Exhibit "4") and Official Receipt No. 0394 (Exhibit "5")
for the payment of the same in the amount of P243,000.00 This is the same amount received and acknowledged by Maglana in Exhibit "A".

YKS accepted without protest both the Delivery and Official Receipts.

While YKS denied having received a copy of Exhibit "1", it was established that the original thereof was shown to Mr. Henry Yao; since no
one would sign a receipt for it, the original was left at the latter's office and this fact was duly noted in Exhibit "1" (Exhibit "l-A").

On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's 4 August 1973 letter stating that it is "withdrawing or
taking delivery of not less than 10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V Taurus." In said reply, PWCC
reminded YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and told the latter that PWCC "only committed to you and which you
correspondingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 11,
1973. 6 Unfortunately, no copy of the said 4 August 1973 letter of YKS was presented in evidence.

On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in reply to the latter's letter of 15 August 1973. Enclosed in the reply
was a copy of Exhibit "2". While the records reveal that YKS received this reply also on 21 August 1973 (Exhibit "3" "A"), 8 it still denied
having received it. Likewise, no copy of the so-called 15 August 1973 letter was presented in evidence.
On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a follow-up to the letter of 15 August 1973; YKS insisted on
the delivery of 45,030 bags of white cement. 10

On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the latter's attention to the statement of delivery dated 24
August 1973, particularly the price change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu. 11

On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC insisting on the full compliance with the terms of Exhibit "A" and
informing the latter that it is exercising the option therein stipulated.

On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the 2 November 1973 telegram, but this was returned to
sender as unclaimed. 13

As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.

On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last time, compliance by the latter with its obligation under
Exhibit "A". 14

On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned letter of 9 February 1974; PWCC reiterated the
unenforceability of Exhibit "A". 15

On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a complaint for Specific Performance with Damages against
PWCC. The complaint 16 was based on Exhibit "A" and was docketed as Civil Case No. 5064.

In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath the material averments in the complaint and alleged that:
(a) YKS "has no legal personality to sue having no legal personality even by fiction to represent itself;" (b) Mr. Maglana, its President and
Chairman, was lured into signing Exhibit "A"; (c) such signing was subject to the condition that Exhibit "A" be approved by the Board of
Directors of PWCC, as corporate commitments are made through it; (d) the latter disapproved it, hence Exhibit "A" was never consummated
and is not enforceable against PWCC; (e) it agreed to sell 10,000 bags of white cement, not under Exhibit "A", but under a separate contract
prepared by the Board; (f) the rejection by the Board of Exhibit "A" was made known to YKS through various letters sent to it, copies of which
were attached to the Answer as Annexes 1, 2 and 3; 18 (g) YKS knew, per Delivery Order 19 and Official Receipt 20 issued by PWCC, that
only 10;000 bags were sold to it without any terms or conditions, at P24.30 per bag FOB Asturias, Cebu; (h) YKS is solely to blame for the
failure to take complete delivery of 10,000 bags for it did not send its boat or truck to PWCC's plant; and (i) YKS has, therefore, no cause of
action.

In its Counterclaim, PWCC asks for moral damages in the amount of not less than P10,000.00, exemplary damages in the sum of
P500,000.00 and attorney's fees in the sum of P10,000.00.

On 24 July 1974, YKS filed its Answer to the Counterclaim. 21

Issues having been joined, the trial court conducted a pre-trial. 22 On that occasion, the parties admitted that according to the By-Laws of
PWCC, the Chairman of the Board, who is also the President of the corporation, "has the power to execute and sign, for and in behalf of the
corporation, all contracts or agreements which the corporation enters into," subject to the qualification that "all the president's actuations,
prior to and after he had signed and executed said contracts, shall be given to the board of directors of defendant Corporation." Furthermore,
it was likewise stated for the record "that the corporation is a semi-subsidiary of the government because of the NIDC participation in the
same, and that all contracts of the corporation should meet the approval of the NIDC and/or the PNB Board because of an exposure and
financial involvement of around P10 million therein. 23

During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding upon it because Mr. Maglana was not authorized to make
the offer and sign the contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board of Directors has the power . . . (7) To
enter into (sic) agreement or contract of any kind with any person in the name and for and in behalf of the corporation through its President,
subject only to the declared objects and purpose of the corporation and the existing provisions of law. 24 Among the powers of the President
is "to operate and conduct the business of the corporation according to his own judgment and discretion, whenever the same is not expressly
limited by such orders, directives or resolutions." 25 Per standard practice of the corporation, contracts should first pass through the
marketing and intelligence unit before they are finalized. Because of its interest in the PWCC, the NIDC, through its comptroller, goes over
contracts involving funds of and white cement produced by the PWCC. Finally, among the duties of its legal counsel is to review proposed
contracts before they are submitted to the Board. While the president. may be tasked with the preparation of a contract, it must first pass
through the legal counsel and the comptroller of the corporation. 26

On 20 November 1975, after trial on the merits, the court handed down its decision in favor of herein petitioner, the dispositive portion of
which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

 (1) Ordering defendant: to complete the delivery of 45,000 bags of prime white cement at 94 lbs.
net per bag at the price agreed, with a breakage allowance of empty bags at 4% over the quantity
agreed;

(2) Ordering defendant to pay P50,000.00, as moral damages; P5,000.00 as exemplary

damages; P3,000.00 as attorney's fees; and the costs of these proceedings.

SO ORDERED. 27

In disregarding PWCC's theory, the trial court interpreted the provision of the By-Laws — granting its Board of Directors the power to enter
into an agreement or contract of any kind with any person through the President, — to mean that the latter may enter into such contract or
agreement at any time and that the same is not subject to the ratification of the board of directors but "subject only to the declared objects
and purpose of the corporation and existing laws." It then concluded:

It is obvious therefore, that it is not the whole membership of the board of directors who actually enters into any
contract with any person in the name and for and in behalf of the corporation, but only its president. It is likewise crystal
clear that this automatic representation of the board by the president is limited only by the "declared objects and
purpose of the corporation and existing provisions of law." 28

It likewise interpreted the provision on the power of the president to "operate and conduct the business of the corporation according to the
orders, directives or resolutions of the board of directors and according to his own judgment and discretion whenever the same is not
expressly limited by such orders, directives and resolutions," to mean that the president can operate and conduct the business of the
corporation according to his own judgment and discretion as long as it is not expressly limited by the orders, directives or resolutions of the
board of directors. 29 The trial court found no evidence that the board had set a prior limitation upon the exercise of such judgment and
discretion; it further ruled that the By-Laws, does not require that Exhibit "A" be approved by the Board of Directors. Finally, in the light of the
Chairman's power to "execute and sign for and in behalf of the corporation all contracts or agreements which the corporation may enter into"
(Exhibit "I-1"), it concluded that Mr. Maglana merely followed the By-Laws "presumably both as president and chairman of the board
thereof." 30 Hence, Exhibit "A" was validly entered into by Maglana and thus binds the corporation.

The trial court, however, ruled that the option to sell is not valid because it is not supported by any consideration distinct from the price; it was
exercised before compliance with the original contract by PWCC; and the repudiation of the original contract by PWCC was deemed a
withdrawal of the option before acceptance by the petitioner.

Both parties appealed from the said decision to the respondent Court of Appeals before which petitioner presented the following Assignment
of Errors:

THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO RENEW THE CONTRACT OF SALE IS NOT
ENFORCEABLE BECAUSE THE OPTION WAS MADE EVEN BEFORE THE COMPLIANCE OF (sic) THE ORIGINAL
CONTRACT BY DEFENDANT AND THAT DEFENDANT'S PROMISE TO SELL IS NOT SUPPORTED BY ANY
CONSIDERATION DISTINCT FROM THE PRICE.

II

THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF ACTUAL DAMAGES, SUFFICIENT
EXEMPLARY DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE COMPLAINT AND PROVEN DURING
THE TRIAL." 31

while the private respondent cited the following errors:

THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A VALID CONTRACT OR PLAINTIFF CAN CLAIM
THAT THE PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY ENFORCEABLE, AS THE SAME IS A
MERE UNACCEPTED PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED TO BE ENTERED INTO OR
LATER ON RATIFIED BY THE DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A" WAS TOTALLY
REJECTED AND DISAPPROVED IN TOTO BY THE DEFENDANT'S BOARD OF DIRECTORS IN CLEAR, PLAIN
LANGUAGE AND DULY INFORMED AND TRANSMITTED TO PLAINTIFF.

II

THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN LEGALLY UTILIZE THE COURTS AS THE FORUM
TO GIVE LIFE AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-EXISTING CONTRACT.
 III

THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN AND CONTRADICT HIS VERY OWN
ACTUATIONS AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS FROM THE COUNTER-
OFFER OF DEFENDANT FOR 10,000 BAGS OF CEMENT ONLY, UNDER THE PRICE, TERMS AND CONDITIONS
TOTALLY FOREIGN TO AND WHOLLY DIFFERENT FROM THOSE WHICH APPEAR IN EXHIBIT "A".

IV

THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S COUNTER-CLAIMS AS THE SAME ARE DULY
SUPPORTED BY CLEAR AND INDUBITABLE EVIDENCE. 32

In its decision 33 promulgated on 21 December 1979, the respondent Court reversed the decision of the trial court, thus:

WHEREFORE, the judgment appealed from is REVERSED and set aside, Plaintiff's complaint is dismissed with costs.
Plaintiff is ordered to pay defendant corporation P25,000.00 exemplary damages, and P10,000.00 attorney's fees.

SO ORDERED.

Such conclusion is based on its findings, to wit:

Before resolving the issue, it is helpful to bring out some preliminary facts. First, the defendant corporation is
supervised and principally financed by the National Investment and Development Corporation (NIDC), a subsidiary
investment of the Philippine National Bank (PNB), with cash financial exposure of some P10,000,000.00. PNB is a
government financial institution whose Board is chairmaned (sic) by the Minister of National Defense. This fact is very
material to the issue of whether defendant corporations president can bind the corporation with his own act.

Second, for failure to deny under oath the following actionable documents in support of defendant's counterclaim:

1. The resolution contained in defendant's letter to plaintiff dated July 5, 1973, on the 10,000 bags
of white cement delivered to plaintiff was not by reason of the letter contract, Exhibit "A", which
was totally disapproved by defendant corporation's board of directors, clearly stating that "If within
ten (10) days from date hereof, we will not hear from you but you will withdraw cement at P24.30
per bag from our plant, then we will deposit your check of P243,000.00 dated June 7, 1973
issued by the Producers Bank of the Philippines, per instruction of the Board." (Annex "I" to
defendant's Answer).

2. Letter of defendant to plaintiff dated August 4, 1973 that defendant "only committed to you and
which you accordingly paid 10,000 bags of white cement of which 4,150 bags were already
delivered to you as of August 1, 1973" (Annex "2" of defendant's Answer).

3. Letter dated August 21, 1973 to plaintiff reiterating defendant's letter of August 4, 1973 (Annex
"3" to defendant's Answer).

4. Letter to stores dated August 21, 1973,

5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white cement at P24.30
per bag (Annex "5", to defendant's Answer).

plaintiff is deemed to have admitted, not only the due execution and genuiness (sic) of said documents, (Rule 8 Sec. 8,
Rules of Court) but also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the foregoing documents tend to
prove that the letter-offer, Exhibit "A", was rejected by defendant corporation's Board of Directors and plaintiff was duly
notified thereof and that the P243,000.00 check was considered by both parties as payment of the 10,000 bags of
cement under a separate transaction. As proof of which plaintiff did not complain nor protest until February 9, 1974,
when he threatened legal action.

Third, Maglana's signing the letter-offer prepared for him in the Solidbank was made clearly upon the condition that it
was subject to the approval of the board of directors of defendant corporation. We find consistency herein because
according to the Corporation Law, and the By-Laws of defendant corporation, all corporate commitments and business
are conducted by, and contracts entered into through, the express authority of the Board of Directors (Sec. 28. Corp.
Law, Exh "I" or "8").

Fourth, What Henry Yao and Maglana agreed upon as embodied in Exhibit "A", insofar as defendant corporation is
concerned, was an unauthorized contract (Arts. 1317 and 1403 (1), Civil Code). And because Maglana was not
 authorized by the Board of Directors of defendant corporation nor was his, actuation ratified by the Board, the
agreement is unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs.
Archbishop of Manila, 43 O-G. 3224).

While it may be true that Maglana is President of defendant corporation nowhere in the Articles of Incorporation nor in
the By-Laws of said corporation was he empowered to enter into any contract all by himself and bind the corporation
without first securing the authority and consent of the Board of Directors. Whatever authority Maglana may have must
be derived from the Board of Directors of defendant corporation. A corporate officers power as an agent must be
sought from the law, the articles of incorporation and the By-Laws or from a resolution of the Board (Vicente vs.
Geraldez, 52 SCRA 227, Board of Liquidators vs. Kalaw, 20 SCRA 987).

It clearly results from the foregoing that the judgment appealed from is untenable. Having no cause of action against
defendant corporation, plaintiff is not entitled to any relief. We see no justification, therefore, for the court a
quo's awards in its favor. . . . 34

Its motion for reconsideration having been denied by the respondent Court in its resolution 35 dated 15 April 1980, petitioner filed the instant
petition based on the following grounds:

1. That the contract (Exh. "A") entered into by the President and Chairman of the Board of Directors Constancio B.
Maglana in behalf of the respondent corporation binds the said corporation.

2. That the contract (Exh. "A") was never novated nor superceded (sic) by a subsequent contract.

3. That the option to renew the contract as contained in Exhibit "A" is enforceable.

4. That Sec. 8, Rule 8 of the Rules of Court only applies when the adverse party appear (sic) to be a party to the
instrument but not to one who is not a party to the instrument and Sec. 1, Rule 9 of the said Rules with regards (sic) to
denying under oath refers only to allegations of
usury. 36

We gave due course 37 to the petition after private respondent filed its Comment 38 and required the parties to submit simultaneously their
Memoranda, which the parties subsequently complied with. 39

Before going any further, this Court must first resolve an issue which, although raised in the Answer of private respondent, was neither
pursued in its appeal before the respondent Court nor in its Comment and Memorandum in this case. It also eluded the attention of the trial
court and the respondent Court. The issue, which is of paramount importance, concerns the lack of capacity of plaintiff/petitioner to sue. In
the caption of both the complaint and the instant petition, the plaintiff and the petitioner, respectively, is:

YAO KA SIN TRADING,

owned and operated by
YAO KA SIN. 40

and is described in the body thereof as "a business concern of single proprietorship owned and operated by Yao Ka Sin." 41 In the body of
the petition, it is described as "a single proprietorship business concern." 42 It also appears that, as gathered from the decision of the trial
court, no Yao Ka Sin testified. Instead, one Henry Yao took the witness stand and testified that he is the "manager of Yao Ka Sin Trading"
and "it was in representation of the plaintiff" that he signed Exhibit "A" 43 Under Section 1, Rule 3 of the Rules of Court, only natural or
juridical persons or entities authorized by law may be parties in a civil action. In Juasing Hardware vs. Mendoza, 44 this Court held that a
single proprietorship is neither a natural person nor a juridical person under Article 44 of the Civil Code; it is not an entity authorized by law to
bring suit in court:

The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for
profit by a single individual, and requires the proprietor or owner thereof to secure licenses and permits, register the
business name, and pair taxes to the national government. It does not vest juridical or legal personality upon the sole
proprietorship nor empower it to file or defend an action in court. 45

Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46

The complaint then should have been amended to implead Yao Ka Sin as plaintiff in substitution of Yao Ka Sin Trading. However, it is now
too late in the history of this case to dismiss this petition and, in effect, nullify all proceedings had before the trial court and the respondent
Court on the sole ground of petitioner's lack of capacity to sue. Considering that private respondent did not pursue this issue before the
respondent Court and this Court; that, as We held in Juasing, the defect is merely formal and not substantial, and an amendment to cure
such defect is expressly authorized by Section 4, Rule 10 of the Rules of Court which provides that "[a] defect in the designation of the
parties may be summarily corrected at any stage of the action provided no prejudice is caused thereby to the adverse party;" and that "[a]
sole proprietorship does not, of coarse, possess any juridical personality separate and apart from the personality of the owner of the
enterprise and the personality of the persons acting in the name of such proprietorship," 47 We hold and declare that Yao Ka Sin should be
deemed as the plaintiff in Civil Case No. 5064 and the petitioner in the instant case. As this Court stated nearly eighty (80) years ago
in Alonso vs. Villamor: 48

No one has been misled by the error in the name of the party plaintiff. If we should by reason of this error send this
case back for amendment and new trial, there would be on the retrial the same complaint, the same answer, the same
defense, the same interests, the same witnesses, and the same evidence. The name of the plaintiff would constitute
the only difference between the old trial and the new. In our judgment there is not enough in a name to justify such
action.

And now to the merits of the petition.

The respondent Court correctly ruled that Exhibit "A" is not binding upon the private respondent. Mr. Maglana, its President and Chairman,
was not empowered to execute it. Petitioner, on the other hand, maintains that it is a valid contract because the Maglana has the power to
enter into contracts for the corporation as implied from the following provisions of the By-Laws of private respondent:

a) The power of the Board of Directors to . . . enter into (sic) agreement or contract of any kind with any person in the
name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of
the corporation and the existing provisions of law. (Exhibit "8-A"); and

b) The power of the Chairman of the Board of Directors to "execute and sign, for and in behalf of the corporation, all
contracts or agreements which the corporation may enter into" (Exhibit "I-1").

And even admitting, for the sake of argument, that Mr. Maglana was not so authorized under the By-Laws, the private respondent, pursuant
to the doctrine laid down by this Court in Francisco vs. Government Service Insurance
System 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his act for clothing him with apparent authority.

We are not persuaded.

Since a corporation, such as the private respondent, can act only through its officers and agents, "all acts within the powers of said
corporation may be performed by agents of its selection; and, except so far as limitations or restrictions may be imposed by special charter,
by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer
or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents when once appointed, or
members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private
persons." 51 Moreover, " . . . a corporate officer or agent may represent and bind the corporation in transactions with third persons to the
extent that authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such
powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has
caused persons dealing with the officer or agent to believe that it has conferred. 52

While there can be no question that Mr. Maglana was an officer — the President and Chairman — of private respondent corporation at the
time he signed Exhibit "A", the above provisions of said private respondent's By-Laws do not in any way confer upon the President the
authority to enter into contracts for the corporation independently, of the Board of Directors. That power is exclusively lodged in the latter.
Nevertheless, to expedite or facilitate the execution of the contract, only the President — and not all the members of the Board, or so much
thereof as are required for the act — shall sign it for the corporation. This is the import of the words through the president in Exhibit "8-A" and
the clear intent of the power of the chairman "to execute and sign for and in behalf of the corporation all contracts and agreements which the
corporation may enter into" in Exhibit "I-1". Both powers presuppose a prior act of the corporation exercised through the Board of Directors.
No greater power can be implied from such express, but limited, delegated authority. Neither can it be logically claimed that any power
greater than that expressly conferred is inherent in Mr. Maglana's position as president and chairman of the corporation.

Although there is authority "that if the president is given general control and supervision over the affairs of the corporation, it will be presumed
that he has authority to make contract and do acts within the course of its ordinary business," 53 We find such inapplicable in this case. We
note that the private corporation has a general manager who, under its By-Laws has, inter alia, the following powers: "(a) to have the active
and direct management of the business and operation of the corporation, conducting the same accordingly to the order, directives or
resolutions of the Board of Directors or of the president." It goes without saying then that Mr. Maglana did not have a direct and active and in
the management of the business and operations of the corporation. Besides, no evidence was adduced to show that Mr. Maglana had, in the
past, entered into contracts similar to that of Exhibit "A" either with the petitioner or with other parties.

Petitioner's last refuge then is his alternative proposition, namely, that private respondent had clothed Mr. Maglana with the apparent power
to act for it and had caused persons dealing with it to believe that he was conferred with such power. The rule is of course settled that
"[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which
the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in
favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time." 54 Also, "if a
private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority in real, as to innocent third persons dealing in good faith with such officers or agents." 55 This
"apparent authority may result from (1) the general manner, by which the corporation holds out an officer or agent as having power to act or,
in other words, the apparent authority with which it clothes him to act in general or (2) acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. 56
It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana with the apparent power to
execute Exhibit "A" or any similar contract. This could have been easily done by evidence of similar acts executed either in its favor or in
favor of other parties. Petitioner miserably failed to do that. Upon the other hand, private respondent's evidence overwhelmingly shows that
no contract can be signed by the president without first being approved by the Board of Directors; such approval may only be given after the
contract passes through, at least, the comptroller, who is the NIDC representative, and the legal counsel.

The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly unavailing to the petitioner. In said cases, this
Court found sufficient evidence, based on the conduct and actuations of the corporations concerned, of apparent authority conferred upon
the officer involved which bound the corporations on the basis of ratification. In the first case, it was established that the offer of compromise
made by plaintiff in the letter, Exhibit "A", was validly accepted by the GSIS. The terms of the trial offer were clear, and over the signature of
defendant's general manager Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. It was sent by the
GSIS Board Secretary and defendant did not disown the same. Moreover, in a letter remitting the payment of P30,000 advanced by her
father, plaintiff quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly
unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and kept silent about the telegram. This Court then ruled
that:

This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff,
constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393).

Art. 1393. Ratification may be effected expressly or tactly it is understood that there is a tacit
ratification if, with knowledge of the reason which renders the contract voidable and such reason
having ceased, the person who has a right to invoke it should execute an act which necessarily
implies an intention to waive his right

In the second case, this Court found:

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute
contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to
be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by
its acts and through acquiescence, practically laid aside the by-laws requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

The inevitable conclusion then is that Exhibit "A" is an unenforceable contract under Article 1317 of the Civil Code which provides as follows:

Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a
right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf
it, has been execrated, before it is revoked by the other contracting party.

The second ground is based on a wrong premise. It assumes, contrary to Our conclusion above, that Exhibit "A" is a valid contract binding
upon the private respondent. It was effectively disapproved and rejected by the Board of Directors which, at the same time, considered the
amount of P243,000.00 received Mr. Maglana as payment for 10,000 bags of white cement, treated as an entirely different contract, and
forthwith notified petitioner of its decision that "If within ten (10) days from date hereof we will not hear from you but you will withdraw cement
at P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the
Philippines, per instruction of the Board." 57 Petitioner received the copy of this notification and thereafter accepted without any protest the
Delivery Receipt covering the 10,000 bags and the Official Receipt for the P243,000.00. The respondent Court thus correctly ruled that
petitioner had in fact agreed to a new transaction involving only 10,000 bags of white cement.

The third ground must likewise fail. Exhibit "A" being unenforceable, the option to renew it would have no leg to stand on. The river cannot
rise higher than its source. In any event, the option granted in. this case is without any consideration Article 1324 of the Civil Code expressly
provides that:

When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something
paid or promised.

while Article 1749 of the same Code provides:

A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if
the promise is supported by a consideration distinct from the price.
Accordingly, even if it were accepted, it can not validly bind the private respondent. 58

The fourth ground is, however, meritorious.

Section 8, Rule 8 of the Rules of Court provides:

Sec. 8. How to contest genuineness of such documents — When an action or defense is founded upon a written
instrument, copied in or attached in the corresponding pleading as provided in the preceding section, the genuineness
and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies
them, and sets forth what he claims to be the facts; but this provision does not apply when the adverse party does not
appear, to be a party to the instrument or when compliance with an order for an inspection of the original instrument is
refused.

It is clear that the petitioner is not a party to any of the documents attached to the private respondent's Answer. Thus, the above quoted rule
is not applicable. 59 While the respondent Court, erred in holding otherwise, the challenged decision must, nevertheless, stand in view of the
above disquisitions on the first to the third grounds of the petition.

WHEREFORE, judgment is hereby rendered AFFIRMING the decision of respondent Court of Appeals in C.A. G.R. No. 61072-R
promulgated on 21 December 1979.
 FIRST DIVISION

[G.R. No. 126751. March 28, 2001]

SAFIC ALCAN & CIE, petitioner, vs. IMPERIAL VEGETABLE OIL CO.,
INC., respondent.

DECISION
YNARES-SANTIAGO, J.:

Petitioner Safic Alcan & Cie (hereinafter, Safic) is a French corporation engaged
in the international purchase, sale and trading of coconut oil. It filed with the Regional
Trial Court of Manila, Branch XXV, a complaint dated February 26, 1987 against
private respondent Imperial Vegetable Oil Co., Inc. (hereinafter, IVO), docketed as
Civil Case No. 87-39597. Petitioner Safic alleged that on July 1, 1986 and September
25, 1986, it placed purchase orders with IVO for 2,000 long tons of crude coconut oil,
valued at US$222.50 per ton, covered by Purchase Contract Nos. A601446 and
A601655, respectively, to be delivered within the month of January 1987. Private
respondent, however, failed to deliver the said coconut oil and, instead, offered a wash
out settlement, whereby the coconut oil subject of the purchase contracts were to be
sold back to IVO at the prevailing price in the international market at the time of wash
out. Thus, IVO bound itself to pay to Safic the difference between the said prevailing
price and the contract price of the 2,000 long tons of crude coconut oil, which
amounted to US$293,500.00. IVO failed to pay this amount despite repeated oral and
written demands.
Under its second cause of action, Safic alleged that on eight occasions between
April 24, 1986 and October 31, 1986, it placed purchase orders with IVO for a total of
4,750 tons of crude coconut oil, covered by Purchase Contract Nos. A601297A/B,
A601384, A601385, A601391, A601415, A601681, A601683 and
A601770A/B/C/. When IVO failed to honor its obligation under the wash out
settlement narrated above, Safic demanded that IVO make marginal deposits within
forty-eight hours on the eight purchase contracts in amounts equivalent to the
difference between the contract price and the market price of the coconut oil, to
compensate it for the damages it suffered when it was forced to acquire coconut oil at
a higher price. IVO failed to make the prescribed marginal deposits on the eight
contracts, in the aggregate amount of US$391,593.62, despite written demand
therefor.
 The demand for marginal deposits was based on the customs of the trade, as
governed by the provisions of the standard N.I.O.P. Contract and the FOSFA
Contract, to wit:

N.I.O.P. Contract, Rule 54 If the financial condition of either party to a contract

subject to these rules becomes so impaired as to create a reasonable doubt as to the
ability of such party to perform its obligations under the contract, the other party may
from time to time demand marginal deposits to be made within forty-eight (48) hours
after receipt of such demand, such deposits not to exceed the difference between the
contract price and the market price of the goods covered by the contract on the day
upon which such demand is made, such deposit to bear interest at the prime rate plus
one percent (1%) per annum. Failure to make such deposit within the time specified
shall constitute a breach of contract by the party upon whom demand for deposit is
made, and all losses and expenses resulting from such breach shall be for the account
of the party upon whom such demand is made. (Underscoring ours.)[1]

FOSFA Contract, Rule 54 BANKRUPTCY/INSOLVENCY: If before the fulfillment

of this contract either party shall suspend payment, commit an act of bankruptcy,
notify any of his creditors that he is unable to meet his debts or that he has suspended
payment or that he is about to suspend payment of his debts, convene, call or hold a
meeting either of his creditors or to pass a resolution to go into liquidation (except for
a voluntary winding up of a solvent company for the purpose of reconstruction or
amalgamation) or shall apply for an official moratorium, have a petition presented for
winding up or shall have a Receiver appointed, the contract shall forthwith be closed,
either at the market price then current for similar goods or, at the option of the other
party at a price to be ascertained by repurchase or resale and the difference between
the contract price and such closing-out price shall be the amount which the other party
shall be entitled to claim shall be liable to account for under this contract (sic). Should
either party be dissatisfied with the price, the matter shall be referred to arbitration.
Where no such resale or repurchase takes place, the closing-out price shall be fixed by
a Price Settlement Committee appointed by the Federation. (Underscoring ours.)[2]

Hence, Safic prayed that IVO be ordered to pay the sums of US$293,500.00 and
US$391,593.62, plus attorneys fees and litigation expenses. The complaint also
included an application for a writ of preliminary attachment against the properties of
IVO.
Upon Safics posting of the requisite bond, the trial court issued a writ of
preliminary attachment. Subsequently, the trial court ordered that the assets of IVO be
placed under receivership, in order to ensure the preservation of the same.
In its answer, IVO raised the following special affirmative defenses: Safic had no
legal capacity to sue because it was doing business in the Philippines without the
requisite license or authority; the subject contracts were speculative contracts entered
into by IVOs then President, Dominador Monteverde, in contravention of the
prohibition by the Board of Directors against engaging in speculative paper trading,
and despite IVOs lack of the necessary license from Central Bank to engage in such
kind of trading activity; and that under Article 2018 of the Civil Code, if a contract
which purports to be for the delivery of goods, securities or shares of stock is entered
into with the intention that the difference between the price stipulated and the
exchange or market price at the time of the pretended delivery shall be paid by the
loser to the winner, the transaction is null and void.
IVO set up counterclaims anchored on harassment, paralyzation of business,
financial losses, rumor-mongering and oppressive action. Later, IVO filed a
supplemental counterclaim alleging that it was unable to operate its business normally
because of the arrest of most of its physical assets; that its suppliers were driven away;
and that its major creditors have inundated it with claims for immediate payment of its
debts, and China Banking Corporation had foreclosed its chattel and real estate
mortgages.
During the trial, the lower court found that in 1985, prior to the date of the
contracts sued upon, the parties had entered into and consummated a number of
contracts for the sale of crude coconut oil. In those transactions, Safic placed several
orders and IVO faithfully filled up those orders by shipping out the required crude
coconut oil to Safic, totalling 3,500 metric tons. Anent the 1986 contracts being sued
upon, the trial court refused to declare the same as gambling transactions, as defined
in Article 2018 of the Civil Code, although they involved some degree of
speculation. After all, the court noted, every business enterprise carries with it a
certain measure of speculation or risk.However, the contracts performed in 1985, on
one hand, and the 1986 contracts subject of this case, on the other hand, differed in
that under the 1985 contracts, deliveries were to be made within two months. This, as
alleged by Safic, was the time needed for milling and building up oil
inventory. Meanwhile, the 1986 contracts stipulated that the coconut oil were to be
delivered within period ranging from eight months to eleven to twelve months after
the placing of orders. The coconuts that were supposed to be milled were in all
likelihood not yet growing when Dominador Monteverde sold the crude coconut
oil. As such, the 1986 contracts constituted trading in futures or in mere expectations.
The lower court further held that the subject contracts were ultra vires and were
entered into by Dominador Monteverde without authority from the Board of
Directors. It distinguished between the 1985 contracts, where Safic likewise dealt with
Dominador Monteverde, who was presumably authorized to bind IVO, and the 1986
contracts, which were highly speculative in character. Moreover, the 1985 contracts
were covered by letters of credit, while the 1986 contracts were payable by
telegraphic transfers, which were nothing more than mere promises to pay once the
shipments became ready. For these reasons, the lower court held that Safic cannot
invoke the 1985 contracts as an implied corporate sanction for the high-risk 1986
contracts, which were evidently entered into by Monteverde for his personal benefit.
The trial court ruled that Safic failed to substantiate its claim for actual
damages. Likewise, it rejected IVOs counterclaim and supplemental counterclaim.
Thus, on August 28, 1992, the trial court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered dismissing the complaint of plaintiff

Safic Alcan & Cie, without prejudice to any action it might subsequently institute
against Dominador Monteverde, the former President of Imperial Vegetable Oil Co.,
Inc., arising from the subject matter of this case. The counterclaim and supplemental
counterclaim of the latter defendant are likewise hereby dismissed for lack of merit.
No pronouncement as to costs.

The writ of preliminary attachment issued in this case as well as the order placing
Imperial Vegetable Oil Co., Inc. under receivership are hereby dissolved and set
aside.[3]

Both IVO and Safic appealed to the Court of Appeals, jointly docketed as CA-
G.R. CV No. 40820.
IVO raised only one assignment of error, viz:

THE TRIAL COURT ERRED IN HOLDING THAT THE ISSUANCE OF THE

WRIT OF PRELIMINARY ATTACHMENT WAS NOT THE MAIN CAUSE OF
THE DAMAGES SUFFERED BY DEFENDANT AND IN NOT AWARDING
DEFENDANT-APPELLANT SUCH DAMAGES.

For its part, Safic argued that:

THE TRIAL COURT ERRED IN HOLDING THAT IVOS PRESIDENT,

DOMINADOR MONTEVERDE, ENTERED INTO CONTRACTS WHICH
WERE ULTRA VIRES AND WHICH DID NOT BIND OR MAKE IVO LIABLE.

THE TRIAL COURT ERRED IN HOLDING THAT SAFIC WAS UNABLE TO

PROVE THE DAMAGES SUFFERED BY IT AND IN NOT AWARDING SUCH
DAMAGES.

THE TRIAL COURT ERRED IN NOT HOLDING THAT IVO IS LIABLE UNDER
THE WASH OUT CONTRACTS.
 On September 12, 1996, the Court of Appeals rendered the assailed Decision
dismissing the appeals and affirming the judgment appealed from in toto.[4]
Hence, Safic filed the instant petition for review with this Court, substantially
reiterating the errors it raised before the Court of Appeals and maintaining that the
Court of Appeals grievously erred when:

a. it declared that the 1986 forward contracts (i.e., Contracts Nos. A601446 and
A60155 (sic) involving 2,000 long tons of crude coconut oil, and Contracts Nos.
A601297A/B, A601385, A601391, A601415, A601681. A601683 and
A601770A/B/C involving 4,500 tons of crude coconut oil) were unauthorized acts of
Dominador Monteverde which do not bind IVO in whose name they were entered
into. In this connection, the Court of Appeals erred when (i) it ignored its own finding
that (a) Dominador Monteverde, as IVOs President, had an implied authority to make
any contract necessary or appropriate to the contract of the ordinary business of the
company; and (b) Dominador Monteverde had validly entered into similar forward
contracts for and on behalf of IVO in 1985; (ii) it distinguished between the 1986
forward contracts despite the fact that the Manila RTC has struck down IVOs
objection to the 1986 forward contracts (i.e. that they were highly speculative paper
trading which the IVO Board of Directors had prohibited Dominador Monteverde
from engaging in because it is a form of gambling where the parties do not intend
actual delivery of the coconut oil sold) and instead found that the 1986 forward
contracts were not gambling; (iii) it relied on the testimony of Mr. Rodrigo
Monteverde in concluding that the IVO Board of Directors did not authorize its
President, Dominador Monteverde, to enter into the 1986 forward contracts; and (iv) it
did not find IVO, in any case, estopped from denying responsibility for, and liability
under, the 1986 forward contracts because IVO had recognized itself bound to similar
forward contracts which Dominador Monteverde entered into (for and on behalf of
IVO) with Safic in 1985 notwithstanding that Dominador Monteverde was (like in the
1986 forward contracts) not expressly authorized by the IVO Board of Directors to
enter into such forward contracts;

b. it declared that Safic was not able to prove damages suffered by it, despite the fact
that Safic had presented not only testimonial, but also documentary, evidence which
proved the higher amount it had to pay for crude coconut oil (vis--vis the contract
price it was to pay to IVO) when IVO refused to deliver the crude coconut oil bought
by Safic under the 1986 forward contracts; and

c. it failed to resolve the issue of whether or not IVO is liable to Safic under the wash
out contracts involving Contracts Nos. A601446 and A60155 (sic), despite the fact
that Safic had properly raised the issue on its appeal, and the evidence and the law
support Safics position that IVO is so liable to Safic.
 In fine, Safic insists that the appellate court grievously erred when it did not
declare that IVOs President, Dominador Monteverde, validly entered into the 1986
contracts for and on behalf of IVO.
We disagree.
Article III, Section 3 [g] of the By-Laws[5] of IVO provides, among others, that

Section 3. Powers and Duties of the President. The President shall be elected by the
Board of Directors from their own number.

He shall have the following duties:

xxxxxxxxx

[g] Have direct and active management of the business and operation of the
corporation, conducting the same according to the orders, resolutions and instruction
of the Board of Directors and according to his own discretion whenever and wherever
the same is not expressly limited by such orders, resolutions and instructions.

It can be clearly seen from the foregoing provision of IVOs By-laws that
Monteverde had no blanket authority to bind IVO to any contract. He must act
according to the instructions of the Board of Directors. Even in instances when he was
authorized to act according to his discretion, that discretion must not conflict with
prior Board orders, resolutions and instructions. The evidence shows that the IVO
Board knew nothing of the 1986 contracts[6] and that it did not authorize Monteverde
to enter into speculative contracts.[7] In fact, Monteverde had earlier proposed that the
company engage in such transactions but the IVO Board rejected his proposal.[8] Since
the 1986 contracts marked a sharp departure from past IVO transactions, Safic should
have obtained from Monteverde the prior authorization of the IVO Board. Safic can
not rely on the doctrine of implied agency because before the controversial 1986
contracts, IVO did not enter into identical contracts with Safic. The basis for agency is
representation and a person dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent.[9] In the case of Bacaltos Coal Mines
v. Court of Appeals,[10] we elucidated the rule on dealing with an agent thus:

Every person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent. If he does not make such inquiry, he is chargeable
with knowledge of the agents authority, and his ignorance of that authority will not be
any excuse. Persons dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the principal, to
ascertain not only the fact of the agency but also the nature and extent of the authority,
and in case either is controverted, the burden of proof is upon them to establish it.[11]
 The most prudent thing petitioner should have done was to ascertain the extent of
the authority of Dominador Monteverde. Being remiss in this regard, petitioner can
not seek relief on the basis of a supposed agency.
Under Article 1898[12] of the Civil Code, the acts of an agent beyond the scope of
his authority do not bind the principal unless the latter ratifies the same expressly or
impliedly. It also bears emphasizing that when the third person knows that the agent
was acting beyond his power or authority, the principal can not be held liable for the
acts of the agent. If the said third person is aware of such limits of authority, he is to
blame, and is not entitled to recover damages from the agent, unless the latter
undertook to secure the principals ratification.[13]
There was no such ratification in this case. When Monteverde entered into the
speculative contracts with Safic, he did not secure the Boards approval. [14] He also did
not submit the contracts to the Board after their consummation so there was, in fact,
no occasion at all for ratification. The contracts were not reported in IVOs export
sales book and turn-out book.[15] Neither were they reflected in other books and
records of the corporation.[16] It must be pointed out that the Board of Directors, not
Monteverde, exercises corporate power.[17] Clearly, Monteverdes speculative contracts
with Safic never bound IVO and Safic can not therefore enforce those contracts
against IVO.
To bolster its cause, Safic raises the novel point that the IVO Board of Directors
did not set limitations on the extent of Monteverdes authority to sell coconut oil. It
must be borne in mind in this regard that a question that was never raised in the courts
below can not be allowed to be raised for the first time on appeal without offending
basic rules of fair play, justice and due process.[18] Such an issue was not brought to the
fore either in the trial court or the appellate court, and would have been disregarded by
the latter tribunal for the reasons previously stated. With more reason, the same does
not deserve consideration by this Court.
Be that as it may, Safics belated contention that the IVO Board of Directors did
not set limitations on Monteverdes authority to sell coconut oil is belied by what
appears on the record. Rodrigo Monteverde, who succeeded Dominador Monteverde
as IVO President, testified that the IVO Board had set down the policy of engaging in
purely physical trading thus:
Q. Now you said that IVO is engaged in trading. With whom does it usually trade its oil?
A. I am not too familiar with trading because as of March 1987, I was not yet an officer of the
corporation, although I was at the time already a stockholder, I think IVO is engaged in trading
oil.
Q. As far as you know, what kind of trading was IVO engaged with?
A. It was purely on physical trading.
Q. How did you know this?
A. As a stockholder, rather as member of [the] Board of Directors, I frequently visited the plant and
from my observation, as I have to supervise and monitor purchases of copras and also the sale of
the same, I observed that the policy of the corporation is for the company to engaged (sic) or to
purely engaged (sic)in physical trading.
Q. What do you mean by physical trading?
A. Physical Trading means we buy and sell copras that are only available to us. We only have to sell
the available stocks in our inventory.
Q. And what is the other form of trading?
Atty. Fernando
No basis, your Honor.
Atty. Abad
Well, the witness said they are engaged in physical trading and what I am saying [is] if there are any
other kind or form of trading.
Court
Witness may answer if he knows.
Witness
A. Trading future[s] contracts wherein the trader commits a price and to deliver coconut oil in the
future in which he is yet to acquire the stocks in the future.
Atty. Abad
Q. Who established the so-called physical trading in IVO?
A. The Board of Directors, sir.
Atty. Abad.
Q. How did you know that?
A. There was a meeting held in the office at the factory and it was brought out and suggested by our
former president, Dominador Monteverde, that the company should engaged (sic) in future[s]
contract[s] but it was rejected by the Board of Directors. It was only Ador Monteverde who then
wanted to engaged (sic) in this future[s] contract[s].
Q. Do you know where this meeting took place?
A. As far as I know it was sometime in 1985.
Q. Do you know why the Board of Directors rejected the proposal of Dominador Monteverde that the
company should engaged (sic) in future[s] contracts?
Atty. Fernando
Objection, your Honor, no basis.
Court
Why dont you lay the basis?
Atty. Abad
Q. Were you a member of the board at the time?
A. In 1975, I am already a stockholder and a member.
Q. Then would [you] now answer my question?
Atty. Fernando
No basis, your Honor. What we are talking is about 1985.
Atty. Abad
Q. When you mentioned about the meeting in 1985 wherein the Board of Directors rejected the
future[s] contract[s], were you already a member of the Board of Directors at that time?
A. Yes, sir.
Q. Do you know the reason why the said proposal of Mr. Dominador Monteverde to engage in
future[s] contract[s] was rejected by the Board of Directors?
A. Because this future[s] contract is too risky and it partakes of gambling.
Q. Do you keep records of the Board meetings of the company?
A. Yes, sir.
Q. Do you have a copy of the minutes of your meeting in 1985?
A. Incidentally our Secretary of the Board of Directors, Mr. Elfren Sarte, died in 1987 or 1988, and
despite [the] request of our office for us to be furnished a copy he was not able to furnish us a
copy.[19]

xxxxxxxxx
Atty. Abad
Q. You said the Board of Directors were against the company engaging in future[s] contracts. As far
as you know, has this policy of the Board of Directors been observed or followed?
Witness
A. Yes, sir.
Q. How far has this Dominador Monteverde been using the name of I.V.O. in selling future contracts
without the proper authority and consent of the companys Board of Directors?
A. Dominador Monteverde never records those transactions he entered into in connection with these
future[s] contracts in the companys books of accounts.
Atty. Abad
Q. What do you mean by that the future[s] contracts were not entered into the books of accounts of the
company?
Witness
A. Those were not recorded at all in the books of accounts of the company, sir.[20]

xxxxxxxxx
 Q. What did you do when you discovered these transactions?
A. There was again a meeting by the Board of Directors of the corporation and that we agreed to
remove the president and then I was made to replace him as president.
Q. What else?
A. And a resolution was passed disowning the illegal activities of the former president.[21]

Petitioner next argues that there was actually no difference between the 1985
physical contracts and the 1986 futures contracts.
The contention is unpersuasive for, as aptly pointed out by the trial court and
sustained by the appellate court

Rejecting IVOs position, SAFIC claims that there is no distinction between the 1985
and 1986 contracts, both of which groups of contracts were signed or authorized by
IVOs President, Dominador Monteverde. The 1986 contracts, SAFIC would bewail,
were similarly with their 1985 predecessors, forward sales contracts in which IVO had
undertaken to deliver the crude coconut oil months after such contracts were entered
into. The lead time between the closing of the deal and the delivery of the oil
supposedly allowed the seller to accumulate enough copra to mill and to build up its
inventory and so meet its delivery commitment to its foreign buyers. SAFIC
concludes that the 1986 contracts were equally binding, as the 1985 contracts were, on
IVO.

Subjecting the evidence on both sides to close scrutiny, the Court has found some
remarkable distinctions between the 1985 and 1986 contracts. x x x

1. The 1985 contracts were performed within an average of two months from the date
of the sale. On the other hand, the 1986 contracts were to be performed within an
average of eight and a half months from the dates of the sale.All the supposed
performances fell in 1987. Indeed, the contract covered by Exhibit J was to be
performed 11 to 12 months from the execution of the contract. These pattern (sic)
belies plaintiffs contention that the lead time merely allowed for milling and building
up of oil inventory. It is evident that the 1986 contracts constituted trading in futures
or in mere expectations. In all likelihood, the coconuts that were supposed to be
milled for oil were not yet on their trees when Dominador Monteverde sold the crude
oil to SAFIC.

2. The mode of payment agreed on by the parties in their 1985 contracts was
uniformly thru the opening of a letter of credit LC by SAFIC in favor of IVO. Since
the buyers letter of credit guarantees payment to the seller as soon as the latter is able
to present the shipping documents covering the cargo, its opening usually mark[s] the
fact that the transaction would be consummated. On the other hand, seven out of the
ten 1986 contracts were to be paid by telegraphic transfer upon presentation of the
shipping documents. Unlike the letter of credit, a mere promise to pay by telegraphic
transfer gives no assurance of [the] buyers compliance with its contracts. This fact
lends an uncertain element in the 1986 contracts.

3. Apart from the above, it is not disputed that with respect to the 1985 contracts, IVO
faithfully complied with Central Bank Circular No. 151 dated April 1, 1963, requiring
a coconut oil exporter to submit a Report of Foreign Sales within twenty-four (24)
hours after the closing of the relative sales contract with a foreign buyer of coconut
oil. But with respect to the disputed 1986 contracts, the parties stipulated during the
hearing that none of these contracts were ever reported to the Central Bank, in
violation of its above requirement. (See Stipulation of Facts dated June 13, 1990). The
1986 sales were, therefore suspect.

4. It is not disputed that, unlike the 1985 contacts, the 1986 contracts were never
recorded either in the 1986 accounting books of IVO or in its annual financial
statement for 1986, a document that was prepared prior to the controversy. (Exhibits 6
to 6-0 and 7 to 7-I). Emelita Ortega, formerly an assistant of Dominador Monteverde,
testified that they were strange goings-on about the 1986 contract. They were neither
recorded in the books nor reported to the Central Bank. What is more, in those
unreported cases where profits were made, such profits were ordered remitted to
unknown accounts in California, U.S.A., by Dominador Monteverde.

xxxxxxxxx

Evidently, Dominador Monteverde made business for himself, using the name of IVO
but concealing from it his speculative transactions.

Petitioner further contends that both the trial and appellate courts erred in
concluding that Safic was not able to prove its claim for damages. Petitioner first
points out that its wash out agreements with Monteverde where IVO allegedly agreed
to pay US$293,500.00 for some of the failed contracts was proof enough and, second,
that it presented purchases of coconut oil it made from others during the period of
IVOs default.
We remain unconvinced. The so-called wash out agreements are clearly ultra
vires and not binding on IVO. Furthermore, such agreements did not prove Safics
actual losses in the transactions in question. The fact is that Safic did not pay for the
coconut oil that it supposedly ordered from IVO through Monteverede. Safic only
claims that, since it was ready to pay when IVO was not ready to deliver, Safic
suffered damages to the extent that they had to buy the same commodity from others
at higher prices.
 The foregoing claim of petitioner is not, however, substantiated by the evidence
and only raises several questions, to wit: 1.] Did Safic commit to deliver the quantity
of oil covered by the 1986 contracts to its own buyers? Who were these buyers? What
were the terms of those contracts with respect to quantity, price and date of
delivery? 2.] Did Safic pay damages to its buyers? Where were the receipts? Did Safic
have to procure the equivalent oil from other sources? If so, who were these
sources? Where were their contracts and what were the terms of these contracts as to
quantity, price and date of delivery?
The records disclose that during the course of the proceedings in the trial court,
IVO filed an amended motion[22] for production and inspection of the following
documents: a.] contracts of resale of coconut oil that Safic bought from IVO; b.] the
records of the pooling and sales contracts covering the oil from such pooling, if the
coconut oil has been pooled and sold as general oil; c.] the contracts of the purchase
of oil that, according to Safic, it had to resort to in order to fill up alleged undelivered
commitments of IVO; d.] all other contracts, confirmations, invoices, wash out
agreements and other documents of sale related to (a), (b) and (c). This amended
motion was opposed by Safic.[23] The trial court, however, in its September 16, 1988
Order,[24] ruled that:

From the analysis of the parties respective positions, conclusion can easily be drawn
therefrom that there is materiality in the defendants move: firstly, plaintiff seeks to
recover damages from the defendant and these are intimately related to plaintiffs
alleged losses which it attributes to the default of the defendant in its contractual
commitments; secondly, the documents are specified in the amended motion. As such,
plaintiff would entertain no confusion as to what, which documents to locate and
produce considering plaintiff to be (without doubt) a reputable going concern in the
management of the affairs which is serviced by competent, industrious, hardworking
and diligent personnel; thirdly, the desired production and inspection of the
documents was precipitated by the testimony of plaintiffs witness (Donald OMeara)
who admitted, in open court, that they are available. If the said witness represented
that the documents, as generally described, are available, reason there would be none
for the same witness to say later that they could not be produced, even after they have
been clearly described.

Besides, if the Court may additionally dwell on the issue of damages, the production
and inspection of the desired documents would be of tremendous help in the ultimate
resolution thereof. Plaintiff claims for the award of liquidated or actual damages to the
tune of US$391,593.62 which, certainly, is a huge amount in terms of pesos, and
which defendant disputes. As the defendant cannot be precluded in taking exceptions
to the correctness and validity of such claim which plaintiffs witness (Donald
OMeara) testified to, and as, by this nature of the plaintiffs claim for damages, proof
thereof is a must which can be better served, if not amply ascertained by examining
the records of the related sales admitted to be in plaintiffs possession, the amended
motion for production and inspection of the defendant is in order.

The interest of justice will be served best, if there would be a full disclosure by the
parties on both sides of all documents related to the transactions in litigation.

Notwithstanding the foregoing ruling of the trial court, Safic did not produce the
required documents, prompting the court a quo to assume that if produced, the
documents would have been adverse to Safics cause. In its efforts to bolster its claim
for damages it purportedly sustained, Safic suggests a substitute mode of computing
its damages by getting the average price it paid for certain quantities of coconut oil
that it allegedly bought in 1987 and deducting this from the average price of the 1986
contracts. But this mode of computation if flawed because: 1.] it is conjectural since it
rests on average prices not on actual prices multiplied by the actual volume of coconut
oil per contract; and 2.] it is based on the unproven assumption that the 1987 contracts
of purchase provided the coconut oil needed to make up for the failed 1986
contracts. There is also no evidence that Safic had contracted to supply third parties
with coconut oil from the 1986 contracts and that Safic had to buy such oil from
others to meet the requirement.
Along the same vein, it is worthy to note that the quantities of oil covered by its
1987 contracts with third parties do not match the quantities of oil provided under the
1986 contracts. Had Safic produced the documents that the trial court required, a
substantially correct determination of its actual damages would have been
possible. This, unfortunately, was not the case. Suffice it to state in this regard that
[T]he power of the courts to grant damages and attorneys fees demands factual, legal
and equitable justification; its basis cannot be left to speculation and conjecture.[25]
WHEREFORE, in view of all the foregoing, the petition is DENIED for lack of
merit.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-40620 May 5, 1979

RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE LA

RAMA, and the HEIRS OF MERCEDES DE LA RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of Negros
Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and
LUISA U. DACLES respondents.

Exequiel T. A Alejandro for petitioners.

Acuña, Lirazan & Associates for private respondents.

CONCEPCION JR., J,:

Petition for certiorari to review the order of the respondent judge, dated January 2, 1975, denying the
petitioners' motion to dismiss the complaint filed in Civil Case No. 10257 of the Court of First
Instance of Negros Occidental, entitled, "Benjamin Lopue Sr., et al., plaintiffs, versus Ricardo
Gamboa, et al., defendants," as well as the order dated April 4, 1975, denying the motion for the
reconsideration of Said order.

In the aforementioned Civil Case No. 10257 of the Court of First Instance of Negros Occidental, the
herein petitioners, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Eduardo de la
Rama, and the late Mercedes de la Rama-Borromeo, now represented by her heirs, as well as
Ramon de la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi, were sued by the herein
private respondents, Benjamin Lopue, Sr., Benjamin Lopue, Jr., Leonito Lopue, and Luisa U. Dacles
to nullify the issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in favor of the said
defendants. The gist of the complaint, filed on April 4, 1972, is that the plaintiffs, with the exception
of Anastacio Dacles who was joined as a formal party, are the owners of 1,328 shares of stock of the
Inocentes de la Rama, Inc., a domestic corporation, with an authorized capital stock of 3,000 shares,
with a par value of P100.00 per share, 2,177 of which were subscribed and issued, thus leaving 823
shares unissued; that upon the plaintiffs' acquisition of the shares of stock held by Rafael Ledesma
and Jose Sicangco, Jr., then President and Vice-President of the corporation, respectively, the
defendants Mercedes R. Borromeo, Honorio de la Rama, and Ricardo Gamboa, remaining members
of the board of directors of the corporation, in order to forestall the takeover by the plaintiffs of the
afore-named corporation, surreptitiously met and elected Ricardo L. Gamboa and Honorio de la
Rama as president and vice-president of the corporation, respectively, and thereafter passed a
resolution authorizing the sale of the 823 unissued shares of the corporation to the defendants,
Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Ramon de la Rama, Paz R. Battistuzzi
Eduardo de la Rama, and Mercedes R. Borromeo, at par value, after which the defendants Honorio
de la Rama, Lydia de la Rama-Gamboa, and Enzo Battistuzzi were elected to the board of directors
of the corporation; that the sale of the unissued 823 shares of stock of the corporation was in
violation of the plaintiffs' and pre-emptive rights and made without the approval of the board of
directors representing 2/3 of the outstanding capital stock, and is in disregard of the strictest relation
of trust existing between the defendants, as stockholders thereof; and that the defendants Lydia de
la Rama-Gamboa, Honorio de la Rama, and Enzo Battistuzzi were not legally elected to the board of
directors of the said corporation and has unlawfully usurped or intruded into said office to the
prejudice of the plaintiffs. Wherefore, they prayed that a writ of preliminary injunction be issued
restraining the defendants from committing, or continuing the performance of an act tending to
prejudice, diminish or otherwise injure the plaintiffs' rights in the corporate properties and funds of
the corporation, and from disposing, transferring, selling, or otherwise impairing the value of the 823
shares of stock illegally issued by the defendants; that a receiver be appointed to preserve and
administer the property and funds of the corporation; that defendants Lydia de la Rama-Gamboa,
Honorio de la Rama, and Enzo Battistuzzi be declared as usurpers or intruders into the office of
director in the corporation and, consequently, ousting them therefrom and declare Luisa U. Dacles
as a legally elected director of the corporation; that the sale of 823 shares of stock of the corporation
be declared null and void; and that the defendants be ordered to pay damages and attorney's fees,
as well as the costs of suit .1

Acting upon the complaint, the respondent judge, after proper hearing, directed the clerk of court "to
issue the corresponding writ of preliminary injunction restraining the defendants and/or their
representatives, agents, or persons acting in their behalf from the commission or continuance of any
act tending in any way to prejudice, diminish or otherwise injure plaintiffs' rights in the corporate
properties and funds of the corporation Inocentes de la Rama, Inc.' and from disposing, transferring,
selling or otherwise impairing the value of the certificates of stock allegedly issued illegally in their
names on February 11, 1972, or at any date thereafter, and ordering them to deposit with the Clerk
of Court the corresponding certificates of stock for the 823 shares issued to said defendants on
February 11, 1972, upon plaintiffs' posting a bond in the sum of P50,000.00, to answer for any
damages and costs that may be sustained by the defendants by reason of the issuance of the writ,
copy of the bond to be furnished to the defendants. " 2 Pursuant thereto, the defendants deposited
with the clerk of court the corporation's certificates of stock Nos. 80 to 86, inclusive, representing the
disputed 823 shares of stock of the corporation. 3

On October 31, 1972, the plaintiffs therein, now private respondents, entered into a compromise
agreement with the defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi
,4 whereby the contracting parties withdrew their respective claims against each other and the
aforenamed defendants waived and transferred their rights and interests over the questioned 823
shares of stock in favor of the plaintiffs, as follows:

3. That the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi and Enzo
Battistuzzi will waive, cede, transfer or other wise convey, as they hereby waive,
cede, transfer and convey, free from all liens and encumbrances unto the plaintiffs, in
such proportion as the plaintiffs may among themselves determine, all of the rights,
interests, participations or title that the defendants Ramon L. de la Rama, Paz de la
Rama Battistuzzi Enzo Battistuzzi now have or may have in the eight hundred
twenty-three (823) shares in the capital stock of the corporation INOCENTES DELA
RAMA, INC.' which were issued in the names of the defendants in the above-entitled
case on or about February 11, 1972, or at any date thereafter and which shares are
the subject-matter of the present suit.

The compromise agreement was approved by the trial court on December 4, 1972,5 As a result, the
defendants filed a motion to dismiss the complaint, on November 19, 1974, upon the grounds: (1)
that the plaintiffs' cause of action had been waived or abandoned; and (2) that they were estopped
from further prosecuting the case since they have, in effect, acknowledged the validity of the
issuance of the disputed 823 shares of stock. The motion was denied on January 2, 1975. 6

The defendants also filed a motion to declare the defendants Ramon L. de la Rama, Paz de la Rama
Battistuzzi and Enzo Battistuzzi in contempt of court, for having violated the writ of preliminary
injunction when they entered into the aforesaid compromise agreement with the plaintiffs, but the
respondent judge denied the said motion for lack of merit. 7

On February 10, 1975, the defendants filed a motion for the reconsideration of the order denying
their motion to dismiss the complaint' and subsequently, an Addendum thereto, claiming that the
respondent court has no jurisdiction to interfere with the management of the corporation by the
board of directors, and the enactment of a resolution by the defendants, as members of the board of
directors of the corporation, allowing the sale of the 823 shares of stock to the defendants was
purely a management concern which the courts could not interfere with. When the trial court denied
said motion and its addendum, the defendants filed the instant petition for certiorari for the review of
said orders.

The petition is without merit. The questioned order denying the petitioners' motion to dismiss the
complaint is merely interlocutory and cannot be the subject of a petition for certiorari. The proper
procedure to be followed in such a case is to continue with the trial of the case on the merits and, if
the decision is adverse, to reiterate the issue on appeal. It would be a breach of orderly procedure to
allow a party to come before this Court every time an order is issued with which he does not agree.

Besides, the order denying the petitioners' motion to dismiss the complaint was not capriciously,
arbitrarily, or whimsically issued, or that the respondent court lacked jurisdiction over the cause as to
warrant the issuance of the writ prayed for. As found by the respondent judge, the petitioners have
not waived their cause of action against the petitioners by entering into a compromise agreement
with the other defendants in view of the express provision of the compromise agreement that the
same "shall not in any way constitute or be considered a waiver or abandonment of any claim or
cause of action against the other defendants." There is also no estoppel because there is nothing in
the agreement which could be construed as an affirmative admission by the plaintiff of the validity of
the resolution of the defendants which is now sought to be judicially declared null and void. The
foregoing circumstances and the fact that no consideration was mentioned in the agreement for the
transfer of rights to the said shares of stock to the plaintiffs are sufficient to show that the agreement
was merely an admission by the defendants Ramon de la Rama, Paz de la Rama Battistuzzi and
Enzo Battistuzzi of the validity of the claim of the plaintiffs.

The claim of the petitioners, in their Addendum to the motion for reconsideration of the order denying
the motion to dismiss the complaint, questioning the trial court's jurisdiction on matters affecting the
management of the corporation, is without merit. The well-known rule is that courts cannot undertake
to control the discretion of the board of directors about administrative matters as to which they have
legitimate power of, 10 action and contracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton destruction of the rights of the
minority. 11 In the instant case, the plaintiffs aver that the defendants have concluded a transaction
among themselves as will result to serious injury to the interests of the plaintiffs, so that the trial
court has jurisdiction over the case.

The petitioners further contend that the proper remedy of the plaintiffs would be to institute a
derivative suit against the petitioners in the name of the corporation in order to secure a binding
relief after exhausting all the possible remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party
in interest. 12 In the case at bar, however, the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides, misjoinder of parties is not a ground to
dismiss an action. 13

WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of merit. With costs
against the petitioners.

SO ORDERED.
 FIRST DIVISION

FILIPINAS PORT SERVICES, INC., G.R. No. 161886

represented by
stockholders, ELIODORO C. CRUZ
Present:
and MINDANAO TERMINAL AND
BROKERAGE SERVICES, INC.,
Petitioners, PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,

- versus - CORONA,
AZCUNA, and

VICTORIANO S. GO, ARSENIO LOPEZ GARCIA, JJ.

CHUA, EDGAR C.
TRINIDAD, HERMENEGILDO M.
TRINIDAD, JESUS SYBICO, MARY
JEAN D. CO, HENRY CHUA, JOSELITO
S. JAYME, ERNESTO S. JAYME, and
ELIEZER B. DE JESUS,
Respondents.

Promulgated:

March 16, 2007

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

DECISION
GARCIA, J.:

Assailed and sought to be set aside in this petition for review on certiorari is
the Decision[1] dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV
No. 73827, reversing an earlier decision of the Regional Trial Court (RTC) of Davao
City and accordingly dismissing the derivative suit instituted by petitioner Eliodoro
C. Cruz for and in behalf of the stockholders of co-petitioner Filipinas Port
Services, Inc. (Filport, hereafter).

The case is actually an intra-corporate dispute involving Filport, a domestic

corporation engaged in stevedoring services with principal office in Davao City. It
was initially instituted with the Securities and Exchange Commission (SEC) where
the case hibernated and remained unresolved for several years until it was
overtaken by the enactment into law, on 19 July 2000, of Republic Act (R.A.) No.
8799, otherwise known as the Securities Regulation Code. From the SEC and
consistent with R.A. No. 8799, the case was transferred to the RTC of Manila,
Branch 14, sitting as a corporate court. Subsequently, upon respondents motion,
the case eventually landed at the RTC of Davao City where it was docketed as Civil
Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor of the petitioners
prompting respondents to go to the CA in CA-G.R. CV No. 73827. This time, the
respondents prevailed, hence, this petition for review by the petitioners.

The relevant facts:

On 4 September 1992, petitioner Eliodoro C. Cruz, Filports president from 1968
until he lost his bid for reelection as Filports president during the general
stockholders meeting in 1991, wrote a letter[2] to the corporations Board of
Directors questioning the boards creation of the following positions with a
monthly remuneration of P13,050.00 each, and the election thereto of certain
members of the board, to wit:
 Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)

Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)

Asst. Vice-President for Finance - Mary Jean D. Co (Director)

Asst. Vice-President for Administration - Henry Chua (Director)

Special Asst. to the Chairman - Arsenio Lopez Chua (Director)

Special Asst. to the President - Fortunato V. de Castro

In his aforesaid letter, Cruz requested the board to take necessary

action/actions to recover from those elected to the aforementioned positions the
salaries they have received.

On 15 September 1992, the board met and took up Cruzs letter. The
records do not show what specific action/actions the board had taken on the
letter. Evidently, whatever action/actions the board took did not sit well with
Cruz.

On 14 June 1993, Cruz, purportedly in representation of Filport and its

stockholders, among which is herein co-petitioner Mindanao Terminal and
Brokerage Services, Inc. (Minterbro), filed with the SEC a petition[3] which he
describes as a derivative suit against the herein respondents who were then the
incumbent members of Filports Board of Directors, for alleged acts of
mismanagement detrimental to the interest of the corporation and its
shareholders at large, namely:

1. creation of an executive committee in 1991 composed of seven (7) members of the

board with compensation of P500.00 for each member per meeting, an office
 which, to Cruz, is not provided for in the by-laws of the corporation and whose

function merely duplicates those of the President and General Manager;

2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant

General Manager which increases are greatly disproportionate to the volume

and character of the work of the directors holding said positions;

3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate

Planning, Operations, Finance and Administration, and the election thereto of

board members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry

Chua, respectively; and

4. creation of the additional positions of Special Assistants to the President and the

Board Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to

the same, the directors elected/appointed thereto not doing any work to

deserve the monthly remuneration of P13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that
despite demands made upon the respondent members of the board of directors
to desist from creating the positions in question and to account for the amounts
incurred in creating the same, the demands were unheeded. Cruz thus prayed
that the respondent members of the board of directors be made to pay Filport,
jointly and severally, the sums of money variedly representing the damages
incurred as a result of the creation of the offices/positions complained of and the
aggregate amount of the questioned increased salaries.
In their common Answer with Counterclaim,[4] the respondents denied the
allegations of mismanagement and materially averred as follows:

1. the creation of the executive committee and the grant of per diems for the

attendance of each member are allowed under the by-laws of the corporation;

2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer

and Assistant General Manager were well within the financial capacity of the

corporation and well-deserved by the officers elected thereto; and

3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration

were already in existence during the tenure of Cruz as president of the

corporation, and were merely recreated by the Board, adding that all those

appointed to said positions of Assistant Vice Presidents, as well as the additional

position of Special Assistants to the Chairman and the President, rendered

services to deserve their compensation.

In the same Answer, respondents further averred that Cruz and his co-petitioner
Minterbro, while admittedly stockholders of Filport, have no authority nor
standing to bring the so-called derivative suit for and in behalf of the corporation;
that respondent Mary Jean D. Co has already ceased to be a corporate director
and so with Fortunato V. de Castro, one of those holding an assailed position; and
that no demand to cease and desist from further committing the acts complained
of was made upon the board. By way of affirmative defenses, respondents
asserted that (1) the petition is not duly verified by petitioner Filport which is the
real party-in-interest; (2) Filport, as represented by Cruz and Minterbro, failed to
exhaust remedies for redress within the corporation before bringing the suit; and
(3) the petition does not show that the stockholders bringing the suit are joined
as nominal parties. In support of their counterclaim, respondents averred that
Cruz filed the alleged derivative suit in bad faith and purely for harassment
purposes on account of his non-reelection to the board in the 1991 general
stockholders meeting.

As earlier narrated, the derivative suit (SEC Case No. 06-93-4491)

hibernated with the SEC for a long period of time. With the enactment of R.A. No.
8799, the case was first turned over to the RTC of Manila, Branch 14, sitting as a
corporate court. Thereafter, on respondents motion, it was eventually transferred
to the RTC of Davao City whereat it was docketed as Civil Case No. 28,552-
2001 and raffled to Branch 10 thereof.

On 10 December 2001, RTC-Davao City rendered its decision[5] in the case.

Even as it found that (1) Filports Board of Directors has the power to create
positions not provided for in the by-laws of the corporation since the board is the
governing body; and (2) the increases in the salaries of the board chairman, vice-
president, treasurer and assistant general manager are reasonable, the trial court
nonetheless rendered judgment against the respondents by ordering the
directors holding the positions of Assistant Vice President for Corporate Planning,
Special Assistant to the President and Special Assistant to the Board Chairman to
refund to the corporation the salaries they have received as such
officers considering that Filipinas Port Services is not a big corporation requiring
multiple executive positions and that said positions were just created for
accommodation. We quote the fallo of the trial courts decision.
WHEREFORE, judgment is rendered ordering:

Edgar C. Trinidad under the third and fourth causes of action to restore to the

corporation the total amount of salaries he received as assistant vice president for

corporate planning; and likewise ordering Fortunato V. de Castro and Arsenio Lopez
 Chua under the fourth cause of action to restore to the corporation the salaries they

each received as special assistants respectively to the president and board chairman. In

case of insolvency of any or all of them, the members of the board who created their

positions are subsidiarily liable.

The counter claim is dismissed.

From the adverse decision of the trial court, herein respondents went on appeal
to the CA in CA-G.R. CV No. 73827.
In its decision[6] of 19 January 2004, the CA, taking exceptions to the findings of
the trial court that the creation of the positions of Assistant Vice President for
Corporate Planning, Special Assistant to the President and Special Assistant to the
Board Chairman was merely for accommodation purposes, granted the
respondents appeal, reversed and set aside the appealed decision of the trial
court and accordingly dismissed the so-called derivative suit filed by Cruz, et
al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged

decision is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case No.

28,552-2001 with no pronouncement as to costs.

SO ORDERED.

Intrigued, and quite understandably, by the fact that, in its decision, the
CA, before proceeding to address the merits of the appeal, prefaced its
disposition with the statement reading [T]he appeal is bereft of merit,[7] thereby
contradicting the very fallo of its own decision and the discussions made in the
body thereof, respondents filed with the appellate court a Motion For Nunc Pro
TuncOrder,[8] thereunder praying that the phrase [T]he appeal is bereft of
merit, be corrected to read [T]he appeal is impressed with merit. In its
resolution[9] of 23 April 2004, the CA granted the respondents motion and
accordingly effected the desired correction.

Hence, petitioners present recourse.

Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we
shall formulate the issues as follows:

1. Whether the CA erred in holding that Filports Board of Directors

acted within its powers in creating the executive committee and
the positions of AVPs for Corporate Planning, Operations,
Finance and Administration, and those of the Special Assistants to
the President and the Board Chairman, each with corresponding
remuneration, and in increasing the salaries of the positions of
Board Chairman, Vice-President, Treasurer and Assistant General
Manager; and

2. Whether the CA erred in finding that no evidence exists to prove that

(a) the positions of AVP for Corporate Planning, Special Assistant
to the President and Special Assistant to the Board Chairman were
created merely for accommodation, and (b) the
salaries/emoluments corresponding to said positions were actually
paid to and received by the directors appointed thereto.

For their part, respondents, aside from questioning the propriety of the instant
petition as the same allegedly raises only questions of fact and not of law, also put
in issue the purported derivative nature of the main suit initiated by petitioner
Eliodoro C. Cruz allegedly in representation of and in behalf of Filport and its
stockholders.

The petition is bereft of merit.

It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules
of Court, only questions of law may be raised and passed upon by the Court.
Factual findings of the CA are binding and conclusive and will not be reviewed or
disturbed on appeal.[10] Of course, the rule is not cast in stone; it admits of certain
exceptions, such as when the findings of fact of the appellate court are at variance
with those of the trial court,[11] as here. For this reason, and for a proper and
complete resolution of the case, we shall delve into the records and reexamine the
same.
The governing body of a corporation is its board of directors. Section 23 of the
Corporation Code[12] explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held
by a board of directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock corporations),
the board of directors (or trustees, in case of non-stock corporations) has the sole
authority to determine policies, enter into contracts, and conduct the ordinary
business of the corporation within the scope of its charter, i.e., its articles of
incorporation, by-laws and relevant provisions of law.Verily, the authority of the
board of directors is restricted to the management of the regular business affairs of
the corporation, unless more extensive power is expressly conferred.

The raison detre behind the conferment of corporate powers on the board of
directors is not lost on the Court. Indeed, the concentration in the board of the
powers of control of corporate business and of appointment of corporate officers
and managers is necessary for efficiency in any large organization. Stockholders
are too numerous, scattered and unfamiliar with the business of a corporation to
conduct its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of
corporate business.[13]
In the present case, the boards creation of the positions of Assistant Vice
Presidents for Corporate Planning, Operations, Finance and Administration, and
those of the Special Assistants to the President and the Board Chairman, was in
accordance with the regular business operations of Filport as it is authorized to do
so by the corporations by-laws, pursuant to the Corporation Code.

The election of officers of a corporation is provided for under Section 25 of the

Code which reads:

Sec. 25. Corporate officers, quorum. Immediately after their election, the
directors of a corporation must formally organize by the election of a
 president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the
by-laws. (Emphasis supplied.)

In turn, the amended Bylaws of Filport[14] provides the following:

Officers of the corporation, as provided for by the by-laws,

shall be elected by the board of directors at their first meeting after the
election of Directors. xxx

The officers of the corporation shall be a Chairman of the Board,

President, a Vice-President, a Secretary, a Treasurer, a General Manager
and such other officers as the Board of Directors may from time to
time provide, and these officers shall be elected to hold office until their
successors are elected and qualified. (Emphasis supplied.)

Likewise, the fixing of the corresponding remuneration for the positions in

question is provided for in the same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the
officers and agents of the corporation. (Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its
board of directors of an executive committee. Under Section 35[15] of the
Corporation Code, the creation of an executive committee must be provided for in
the bylaws of the corporation.

Notwithstanding the silence of Filports bylaws on the matter, we cannot rule

that the creation of the executive committee by the board of directors is illegal or
unlawful. One reason is the absence of a showing as to the true nature and
functions of said executive committee considering that the executive committee,
referred to in Section 35 of the Corporation Code which is as powerful as the board
of directors and in effect acting for the board itself, should be distinguished from
other committees which are within the competency of the board to create at
anytime and whose actions require ratification and confirmation by the
board.[16] Another reason is that, ratiocinated by both the two (2) courts below, the
Board of Directors has the power to create positions not provided for in Filports
bylaws since the board is the corporations governing body, clearly upholding the
power of its board to exercise its prerogatives in managing the business affairs of
the corporation.

As well, it may not be amiss to point out that, as testified to and admitted by
petitioner Cruz himself, it was during his incumbency as Filport president that the
executive committee in question was created, and that he was even the one who
moved for the creation of the positions of the AVPs for Operations, Finance and
Administration. By his acquiescence and/or ratification of the creation of the
aforesaid offices, Cruz is virtually precluded from suing to declare such acts of the
board as invalid or illegal. And it makes no difference that he sues in behalf of
himself and of the other stockholders. Indeed, as his voice was not heard in protest
when he was still Filports president, raising a hue and cry only now leads to the
inevitable conclusion that he did so out of spite and resentment for his non-
reelection as president of the corporation.

With regard to the increased emoluments of the Board Chairman, Vice-President,

Treasurer and Assistant General Manager which are supposedly disproportionate to
the volume and nature of their work, the Court, after a judicious scrutiny of the
increase vis--vis the value of the services rendered to the corporation by the
officers concerned, agrees with the findings of both the trial and appellate courts as
to the reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence as to
the alleged acts of mismanagement by the then incumbent board. A perusal of the
records, however, reveals that petitioners merely relied on the testimony of Cruz in
support of their bold claim of mismanagement. To the mind of the Court, Cruz
testimony on the matter of mismanagement is bereft of any foundation. As it were,
his testimony consists merely of insinuations of alleged wrongdoings on the part of
the board. Without more, petitioners posture of mismanagement must fall and with
it goes their prayer to hold the respondents liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement resulting
to corporate damages and/or business losses, still the respondents may not be
held liable in the absence, as here, of a showing of bad faith in doing the acts
complained of.
If the cause of the losses is merely error in business judgment, not amounting to
bad faith or negligence, directors and/or officers are not liable.[17] For them to be
held accountable, the mismanagement and the resulting losses on account
thereof are not the only matters to be proven; it is likewise necessary to show
that the directors and/or officers acted in bad faith and with malice in doing the
assailed acts. Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill-will
partaking of the nature of fraud.[18] We have searched the records and nowhere
do we find a dishonest purpose or some moral obliquity, or conscious doing of a
wrong on the part of the respondents that partakes of the nature of fraud.
We thus extend concurrence to the following findings of the CA, affirmatory of
those of the trial court:

xxx As a matter of fact, it was during the term of appellee Cruz, as president and

director, that the executive committee was created. What is more, it was appellee

himself who moved for the creation of the positions of assistant vice presidents for

operations, for finance, and for administration. He should not be heard to complain

thereafter for similar corporate acts.

The increase in the salaries of the board chairman, president, treasurer, and assistant

general manager are indeed reasonable enough in view of the responsibilities assigned

to them, and the special knowledge required, to be able to effectively discharge their

respective functions and duties.

Surely, factual findings of trial courts, especially when affirmed by the CA, are
binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court parted
ways. We refer to the accommodation angle.

The trial court was with petitioner Cruz in saying that the creation of the positions
of the three (3) AVPs for Corporate Planning, Special Assistant to the President
and Special Assistant to the Board Chairman, each with a salary of P13,050.00 a
month, was merely for accommodation purposes considering that Filport is not a
big corporation requiring multiple executive positions. Hence, the trial courts
order for said officers to return the amounts they received as compensation.

On the other hand, the CA took issue with the trial court and ruled that Cruzs
accommodation theory is not based on facts and without any evidentiary
substantiation.

We concur with the line of the appellate court. For truly, aside from Cruzs bare and
self-serving testimony, no other evidence was presented to show the fact of
accommodation. By itself, the testimony of Cruz is not enough to support his claim
that accommodation was the underlying factor behind the creation of the
aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not constitute evidence
adequate to support a conclusion. It is basic in the rule of evidence that he who
alleges a fact bears the burden of proving it by the quantum of proof required.
Bare allegations, unsubstantiated by evidence, are not equivalent to proof under
the Rules of Court.[19] The party having the burden of proof must establish his case
by a preponderance of evidence.[20]

Besides, the determination of the necessity for additional offices and/or positions
in a corporation is a management prerogative which courts are not wont to review
in the absence of any proof that such prerogative was exercised in bad faith or with
malice.
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport
were the Court to determine the propriety or impropriety of the creation of offices
therein and the grant of salary increases to officers thereof. Such are corporate
and/or business decisions which only the corporations Board of Directors can
determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,[21] the Court unequivocally
held:
Questions of policy or of management are left solely to the honest
decision of the board as the business manager of the corporation, and the
court is without authority to substitute its judgment for that of the board,
and as long as it acts in good faith and in the exercise of honest judgment
in the interest of the corporation, its orders are not reviewable by the
courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA went
beyond the issues raised in the court of origin when it ruled on the absence of
receipt of actual payment of the salaries/emoluments pertaining to the positions
of Assistant Vice-President for Corporate Planning, Special Assistant to the Board
Chairman and Special Assistant to the President. Petitioners insist that the issue
of nonpayment was never raised by the respondents before the trial court, as in
fact, the latter allegedly admitted the same in their Answer With Counterclaim.
We are not persuaded.

By claiming that Filport suffered damages because the directors appointed to the
assailed positions are not doing anything to deserve their compensation, petitioners
are saddled with the burden of proving that salaries were actually paid. Since the
trial court, in effect, found that the petitioners successfully proved payment of the
salaries when it directed the reimbursements of the same, respondents necessarily
have to raise the issue on appeal. And the CA rightly resolved the issue when it
found that no evidence of actual payment of the salaries in question was actually
adduced. Respondents alleged admission of the fact of payment cannot be inferred
from a reading of the pertinent portions of the parties respective initiatory
pleadings. Respondents allegations in their Answer With Counterclaim that the
officers corresponding to the positions created performed the work called for in
their positions or deserve their compensation, cannot be interpreted to mean that
they were actually paid such compensation. Directly put, the averment that one
deserves ones compensation does not necessarily carry the implication that such
compensation was actually remitted or received. And because payment was not
duly proven, there is no evidentiary or factual basis for the trial court to direct
respondents to make reimbursements thereof to the corporation.
This brings us to the respondents claim that the case filed by the petitioners
before the SEC, which eventually landed in RTC-Davao City as Civil Case No.
28,552-2001, is not a derivative suit, as maintained by the petitioners.

We sustain the petitioners.

Under the Corporation Code, where a corporation is an injured party, its

power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit in behalf of the
corporation in order to protect or vindicate corporate rights whenever the
officials of the corporation refuse to sue, or when a demand upon them to file the
necessary action would be futile because they are the ones to be sued, or because
they hold control of the corporation.[22] In such actions, the corporation is the real
party-in-interest while the suing stockholder, in behalf of the corporation, is only
a nominal party.[23]

Here, the action below is principally for damages resulting from alleged
mismanagement of the affairs of Filport by its directors/officers, it being alleged
that the acts of mismanagement are detrimental to the interests of Filport. Thus,
the injury complained of primarily pertains to the corporation so that the suit for
relief should be by the corporation. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may
validly institute a derivative suit to vindicate the alleged corporate injury, in which
case Cruz is only a nominal party while Filport is the real party-in-interest. For
sure, in the prayer portion of petitioners petition before the SEC, the reliefs
prayed were asked to be made in favor of Filport.

Besides, the requisites before a derivative suit can be filed by a stockholder

are present in this case, to wit:
 a) the party bringing suit should be a shareholder as of the time of the
act or transaction complained of, the number of his shares not
being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a

demand on the board of directors for the appropriate relief but
the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the

wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the
suit.[24]

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought

without success to have its board of directors remedy what he perceived as
wrong when he wrote a letter requesting the board to do the necessary action in
his complaint; and (3) the alleged wrong was in truth a wrong against the
stockholders of the corporation generally, and not against Cruz or Minterbro, in
particular. In the end, it is Filport, not Cruz which directly stands to benefit from
the suit. And while it is true that the complaining stockholder must show to the
satisfaction of the court that he has exhausted all the means within his reach to
attain within the corporation itself the redress for his grievances, or actions in
conformity to his wishes, nonetheless, where the corporation is under the
complete control of the principal defendants, as here, there is no necessity of
making a demand upon the directors. The reason is obvious: a demand upon the
board to institute an action and prosecute the same effectively would have been
useless and an exercise in futility. In fine, we rule and so hold that the petition
filed with the SEC at the instance of Cruz, which ultimately found its way to the
RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which Cruz
has the necessary legal standing to institute.

WHEREFORE, the petition is DENIED and the challenged decision of the CA

is AFFIRMED in all respects.
No pronouncement as to costs.

SO ORDERED.
 FIRST DIVISION

MANILA METAL CONTAINER G.R. No. 166862

CORPORATION,
Petitioner,
Present:
REYNALDO C. TOLENTINO,
Intervenor, PANGANIBAN, C.J., Chairperson,
YNARES-SANTIAGO,
AUSTRIA-MARTINEZ,
- versus - CALLEJO, SR., and
CHICO-NAZARIO, JJ.
PHILIPPINE NATIONAL BANK,
Respondent,
DMCI-PROJECT DEVELOPERS, Promulgated:
INC.,
Intervenor. December 20, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CALLEJO, SR., J.:

 Before us is a petition for review on certiorari of the Decision[1] of the Court
of Appeals (CA) in CA-G.R. No. 46153 which affirmed the decision[2] of the
Regional Trial Court (RTC), Branch 71, Pasig City, in Civil Case No. 58551, and its
Resolution[3] denying the motion for reconsideration filed by petitioner Manila
Metal Container Corporation (MMCC).

The Antecedents

Petitioner was the owner of a 8,015 square meter parcel of land located
in Mandaluyong (now a City), Metro Manila. The property was covered by
Transfer Certificate of Title (TCT) No. 332098 of the Registry of Deeds of Rizal. To
secure a P900,000.00 loan it had obtained from respondent Philippine National
Bank (PNB), petitioner executed a real estate mortgage over the lot.Respondent
PNB later granted petitioner a new credit accommodation of P1,000,000.00; and,
on November 16, 1973, petitioner executed an Amendment[4] of Real Estate
Mortgage over its property. On March 31, 1981, petitioner secured another loan
of P653,000.00 from respondent PNB, payable in quarterly installments
of P32,650.00, plus interests and other charges.[5]

On August 5, 1982, respondent PNB filed a petition for extrajudicial

foreclosure of the real estate mortgage and sought to have the property sold at
public auction for P911,532.21, petitioners outstanding obligation to respondent
PNB as of June 30, 1982,[6] plus interests and attorneys fees.

After due notice and publication, the property was sold at public auction
on September 28, 1982 where respondent PNB was declared the winning bidder
for P1,000,000.00. The Certificate of Sale[7] issued in its favor was registered with
the Office of the Register of Deeds of Rizal, and was annotated at the dorsal
portion of the title on February 17, 1983. Thus, the period to redeem the property
was to expire on February 17, 1984.
Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that
it be granted an extension of time to redeem/repurchase the property.[8] In its
reply dated August 30, 1983, respondent PNB informed petitioner that the
request had been referred to its Pasay City Branch for appropriate action and
recommendation.[9]

In a letter[10] dated February 10, 1984, petitioner reiterated its request for a one
year extension from February 17, 1984 within which to redeem/repurchase the
property on installment basis. It reiterated its request to repurchase the property
on installment.[11] Meanwhile, some PNB Pasay City Branch personnel informed
petitioner that as a matter of policy, the bank does not accept partial
redemption.[12]

Since petitioner failed to redeem the property, the Register of Deeds

cancelled TCT No. 32098 on June 1, 1984, and issued a new title in favor of
respondent PNB.[13] Petitioners offers had not yet been acted upon by respondent
PNB.

Meanwhile, the Special Assets Management Department (SAMD) had prepared a

statement of account, and as of June 25, 1984 petitioners obligation amounted
to P1,574,560.47. This included the bid price of P1,056,924.50, interest, advances
of insurance premiums, advances on realty taxes, registration expenses,
miscellaneous expenses and publication cost.[14] When apprised of the statement
of account, petitioner remitted P725,000.00 to respondent PNB as deposit to
repurchase, and Official Receipt No. 978191 was issued to it.[15]

In the meantime, the SAMD recommended to the management of respondent

PNB that petitioner be allowed to repurchase the property for P1,574,560.00. In a
letter dated November 14, 1984, the PNB management informed petitioner that
it was rejecting the offer and the recommendation of
the SAMD. It was suggested that petitioner purchase the property
for P2,660,000.00, its minimum market value. Respondent PNB gave petitioner
until December 15, 1984 to act on the proposal; otherwise, its P725,000.00
deposit would be returned and the property would be sold to other interested
buyers.[16]

Petitioner, however, did not agree to respondent PNBs proposal. Instead, it

wrote another letter dated December 12, 1984 requesting for a
reconsideration. Respondent PNB replied in a letter dated December 28, 1984,
wherein it reiterated its proposal that petitioner purchase the property
for P2,660,000.00. PNB again informed petitioner that it would return the deposit
should petitioner desire to withdraw its offer to purchase the
property.[17] On February 25, 1985, petitioner, through counsel, requested that
PNB reconsider its letter dated December 28, 1984. Petitioner declared that it had
already agreed to the SAMDs offer to purchase the property for P1,574,560.47,
and that was why it had paid P725,000.00. Petitioner warned respondent PNB
that it would seek judicial recourse should PNB insist on the position.[18]

On June 4, 1985, respondent PNB informed petitioner that the PNB Board
of Directors had accepted petitioners offer to purchase the property, but
for P1,931,389.53 in cash less the P725,000.00 already deposited with it.[19] On
page two of the letter was a space above the typewritten name of petitioners
President, Pablo Gabriel, where he was to affix his signature. However, Pablo
Gabriel did not conform to the letter but merely indicated therein that he had
received it.[20] Petitioner did not respond, so PNB requested petitioner in a letter
dated June 30, 1988 to submit an amended offer to repurchase.

Petitioner rejected respondents proposal in a letter dated July 14, 1988. It

maintained that respondent PNB had agreed to sell the property
for P1,574,560.47, and that since its P725,000.00 downpayment had been
accepted, respondent PNB was proscribed from increasing the purchase price of
the property.[21] Petitioner averred that it had a net balance payable in the
amount of P643,452.34. Respondent PNB, however, rejected petitioners offer to
pay the balance of P643,452.34 in a letter dated August 1, 1989.[22]
 On August 28, 1989, petitioner filed a complaint against respondent PNB
for Annulment of Mortgage and Mortgage Foreclosure, Delivery of Title, or
Specific Performance with Damages. To support its cause of action for specific
performance, it alleged the following:

34. As early as June 25, 1984, PNB had accepted the down payment from Manila Metal
in the substantial amount of P725,000.00 for the redemption/repurchase price
of P1,574,560.47 as approved by its SMAD and considering the reliance made by
Manila Metal and the long time that has elapsed, the approval of the higher
management of the Bank to confirm the agreement of its SMAD is clearly
a potestative condition which cannot legally prejudice Manila Metal which has acted
and relied on the approval of SMAD. The Bank cannot take advantage of a condition
which is entirely dependent upon its own will after accepting and benefiting from
the substantial payment made by Manila Metal.

35. PNB approved the repurchase price of P1,574,560.47 for which it

accepted P725,000.00 from Manila Metal. PNB cannot take advantage of its own
delay and long inaction in demanding a higher amount based on unilateral
computation of interest rate without the consent of Manila Metal.

Petitioner later filed an amended complaint and supported its claim for
damages with the following arguments:

36. That in order to protect itself against the wrongful and malicious acts of the
defendant Bank, plaintiff is constrained to engage the services of counsel at an
agreed fee of P50,000.00 and to incur litigation expenses of at least P30,000.00,
which the defendant PNB should be condemned to pay the plaintiff Manila Metal.

37. That by reason of the wrongful and malicious actuations of defendant PNB, plaintiff
Manila Metal suffered besmirched reputation for which defendant PNB is liable for
moral damages of at least P50,000.00.

38. That for the wrongful and malicious act of defendant PNB which are highly
reprehensible, exemplary damages should be awarded in favor of the plaintiff by
way of example or correction for the public good of at least P30,000.00.[23]
 Petitioner prayed that, after due proceedings, judgment be rendered in its
favor, thus:

a) Declaring the Amended Real Estate Mortgage (Annex A) null and void and without
any legal force and effect.

b) Declaring defendants acts of extra-judicially foreclosing the mortgage over plaintiffs

property and setting it for auction sale null and void.

c) Ordering the defendant Register of Deeds to cancel the new title issued in the name
of PNB (TCT NO. 43792) covering the property described in paragraph 4 of the
Complaint, to reinstate TCT No. 37025 in the name of Manila Metal and to cancel
the annotation of the mortgage in question at the back of the TCT
No. 37025 described in paragraph 4 of this Complaint.

d) Ordering the defendant PNB to return and/or deliver physical possession of the
TCT No. 37025 described in paragraph 4 of this Complaint to the plaintiff Manila
Metal.

e) Ordering the defendant PNB to pay the plaintiff Manila Metals actual damages,
moral and exemplary damages in the aggregate amount of not less than P80,000.00
as may be warranted by the evidence and fixed by this Honorable Court in the
exercise of its sound discretion, and attorneys fees of P50,000.00 and litigation
expenses of at least P30,000.00 as may be proved during the trial, and costs of suit.

Plaintiff likewise prays for such further reliefs which may be deemed just and
equitable in the premises.[24]

In its Answer to the complaint, respondent PNB averred, as a special and

affirmative defense, that it had acquired ownership over the property after the
period to redeem had elapsed. It claimed that no contract of sale was perfected
between it and petitioner after the period to redeem the property had expired.
 During pre-trial, the parties agreed to submit the case for decision, based
on their stipulation of facts.[25] The parties agreed to limit the issues to the
following:

1. Whether or not the June 4, 1985 letter of the defendant approving/accepting

plaintiffs offer to purchase the property is still valid and legally enforceable.

2. Whether or not the plaintiff has waived its right to purchase the property when it
failed to conform with the conditions set forth by the defendant in its letter
dated June 4, 1985.

3. Whether or not there is a perfected contract of sale between the parties.[26]

While the case was pending, respondent PNB demanded, on September 20,
1989, that petitioner vacate the property within 15 days from notice,[27] but
petitioners refused to do so.

On March 18, 1993, petitioner offered to repurchase the property

for P3,500,000.00.[28] The offer was however rejected by respondent PNB, in a
letter dated April 13, 1993. According to it, the prevailing market value of the
property was approximately P30,000,000.00, and as a matter of policy, it could
not sell the property for less than its market value.[29] On June 21, 1993, petitioner
offered to purchase the property for P4,250,000.00 in cash.[30] The offer was again
rejected by respondent PNB on September 13, 1993.[31]

On May 31, 1994, the trial court rendered judgment dismissing the
amended complaint and respondent PNBs counterclaim. It ordered respondent
PNB to refund the P725,000.00 deposit petitioner had made.[32] The trial court
ruled that there was no perfected contract of sale between the parties; hence,
petitioner had no cause of action for specific performance against respondent.The
trial court declared that respondent had rejected petitioners offer to repurchase
the property. Petitioner, in turn, rejected the terms and conditions contained in
the June 4, 1985 letter of the SAMD. While petitioner had offered to repurchase
the property per its letter of
July 14, 1988, the amount of P643,422.34 was way below the P1,206,389.53
which respondent PNB had demanded. It further declared that the P725,000.00
remitted by petitioner to respondent PNB on June 4, 1985 was a deposit, and not
a downpayment or earnest money.

On appeal to the CA, petitioner made the following allegations:

THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEES LETTER DATED 4

JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-APPELLANTS OFFER TO PURCHASE THE
SUBJECT PROPERTY IS NOT VALID AND ENFORCEABLE.

II

THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED CONTRACT
OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE.

III

THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT WAIVED ITS RIGHT
TO PURCHASE THE SUBJECT PROPERTY WHEN IT FAILED TO CONFORM WITH
CONDITIONS SET FORTH BY DEFENDANT-APPELLEE IN ITS LETTER DATED 4 JUNE 1985.

IV

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS THE DEFENDANT-
APPELLEE WHICH RENDERED IT DIFFICULT IF NOT IMPOSSIBLE FOR PLAINTIFF-
APPELLANT TO COMPLETE THE BALANCE OF THEIR PURCHASE PRICE.

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE WAS NO VALID
RESCISSION OR CANCELLATION OF SUBJECT CONTRACT OF REPURCHASE.
 VI

THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND REFUSED TO
SUBMIT THE AMENDED REPURCHASE OFFER.

VII

THE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT OF PLAINTIFF-

APPELLANT.

VIII

THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ACTUAL, MORAL

AND EXEMPLARY DAMAGES, ATTOTRNEYS FEES AND LITIGATION EXPENSES.[33]

Meanwhile, on June 17, 1993, petitioners Board of Directors approved

Resolution No. 3-004, where it waived, assigned and transferred its rights over
the property covered by TCT No. 33099 and TCT No. 37025 in favor
of Bayani Gabriel, one of its Directors.[34] Thereafter, Bayani Gabriel executed a
Deed of Assignment over 51% of the ownership and management of the property
in favor of Reynaldo Tolentino, who later moved for leave to intervene as
plaintiff-appellant. On July 14, 1993, the CA issued a resolution granting the
motion,[35] and likewise granted the motion of Reynaldo Tolentino substituting
petitioner MMCC, as plaintiff-appellant, and his motion to withdraw as
intervenor.[36]

The CA rendered judgment on May 11, 2000 affirming the decision of the
[37]
RTC. It declared that petitioner obviously never agreed to the selling price
proposed by respondent PNB (P1,931,389.53) since petitioner had kept on
insisting that the selling price should be lowered to P1,574,560.47. Clearly
therefore, there was no meeting of the minds between the parties as to the price
or consideration of the sale.

The CA ratiocinated that petitioners original offer to purchase the subject

property had not been accepted by respondent PNB. In fact, it made a counter-
offer through its June 4, 1985 letter specifically on the selling price; petitioner did
not agree to the counter-offer; and the negotiations did not prosper. Moreover,
petitioner did not pay the balance of the purchase price within the sixty-day
period set in the June 4, 1985 letter of respondent PNB. Consequently, there was
no perfected contract of sale, and as such, there was no contract to rescind.

According to the appellate court, the claim for damages and the
counterclaim were correctly dismissed by the court a quo for no evidence was
presented to support it. Respondent PNBs letter dated June 30, 1988 cannot
revive the failed negotiations between the parties. Respondent PNB merely asked
petitioner to submit an amended offer to repurchase. While petitioner reiterated
its request for a lower selling price and that the balance of the repurchase be
reduced, however, respondent rejected the proposal in a letter dated August 1,
1989.

Petitioner filed a motion for reconsideration, which the CA likewise denied.

Thus, petitioner filed the instant petition for review on certiorari, alleging that:

I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THERE
IS NO PERFECTED CONTRACT OF SALE BETWEEN THE PETITIONER AND
RESPONDENT.

II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE
AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER IS NOT AN EARNEST
MONEY.

III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE
FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY ITS CONFORMITY TO THE
TERMS CONTAINED IN PNBS JUNE 4, 1985 LETTER MEANS THAT THERE WAS NO
VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-PAYMENT OF

THE PETITIONER-APPELLANT OF THE BALANCE OF THE OFFERED PRICE IN THE
 LETTER OF PNB DATED JUNE 4, 1985, WITHIN SIXTY (60) DAYS FROM NOTICE OF
APPROVAL CONSTITUTES NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF
SALE BETWEEN THE PARTIES.

V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE LETTERS OF
PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE 21, 1993, OFFERING
TO BUY THE SUBJECT PROPERTY AT DIFFERENT AMOUNT WERE PROOF THAT
THERE IS NO PERFECTED CONTRACT OF SALE.[38]

The threshold issue is whether or not petitioner and respondent PNB had entered
into a perfected contract for petitioner to repurchase the property from
respondent.

Petitioner maintains that it had accepted respondents offer made through

the SAMD, to sell the property for P1,574,560.00. When the acceptance was
made in its letter dated June 25, 1984; it then deposited P725,000.00 with the
SAMD as partial payment, evidenced by Receipt No. 978194 which respondent
had issued. Petitioner avers that the SAMDs acceptance of the deposit amounted
to an acceptance of its offer to repurchase. Moreover, as gleaned from the letter
of SAMD dated June 4, 1985, the PNB Board of Directors had approved
petitioners offer to purchase the property. It claims that this was
the suspensive condition, the fulfillment of which gave rise to the
contract. Respondent could no longer unilaterally withdraw its offer to sell the
property for P1,574,560.47, since the acceptance of the offer resulted in a
perfected contract of sale; it was obliged to remit to respondent the balance of
the original purchase price of P1,574,560.47, while respondent was obliged to
transfer ownership and deliver the property to petitioner, conformably with
Article 1159 of the New Civil Code.

Petitioner posits that respondent was proscribed from increasing the

interest rate after it had accepted respondents offer to sell the property
for P1,574,560.00. Consequently, respondent could no longer validly make a
counter-offer of P1,931,789.88 for the purchase of the property. It likewise
maintains that, although the P725,000.00 was considered as deposit for the
repurchase of the property in the receipt issued by the SAMD, the amount
constitutes earnest money as contemplated in Article 1482 of the New Civil
Code. Petitioner cites the rulings of this Court
[39] [40]
in Villonco v. Bormaheco and Topacio v. Court of Appeals.

Petitioner avers that its failure to append its conformity to the June 4, 1984 letter
of respondent and its failure to pay the balance of the price as fixed by
respondent within the 60-day period from notice was to protest respondents
breach of its obligation to petitioner. It did not amount to a rejection of
respondents offer to sell the property since respondent was merely seeking to
enforce its right to pay the balance of P1,570,564.47. In any event, respondent
had the option either to accept the balance of the offered price or to cause the
rescission of the contract.

Petitioners letters dated March 18, 1993 and June 21, 1993 to respondent during
the pendency of the case in the RTC were merely to compromise the pending
lawsuit, they did not constitute separate offers to repurchase the property. Such
offer to compromise should not be taken against it, in accordance with Section
27, Rule 130 of the Revised Rules of Court.

For its part, respondent contends that the parties never graduated from the
negotiation stage as they could not agree on the amount of the repurchase price
of the property. All that transpired was an exchange of proposals and counter-
proposals, nothing more. It insists that a definite agreement on the amount and
manner of payment of the price are essential elements in the formation of a
binding and enforceable contract of sale. There was no such agreement in this
case. Primarily, the concept of suspensive condition signifies a future and
uncertain event upon the fulfillment of which the obligation becomes effective. It
clearly presupposes the existence of a valid and binding agreement,
the effectivity of which is subordinated to its fulfillment. Since there is no
perfected contract in the first place, there is no basis for the application of the
principles governing suspensive conditions.
According to respondent, the Statement of Account prepared by SAMD as of June
25, 1984 cannot be classified as a counter-offer; it is simply a recital of its total
monetary claims against petitioner.Moreover, the amount stated therein could
not likewise be considered as the counter-offer since as admitted by petitioner, it
was only recommendation which was subject to approval of the PNB Board of
Directors.

Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a

perfected sale contract. As gleaned from the parties Stipulation of Facts during
the proceedings in the court a quo, the amount is merely an acknowledgment of
the receipt of P725,000.00 as deposit to repurchase the property. The deposit
of P725,000.00 was accepted by respondent on the condition that the purchase
price would still be approved by its Board of Directors. Respondent maintains that
its acceptance of the amount was qualified by that condition, thus not
absolute. Pending such approval, it cannot be legally claimed that respondent is
already bound by any contract of sale with petitioner.

According to respondent, petitioner knew that the SAMD has no capacity to

bind respondent and that its authority is limited to administering, managing and
preserving the properties and other special assets of PNB. The SAMD does not
have the power to sell, encumber, dispose of, or otherwise alienate the assets,
since the power to do so must emanate from its Board of Directors. The SAMD
was not authorized by respondents Board to enter into contracts of sale with
third persons involving corporate assets. There is absolutely nothing on record
that respondent authorized the SAMD, or made it appear to petitioner that it
represented itself as having such authority.

Respondent reiterates that SAMD had informed petitioner that its offer to
repurchase had been approved by the Board subject to the condition, among
others, that the selling price shall be the total banks claim as of documentation
date x x x payable in cash (P725,000.00 already deposited)
within 60 days from notice of approval. A new Statement of Account was
attached therein indicating the total banks claim to be P1,931,389.53 less deposit
of P725,000.00, or P1,206,389.00.Furthermore, while respondents Board of
Directors accepted petitioners offer to repurchase the property, the acceptance
was qualified, in that it required a higher sale price and subject to specified terms
and conditions enumerated therein. This qualified acceptance was in effect a
counter-offer, necessitating petitioners acceptance in return.

The Ruling of the Court

The ruling of the appellate court that there was no perfected contract of sale
between the parties on June 4, 1985 is correct.

A contract is a meeting of minds between two persons whereby one binds

himself, with respect to the other, to give something or to render some
service.[41] Under Article 1318 of the New Civil Code, there is no contract unless
the following requisites concur:

(1) Consent of the contracting parties;

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

(3) Cause of the obligation which is established.

Contracts are perfected by mere consent which is manifested by the meeting of

the offer and the acceptance upon the thing and the cause which are to
constitute the contract.[42] Once perfected, they bind other contracting parties
and the obligations arising therefrom have the form of law between the parties
and should be complied with in good faith. The parties are bound not only to the
fulfillment of what has been expressly stipulated but also to the consequences
which, according to their nature, may be in keeping with good faith, usage and
law.[43]
By the contract of sale, one of the contracting parties obligates himself to transfer
the ownership of and deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.[44] The absence of any of the essential
elements will negate the existence of a perfected contract of sale. As the Court
ruled in Boston Bank of the Philippines v. Manalo:[45]

A definite agreement as to the price is an essential element of a binding agreement to

sell personal or real property because it seriously affects the rights and obligations of
the parties. Price is an essential element in the formation of a binding and enforceable
contract of sale. The fixing of the price can never be left to the decision of one of the
contracting parties. But a price fixed by one of the contracting parties, if accepted by the
other, gives rise to a perfected sale.[46]

A contract of sale is consensual in nature and is perfected upon mere meeting of

the minds. When there is merely an offer by one party without acceptance of the
other, there is no contract.[47] When the contract of sale is not perfected, it
cannot, as an independent source of obligation, serve as a binding juridical
relation between the parties.[48]

In San Miguel Properties Philippines, Inc. v. Huang,[49] the Court ruled that the
stages of a contract of sale are as follows: (1) negotiation, covering the period
from the time the prospective contracting parties indicate interest in the contract
to the time the contract is perfected; (2) perfection, which takes place upon the
concurrence of the essential elements of the sale which are the meeting of the
minds of the parties as to the object of the contract and upon the price; and
(3) consummation, which begins when the parties perform their respective
undertakings under the contract of sale, culminating in the extinguishment
thereof.

A negotiation is formally initiated by an offer, which, however, must be

certain.[50] At any time prior to the perfection of the contract, either negotiating
party may stop the negotiation. At this stage, the offer may be withdrawn; the
withdrawal is effective immediately after its manifestation. To convert the offer
into a contract, the acceptance must be absolute and must not qualify the terms
of the offer; it must be plain, unequivocal, unconditional and without variance of
any sort from the proposal. In Adelfa Properties, Inc. v. Court of Appeals,[51] the
Court ruled that:

x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some acts
or conduct communicated to the offeror, it may be shown by acts, conduct, or words of
the accepting party that clearly manifest a present intention or determination to accept
the offer to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words
of a party recognizing the existence of the contract of sale.[52]

A qualified acceptance or one that involves a new proposal constitutes a counter-

offer and a rejection of the original offer. A counter-offer is considered in law, a
rejection of the original offer and an attempt to end the negotiation between the
parties on a different basis.[53] Consequently, when something is desired which is
not exactly what is proposed in the offer, such acceptance is not sufficient to
guarantee consent because any modification or variation from the terms of the
offer annuls the offer.[54] The acceptance must be identical in all respects with
that of the offer so as to produce consent or meeting of the minds.

In this case, petitioner had until February 17, 1984 within which to redeem
the property. However, since it lacked the resources, it requested for more time
to redeem/repurchase the property under such terms and conditions agreed
upon by the parties.[55] The request, which was made through a letter
dated August 25, 1983, was referred to the respondents main branch for
appropriate action.[56] Before respondent could act on the request, petitioner
again wrote respondent as follows:

1. Upon approval of our request, we will pay your goodselves ONE HUNDRED & FIFTY
THOUSAND PESOS (P150,000.00);

2. Within six months from date of approval of our request, we will pay another FOUR
HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and
 3. The remaining balance together with the interest and other expenses that will be
incurred will be paid within the last six months of the one year grave period
requested for.[57]

When the petitioner was told that respondent did not allow partial
redemption,[58] it sent a letter to respondents President reiterating its offer to
purchase the property.[59] There was no response to petitioners letters dated
February 10 and 15, 1984.

The statement of account prepared by the SAMD stating that the net claim
of respondent as of June 25, 1984 was P1,574,560.47 cannot be considered an
unqualified acceptance to petitioners offer to purchase the property. The
statement is but a computation of the amount which petitioner was obliged to
pay in case respondent would later agree to sell the property, including interests,
advances on insurance premium, advances on realty taxes, publication cost,
registration expenses and miscellaneous expenses.

There is no evidence that the SAMD was authorized by respondents Board

of Directors to accept petitioners offer and sell the property
for P1,574,560.47. Any acceptance by the SAMD of petitioners offer would not
bind respondent. As this Court ruled in AF Realty Development, Inc.
vs. Diesehuan Freight Services, Inc.:[60]

Section 23 of the Corporation Code expressly provides that the corporate

powers of all corporations shall be exercised by the board of directors. Just as a natural
person may authorize another to do certain acts in his behalf, so may the board of
directors of a corporation validly delegate some of its functions to individual officers or
agents appointed by it. Thus, contracts or acts of a corporation must be made either by
the board of directors or by a corporate agent duly authorized by the board. Absent
such valid delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or connected
 with the performance of authorized duties of such director, are held not binding on the
corporation.

Thus, a corporation can only execute its powers and transact its business
through its Board of Directors and through its officers and agents when
authorized by a board resolution or its by-laws.[61]

It appears that the SAMD had prepared a recommendation for respondent

to accept petitioners offer to repurchase the property even beyond the one-year
period; it recommended that petitioner be allowed to redeem the property and
pay P1,574,560.00 as the purchase price. Respondent later approved the
recommendation that the property be sold to petitioner. But instead of
the P1,574,560.47 recommended by the SAMD and to which petitioner had
previously conformed, respondent set the purchase price at P2,660,000.00. In
fine, respondents acceptance of petitioners offer was qualified, hence can be at
most considered as a counter-offer. If petitioner had accepted this counter-offer,
a perfected contract of sale would have arisen; as it turns out, however,
petitioner merely sought to have the counter-offer reconsidered. This request for
reconsideration would later be rejected by respondent.

We do not agree with petitioners contention that the P725,000.00 it had

remitted to respondent was earnest money which could be considered as proof of
the perfection of a contract of sale under Article 1482 of the New Civil Code. The
provision reads:

ART. 1482. Whenever earnest money is given in a contract of sale, it shall be

considered as part of the price and as proof of the perfection of the contract.

This contention is likewise negated by the stipulation of facts which the

parties entered into in the trial court:
 8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB
prepared an updated Statement of Account showing MMCCs total liability to PNB as of
June 25, 1984 to be P1,574,560.47 and recommended this amount as the repurchase
price of the subject property.

9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase

the property. The deposit of P725,000 was accepted by PNB on the condition that the
purchase price is still subject to the approval of the PNB Board.[62]

Thus, the P725,000.00 was merely a deposit to be applied as part of the

purchase price of the property, in the event that respondent would approve the
recommendation of SAMD for respondent to accept petitioners offer to purchase
the property for P1,574,560.47. Unless and until the respondent accepted the
offer on these terms, no perfected contract of sale would arise. Absent proof of
the concurrence of all the essential elements of a contract of sale, the giving of
earnest money cannot establish the existence of a perfected contract of sale.[63]

It appears that, per its letter to petitioner dated June 4, 1985, the respondent had
decided to accept the offer to purchase the property for P1,931,389.53. However,
this amounted to an amendment of respondents qualified acceptance, or an
amended counter-offer, because while the respondent lowered the purchase
price, it still declared that its acceptance was subject to the following terms and
conditions:

1. That the selling price shall be the total Banks claim as of documentation date (pls.
see attached statement of account as of 5-31-85), payable in cash (P725,000.00
already deposited) within sixty (60) days from notice of approval;
 2. The Bank sells only whatever rights, interests and participation it may have in the
property and you are charged with full knowledge of the nature and extent of said
rights, interests and participation and waive your right to warranty against
eviction.

3. All taxes and other government imposts due or to become due on the property, as
well as expenses including costs of documents and science stamps, transfer fees,
etc., to be incurred in connection with the execution and registration of all
covering documents shall be borne by you;

4. That you shall undertake at your own expense and account the ejectment of the
occupants of the property subject of the sale, if there are any;

5. That upon your failure to pay the balance of the purchase price within sixty (60)
days from receipt of advice accepting your offer, your deposit shall be forfeited
and the Bank is thenceforth authorized to sell the property to other interested
parties.

6. That the sale shall be subject to such other terms and conditions that the Legal
Department may impose to protect the interest of the Bank.[64]

It appears that although respondent requested petitioner to conform to its

amended counter-offer, petitioner refused and instead requested respondent to
reconsider its amended counter-offer.Petitioners request was ultimately rejected
and respondent offered to refund its P725,000.00 deposit.

In sum, then, there was no perfected contract of sale between petitioner

and respondent over the subject property.
 IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.
The assailed decision is AFFIRMED. Costs against petitioner Manila Metal
Container Corporation.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 11897 September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.

Jose Moreno Lacalle for appellant Fernandez.

Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.

STREET, J.:

The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands,
and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit, was engaged in
the business of maintaining and conducting a theatre in the city of Manila for the exhibition of
cinematographic films. Under the articles of incorporation the company is authorized to manufacture,
buy, or otherwise obtain all accessories necessary for conducting such a business. The plaintiff J. F.
Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in the
business of marketing films for a manufacturer or manufacturers, there engaged in the production or
distribution of cinematographic material. In this enterprise the plaintiff was represented in the city of
Manila by his son, Jose Ramirez.

In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became
apprised of the fact that the plaintiff in Paris had control of the agencies for two different marks of
films, namely, the "Eclair Films" and the "Milano Films;" and negotiations were begun with said
officials of the Orientalist Company by Jose Ramirez, as agent of the plaintiff, for the purpose of
placing the exclusive agency of these films in the hands of the Orientalist Company. The defendant
Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was
chiefly active in this matter, being moved by the suggestions and representations of Vicente
Ocampo, manage of the Oriental Theater, to the effect that the securing of the said films was
necessary to the success of the corporation.

Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in
the hands of Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the terms upon which
the plaintiff would undertake to supply from Paris the aforesaid films. This officer was declared to be
good until the end of July; and as only about for the Orientalist Company to act on the matter
speedily, if it desired to take advantage of said offer. Accordingly, Ramon J. Fernandez, on July 30,
had an informal conference with all the members of the company's board of directors except one,
and with approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in
Manila, accepting the offer contained in the memorandum of July 4th for the exclusive agency of
the Eclair films. A few days later, on August 5, he addressed another letter couched in the same
terms, likewise accepting the office of the exclusive agency for the Milano Films.
The memorandum offer contained a statement of the price at which the films would be sold, the
quantity which the representative of each was required to take and information concerning the
manner and intervals of time for the respective shipments. The expenses of packing, transportation
and other incidentals were to be at the cost of the purchaser. There was added a clause in which J.
F. Ramirez described his function in such transactions as that of a commission agent and stated that
he would see to the prompt shipment of the films, would pay the manufacturer, and take care that
the films were insured — his commission for such services being fixed at 5 per cent.

What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez
to Jose Ramirez is in the following terms:

We willingly accepted the officer under the terms communicated by your father in his letter
dated at Paris on July 4th of the present year.

These communications were signed in the following form, in which it will be noted the separate
signature of R. J. Fernandez, as an individual, is placed somewhat below and to the left of the
signature of the Orientalist Company as singed by R. J. Fernandez, in the capacity of treasurer:

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,
Treasurer,

R. J. FERNANDEZ.

Both of these letters also contained a request that Jose Ramirez should at once telegraph to his
father in Paris that his offer had been accepted by the Orientalist Company and instruct him to make
a contract with the film companies, according to the tenor of the offer, and in the capacity of
attorney-in-fact for the Orientalist Company. The idea behind the latter suggestion apparently was
that the contract for the films would have to be made directly between the film-producing companies
and the Orientalist Company; and it seemed convenient, in order to save time, that the Orientalist
Company should clothed J. F. Ramirez with full authority as its attorney-in-fact. This idea was never
given effect; and so far as the record shows, J. F. Ramirez himself procured the films upon his own
responsibility, as he indicated in the officer of July 4 that he would do, with the result that the only
contracting parties in this case are J. F. Ramirez of the one part, and the Orientalist Company, with
Ramon J. Fernandez of the other.

In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each
shipment being attached to the proper bill of lading. It appears that the Orientalist Company was
without funds to meet these obligations and the first few drafts were dealt with in the following
manner: The drafts, upon presented through the bank, were accepted in the name of the Orientalist
Company by its president B. Hernandez, and were taken up by the latter with his own funds. As the
drafts had thus been paid by B. Hernandez, the films which had been procured by he payment of
said drafts were treated by him as his own property; and they in fact never came into the actual
possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films
to the Orientalist Company and they were exhibited by it in the Oriental Theater under an
arrangement which was made between him and the theater's manager.

During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila
several remittances of films from Paris, and it is these shipments which have given occasion for the
present action. All of the drafts accompanying these films were drawn, as on former occasions, upon
the Orientalist Company; and all were accepted in the name of B. Hernandez, except the last, which
was accepted by B. Hernandez individually. None of the drafts thus accepted were taken up by the
drawee or by B. Hernandez when they fell due; and it was finally necessary for the plaintiff himself to
take them up as dishonored by non-payment.

Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist
Company, and Ramon J. Fernandez. As the films which accompanied the dishonored were liable to
deteriorate, the court, upon application of the plaintiff, and apparently without opposition on the part
of the defendants, appointed a receiver who took charge of the films and sold them. The amount
realized from this sale was applied to the satisfaction of the plaintiff's claim and was accordingly
delivered to him in part payment thereof. At trial judgment was given for the balance due to the
plaintiff, namely P6,018.93, with interest from May 19, 1914, the date of the institution of the action.
In the judgment of the trial court the Orientalist Company was declared to be a principal debtor and
Ramon J. Fernandez was declared to be liable subsidiarily as guarantor. From this judgment both of
the parties defendant appealed.

In this Court neither of the parties appellant make any question with respect to the right of the
plaintiff to recover from somebody the amount awarded by the lower court; but each of the
defendants insists the other is liable for the whole. It results that the real contention upon this appeal
is between the two defendants.

It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by
the Orientalist Company that the judgment has already been executed as against the company is
exclusively and primarily liable the entire indebtedness, the question as to the liability of Ramon J.
Fernandez would be academic. But if the latter is liable as principal obligor for the whole or any part
of the debt, it will be necessary to modify the judgment in order to adjust the rights of the defendants
in accordance with such finding.

It will be noted that the action is primarily founded upon the liability created by the letters dated July
30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters
mentioned are copied into the complaint as the foundation of the action. The action is not based
upon the dishonored drafts which were accepted by B. Hernandez in the name of the Orientalist
Company; and although these drafts, as well as the last draft, which was accepted by B. Hernandez
individually, have been introduced in evidence, this was evidently done for the purpose of proving
the amount of damages which the plaintiff was entitled to recover.

In the discussion which is to follow we shall consider, first, the question of the liability of the
corporation upon the contracts contained in the letters of July 30 and August 5, 1913, and, secondly
the question of the liability of Ramon J. Fernandez, based upon his personal signature to the same
documents.

As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The
action, as already stated, is based upon documents purporting to be signed by the Orientalist
Company, and copies of the documents are set out in the complaint. It was therefore incumbent
upon the corporation, if it desired to question the authority of Fernandez to bind it, to deny the due
execution of said contracts under oath, as prescribed in section 103 of the Code of Civil procedure.
Said section, in the part pertinent to the situation now under consideration, reads as follows:

When an action is brought upon a written instrument and the complaint contains or has
annexed or has annexed a copy of such instrument, the genuineness and due execution of
the instrument shall be deemed admitted, unless specifically denied under oath in the
answer.
No sworn answer denying the genuineness and due execution of the contracts in question or
questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was filed in this
case; but evidence was admitted without objection from the plaintiff, tending to show that Ramon J.
Fernandez had no such authority. This evidence consisted of extracts from the minutes of the
proceedings of the company's board of directors and also of extracts from the minutes of the
proceedings of the company's stockholders, showing that the making of this contract had been under
consideration in both bodies and that the authority to make the same had been withheld by the
stockholders. It therefore becomes necessary for us to consider whether the administration resulting
from the failure of the defendant company to deny the execution of the contracts under oath is
binding upon it for all purposes of this lawsuit, or whether such failure should be considered a mere
irregularity of procedure which was waived when the evidence referred to was admitted without
objection from the plaintiff. The proper solution of this problem makes it necessary to consider
carefully the principle underlying the provision above quoted.

That the situation was one in which an answer under oath denying the authority of the agent should
have been interposed, supposing that the company desired to contest this point, is not open to
question. In the case of Merchant vs. International Banking Corporation, (6 Phil. Rep., 314), it
appeared that one Brown has signed the name of the defendant bank as guarantor of a promissory
note. The bank was sued upon this guaranty and at the hearing attempted to prove that Brown had
no authority to bind the bank by such contract. It was held that buy failing to deny the contract under
oath, the bank had admitted the genuineness and due execution thereof, and that this admission
extended not only to the authenticity of the signature of Brown but also to his authority. Said Justice
Willard: "The failure of the defendant to deny the genuineness and due execution of this guaranty
under oath was an admission not only of the signature of Brown, but also his authority to make the
contract in behalf of the defendant and of the power the contract in behalf of the defendant and of
the power of the defendant to enter into such a contract.

The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be
seen by reference to the following, among other authorities:

The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation
upon an appeal bond. The name of the company had been affixed to the obligation by an agent, and
no sufficient affidavit was filed by the corporation questioning its signature or the authority of the
agent to bind the company. It was held that the plaintiff did not have to prove the due execution of
the bond and that the corporation as to be taken as admitting the authority of the agent to make the
signature. Among other things the court said: "But it is said that the authority of Barrett to execute
the bond is distinguishable from the signing and, although the signature must be denied under oath,
the authority of the agent need not be. Upon this we observe that the statute manifestly refers to the
legal effect of the signature, rather than the manual act of singing. If the name of the obligor, in a
bond, is subscribed by one in his presence, and by his direction, the effect is the same as if his
name should be signed with his own hand, and under such circumstances we do not doubt that the
obligor must deny his signature under oath, in order to put the obligee to proof of the fact. Quit facit
per aliam facit per se, and when the name is signed by one thereunto authorized, it is as much as
the signature of the principal as if written with his own hand. Therefore, if the principal would deny
the authority of the agent, as the validity of the signature is thereby directly attacked, the denial must
be under oath.

In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note
purporting to have been given by on A. B., as the treasurer of the defendant company. Said the
court: "Under the Judiciary Act of 1799, requiring the defendant to deny on oath an instrument of
writing, upon which he is sued, the plea in this case should have been verified.
If the person who signed this note for the company, and upon which they are sued, was not
authorized to make it, let them say so upon oath, and the onus is then on the plaintiff to overcome
the plea."

It should be noted that the provision contained in section 103 of our Code of Civil Procedure is
embodied in some form or other in the statutes of probably all of the American States, and it is not
by any means peculiar to the laws of California, though it appears to have been taken immediately
from the statutes of that State. (Secs. 447, 448, California Code of Civil Procedure.)

There is really a broader question here involved than that which relates merely to the formality of
verifying the answer with an affidavit. This question arises from the circumstance that the answer of
the corporation does not in any was challenge the authority of Ramon J. Fernandez to bind it by the
contracts in question and does not set forth, as a special defense, any such lack of authority in him.
Upon well-established principles of pleading lack of authority in an officer of a corporation to bind it
by a contract executed by him in its name is a defense which should be specially pleaded — and this
quite apart from the requirement, contained in section 103, that the answer setting up such defense
should be verified by oath. But is should not here escape observation that section 103 also requires
— in denial contemplated in that section shall be specific. An attack on the instrument in general
terms is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)

In the first edition of a well-known treatise on the laws of corporations we find the following
proposition:

If an action is brought against a corporation upon a contract alleged to be its contract, if it

desires to set up the defense that the contract was executed by one not authorized as its
agent, it must plead non est factum. (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)

Again, says the same author:

A corporation can not avail itself of the defense that it had no power to enter into the
obligation to enforce which the suit is brought, unless it pleads that defense. This principle
applies equally where the defendant intends to challenge the power of its officer or agent to
execute in its behalf the contract upon which the action brought and where it intends to
defend on the ground of total want of power in the corporation to make such a contract.
(Opus citat. sec. 7619.)

In Simon vs. Calfee (80 Ark., 65), it was said:

Though the power of the officers of a business corporation to issue negotiable paper in its
name is not presumed, such corporation can not avail itself of a want of power in its officers
to bind it unless the defense was made on such ground.

The rule has been applied where the question was whether corporate officer, having admitted power
to make a contract, had in the particular instance exceeded that authority, (Merill vs. Consumers'
Coal Co., 114 N.Y., 216); and it has been held that where the answer in a suit against a corporation
on its note relies simply on the want of power of the corporation to issue notes, the defendant can
not afterwards object that the plaintiff has not shown that the officer executing the note were
empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated.
In dealing with corporations the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that authority and thereby held him out
as a person competent to bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the
actual authority may never have been granted. The public is not supposed nor required to know the
transactions which happen around the table where the corporate board of directors or the
stockholders are from time to time convoked. Whether a particular officer actually possesses the
authority which he assumes to exercise is frequently known to very few, and the proof of it usually is
not readily accessible to the stranger who deals with the corporation on the faith of the ostensible
authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an
officer of a corporation has made a contract in its name, that the corporation should be required, if it
denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the
fact that the agent's authority is contested; and he is given an opportunity to adduce evidence
showing either that the authority existed or that the contract was ratified and approved.

We are of the opinion that the failure of the defendant corporation to make any issue in its answer
with regard to the authority of Ramon J. Fernandez to bind it, and particularly its failure to deny
specifically under oath the genuineness and due execution of the contracts sued upon, have the
effect of elimination the question of his authority from the case, considered as a matter of mere
pleading. The statute (sec. 103) plainly says that if a written instrument, the foundation of the suit, is
not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an admission
made in a pleading can not be controverted by the party making such admission; and all proof
submitted by him contrary thereto or inconsistent therewith should simply be ignored by the court,
whether objection is interposed by the opposite party or not. We can see no reason why a
constructive admission, created by the express words of the statute, should be considered to have
less effect than any other admission.

The parties to an action are required to submit their respective contentions to the court in their
complaint and answer. These documents supply the materials which the court must use in order to
discover the points of contention between the parties; and where the statute says that the due
execution of a document which supplies the foundation of an action is to be taken as admitted
unless denied under oath, the failure of the defendant to make such denial must be taken to operate
as a conclusive admission, so long as the pleadings remain that form.

It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances
between the allegations of a pleading and the proof shall be disregarded and the facts shall be found
according to the evidence. The same section, however, recognizes the necessity for an amendment
of the pleadings. And judgment must be in conformity with the case made in conformity with the case
made in the pleadings and established by the proof, and relief can not be granted that is
substantially inconsistent with either. A party can no more succeed upon a case proved but not
alleged than upon a case alleged but nor proved. This rule of course operates with like effect upon
both parties, and applies equality to the defendants special defense as to the plaintiffs cause of
action.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to
permit the answer of the defendant to be amended; and if we believed that the interests of justice so
required, we would either exercise that authority or remand the cause for a new trial in court below.
As will appear further on in this opinion, however, we think that the interests of justice will best be
promoted by deciding the case, without more ado, upon the issues presented in the record as it now
stands.
That we may not appear to have overlooked the matter, we will observe that two cases are cited
from California in which the Supreme Court of the State has held that where a release is pleaded by
way of defense and evidence tending to destroy its effect is introduced without objection, the
circumstance that it was not denied under oath is immaterial. In the earlier of these cases,
Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a railroad company to
recover damages for the death of the plaintiff's minor son, alleged to have been killed by the
negligence of the defendant. The defendant company pleaded by way of defense a release
purporting to be signed by the plaintiff, and in its answer inserted a copy of the release. The
execution of the release was not denied under oath; but at the trial evidence was submitted on
behalf of the plaintiff tending to show that at the time he signed the release, he was incompetent by
reason of drunkenness to bind himself thereby. It was held that inasmuch as this evidence had been
submitted by the plaintiff without objection, it was proper for the court to consider it. We do not
question the propriety of that decision, especially as the issue had been passed upon by a jury; but
we believe that the decision would have been more soundly planted if it had been said that the
incapacity of the plaintiff, due to his drunken condition, was a matter which did not involve either the
genuineness or due execution of the release. Like the defenses of fraud, coercion, imbecility, and
mistake, it was a matter which could be proved under the general issue and did not have to be set
up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar explanation
can, we think, be given of the case of Clark vs. Child in which the rule declared in the earlier case
was followed. With respect to both decisions which we merely observe that upon point of procedure
which they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.

We shall now consider the liability of the defendant company on the merits just as if that liability had
been properly put in issue by a specific answer under oath denying the authority of Fernandez go to
bind it. Upon this question it must at the outset be premised that Ramon J. Fernandez, as treasurer,
had no independent authority to bind the company by signing its name to the letters in question. It is
declared by signing its name to the letters in question. It is declared in section 28 of the Corporation
Law that corporate power shall be exercised, and all corporate business conducted by the board of
directors; and this principle is recognized in the by-laws of the corporation in question which contain
a provision declaring that the power to make contracts shall be vested in the board of directors. It is
true that it is also declared in the same by-laws that the president shall have the power, and it shall
be his duty, to sign contract; but this has reference rather to the formality of reducing to proper form
the contract which are authorized by the board and is not intended to confer an independent power
to make contract binding on the corporation.

The fact that the power to make corporate contract is thus vested in the board of directors does not
signify that a formal vote of the board must always be taken before contractual liability can be fixed
upon a corporation; for the board can create liability, like an individual, by other means than by a
formal expression of its will. In this connection the case of Robert Gair Co. vs. Columbia Rice
Packing Co. (124 La., 194) is instructive. If there appeared that the secretary of the defendant
corporation had signed an obligation on its behalf binding it as guarantor of the performance of an
important contract upon which the name of another corporation appeared as principal. The
defendant company set up by way of defense that is secretary had no authority to bind it by such an
engagement. The court found that the guaranty was given with the knowledge and consent of the
president and directors, and that this consent of the president and directors, and that this consent
was given with as much observance of formality as was customary in the transaction of the business
of the company. It was held that, so far as the authority of the secretary was concerned, the contract
was binding. In discussing this point, the court quoted with approval the following language form one
of its prior decisions:

The authority of the subordinate agent of a corporation often depends upon the course of
dealings which the company or its director have sanctioned. It may be established
sometimes without reference to official record of the proceedings of the board, by proof of
 the usage which the company had permitted to grow up in business, and of the
acquiescence of the board charged with the duty of supervising and controlling the
company's business.

It appears in evidence, in the case now before us, that on July 30, the date upon which the letter
accepting the offer of the Eclair films was dispatched the board of directors of the Orientalist
Company convened in special session in the office of Ramon J. Fernandez at the request of the
latter. There were present the four members, including the president, who had already signified their
consent to the making of the contract. At this meeting, as appears from the minutes, Fernandez
informed the board of the offer which had been received from the plaintiff with reference to the
importation of films. The minutes add that terms of this offer were approved; but at the suggestion of
Fernandez it was decided to call a special meeting of the stockholders to consider the matter and
definite action was postponed.

The stockholders meeting was convoked upon September 18, 1913, upon which occasion
Fernandez informed those present of the offer in question and of the terms upon which the films
could be procured. He estimated that the company would have to make an outlay of about P5,500
per month, if the offer for the two films should be accepted by it.

The following extracts from the minutes of this meeting are here pertinent:

Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for
the purpose of avoiding that other importers should get ahead of the corporation in this
regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr. Papa met for the purpose of
considering the acceptance of the offer together with the responsibilities attached thereto,
made to the corporation by the film manufacturers of Eclair and Milano of Paris and Italy
respectively, inasmuch as the first shipment of films was then expected to arrive.

At the same time he informed the said stockholders that he had already made arrangements
with respect to renting said films after they have been once exhibited in the Cine Oriental,
and that the corporation could very well meet the expenditure involved and net a certain
profit, but that, if we could enter into a contract with about nine cinematographs, big gains
would be obtained through such a step.

The possibility that the corporation might not see fit to authorize the contract, or might for lack of
funds be unable to make the necessary outlay, was foreseen; and in such contingency the
stockholders were informed, that the four gentlemen above mentioned (Hernandez, Fernandez,
Monroy, and Papa) "would continue importing said films at their own account and risk, and shall be
entitled only to a compensation of 10 per cent of their outlay in importing the films, said payment to
be made in shares of said corporation, inasmuch as the corporation is lacking available funds for the
purpose, and also because there are 88 shares of stock remaining still unsold."

In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the
Eclair and Milano films should be accepted, if the corporation could obtain the money with which to
meet the expenditure involved, and to this end appointed a committee to apply to the bank for a
credit. The evidence shows that an attempt was made, on behalf of the corporation, to obtain a
credit of P10,000 from the Bank of the Philippine Islands for the purpose indicated, but the bank
declined to grant his credit. Thereafter another special meeting of the shareholders of the defendant
corporation was called at which the failure of their committee to obtain a credit from the bank was
made known. A resolution was thereupon passed to the effect that the company should pay to
Hernandez, Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in
importing the films, said payment to be made in shares of the company in accordance with the
suggestion made at the previous meeting. At the time this meeting was held three shipment of the
films had already been received in Manila.

We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of
September 18, and especially from the first paragraph above quoted, that this body was then
cognizant that the officer had already been accepted in the name of the Orientalist Company and
that the films which were then expected to arrive were being imported by virtue of such acceptance.
Certainly four members of the board of directors there present were aware of this fact, as the letter
accepting the offer had been sent with their knowledge and consent. In view of this circumstance, a
certain doubt arises whether they meant to utilize the financial assistance of the four so-called
importers in order that the corporation might bet the benefit of the contract for the films, just as it
would have utilized the credit of the bank if such credit had been extended. If such was the intention
of the stockholders their action amounted to a virtual, though indirect, approval of the contract. It is
not however, necessary to found the judgment on this interpretation of the stockholders proceedings,
inasmuch as we think for reasons presently to be stated, that the corporation is bound, and we will
here assume that in the end the contract were not approved by the stockholders.

It will be observed that Ramon J. Fernandez was the particular officer and member of the board of
directors who was most active in the effort to secure the films for the corporation. The negotiations
were conducted by him with the knowledge and consent of other members of the board; and the
contract was made with their prior approval. As appears from the papers in this record, Fernandez
was the person to who keeping was confided the printed stationery bearing the official style of the
corporation, as well as rubber stencil with which the name of the corporation could be signed to
documents bearing its name.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of
the board of directors of the Orientalist Company, we find that upon October 27, 1913, after
Fernandez had departed from the Philippine Islands, to be absent for many months, said board
adopted a resolution conferring the following among other powers on Vicente Ocampo, the manager
of the Oriental theater, namely:

(1) To rent a box for the films in the "Kneeler Building."

(4) To be in charge of the films and of the renting of the same.

(5) To advertise in the different newspapers that we are importing films to be exhibited in the
Cine Oriental.

(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for
the payment thereof.

(7) To buy a book and cards for indexing the names of the films.

(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R.
Acuña to enter into agreements with cinematograph proprietors in the provinces for the
purpose of renting films from us.

It thus appears that the board of directors, before the financial inability of the corporation to proceed
with the project was revealed, had already recognized the contract as being in existence and had
proceeded to take the steps necessary to utilize the films. Particularly suggestive is the direction
given at this meeting for the publication of announcements in the newspapers to the effect that the
company was engaged in importing films. In the light of all the circumstances of the case, we are of
the opinion that the contracts in question were thus inferentially approved by the company's board of
directors and that the company is bound unless the subsequent failure of the stockholders to
approve said contracts had the effect of abrogating the liability thus created.

Both upon principle and authority it is clear that the action of the stockholders, whatever its
character, must be ignored. The functions of the stockholders of a corporation are, it must be
remembered, of a limited nature. The theory of a corporation is that the stockholders may have all
the profits but shall turn over the complete management of the enterprise to their representatives
and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing
directors, making by-laws, and exercising certain other special powers defined by-law. In conformity
with this idea it is settled that contract between a corporation and third person must be made by the
director and not by the stockholders. The corporation, in such matters, is represented by the former
and not by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely
accordant with the provisions of section 28 of our Corporation Law already referred to. It results that
where a meeting of the stockholders is called for the purpose of passing on the propriety of making a
corporate contract, its resolutions are at most advisory and not in any wise binding on the board.

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the
situation as it presents itself to the third party with whom the contract is made. Naturally he can have
little or no information as to what occurs in corporate meetings; and he must necessarily rely upon
the external manifestations of corporate consent. The integrity of commercial transactions can only
be maintained by holding the corporation strictly to the liability fixed upon it by its agents in
accordance with law, and we would be sorry to announce a doctrine which would permit the property
of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the
earth without recourse against the corporations whose name and authority had been used in the
manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officer, or any other agent, to do acts within the scope of an apparent
authority, and thus hold him out to the public as possessing power to do those acts, the corporation
will as against any one who has in good faith dealt with the corporation through such agent, be
estopped from denying his authority; and where it is said "if the corporation permits" this means the
same as "if the thing is permitted by the directing power of the corporation."

It being determined that the corporation is bound by the contract in question, it remains to consider
the character of the liability assumed by R. J. Fernandez, in affixing his personal signature to said
contract. The question here is whether Fernandez is liable jointly with the Orientalists Company as a
principal obligor, or whether his liability is that of a guarantor merely.

As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is
not in line with the signature of the Orientalist Company, but is set off to the left of the company's
signature and somewhat who sign contracts in some capacity other than that of principal obligor to
place their signature alone would justify a court in holding that Fernandez here took upon himself the
responsibility of a guarantor rather than that of a principal obligor. We do, however, think, that the
form in which the contract is signed raises a doubt as to what the real intention was; and we feel
justified, in looking to the evidence to discover that intention. In this connection it is entirely clear,
from the testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter was
intended to be that of guarantor. There is, to be sure, a certain difference between these witnesses
as to the nature of this guaranty, inasmuch as Fernandez would have us believe that his name was
signed as a guaranty that the contract would be approved by the corporation, while Ramirez says
that the name was put on the contract for the purpose of guaranteeing, not the approval of the
contract, but its performance. We are convinced that the latter was the real intention of the
contracting parties.
We are not unmindful of the force of that rule of law which declares that oral evidence is admissible
to show the character in which the signature was affixed. This conclusion is perhaps supported by
the language of the second paragraph of article 1281 of the Civil Code, which declares that if the
words of a contract should appear contrary to the evident intention of the parties, the intention shall
prevail. But the conclusion reached is, we think, deducible from the general principle that in case of
ambiguity parol evidence is admissible to show the intention of the contracting parties.

It should be stated in conclusion that as the issues in this case have been framed, the only question
presented to this court is: To what extent are the signatory parties to the contract liable to the plaintiff
J. F. Ramirez? No contentious issue is raised directly between the defendants, the Orientalist
Company and Ramon H. Fernandez; nor does the present the present action involve any question
as to the undertaking of Fernandez and his three associates to effect the importation of the films
upon their own account and risk. Whether they may be bound to hold the company harmless is a
matter upon which we express no opinion.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 93695 February 4, 1992

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,

vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES,
JR. and THOMAS GONZALES, respondents.

Cayanga, Zuniga & Angel Law Offices for petitioners.

Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who
owns the stocks of the corporation under the terms of the voting trust agreement? How long can a
voting trust agreement remain valid and effective? Did a director of the corporation cease to be such
upon the creation of the voting trust agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition forcertiorari — whether or not there was
proper service of summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners
as president and vice-president, allegedly, of the subject corporation after the execution of a voting
trust agreement between ALFA and the Development Bank of the Philippines (DBP, for short).

From the records of the instant case, the following antecedent facts appear:

On November 15, 1985, a complaint for a sum of money was filed by the International Corporate
Bank, Inc. against the private respondents who, in turn, filed a third party complaint against ALFA
and the petitioners on March 17, 1986.

On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing
the court that the summons for ALFA was erroneously served upon them considering that the
management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company which has a separate
and distinct corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the
appropriate steps to serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of
Proper Service of Summons which the trial court granted on August 17, 1988.

On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14,
section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA
and that the private respondents should have availed of another mode of service under Rule 14,
Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA.

In their Comment to the Motion for Reconsideration dated September 27, 1988, the private
respondents argued that the voting trust agreement dated March 11, 1981 did not divest the
petitioners of their positions as president and executive vice-president of ALFA so that service of
summons upon ALFA through the petitioners as corporate officers was proper.

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through
the petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its
answer through the petitioners as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating
their stand that by virtue of the voting trust agreement they ceased to be officers and directors of
ALFA, hence, they could no longer receive summons or any court processes for or on behalf of
ALFA. In support of their second motion for reconsideration, the petitioners attached thereto a copy
of the voting trust agreement between all the stockholders of ALFA (the petitioners included), on the
one hand, and the DBP, on the other hand, whereby the management and control of ALFA became
vested upon the DBP.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2,
1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA
cannot be considered as proper service of summons on ALFA.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which
was affirmed by the court in its Order dated August 14, 1989 denying the private respondent's
motion for reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent
before the public respondent which, nonetheless, resolved to give due course thereto on September
21, 1989.

On October 17, 1989, the trial court, not having been notified of the pending petition
for certiorari with public respondent issued an Order declaring as final the Order dated April 25,
1989. The private respondents in the said Order were required to take positive steps in prosecuting
the third party complaint in order that the court would not be constrained to dismiss the same for
failure to prosecute. Subsequently, on October 25, 1989 the private respondents filed a motion for
reconsideration on which the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private respondents' petition
for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April
25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is
ordered to file its answer within the reglementary period. (CA Decision, p. 8; Rollo, p.
24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public
respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed
this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part
of the public respondent in reversing the questioned Orders dated April 25, 1989 and August 14,
1989 of the court a quo, thus, holding that there was proper service of summons on ALFA through
the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990
erroneously applying the rule that the period during which a motion for reconsideration has been
pending must be deducted from the 15-day period to appeal. However, in its Resolution dated
January 3, 1991, the public respondent set aside the aforestated entry of judgment after further
considering that the rule it relied on applies to appeals from decisions of the Regional Trial Courts to
the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].
(CA Rollo, pp. 249-250)

In their memorandum, the petitioners present the following arguments, to wit:

(1) that the execution of the voting trust agreement by a stockholders whereby all his
shares to the corporation have been transferred to the trustee deprives the
stockholders of his position as director of the corporation; to rule otherwise, as the
respondent Court of Appeals did, would be violative of section 23 of the Corporation
Code ( Rollo, pp. 270-3273); and

(2) that the petitioners were no longer acting or holding any of the positions provided
under Rule 14, Section 13 of the Rules of Court authorized to receive service of
summons for and in behalf of the private domestic corporation so that the service of
summons on ALFA effected through the petitioners is not valid and ineffective; to
maintain the respondent Court of Appeals' position that ALFA was properly served its
summons through the petitioners would be contrary to the general principle that a
corporation can only be bound by such acts which are within the scope of its officers'
or agents' authority (Rollo, pp. 273-275)

In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on
the nature of a voting trust agreement and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

(a) trust created by an agreement between a group of the stockholders of a

corporation and the trustee or by a group of identical agreements between individual
stockholders and a common trustee, whereby it is provided that for a term of years,
or for a period contingent upon a certain event, or until the agreement is terminated,
control over the stock owned by such stockholders, either for certain purposes or for
 all purposes, is to be lodged in the trustee, either with or without a reservation to the
owners, or persons designated by them, of the power to direct how such control shall
be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements,
a more definitive meaning may be gathered. The said provision partly reads:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the share for a period rights pertaining to the
shares for a period not exceeding five (5) years at any one time: Provided, that in the
case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding (5) years but shall automatically expire
upon full payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In the books of the corporation, it
shall be noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right to inspect the books
of the corporation, the right to sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation. However, in order to
distinguish a voting trust agreement from proxies and other voting pools and agreements, it must
pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the
other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a
definite period of time; and (3) that the principal purpose of the grant of voting rights is to acquire
voting control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section
2075 [1976] p. 331 citingTankersly v. Albright, 374 F. Supp. 538)

Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a
trustee not only the stockholder's voting rights but also other rights pertaining to his shares as long
as the voting trust agreement is not entered "for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud." (section 59,
5th paragraph of the Corporation Code) Thus, the traditional concept of a voting trust agreement
primarily intended to single out a stockholder's right to vote from his other rights as such and made
irrevocable for a limited duration may in practice become a legal device whereby a transfer of the
stockholder's shares is effected subject to the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable
or beneficial ownership of the corporate shares of a stockholders, on the one hand, and the legal title
thereto on the other hand.

The law simply provides that a voting trust agreement is an agreement in writing whereby one or
more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest
in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon
the fulfillment of statutory conditions and such other terms and conditions specified in the
agreement. The five year-period may be extended in cases where the voting trust is executed
pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation of the voting trust
agreement. The petitioners maintain that with the execution of the voting trust agreement between
them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former
assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of
the voting trust agreement the petitioners can no longer be considered directors of ALFA. In support
of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in part,
that:

Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be
director . . . (Rollo, p. 270)

The private respondents, on the contrary, insist that the voting trust agreement between ALFA and
the DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors
of a corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of
the transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing stockholder", is equitable

owner for the stocks represented by the voting trust certificates and the stock
reversible on termination of the trust by surrender. It is said that the voting trust
agreement does not destroy the status of the transferring stockholders as such, and
thus render them ineligible as directors. But a more accurate statement seems to be
that for some purposes the depositing stockholder holding voting trust certificates in
lieu of his stock and being the beneficial owner thereof, remains and is treated as a
stockholder. It seems to be deducible from the case that he may sue as a
stockholder if the suit is in equity or is of an equitable nature, such as, a technical
stockholders' suit in right of the corporation. [Commercial Laws of the Philippines by
Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

We find the petitioners' position meritorious.

Both under the old and the new Corporation Codes there is no dispute as to the most immediate
effect of a voting trust agreement on the status of a stockholder who is a party to its execution —
from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the
equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268;
Pineda and Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175;
Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981,
ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines,Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the change in
his status deprives the stockholder of the right to qualify as a director under section 23 of the present
Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the
stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporation. A director who ceases to be the owner of at least one share
 of the capital stock of a stock corporation of which is a director shall thereby cease to
be a director . . . (Emphasis supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely
affected by the simple act of such director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares subject of the voting trust
agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required
(section 36 of the old Corporation Code). No disqualification arises by virtue of the phrase "in his
own right" provided under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and other persons who in
fact are not beneficial owners of the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the
Law of Private Corporations, section 300, p. 92 [1969] citingPeople v. Lihme, 269 Ill. 351, 109 N.E.
1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in
1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share standing in their names on the books
of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The petitioners ceased to be directors.
Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective
positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is
the essence of the subject voting trust agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the
shares of the stocks owned by them respectively and shall do all things necessary for
the transfer of their respective shares to the TRUSTEE on the books of ALFA.

2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the
number of shares transferred, which shall be transferrable in the same manner and
with the same effect as certificates of stock subject to the provisions of this
agreement;

3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual
or special, upon any resolution, matter or business that may be submitted to any
such meeting, and shall possess in that respect the same powers as owners of the
equitable as well as the legal title to the stock;

4. The TRUSTEE may cause to be transferred to any person one share of stock for
the purpose of qualifying such person as director of ALFA, and cause a certificate of
stock evidencing the share so transferred to be issued in the name of such person;

xxx xxx xxx

9. Any stockholder not entering into this agreement may transfer his shares to the
same trustees without the need of revising this agreement, and this agreement shall
have the same force and effect upon that said stockholder. (CA Rollo, pp. 137-138;
Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership
of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of
record with respect to the said shares of stocks. In the absence of a showing that the DBP had
caused to be transferred in their names one share of stock for the purpose of qualifying as directors
of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA
which was the case before the execution of the subject voting trust agreement. There appears to be
no dispute from the records that DBP has taken over full control and management of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A.
Guevarra, Vice-President of its Special Accounts Department II, Remedial Management Group, the
petitioners were no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp.
140-142)

Inasmuch as the private respondents in this case failed to substantiate their claim that the subject
voting trust agreement did not deprive the petitioners of their position as directors of ALFA, the
public respondent committed a reversible error when it ruled that:

. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased
to be president and vice-president, respectively, of the corporation at the time of
service of summons on them on August 21, 1987, they were at least up to that time,
still directors . . .

The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of
the subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the
execution of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all the
directors of ALFA were stripped of their positions as such.

There can be no reliance on the inference that the five-year period of the voting trust agreement in
question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph
of section 59 of the new Corporation Code which reads:

Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificate
as well as the certificates of stock in the name of the trustee or trustees shall thereby
be deemed cancelled and new certificates of stock shall be reissued in the name of
the transferors.

On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA
and the DBP that the duration of the agreement is contingent upon the fulfillment of certain
obligations of ALFA with the DBP. This is shown by the following portions of the agreement.

WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured
by a first mortgage on the manufacturing plant of said company;

WHEREAS, ALFA is also indebted to other creditors for various financial

accomodations and because of the burden of these obligations is encountering very
serious difficulties in continuing with its operations.

WHEREAS, in consideration of additional accommodations from the TRUSTEE,

ALFA had offered and the TRUSTEE has accepted participation in the management
and control of the company and to assure the aforesaid participation by the
 TRUSTEE, the TRUSTORS have agreed to execute a voting trust covering their
shareholding in ALFA in favor of the TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

xxx xxx xxx

6. This Agreement shall last for a period of Five (5) years, and is renewable for as
long as the obligations of ALFA with DBP, or any portion thereof, remains
outstanding; (CA Rollo, pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have
transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national
government through the Asset Privatization Trust (APT) as attested to in a Certification dated
January 24, 1989 of the Vice President of the DBP's Special Accounts Department II. In the same
certification, it is stated that the DBP, from 1987 until 1989, had handled APT's account which
included ALFA's assets pursuant to a management agreement by and between the DBP and APT
(CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on
ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet
terminated so that the legal title to the stocks of ALFA, then, still belonged to the DBP.

In view of the foregoing, the ultimate issue of whether or not there was proper service of summons
on ALFA through the petitioners is readily answered in the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the

defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president, manager,
secretary, cashier, agent or any of its directors.

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct
from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA
347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58,
December 21, 1990). Thus, the above rule on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court processes on its behalf. Not every
stockholder or officer can bind the corporation considering the existence of a corporate entity
separate from those who compose it.

The rationale of the aforecited rule is that service must be made on a representative so integrated
with the corporation sued as to make it a priori supposable that he will realize his responsibilities and
know what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146
SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers. The service of
summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly
argued by the petitioners, will contravene the general principle that a corporation can only be bound
by such acts which are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez,
52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision
dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the
Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati,
Branch 58 are REINSTATED.

SO ORDERED.
 FIRST DIVISION

[G.R. No. 152542. July 8, 2004]

MONFORT HERMANOS AGRICULTURAL DEVELOPMENT

CORPORATION, as represented by MA. ANTONIA M.
SALVATIERRA, petitioner, vs. ANTONIO B. MONFORT III, MA.
LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT,
ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY
FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R.
PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF
APPEALS, respondents.

[G.R. No. 155472. July 8, 2004]

ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON,

ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M.
RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION
CECILIA R. PAYLADO, JOSE MARTIN M.
RODRIGUEZ, petitioners, vs. HON. COURT OF APPEALS,
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT
CORPORATION, as represented by MA. ANTONIA M.
SALVATIERRA, and RAMON H. MONFORT, respondents.

DECISION
YNARES-SANTIAGO, J.:

Before the Court are consolidated petitions for review of the decisions of
the Court of Appeals in the complaints for forcible entry and replevin filed by
Monfort Hermanos Agricultural Development Corporation (Corporation) and
Ramon H. Monfort against the children, nephews, and nieces of its original
incorporators (collectively known as the group of Antonio Monfort III).
The petition in G.R. No. 152542, assails the October 5, 2001 Decision of
[1]

the Special Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652,
which ruled that Ma. Antonia M. Salvatierra has no legal capacity to represent
the Corporation in the forcible entry case docketed as Civil Case No. 534-C,
before the Municipal Trial Court of Cadiz City. On the other hand, the petition
in G.R. No. 155472, seeks to set aside the June 7, 2002 Decision rendered [2]

by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R.

SP No. 49251, where it refused to address, on jurisdictional considerations,
the issue of Ma. Antonia M. Salvatierras capacity to file a complaint for
replevin on behalf of the Corporation in Civil Case No. 506-C before the
Regional Trial Court of Cadiz City, Branch 60.
Monfort Hermanos Agricultural Development Corporation, a domestic
private corporation, is the registered owner of a farm, fishpond and sugar
cane plantation known as Haciendas San Antonio II, Marapara, Pinanoag and
Tinampa-an, all situated in Cadiz City. It also owns one unit of motor vehicle
[3]

and two units of tractors. The same allowed Ramon H. Monfort, its Executive
[4]

Vice President, to breed and maintain fighting cocks in his personal capacity
at Hacienda San Antonio. [5]

In 1997, the group of Antonio Monfort III, through force and intimidation,
allegedly took possession of the 4 Haciendas, the produce thereon and the
motor vehicle and tractors, as well as the fighting cocks of Ramon H. Monfort.

In G.R. No. 155472:

On April 10, 1997, the Corporation, represented by its President, Ma.

Antonia M. Salvatierra, and Ramon H. Monfort, in his personal capacity, filed
against the group of Antonio Monfort III, a complaint for delivery of motor
[6]

vehicle, tractors and 378 fighting cocks, with prayer for injunction and
damages, docketed as Civil Case No. 506-C, before the Regional Trial Court
of Negros Occidental, Branch 60.
The group of Antonio Monfort III filed a motion to dismiss contending, inter
alia, that Ma. Antonia M. Salvatierra has no capacity to sue on behalf of the
Corporation because the March 31, 1997 Board Resolution authorizing Ma.
[7]

Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation

is void as the purported Members of the Board who passed the same were
not validly elected officers of the Corporation.
On May 4, 1998, the trial court denied the motion to dismiss. The group of
[8]

Antonio Monfort III filed a petition for certiorari with the Court of Appeals but
the same was dismissed on June 7, 2002. The Special Former Thirteenth
[9]

Division of the appellate court did not resolve the validity of the March 31,
1997 Board Resolution and the election of the officers who signed it,
ratiocinating that the determination of said question is within the competence
of the trial court.
The motion for reconsideration filed by the group of Antonio Monfort III
was denied. Hence, they instituted a petition for review with this Court,
[10]

docketed as G.R. No. 155472.

In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the

Corporation a complaint for forcible entry, preliminary mandatory injunction
with temporary restraining order and damages against the group of Antonio
Monfort III, before the Municipal Trial Court (MTC) of Cadiz City. It [11]

contended that the latter through force and intimidation, unlawfully took
possession of the 4 Haciendas and deprived the Corporation of the produce
thereon.
In their answer, the group of Antonio Monfort III alleged that they are
[12]

possessing and controlling the Haciendas and harvesting the produce therein
on behalf of the corporation and not for themselves.They likewise raised the
affirmative defense of lack of legal capacity of Ma. Antonia M. Salvatierra to
sue on behalf of the Corporation.
On February 18, 1998, the MTC of Cadiz City rendered a decision
dismissing the complaint. On appeal, the Regional Trial Court of Negros
[13]

Occidental, Branch 60, reversed the Decision of the MTCC and remanded the
case for further proceedings. [14]

Aggrieved, the group of Antonio Monfort III filed a petition for review with
the Court of Appeals. On October 5, 2001, the Special Tenth Division set
aside the judgment of the RTC and dismissed the complaint for forcible entry
for lack of capacity of Ma. Antonia M. Salvatierra to represent the
Corporation. The motion for reconsideration filed by the latter was denied by
[15]

the appellate court.[16]

Unfazed, the Corporation filed a petition for review with this Court,
docketed as G.R. No. 152542 which was consolidated with G.R. No. 155472
per Resolution dated January 21, 2004. [17]

The focal issue in these consolidated petitions is whether or not Ma.

Antonia M. Salvatierra has the legal capacity to sue on behalf of the
Corporation.
 The group of Antonio Monfort III claims that the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to
represent the Corporation is void because the purported Members of the
Board who passed the same were not validly elected officers of the
Corporation.
A corporation has no power except those expressly conferred on it by the
Corporation Code and those that are implied or incidental to its existence. In
turn, a corporation exercises said powers through its board of directors and/or
its duly authorized officers and agents. Thus, it has been observed that the
power of a corporation to sue and be sued in any court is lodged with the
board of directors that exercises its corporate powers. In turn, physical acts of
the corporation, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate by-laws or by a
specific act of the board of directors. [18]

Corollary thereto, corporations are required under Section 26 of the

Corporation Code to submit to the SEC within thirty (30) days after the
election the names, nationalities and residences of the elected directors,
trustees and officers of the Corporation. In order to keep stockholders and the
public transacting business with domestic corporations properly informed of
their organizational operational status, the SEC issued the following rules:

xxxxxxxxx

2. A General Information Sheet shall be filed with this Commission within thirty
(30) days following the date of the annual stockholders meeting. No extension of said
period shall be allowed, except for very justifiable reasons stated in writing by the
President, Secretary, Treasurer or other officers, upon which the Commission may
grant an extension for not more than ten (10) days.

2.A. Should a director, trustee or officer die, resign or in any manner, cease to hold
office, the corporation shall report such fact to the Commission with fifteen (15) days
after such death, resignation or cessation of office.

3. If for any justifiable reason, the annual meeting has to be postponed, the company
should notify the Commission in writing of such postponement.

The General Information Sheet shall state, among others, the names of the
elected directors and officers, together with their corresponding position
title (Emphasis supplied)
 In the instant case, the six signatories to the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to
represent the Corporation, were: Ma. Antonia M. Salvatierra, President;
Ramon H. Monfort, Executive Vice President; Directors Paul M. Monfort,
Yvete M. Benedicto and Jaqueline M. Yusay; and Ester S. Monfort,
Secretary. However, the names of the last four (4) signatories to the said
[19]

Board Resolution do not appear in the 1996 General Information Sheet

submitted by the Corporation with the SEC. Under said General Information
Sheet the composition of the Board is as follows:

1. Ma. Antonia M. Salvatierra (Chairman);

2. Ramon H. Monfort (Member);
3. Antonio H. Monfort, Jr., (Member);
4. Joaquin H. Monfort (Member);
5. Francisco H. Monfort (Member) and
6. Jesus Antonio H. Monfort (Member). [20]

There is thus a doubt as to whether Paul M. Monfort, Yvete M. Benedicto,

Jaqueline M. Yusay and Ester S. Monfort, were indeed duly elected Members
of the Board legally constituted to bring suit in behalf of the Corporation. [21]

In Premium Marble Resources, Inc. v. Court of Appeals, the Court was[22]

confronted with the similar issue of capacity to sue of the officers of the
corporation who filed a complaint for damages. In the said case, we sustained
the dismissal of the complaint because it was not established that the
Members of the Board who authorized the filing of the complaint were the
lawfully elected officers of the corporation.Thus

The only issue in this case is whether or not the filing of the case for damages against
private respondent was authorized by a duly constituted Board of Directors of the
petitioner corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel
Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes
of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing
of the case against private respondent was authorized by the Board. On the other hand,
the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose
L.R. Reyes, presented a Resolution dated July 30, 1986, to show that Premium did not
authorize the filing in its behalf of any suit against the private respondent International
Corporate Bank.
Later on, petitioner submitted its Articles of Incorporation dated November 6,
1979 with the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B.
Gan, Lionel Pengson, and Jose Ma. Silva.

However, it appears from the general information sheet and the Certification issued by
the SEC on August 19, 1986 that as of March 4, 1981, the officers and members of the
board of directors of the Premium Marble Resources, Inc. were:

Alberto C. Nograles President/Director

Fernando D. Hilario Vice President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director
Saturnino G. Belen, Jr. Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly
elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico
and Rodolfo Millare, petitioner failed to show proof that this election was reported to
the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of
1986 appears to be the set of officers elected in March 1981.

We agree with the finding of public respondent Court of Appeals, that in the absence
of any board resolution from its board of directors the [sic] authority to act for and in
behalf of the corporation, the present action must necessarily fail. The power of the
corporation to sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers. Thus, the issue of authority and the invalidity of
plaintiff-appellants subscription which is still pending, is a matter that is also
addressed, considering the premises, to the sound judgment of the Securities &
Exchange Commission.

By the express mandate of the Corporation Code (Section 26), all corporations duly
organized pursuant thereto are required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the names, nationalities and
residences of the directors, trustees and officers elected.

Sec. 26 of the Corporation Code provides, thus:

Sec. 26. Report of election of directors, trustees and officers. Within thirty (30) days
after the election of the directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and residences of the
directors, trustees and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26 is to give the public
information, under sanction of oath of responsible officers, of the nature of business,
financial condition and operational status of the company together with information
on its key officers or managers so that those dealing with it and those who intend to
do business with it may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility.

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et

al., are the incumbent officers of Premium has not been fully substantiated. In the
absence of an authority from the board of directors, no person, not even the officers of
the corporation, can validly bind the corporation.

In the case at bar, the fact that four of the six Members of the Board listed
in the 1996 General Information Sheet are already dead at the time the
[23] [24]

March 31, 1997 Board Resolution was issued, does not automatically make
the four signatories (i.e., Paul M. Monfort, Yvete M. Benedicto, Jaqueline M.
Yusay and Ester S. Monfort) to the said Board Resolution (whose name do
not appear in the 1996 General Information Sheet) as among the incumbent
Members of the Board. This is because it was not established that they were
duly elected to replace the said deceased Board Members.
To correct the alleged error in the General Information Sheet, the retained
accountant of the Corporation informed the SEC in its November 11,
1998 letter that the non-inclusion of the lawfully elected directors in the 1996
General Information Sheet was attributable to its oversight and not the fault of
the Corporation. This belated attempt, however, did not erase the doubt as
[25]

to whether an election was indeed held. As previously stated, a corporation is

mandated to inform the SEC of the names and the change in the composition
of its officers and board of directors within 30 days after election if one was
held, or 15 days after the death, resignation or cessation of office of any of its
director, trustee or officer if any of them died, resigned or in any manner,
ceased to hold office. This, the Corporation failed to do. The alleged election
of the directors and officers who signed the March 31, 1997 Board Resolution
was held on October 16, 1996, but the SEC was informed thereof more than
two years later, or on November 11, 1998. The 4 Directors appearing in the
1996 General Information Sheet died between the years 1984 1987, but the [26]

records do not show if such demise was reported to the SEC.

What further militates against the purported election of those who signed
the March 31, 1997 Board Resolution was the belated submission of the
alleged Minutes of the October 16, 1996 meeting where the questioned
officers were elected. The issue of legal capacity of Ma. Antonia M.
Salvatierra was raised before the lower court by the group of Antonio Monfort
III as early as 1997, but the Minutes of said October 16, 1996 meeting was
presented by the Corporation only in its September 29, 1999 Comment
before the Court of Appeals. Moreover, the Corporation failed to prove that
[27]

the same October 16, 1996 Minutes was submitted to the SEC. In fact,
the 1997 General Information Sheet submitted by the Corporation does not
[28]

reflect the names of the 4 Directors claimed to be elected on October 16,

1996.
Considering the foregoing, we find that Ma. Antonia M. Salvatierra failed to
prove that four of those who authorized her to represent the Corporation were
the lawfully elected Members of the Board of the Corporation. As such, they
cannot confer valid authority for her to sue on behalf of the corporation.
The Court notes that the complaint in Civil Case No. 506-C, for replevin
before the Regional Trial Court of Negros Occidental, Branch 60, has 2
causes of action, i.e., unlawful detention of the Corporations motor vehicle
and tractors, and the unlawful detention of the of 387 fighting cocks of Ramon
H. Monfort. Since Ramon sought redress of the latter cause of action in
his personal capacity, the dismissal of the complaint for lack of capacity to sue
on behalf of the corporation should be limited only to the corporations cause
of action for delivery of motor vehicle and tractors. In view, however, of the
demise of Ramon on June 25, 1999, substitution by his heirs is proper.
[29]

WHEREFORE, in view of all the foregoing, the petition in G.R. No. 152542
is DENIED. The October 5, 2001 Decision of the Special Tenth Division of the
Court of Appeals in CA-G.R. SP No. 53652, which set aside the August 14,
1998 Decision of the Regional Trial Court of Negros Occidental, Branch 60 in
Civil Case No. 822, is AFFIRMED.
In G.R. No. 155472, the petition is GRANTED and the June 7, 2002
Decision rendered by the Special Former Thirteenth Division of the Court of
Appeals in CA-G.R. SP No. 49251, dismissing the petition filed by the group
of Antonio Monfort III, is REVERSED and SET ASIDE.
The complaint for forcible entry docketed as Civil Case No. 822 before
the Municipal Trial Court of Cadiz City is DISMISSED. In Civil Case No. 506-C
with the Regional Trial Court of Negros Occidental, Branch 60, the action for
delivery of personal property filed by Monfort Hermanos Agricultural
Development Corporation is likewise DISMISSED. With respect to the action
filed by Ramon H. Monfort for the delivery of 387 fighting cocks, the Regional
Trial Court of Negros Occidental, Branch 60, is ordered to effect the
corresponding substitution of parties.
No costs.
SO ORDERED.
SECOND DIVISION

VALLE VERDE COUNTRY CLUB, G.R. No. 151969

INC., ERNESTO VILLALUNA,
RAY GAMBOA, AMADO Present:
M. SANTIAGO, JR., FORTUNATO
DEE, AUGUSTO SUNICO, QUISUMBING, J., Chairperson,
VICTOR SALTA, FRANCISCO
ORTIGAS III, ERIC ROXAS, in CARPIO-MORALES,
their capacities as members of the BRION,
Board of Directors of Valle Verde
Country Club, Inc., and JOSE DEL CASTILLO, and
RAMIREZ,
Petitioners, ABAD, JJ.

- versus -

VICTOR AFRICA,
Respondent. Promulgated:

September 4, 2009
x ---------------------------------------------------------------------------------------------- x

DECISION

BRION, J.:

In this petition for review on certiorari,[1] the parties raise a legal question
on corporate governance: Can the members of a corporations board of directors
elect another director to fill in a vacancy caused by the resignation of a hold-over
director?
 THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders Meeting

of petitioner Valle Verde Country Club, Inc. (VVCC), the following were elected as
members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan
(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta,
Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa.[2] In the
years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the
holding of the stockholders meeting could not be obtained. Consequently, the
above-named directors continued to serve in the VVCC Board in a hold-over
capacity.

On September 1, 1998, Dinglasan resigned from his position as member of

the VVCC Board. In a meeting held on October 6, 1998, the remaining directors,
still constituting a quorum of VVCCs nine-member board, elected Eric Roxas
(Roxas) to fill in the vacancy created by the resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member

of the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was elected
by the remaining members of the VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of

Roxas and Ramirez as members of the VVCC Board with the Securities and
Exchange Commission (SEC) and the Regional Trial Court (RTC), respectively. The
SEC case questioning the validity of Roxas appointment was docketed as SEC Case
No. 01-99-6177. The RTC case questioning the validity of Ramirez appointment
was docketed as Civil Case No. 68726.
 In his nullification complaint[3] before the RTC, Africa alleged that the
election of Roxas was contrary to Section 29, in relation to Section 23, of the
Corporation Code of the Philippines(Corporation Code). These provisions read:

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

xxxx

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members
or by expiration of term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be elected only for
the unexpired term of his predecessor in office. xxx. [Emphasis supplied.]

Africa claimed that a year after Makalintals election as member of the VVCC
Board in 1996, his [Makalintals] term as well as those of the other members of
the VVCC Board should be considered to have already expired. Thus, according
to Africa, the resulting vacancy should have been filled by the stockholders in a
regular or special meeting called for that purpose, and not by the remaining
members of the VVCC Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority
to fill in vacancies in the board of directors, Section 29 requires, among others,
that there should be an unexpired term during which the successor-member shall
serve. Since Makalintals term had already expired with the lapse of the one-year
term provided in Section 23, there is no more unexpired term during which
Ramirez could serve.
Through a partial decision[4] promulgated on January 23, 2002, the RTC ruled in
favor of Africa and declared the election of Ramirez, as Makalintals replacement,
to the VVCC Board as null and void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election
of Roxas as member of the VVCC Board, vice hold-over director Dinglasan. While
VVCC manifested its intent to appeal from the SECs ruling, no petition was
actually filed with the Court of Appeals; thus, the appellate court considered the
case closed and terminated and the SECs ruling final and executory.[5]

THE PETITION

VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial
decision for being contrary to law and jurisprudence. VVCC made a direct resort
to the Court via a petition for review on certiorari, claiming that the sole issue in
the present case involves a purely legal question.

As framed by VVCC, the issue for resolution is whether the remaining

directors of the corporations Board, still constituting a quorum, can elect
another director to fill in a vacancy caused by the resignation of a hold-over
director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy
created by the resignation of a hold-over director is expressly granted to the
remaining members of the corporations board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy

occurring in the board of directors caused by the expiration of a members term
shall be filled by the corporations stockholders. Correlating Section 29 with
Section 23 of the same law, VVCC alleges that a members term shall be for one
year and until his successor is elected and qualified; otherwise stated,a members
term expires only when his successor to the Board is elected and qualified. Thus,
until such time as [a successor is] elected or qualified in an annual election where
a quorum is present, VVCC contends that the term of [a member] of the board of
directors has yet not expired.

As the vacancy in this case was caused by Makalintals resignation, not by

the expiration of his term, VVCC insists that the board rightfully appointed
Ramirez to fill in the vacancy.

In support of its arguments, VVCC cites the Courts ruling in the 1927 El
[6]
Hogar case which states:

Owing to the failure of a quorum at most of the general meetings

since the respondent has been in existence, it has been the practice of
the directors to fill in vacancies in the directorate by choosing
suitable persons from among the stockholders. This custom finds its
sanction in Article 71 of the By-Laws, which reads as follows:

Art. 71. The directors shall elect from among the

shareholders members to fill the vacancies that may occur
in the board of directors until the election at the general
meeting.

xxxx

Upon failure of a quorum at any annual meeting the directorate naturally

holds over and continues to function until another directorate is chosen
and qualified. Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of the term
of office for which the officer was elected, the general rule is to allow
the officer to hold over until his successor is duly qualified. Mere failure
of a corporation to elect officers does not terminate the terms of existing
officers nor dissolve the corporation. The doctrine above stated finds
expression in article 66 of the by-laws of the respondent which declares
in so many words that directors shall hold office "for the term of one
year or until their successors shall have been elected and taken
possession of their offices." xxx.
 It results that the practice of the directorate of filling vacancies by the
action of the directors themselves is valid. Nor can any exception be
taken to the personality of the individuals chosen by the directors to fill
vacancies in the body. [Emphasis supplied.]

Africa, in opposing VVCCs contentions, raises the same arguments that he did
before the trial court.

THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition
unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining
directors of a corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director. The
resolution of this legal issue is significantly hinged on the determination of what
constitutes a directors term of office.

The holdover period is not part of the term

of office of a member of the board of
directors

The word term has acquired a definite meaning in jurisprudence. In several

cases, we have defined term as the time during which the officer may claim to
hold the office as of right, and fixes the interval after which the several
incumbents shall succeed one another.[7] The term of office is not affected by the
holdover.[8] The term is fixed by statute and it does not change simply because the
office may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected and
has failed to qualify.

Term is distinguished from tenure in that an officers tenure represents the

term during which the incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for reasons within or beyond
the power of the incumbent.

Based on the above discussion, when Section 23[9] of the Corporation Code
declares that the board of directorsshall hold office for one (1) year until their
successors are elected and qualified, we construe the provision to mean that
the term of the members of the board of directors shall be only for one
year; their term expires one year after election to the office. The holdover period
that time from the lapse of one year from a members election to the Board and
until his successors election and qualification is not part of the directors
original term of office, nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an incumbent member of the board
of directors continues to serve in a holdover capacity, it implies that the office has
a fixed term, which has expired, and the incumbent is holding the succeeding
term.[10]

After the lapse of one year from his election as member of the VVCC Board in
1996, Makalintals term of office is deemed to have already expired. That he
continued to serve in the VVCC Board in a holdover capacity cannot be considered
as extending his term. To be precise, Makalintals term of office began in 1996 and
expired in 1997, but, by virtue of the holdover doctrine in Section 23 of the
Corporation Code, he continued to hold office until his resignation on November
10, 1998. This holdover period, however, is not to be considered as part of his
term, which, as declared, had already expired.

With the expiration of Makalintals term of office, a vacancy resulted which,

by the terms of Section 29[11] of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the purpose. To
assume as VVCC does that the vacancy is caused by Makalintals resignation in
1998, not by the expiration of his term in 1997, is both illogical and
unreasonable. His resignation as a holdover director did not change the nature of
the vacancy; the vacancy due to the expiration of Makalintals term had been
created long before his resignation.

The powers of the corporations board of

directors emanate from its stockholders

VVCCs construction of Section 29 of the Corporation Code on the authority to fill

up vacancies in the board of directors, in relation to Section 23 thereof, effectively
weakens the stockholders power to participate in the corporate governance by
electing their representatives to the board of directors. The board of directors is the
directing and controlling body of the corporation. It is a creation of the
stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to themselves the
powers of the corporation, occupies a position of trusteeship in relation to the
stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of corporate affairs.[12]

The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood
for election, and who have actually been elected by the stockholders, on an annual
basis. Only in that way can the directors' continued accountability to shareholders,
and the legitimacy of their decisions that bind the corporation's stockholders, be
assured. The shareholder vote is critical to the theory that legitimizes the exercise
of power by the directors or officers over properties that they do not own.[13]

This theory of delegated power of the board of directors similarly explains why,
under Section 29 of the Corporation Code, in cases where the vacancy in the
corporations board of directors is caused not by the expiration of a members term,
the successor so elected to fill in a vacancy shall be elected only for the unexpired
term of the his predecessor in office. The law has authorized the remaining
members of the board to fill in a vacancy only in specified instances, so as not to
retard or impair the corporations operations; yet, in recognition of the stockholders
right to elect the members of the board, it limited the period during which the
successor shall serve only to the unexpired term of his predecessor in office.
While the Court in El Hogar approved of the practice of the directors to fill
vacancies in the directorate, we point out that this ruling was made before the
present Corporation Code was enacted[14] and before its Section 29 limited the
instances when the remaining directors can fill in vacancies in the board, i.e., when
the remaining directors still constitute a quorum and when the vacancy is caused
for reasons other than by removal by the stockholders or by expiration of the term.

It also bears noting that the vacancy referred to in Section 29 contemplates

a vacancy occurring within the directors term of office. When a vacancy is
created by the expiration of a term, logically, there is no more unexpired term to
speak of. Hence, Section 29 declares that it shall be the corporations stockholders
who shall possess the authority to fill in a vacancy caused by the expiration of a
members term.

As correctly pointed out by the RTC, when remaining members of the

VVCC Board elected Ramirez to replace Makalintal, there was no more unexpired
term to speak of, as Makalintals one-year term had already expired. Pursuant to
law, the authority to fill in the vacancy caused by Makalintals leaving lies with the
VVCCs stockholders, not the remaining members of its board of directors.

WHEREFORE, we DENY the petitioners petition for review on certiorari,

and AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila,
promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the
petitioners.

SO ORDERED.
 FIRST DIVISION

[G.R. No. 113032. August 21, 1997]

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS,

DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F.
VILLASIS, petitioners, vs. RICARDO T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS &
HON. JUDGE PORFIRIO PARIAN, respondents.

DECISION
HERMOSISIMA, JR., J.:

Up for review on certiorari are: (1) the Decision September 6, 1993 and (2)
the order dated November 23, 1993 of Branch 33 of the Regional Trial Court
of Iloilo City in Criminal Cases Nos. 37097 and 37098 for estafa and
falsification of a public document, respectively. The judgment acquitted the
private respondents of both charges, but petitioners seek to hold them civilly
liable.
Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-
Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same
family, are the majority and controlling members of the Board of Trustees of
Western Institute of Technology, Inc. (WIT, for short), a stock corporation
engaged in the operation, among others, of an educational institution.
According to petitioners, the minority stockholders of WIT, sometime on June
1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board
meeting was held. In attendance were other members of the Board including
one of the petitioners Reginald Villasis. Prior to aforesaid Special Board
Meeting, copies of notice thereof, dated May 24, 1986, were distributed to all
Board Members. The notice allegedly indicated that the meeting to be held on
June 1, 1986 included item No. 6 which states:

"Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western

Institute of Technology, Inc. on compensation of all officers of the corporation."
[1]

In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986,
granting monthly compensation to the private respondents as corporate
officers retroactive June 1, 1985, viz.:
 Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad
Tubilleja (accused), it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation for services

rendered as follows: Chairman - P9,000.00/month, Vice-Chairman - P3,500.00/month,
Corporate Treasurer - P3,500.00/month and Corporate Secretary - P3,500.00/month,
retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed
equally among the ten members of the Board of Trustees. This shall amend and
superceed(sic) any previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of
Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true and
correct to the best of my knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary
[2]

A few years later, that is, on March 13, 1991, petitioners Homero Villasis,
Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-
complaint against private respondents before the Office of the City Prosecutor
of Iloilo, as a result of which two (2) separate criminal informations, one for
falsification of a public document under Article 171 of the Revised Penal Code
and the other for estafa under Article 315, par. 1(b) of the RPC, were filed
before Branch 33 of the Regional Trial Court of Iloilo City. The charge for
falsification of public document was anchored on the private respondents
submission of WITs income statement for the fiscal year 1985-1986 with the
Securities and Exchange Commission (SEC) reflecting therein the
disbursement of corporate funds for the compensation of private respondents
based on Resolution No. 4, series of 1986, making it appear that the same
was passed by the board on March 30, 1986, when in truth, the same was
actually passed on June 1, 1986, a date not covered by the corporations fiscal
year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986). The
information for falsification of a public document states:

The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T.

SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S.
SALAS (whose dates and places of birth cannot be ascertained) of the crime of
FALSIFICATION OF A PUBLC DOCUMENT, Art. 171 of the Revised Penal Code,
committed as follows:

That on or about the 10th day of June, 1986, in the City of Iloilo, Philippines and
within the jurisdiction of this Honorable Court, the above-named accused, being then
the Chairman, Vice-Chairman, Treasurer, Secretary and Trustee (who later became
the secretary), respectively, of the board of trustees of the Western Institute of
Technology, Inc., a corporation duly organized and existing under the laws of the
Republic of the Philippines, conspiring and confederating together and mutually
helping one another, to better realized (sic) their purpose, did then and there wilfully,
unlawfully and criminally prepare and execute and subsequently cause to be
submitted to the Securities and Exchange Commission an income statement of the
corporation for the fiscal year 1985-1986, the same being required to be submitted
every end of the corporation fiscal year by the aforesaid Commission and therefore, a
public document, including therein the disbursement of the retroactive compensation
of accused corporate officers in the amount of P186,470.70, by then and there making
it appear that the basis thereof Resolution No. 4, Series of 1986 was passed by the
board of trustees on March 30, 1986, a date covered by the corporations fiscal year
1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when in truth and in fact, as
said accused well knew, no such Resolution No. 48, Series of 1986 was passed on
March 30, 1986.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22,1991. [Underscoring ours].

[3]

The Information, on the other hand, for estafa reads:

The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T.

SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S.
SALAS (whose dates and places of birth cannot be ascertained) of the crime
of ESTAFA, Art. 315, par 1(b) of the Revised Penal Code, committed as follows:

That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines and within
the jurisdiction of this Honorable Court, the above-named accused, being then the
Chairman, Vice-Chairman, Treasurer, Secretary and Trustee (who later became the
secretary), respectively, of the board of trustees of the Western Institute of
Technology, Inc., a corporation duly organized and existing under the laws of the
Republic of the Philippines, conspiring and confederating together and mutually
helping one another, to better realize their purpose, did then and there wilfully,
unlawfully and feloniously defraud the said corporation (and its stockholders) in the
following manner, to wit: herein accused, knowing fully well that they have no
sufficient, lawful authority to disburse--- let alone violation of applicable laws and
jurisprudence, disbursed the funds of the corporation by effecting payment of their
retroactive salaries in the amount of P186,470.70 and subsequently paying themselves
every 15th and 30th of the month starting June 15, 1986 until the present, in the
amount of P19,500.00 per month, as if the same were their own, and when herein
accused were informed of the illegality of these disbursements by the minority
stockholders by way of objections made in an annual stockholders meeting held on
June 14, 1986 and every year thereafter, they refused, and still refuse, to rectify the
same to the damage and prejudice of the corporation (and its stockholders) in the
total sum of P1,453,970.79 as of November 15, 1991.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22,1991. [Underscoring ours]

[4]

Thereafter, trial for the two criminal cases, docketed as Criminal Cases
Nos. 37097 and 37098, was consolidated. After a full-blown hearing, Judge
Porfirio Parian handed down a verdict of acquittal on both counts dated [5]

September 6, 1993 without imposing any civil liability against the accused
therein.
Petitioners filed a Motion for Reconsideration of the civil aspect of the
[6]

RTC Decision which was, however, denied in an Order dated November 23,
1993. [7]

Hence, the instant petition.

Significantly on December 8, 1994, a Motion for Intervention, dated
December 2, 1994, was filed before this Court by Western Institute of
Technology, Inc., supposedly one of the petitioners herein, disowning its
inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel
for the other petitioners, had no authority whatsoever to represent the
corporation in filing the petition. Intervenor likewise prayed for the dismissal of
the petition for being utterly without merit. The Motion for Intervention was
granted on January 16, 1995. [8]

Petitioners would like us to hold private respondents civilly liable despite

their acquittal in Criminal Cases Nos. 37097 and 37098. They base their claim
on the alleged illegal issuance by private respondents of Resolution No. 48,
series of 1986 ordering the disbursement of corporate funds in the amount
of P186,470.70 representing the retroactive compensation as of June 1, 1985
in favor of private respondents, board members of WIT, plus P1,453,970.79
for the subsequent collective salaries of private respondent every 15 and th
30 of the month until the filing of the criminal complaints against them on
th

March 1991. Petitioners maintain that this grant of compensation to private

respondents is proscribed under Section 30 of the Corporation Code. Thus,
private respondents are obliged to return these amounts to the corporation
with interest.
We cannot sustain the petitioners. The pertinent section of the Corporation
Code provides:

Sec. 30. Compensation of directors.--- In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable per diems: Provided, however, That any such
compensation (other than per diems) may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. [Underscoring ours]

There is no argument that directors or trustees, as the case may be, are
not entitled to salary or other compensation when they perform nothing more
than the usual and ordinary duties of their office. This rule is founded upon a
presumption that directors /trustees render service gratuitously and that the
return upon their shares adequately furnishes the motives for service, without
compensation Under the foregoing section, there are only two (2) ways by
[9]

which members of the board can be granted compensation apart from

reasonable per diems: (1) when there is a provision in the by-laws fixing their
compensation; and (2) when the stockholders representing a majority of the
outstanding capital stock at a regular or special stockholders meeting agree to
give it to them.
This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of note is the
clear phraseology of Section 30 which states: xxx [T]he directors shall not
receive any compensation, as such directors, xxx. The phrase as such
directors is not without significance for it delimits the scope of the prohibition
to compensation given to them for services performed purely in their capacity
as directors or trustees. The unambiguous implication is that members of the
board may receive compensation, in addition to reasonable per diems, when
they render services to the corporation in a capacity other than as
directors/trustees. In the case at bench, Resolution No. 48, s. 1986 granted
[10]

monthly compensation to private respondents not in their capacity as

members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western
Institute of Technology. We quote once more Resolution No. 48, s. 1986 for
easy reference, viz.:

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad
Tubilleja (accused), it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation for services

rendered as follows: Chairman - P9,000.00/month, Vice-Chairman -
P3,500.00/month, Corporate Treasurer - P3,500.00/month and Corporate Secretary -
P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits
shall be distributed equally among the ten members of the Board of Trustees. This
shall amend and superceed(sic) any previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of
Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true and
correct to the best of my knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate
Secretary [Underscoring ours]
[11]

Clearly, therefore , the prohibition with respect to granting compensation to

corporate directors/trustees as such under Section 30 is not violated in this
particular case. Consequently, the last sentence of Section 30 which provides:

xxx xxx. In no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before income tax of the corporation
during the preceding year. [Underscoring ours]

does not likewise find application in this case since the compensation is being
given to private respondents in their capacity as officers of WIT and not as
board members.
Petitioners assert that the instant case is a derivative suit brought by them
as minority shareholders of WIT for and on behalf of the corporation to annul
Resolution No. 48, s. 1986 which is prejudicial to the corporation.
 We are unpersuaded. A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress wrongs committed
against it, for which the directors refuse to sue. It is a remedy designed by
[12]

equity and has been the principal defense of the minority shareholders against
abuses by the majority. Here, however, the case is not a derivative suit but is
[13]

merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098
filed with the RTC of Iloilo for estafa and falsification of public
document. Among the basic requirements for a derivative suit to prosper is
that the minority shareholder who is suing for and on behalf of the corporation
must allege his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. This is necessary to vest
[14]

jurisdiction upon the tribunal in line with the rule that it is the allegations in the
complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. This was not
[15]

complied with by the petitioners either in their complaint before the court a
quo nor in the instant petition which, in part, merely states that this is a petition
for review on certiorari on pure questions of law to set aside a portion of the
RTC decision in Criminal Cases Nos. 37097 and 37098 since the trial courts
[16]

judgment of acquittal failed to impose any civil liability against the private
respondents. By no amount of equity considerations, if at all deserved, can a
mere appeal on the civil aspect of a criminal case be treated as a derivative
suit.
Granting, for purposes of discussion, that this is a derivative suit as
insisted by petitioners, which it is not, the same is outrightly dismissible for
having been wrongfully filed in the regular court devoid of any jurisdiction to
entertain the complaint. The case should have been filed with the Securities
and Exchange Commission (SEC) which exercises original and exclusive
jurisdiction over derivative suits, they being intra-corporate disputes, per
Section 5(b) of P.D. No. 902-A:

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

xxx xxx xxx

b) Controversies arising out of intra-corporate or partnership relations, between and

among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the State insofar as it concerns their individual franchise or right to exist as such
entity;

xxx xxx xxx. [Underscoring ours]

Once the case is decided by the SEC, the losing party may file a petition for
review before the Court of Appeals raising questions of fact, of law, or mixed
questions of fact and law. It is only after the case has ran this course, and
[17]

not earlier, can it be brought to us via a petition for review on certiorari under
Rule 45 raising only pure questions of law. Petitioners, in pleading that we
[18]

treat the instant petition as a derivative suit, are trying to short-circuit the
entire process which we cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098
for falsification of public document and estafa, which this petition truly is, we
have to deny the petition just the same. It will be well to quote the respondent
courts ratiocinations acquitting the private respondents on both counts:

The prosecution wants this Court to believe and agree that there is falsification of
public document because, as claimed by the prosecution, Resolution No. 48, Series of
1986 (Exh. 1-E-1) was not taken up and passed during the Regular Meeting of the
Board of Trustees of the western Institute of Technology (WIT), Inc. on March 30,
1986, but on June 1, 1986 special meeting of the same board of trustees.

This Court is reluctant to accept this claim of falsification. The prosecution omitted to
submit the complete minutes of the regular meeting of the Board of Trustees on March
30, 1986. It only presented in evidence Exh. C, which is page 5 or the last page of the
said minutes. Had the complete minutes (Exh. 1 consisting of five (5) pages, been
submitted, it can readily be seen and understood that Resolution No. 48, Series of
1986 (Exh. 1-E-1) giving compensation to corporate officers, was indeed included in
Other Business, No. 6 of the Agenda, and was taken up and passed on March 30,
1986. The mere fact of existence of Exh. C also proves that it was passed on March
30, 1986 for Exh,. C is a part and parcel of the whole minutes of the Board of
Trustees Regular Meeting on March 30, 1986. No better and more credible proof can
be considered other than the Minutes (Exh. 1) itself of the Regular Meeting of the
Board of Trustees on March 30, 1986. The imputation that said Resolution No.48 was
neither taken up nor passed on March 30, 1986 because the matter regarding
compensation was not specifically stated or written in the Agenda and that the words
possible implementation of said Resolution No. 48, was expressly written in the
Agenda for the Special Meeting of the Board on June 1, 1986, is simply an
implication. This evidence by implication to the mind of the court cannot prevail over
the Minutes (Exh. 1) and cannot ripen into proof beyond reasonable doubt which is
demanded in all criminal prosecutions.

This Court finds that under the Eleventh Article (Exh. 3-D-1) of the Articles of
Incorporation (Exh. 3-B) of the Panay Educational Institution, Inc., now the Western
Institute of Technology, Inc., the officers of the corporation shall receive such
compensation as the Board of Directors may provide. These Articles of Incorporation
was adopted on May 17, 1957 (Exh. 3-E). The Officers of the corporation and their
corresponding duties are enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of
the Amended By-Laws of the Corporation (Exh. 4-A) which was adopted on May 31,
1957. According to Sec. 6, Art. III of the same By-Laws, all officers shall receive
such compensation as may be fixed by the Board of Directors.

It is the perception of this Court that the grant of compensation or salary to the
accused in their capacity as officers of the corporation, through Resolution No. 48,
enacted on March 30, 1986 by the Board of Trustees, is authorized by both the
Articles of Incorporation and the By-Laws of the Corporation. To state otherwise is to
depart from the clear terms of the said articles and by-laws. In their defense the
accused have properly and rightly asserted that the grant of salary is not for
directors, but for their being officers of the corporation who oversee the day to day
activities and operations of the school.

xxx xxx xxx

xxx [O]n the question of whether or not the accused can be held liable for estafa
under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is perceived by this Court
that the receipt and the holding of the money by the accused as salary on basis of the
authority granted by the Articles and By-Laws of the corporation are not tainted with
abuse of confidence. The money they received belongs to them and cannot be said to
have been converted and/or misappropriated by them.

xxx xxx xxx. [Underscoring ours]

[19]

From the foregoing factual findings, which we find to be amply

substantiated by the records, it is evident that there is simply no basis to hold
the accused, private respondents herein, civilly liable. Section 2(b) of Rule
111 on the New Rules on Criminal Procedure provides:

SEC. 2. Institution of separate civil action.

xxx xxx xxx

(b) Extinction of the penal action does not carry with it extinction of the civil, unless
the extinction proceeds from a declaration in a final judgment that the fact from which
the civil might arise did not exist. [Underscoring ours]

Likewise, the last paragraph of Section 2, Rule 120 reads:

SEC. 2. Form and contents of judgment.

xxx xxx xxx

In case of acquittal, unless there is a clear showing that the act from which the civil
liability might arise did not exist, the judgment shall make a finding on the civil
liability of the accused in favor of the offended party. [Underscoring ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely
based on reasonable doubt but rather on a finding that the accused-private
respondents did not commit the criminal acts complained of. Thus, pursuant to
the above rule and settled jurisprudence, any civil action ex delicto cannot
prosper. Acquittal in a criminal action bars the civil action arising therefrom
where the judgment of acquittal holds that the accused did not commit the
criminal acts imputed to them. [20]

WHEREFORE, the instant petition is hereby DENIED with costs against

petitioners.
SO ORDERED.
 SECOND DIVISION

GLORIA V. GOMEZ, G.R. No. 174044

Petitioner,
Present:
Carpio, J., Chairperson,
- versus - Leonardo-De Castro,
Brion,
Del Castillo, and
Abad, JJ.
PNOC DEVELOPMENT AND
MANAGEMENT CORPORATION
(PDMC) (formerly known as
FILOIL DEVELOPMENT AND
MANAGEMENT CORPORATION Promulgated:
[FDMC]),
Respondent. November 27, 2009

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

DECISION

ABAD, J.:
This case is about what distinguishes a regular company manager performing
important executive tasks from a corporate officer whose election and functions
are governed by the companys by-laws.

The Facts and the Case

Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of

Petron Corporation, then a government-owned corporation. With Petrons
privatization, she availed of the companys early retirement program and left that
organization on April 30, 1994. On the following day, May 1, 1994, however, Filoil
Refinery Corporation (Filoil), also a government-owned corporation, appointed
her its corporate secretary and legal counsel,[1] with the same managerial rank,
compensation, and benefits that she used to enjoy at Petron.

But Filoil was later on also identified for privatization. To facilitate its
conversion, the Filoil board of directors created a five-member task force headed
by petitioner Gomez who had been designated administrator.[2] While
documenting Filoils assets, she found several properties which were not in the
books of the corporation. Consequently, she advised the board to suspend the
privatization until all assets have been accounted for.

With the privatization temporarily shelved, Filoil underwent reorganization

and was renamed Filoil Development Management Corporation (FDMC), which
later became the respondent PNOC Development Management Corporation
(PDMC). When this happened, Gomezs task force was abolished and its members,
including Gomez, were given termination notices on March 5, 1996.[3] The matter
was then reported to the Department of Labor and Employment on March 7,
1996.[4]

Meantime, petitioner Gomez continued to serve as corporate secretary of

respondent PDMC. On September 23, 1996 its president re-hired her as
administrator and legal counsel of the company.[5] In accordance with company
guidelines, it credited her the years she served with the Filoil task force. On May
24, 1998, the next president of PDMC extended her term as administrator beyond
her retirement age,[6] pursuant to his authority under the PDMC Approvals
Manual.[7] She was supposed to serve beyond retirement from August 11, 1998 to
August 11, 2004. Meantime, a new board of directors for PDMC took over the
company.

On March 29, 1999 the new board of directors of respondent PDMC

removed petitioner Gomez as corporate secretary. Further, at the boards meeting
on October 21, 1999 the board questioned her continued employment as
administrator. In answer, she presented the former presidents May 24, 1998
letter that extended her term. Dissatisfied with this, the board sought the advice
of its legal department, which expressed the view that Gomezs term extension
was an ultra vires act of the former president. It reasoned that, since her position
was functionally that of a vice-president or general manager, her term could be
extended under the companys by-laws only with the approval of the board. The
legal department held that her de facto tenure could be legally put to an end.[8]

Sought for comment, the Office of the Government Corporate Counsel

(OGCC) held the view that while respondent PDMCs board did not approve the
creation of the position of administrator that Gomez held, such action should be
deemed ratified since the board had been aware of it since 1994. But the OGCC
ventured that the extension of her term beyond retirement age should have been
made with the boards approval.[9]

Petitioner Gomez for her part conceded that as corporate secretary, she
served only as a corporate officer. But, when they named her administrator, she
became a regular managerial employee.Consequently, the respondent PDMCs
board did not have to approve either her appointment as such or the extension of
her term in 1998.
 Pending resolution of the issue, the respondent PDMCs board withheld
petitioner Gomezs wages from November 16 to 30, 1999, prompting her to file a
complaint for non-payment of wages, damages, and attorneys fees with the Labor
Arbiter on December 8, 1999.[10] She later amended her complaint to include
other money claims.[11]

In a special meeting held on December 29, 1999 the respondent PDMCs

board resolved to terminate petitioner Gomezs services retroactive on August 11,
1998, her retirement date.[12] On January 5, 2000 the board informed petitioner of
its decision.[13] Thus, she further amended her complaint to include illegal
dismissal.[14]

Respondent PDMC moved to have petitioner Gomezs complaint dismissed

on ground of lack of jurisdiction. The Labor Arbiter granted the motion[15] upon a
finding that Gomez was a corporate officer and that her case involved an intra-
corporate dispute that fell under the jurisdiction of the Securities and Exchange
Commission (SEC) pursuant to Presidential Decree (P.D.) 902-A.[16] On motion for
reconsideration, the National Labor Relations Commission (NLRC) Third Division
set aside the Labor Arbiters order and remanded the case to the arbitration
branch for further proceedings.[17] The Third Division held that Gomez was a
regular employee, not a corporate officer; hence, her complaint came under the
jurisdiction of the Labor Arbiter.

Upon elevation of the matter to the Court of Appeals (CA) in CA-G.R. SP

88819, however, the latter rendered a decision on May 19, 2006,[18] reversing the
NLRC decision. The CA held that since Gomezs appointment as administrator
required the approval of the board of directors, she was clearly a corporate
officer. Thus, her complaint is within the jurisdiction of the Regional Trial Court
(RTC) under P.D. 902-A, as amended by Republic Act (R.A.) 8799.[19] With the
denial of her motion for reconsideration,[20] Gomez filed this petition for review
on certiorari under Rule 45.
 The Issue Presented

The key issue in this case is whether or not petitioner Gomez was, in her capacity
as administrator of respondent PDMC, an ordinary employee whose complaint for
illegal dismissal and non-payment of wages and benefits is within the jurisdiction
of the NLRC.

The Courts Ruling

Ordinary company employees are generally employed not by action of the

directors and stockholders but by that of the managing officer of the corporation
who also determines the compensation to be paid such employees.[21] Corporate
officers, on the other hand, are elected or appointed[22] by the directors or
stockholders, and are those who are given that character either by the
Corporation Code or by the corporations by-laws.[23]

Here, it was the PDMC president who appointed petitioner Gomez

administrator, not its board of directors or the stockholders. The president alone
also determined her compensation package. Moreover, the administrator was not
among the corporate officers mentioned in the PDMC by-laws. The corporate
officers proper were the chairman, president, executive vice-president, vice-
president, general manager, treasurer, and secretary.[24]

Respondent PDMC claims, however, that since its board had under its by-
laws the power to create additional corporate offices, it may be deemed to have
simply ratified its presidents creation of the corporate position of
administrator.[25] But creating an additional corporate office was definitely not
respondent PDMCs intent based on its several actions concerning the position of
administrator.
 Respondent PDMC never told Gomez that she was a corporate officer until
the tail-end of her service after the board found legal justification for getting rid
of her by consulting its legal department and the OGCC which supplied an answer
that the board obviously wanted. Indeed, the PDMC president first hired her as
administrator in May 1994 and then as administrator/legal counsel in September
1996 without a board approval. The president even extended her term in May
1998 also without such approval. The companys mindset from the beginning,
therefore, was that she was not a corporate officer.

Respondent PDMC of course claims that as administrator petitioner Gomez

performed functions that were similar to those of its vice-president or its general
manager, corporate positions that were mentioned in the companys by-laws. It
points out that Gomez was third in the line of command, next only to the
chairman and president,[26] and had been empowered to make major decisions
and manage the affairs of the company.

But the relationship of a person to a corporation, whether as officer or

agent or employee, is not determined by the nature of the services he performs
but by the incidents of his relationship with the corporation as they actually
exist.[27] Here, respondent PDMC hired petitioner Gomez as an ordinary employee
without board approval as was proper for a corporate officer. When the company
got her the first time, it agreed to have her retain the managerial rank that she
held with Petron. Her appointment paper said that she would be entitled to all
the rights, privileges, and benefits that regular PDMC employees enjoyed.[28] This
is in sharp contrast to what the former PDMC presidents appointment paper
stated: he was elected to the position and his compensation depended on the will
of the board of directors.[29]

What is more, respondent PDMC enrolled petitioner Gomez with the Social
Security System, the Medicare, and the Pag-Ibig Fund. It even issued certifications
dated October 10, 2008,[30]stating that Gomez was a permanent employee and
that the company had remitted combined contributions during her tenure. The
company also made her a member of the PDMCs savings and provident
plan[31] and its retirement plan.[32] It grouped her with the managers covered by
the companys group hospitalization insurance.[33] Likewise, she underwent regular
employee performance appraisals,[34] purchased stocks through the employee
stock option plan,[35] and was entitled to vacation and emergency leaves.[36] PDMC
even withheld taxes on her salary and declared her as an employee in the official
Bureau of Internal Revenue forms.[37] These are all indicia of an employer-
employee relationship which respondent PDMC failed to refute.

Estoppel, an equitable principle rooted on natural justice, prevents a

person from rejecting his previous acts and representations to the prejudice of
others who have relied on them.[38] This principle of law applies to corporations as
well. The PDMC in this case is estopped from claiming that despite all the
appearances of regular employment that it weaved around petitioner Gomezs
position it must have technically hired her only as a corporate officer. The board
and its officers made her stay on and work with the company for years under the
belief that she held a regular managerial position.

That petitioner Gomez served concurrently as corporate secretary for a

time is immaterial. A corporation is not prohibited from hiring a corporate officer
to perform services under circumstances which will make him an
employee.[39] Indeed, it is possible for one to have a dual role of officer and
employee. In Elleccion Vda. De Lecciones v. National Labor Relations
Commission,[40] the Court upheld NLRC jurisdiction over a complaint filed by one
who served both as corporate secretary and administrator, finding that the
money claims were made as an employee and not as a corporate officer.

WHEREFORE, the Court GRANTS the petition, REVERSES and SETS ASIDE the
decision dated May 19, 2006 and the resolution dated August 15, 2006 of the
Court of Appeals in CA-G.R. SP 88819, and REINSTATES the resolution dated
November 22, 2002 of the National Labor Relations Commissions Third Division in
NLRC NCR 30-12-00856-99. Let the records of this case be REMANDED to the
arbitration branch of origin for the conduct of further proceedings.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-10556 April 30, 1958

RICARDO GURREA, plaintiff-appellant,

vs.
JOSE MANUEL LEZAMA, ET AL., defendants-appellees.

Fulgencio Vega and Felix D. Bacabac for appellant.

Jose Manuel Lezama for appellees.
Jose Manuel Lezama and Genivera F. de Lezama. Domingo B. Lauren for the other appellees.

BAUTISTA ANGELO, J.:

Plaintiff instituted this action in the Court of First Instance of Iloilo to have Resolution No. 65 of the
Board of Directors of the La Paz Ice Plant and Cold Storage Co., Inc., removing him from his
position of manager of said corporation declared null and void and to recover damages incident
thereto. The action is predicated on the ground that said resolution was adopted in contravention of
the provisions of the by-laws of the corporation, of the Corporation Law and of the understanding,
intention and agreement reached among its stockholders.

Defendant answered the complaint setting up as defense that plaintiff had been removed by virtue of
a valid resolution.

In connection with this complaint, plaintiff moved for the issuance of a writ of preliminary injunction to
restrain defendant Jose Manuel Lezama from managing the corporation pending the determination
of this case, but after hearing where parties presented testimonial and documentary evidence, the
court denied the motion. Thereafter, by agreement of the parties and without any trial on the merits,
the case was submitted for judgment on the sole legal question of whether plaintiff could be legally
removed as manager of the corporation merely by resolution of the board of directors or whether the
affirmative vote of 2/3 of the paid shares of stocks was necessary for that purpose. And passing
upon this legal point, the trial court held that the removal of plaintiff was legal and dismissed the
complaint without pronouncement as to costs. Plaintiff appealed to the Court of Appeals but finding
that the question at issue is one of law, the latter certified the case to us for decision.

Section 33 of the Corporation Law provides: "Immediately after the election, the directors of a
corporation must organize by the election of a president, who must be one of their number, a
secretary or clerk who shall be a resident of the Philippines . . . and such other officers as may be
provided for in the by-laws." The by-laws of the instant corporation in turn provide that in the board of
directors there shall be a president, a vice-president, a secretary and a treasurer. These are the only
ones mentioned therein as officers of the corporation. The manager is not included although the
latter is mentioned as the person in whom the administration of the corporation is vested, and with
the exception of the president, the by-laws provide that the officers of the corporation may be
removed or suspended by the affirmative vote of 2/3 of the corporation (Exhibit A).

From the above the following conclusion is clear: that we can only regard as officers of a corporation
those who are given that character either by the Corporation Law or by its by-laws. The rest can be
considered merely as employees or subordinate officials. And considering that plaintiff has been
appointed manager by the board of directors and as such does not have the character of an officer,
the conclusion is inescapable that he can be suspended or removed by said board of directors under
such terms as it may see fit and not as provided for in the by-laws. Evidently, the power to appoint
carries with it the power to remove, and it would be incongruous to hold that having been appointed
by the board of directors he could only be removed by the stockholders.

The above interpretation finds also support in the American authorities. Fletcher, in his treatise,
states the rule in the following wise: "It is sometimes important to determine whether a person
representing a corporation is to be classed as an officer of the company or merely as an agent or
employee, especially in construing statutes renting only to 'officers' of corporations. Generally the
officers of a corporation are enumerated in its charter or by-laws, and include a president, vice-
president, secretary, treasurer and sometimes others. The statutes in most of the states expressly
provide for the election of a president, secretary and treasurer, and then provide, that there shall be
such other officers, agents and factors as the corporation shall authorize for that purpose. If the
charter expressly enumerates who shall be officers of the company, a person whose position is not
enumerated is not an officer as to members of the corporation, since the charter is conclusive upon
them" (Fletcher, Cyclopedia of the Law of Private Corporations, Vol. II, p. 19). It has been likewise
held "that the offices pertaining to a private corporation are defined in its charter and by-laws, and
that no other positions in the service of the corporation are offices" (Ann. 53 A.L.R., 599).

Indeed, there are authorities galore that hold that a general manager is not an officer of a
corporation, even if his powers and influence may be as great as those of any officer in said
organization.

Officers Distinguished from Mere Employees. — As already stated, both officers and
employees are agents of the corporation and the difference between them is largely one of
degree; the officers are the most important employees exercising greater authority or power
in the management of the business. Ordinarily, too, the principal offices are designated by
statute, charter or by-law provisions, and specific duties are imposed upon certain officers.
Thus the state statute or a by-law may provide that stock certificates shall be signed by the
president and countersigned by the secretary or treasurer. The general manager of a
corporation is not ordinarily classed as an officer, but his powers and influence may be quite
as great as those of any person in the organization. (Grange, Corporation Law for Officers
and Directors, p. 432; Emphasis supplied.)

One distinction between officers and agents of a corporation lies in the manner of their
creation. An officer is created by the charter of the corporation, and the officer is elected by
the directors or the stockholders. An agency is usually created by the officers, or one or more
of them, and the agent is appointed by the same authority. It is clear that the two terms
officers and agents are by no means interchangeable. One, deriving its existence from the
other, and being dependent upon that other for its continuation, is necessarily restricted in its
powers and duties, and such powers and duties, are not necessarily the same as those
pertaining to the authority creating it. The officers, as such, are the corporation. An agent is
an employee. "A mere employment, however liberally compensated, does not rise to the
dignity of an office." 21 Am and Eng. Enc. Law (2d Ed.) 836. In Wheeler and Wilson Mfg.
Co. vs. Lawson, 57 Wis. 400, 15 N. W. 398, it was held that under a statute requiring an
affidavit to be made by an officer of a corporation, the general agent or managing agent,
within the state, of a foreign corporation is not an officer. In Farmers' Loan and Trust
Co. vs. Warring, 20 Wis. 305, service was made upon the "principal agent" of a corporation
holding in trust a railroad, when the statute required service upon a "principal officer." In
answering the question whether or not the agent was a principal officer the court said: "It is
evident he was not, and must be regarded only as an agent not an officer of any kind, much
less a principal officer." A ruling that a "general manager" of a corporation was not
 authorized to verify pleadings, under a statute requiring verification by "an officer" was made
in Meton vs. Isham Wagon Co. (Sup.) 4 N. Y. Supp. 215. In Raleigh, etc. R. Co. vs. Pullman
Co., 122 Ga. 704, 5O S.E. 1008 (4), it was held that the term "general manager." as applied
to one representing a corporation, and especially a railroad corporation, imported an agent of
a very extensive authority; but it was not ruled that even the term "general manager" would
import that the person holding that position was necessarily an officer of the company. One
distinction between an officer and an agent suggested in Commonwealth vs. Christian, 9
Phila. (Pa.) 558, is that on officer of a corporation, if illegally excluded from his office, may by
mandamus compel the corporation, to reinstate him; while an agent may be dismissed
without cause, and his only remedy would be compensation in damages. It would not be
contended that the "general agent of the defendant at Columbus," in the event of his
discharge, could be reinstated by mandamus. We do not think the general agent at
Columbus was an officer of the defendant company. Therefore his alleged waiver of a
condition in the policy was not binding upon the company. (Vardeman vs. Penn. Mut. Life
Ins. Co. 125 Ga. 117, 54 S.E. P. 66; Emphasis supplied.)

The plaintiff-predicates this action on said contract, and claims that the same being signed
by the defendant through its "general manager" if admitted evidence, would show sufficient
authority prima facie to do any act which the directors could authorize or ratify. The
instrument in question being signed by James W. Codle, "General Manager" and no
evidence in the trial being produced showing the duties of said manager or what kind of an
office he was general manager of, the "general manager" without proof as to the nature of
services performed by the persons called "general manager", have no meaning in law,
excepting that the persons bearing the title is an employee who has been designated with a
title. It does not make him an officer of the company employing him. (Studerbaker Bros.
Co. vs. R. M. Rose Co., 119 N.Y.S pp. 970, 97; Emphasis supplied.)

We therefore hold that plaintiff has been properly removed when the board of directors of the instant
corporation approved its Resolution No. 65 on June 3, 1948.

We will now clarify some of the points raised by the distinguished dissenter in his dissenting opinion.

The fact that the "manager" of the corporation in the several statutes enacted by Congress is held
criminally liable for violation of any of the penal provisions therein prescribed does not make him an
"officer" of the corporation. This liability flows from the nature of his duties which are delegated to
him by the board of directors. He is paid for them. Hence, he has to answer for them should he use it
in violation of law. In the case of Robinson vs. Moark-Nemo Consol Mining Co., et al., 163 S. W.
889, in connection with the liability of the manager, the court said:

Common justice and common sense demand that, where those in charge and control of the
management of a corporation direct it along paths of wrongdoing, they should be held
accountable by law. . . . This doctrine will prevent many wrongs, and have a salutary
influence in bringing about the lawful and orderly management of corporations.

It is claimed that the cases of Meton vs. Isham Wagon, 4 N.Y.S., 215 and State vs. Bergs, 217 N.
W., 736, supporting the theory that a manager is not necessarily an officer, are in illo tempore.1 It is
submitted that we do not adopt a rule just because it is new nor reject another just because it is old.
We adopt a rule because it is a good and sound rule. The fact however is that they are not the only
authorities supporting that theory. Additional cases are cited by Fletcher in support thereof, such as
the cases of Vardeman vs. Penn. Mut. Life Ins. Co., supra Studebaker Bros. Co. vs. R. M. Rose
Co., supra.
The dissenting opinion quotes from Thompson and Fletcher to support the theory that the general
manager of a corporation may be considered as its principal officer even though not so mentioned in
its charter or bylaws. We have examined the cast cited in support of that theory but we have found
that they are not in point. Thus, we have found (1) that the parties involved are mostly outsiders who
press their transactions against the corporation; (2) that the point raised is whether the acts of the
manager bind the corporation; (3) that the tendency of the courts is to hold the corporation liable for
the acts of the manager so long as they are within the powers granted, hence, the courts
emphasized the importance of the position of manager; and (4) the position of manager was
discussed from the point of view of an outsider and not from the internal organization of the
corporation, or in accordance with its charter or by-laws. In the present case, however, the parties
are the manager and the corporation. And the solution of the problem hinges on the internal
government of the corporation where the charter and the by-laws are necessarily involved in the
determination of the rights of the parties. Indeed, it has been held: "But it is urged that a corporation
may have officers not recognized by the charter and by-laws. It is possible this may be as to matters
arising between strangers and the corporation." [Com. vs. Christian, 9 Phila. (Pa.) 556; emphasis
supplied].

The cases on all fours with the present are those of State ex rel Blackwood vs. Brast, et al., 127 S.
E. 507 and Denton Milling Co. vs. Blewitt, 254 S. W. 236, 238, where the parties involved are the
manager and the corporation. The issue raised is the relation of the manager towards the
corporation. The position of the manager is discussed from the point of view of its internal
government. And the holding of the court is that the manager is the creation of the board of directors
and the agent through whom the corporate duties of the board are performed. Hence, the manager
holds his position at the pleasure of the board. This stipulation is well expressed in the following
words of Thompson:

The word "manager" implies agency, control, and presumptively sufficient authority to bind a
corporation in a case in which the corporation was an actual party. It has been said that such
agent must have the same general supervision of the corporation as is associated with the
office of cashier or secretary. By whatever name he may be called, such, managing agent is
a mere employee of the board of directors and holds his position subject to the particular
contract of employment; and unless the contract of employment fixes his term of office, it
may be terminated at the pleasure of the board. . . . The manager, like any other appointed
agent, is subject to removal when his term expires and on the request of the proper officer he
should turn over his business to the corporation and, where he refuses to comply, he may be
restrained from the further performance of work for the corporation. (Thompson on
Corporations, Vol. III, 3rd., pp. 209-210; Emphasis supplied.)

It is not correct to hold that the theory that a manager is not classed as an officer of a corporation is
only the minority view. If we consider the states that hold that managers are merely agents or
employees as among those that hold the theory that managers are not necessarily officers, then our
theory is supported by the majority view. Indeed, this view is upheld by nine states,2 whereas only six
states adopt the view that managers are considered principal officers of the corporation.3

The dissenting opinion quotes the provision of the bylaws relative to the administration of the affairs
of the instant corporation. It is there provided that the affairs of the corporation shall be successively
administered by (1) the stockholders; (2) the board of directors; and(3) the manager. From this it
concludes that the manager should be considered an officer.

The above enumeration only emphasizes the different organs through which the affairs of the
corporation should be administered and the order in which the powers should be exercised. The
stockholders are the entity, composing the whole corporation. The board of directors is the entity
elected by the stockholders to manage the affairs of the corporation. And the manager is the
individual appointed by the board of directors to carry out the powers delegated to him. In other
words, the manager is the creation of the board of directors. He is an alter ego of the board. As our
law provides that only those enumerated in the charter or in the by-laws are considered officers, the
manager who has not been so enumerated therein, but only incidentally mentioned in the order of
management, cannot be considered an officer of the corporation within their purview.

The mere fact that the directors are not mentioned in the by-laws as officers does not deprive them
of their category as such for their character as officer is secured in the charter. The same is not true
with the manager. Customs and corporate usages cannot prevail over the express provisions of the
charter and the by-laws.

There is no comparison between an appointee of the President, especially one in the judiciary, and
the appointee of the board of directors of a corporation. In the first case, removal is especially
provided for by law and in the second, the appointee holds office at the pleasure of the board. And
with regard to the powers of the board of director, to remove a manager of the corporation,
Thompson has the following to say:

. . . Below the grade of director and such other officers as are elected by the corporation at
large, the general rule is that the officers of private corporations hold their offices during the
will of the directors, and are hence removable by the directors without assigning any cause
for the removal, except so far as their power may be restrained by contract with the particular
officer, — just as any other employer may discharge his employee. Speaking generally, it
may be said that the power to appoint carries with it the power to remove. . . . the directors
who appoint a ministerial officer may undoubtedly remove him at pleasure, and he has no
remedy other than an action for damages against the corporation for a breach of contract. . .
. The ordinary ministerial and other lesser officers, however, hold their offices during the
pleasure of the directors and may be removed at will, without assigned cause. Of this class
of officers and agents are the secretary and treasurer of the corporation, the general
manager, the assistant manager, the field manager, the attorney of the company, an
assistant horticulturist, and the bookkeepers. (Thompson on Corporations, Vol. III, 521-523.)
 Republic of the Philippines
Supreme Court
Manila

THIRD DIVISION

MATLING INDUSTRIAL G.R. No. 157802

AND COMMERCIAL
CORPORATION, Present:
RICHARD K. SPENCER,
CATHERINE SPENCER, CARPIO MORALES, Chairperson,
AND ALEX MANCILLA, BRION,
Petitioners, BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.
-versus -
Promulgated:
October 13, 2010
RICARDO R. COROS,
Respondent.
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J.:
This case reprises the jurisdictional conundrum of whether a complaint for
illegal dismissal is cognizable by the Labor Arbiter (LA) or by the Regional Trial
Court (RTC). The determination of whether the dismissed officer was a regular
employee or a corporate officer unravels the conundrum. In the case of the regular
employee, the LA has jurisdiction; otherwise, the RTC exercises the legal authority
to adjudicate.

In this appeal via petition for review on certiorari, the petitioners challenge
the decision dated September 13, 2002[1] and the resolution dated April 2,
2003,[2] both promulgated in C.A.-G.R. SP No. 65714 entitled Matling Industrial
and Commercial Corporation, et al. v. Ricardo R. Coros and National Labor
Relations Commission, whereby by the Court of Appeals (CA) sustained the ruling
of the National Labor Relations Commission (NLRC) to the effect that the LA had
jurisdiction because the respondent was not a corporate officer of petitioner
Matling Industrial and Commercial Corporation (Matling).

Antecedents

After his dismissal by Matling as its Vice President for Finance and
Administration, the respondent filed on August 10, 2000 a complaint for illegal
suspension and illegal dismissal against Matling and some of its corporate officers
(petitioners) in the NLRC, Sub-Regional Arbitration Branch XII, Iligan City.[3]

The petitioners moved to dismiss the complaint,[4] raising the ground, among
others, that the complaint pertained to the jurisdiction of the Securities and
Exchange Commission (SEC) due to the controversy being intra-corporate
inasmuch as the respondent was a member of Matlings Board of Directors aside
from being its Vice-President for Finance and Administration prior to his
termination.
The respondent opposed the petitioners motion to dismiss,[5] insisting that his status
as a member of Matlings Board of Directors was doubtful, considering that he had
not been formally elected as such; that he did not own a single share of stock in
Matling, considering that he had been made to sign in blank an undated
indorsement of the certificate of stock he had been given in 1992; that Matling had
taken back and retained the certificate of stock in its custody; and that even
assuming that he had been a Director of Matling, he had been removed as the Vice
President for Finance and Administration, not as a Director, a fact that the notice of
his termination dated April 10, 2000 showed.

On October 16, 2000, the LA granted the petitioners motion to

dismiss,[6] ruling that the respondent was a corporate officer because he was
occupying the position of Vice President for Finance and Administration and at the
same time was a Member of the Board of Directors of Matling; and that,
consequently, his removal was a corporate act of Matling and the controversy
resulting from such removal was under the jurisdiction of the SEC, pursuant to
Section 5, paragraph (c) of Presidential Decree No. 902.
 Ruling of the NLRC

The respondent appealed to the NLRC,[7] urging that:

I
THE HONORABLE LABOR ARBITER COMMITTED GRAVE
ABUSE OF DISCRETION GRANTING APPELLEES MOTION TO
DISMISS WITHOUT GIVING THE APPELLANT
AN OPPORTUNITY TO FILE HIS OPPOSITION THERETO
THEREBY VIOLATING THE BASIC PRINCIPLE OF DUE
PROCESS.

II
THE HONORABLE LABOR ARBITER COMMITTED AN ERROR
IN DISMISSING THE CASE FOR LACK OF JURISDICTION.

On March 13, 2001, the NLRC set aside the dismissal, concluding that the
respondents complaint for illegal dismissal was properly cognizable by the LA, not
by the SEC, because he was not a corporate officer by virtue of his position in
Matling, albeit high ranking and managerial, not being among the positions listed
in Matlings Constitution and By-Laws.[8] The NLRC disposed thuswise:

WHEREFORE, the Order appealed from is SET ASIDE. A new one is

entered declaring and holding that the case at bench does not involve any
intracorporate matter. Hence, jurisdiction to hear and act on said case is
vested with the Labor Arbiter, not the SEC, considering that the position
of Vice-President for Finance and Administration being held by
complainant-appellant is not listed as among respondent's corporate
officers.

Accordingly, let the records of this case be REMANDED to the

Arbitration Branch of origin in order that the Labor Arbiter below could
act on the case at bench, hear both parties, receive their respective
evidence and position papers fully observing the requirements of due
process, and resolve the same with reasonable dispatch.
SO ORDERED.
The petitioners sought reconsideration, [9] reiterating that the respondent, being a
member of the Board of Directors, was a corporate officer whose removal was not
within the LAs jurisdiction.

The petitioners later submitted to the NLRC in support of the motion for
reconsideration the certified machine copies of Matlings Amended Articles of
Incorporation and By Laws to prove that the President of Matling was thereby
granted full power to create new offices and appoint the officers thereto, and
the minutes of special meeting held on June 7, 1999 by Matlings Board of
Directors to prove that the respondent was, indeed, a Member of the Board of
Directors.[10]

Nonetheless, on April 30, 2001, the NLRC denied the petitioners motion for
reconsideration.[11]

Ruling of the CA

The petitioners elevated the issue to the CA by petition for certiorari, docketed as
C.A.-G.R. No. SP 65714, contending that the NLRC committed grave abuse of
discretion amounting to lack of jurisdiction in reversing the correct decision of the
LA.

In its assailed decision promulgated on September 13, 2002,[12] the CA dismissed

the petition for certiorari, explaining:

For a position to be considered as a corporate office, or, for that matter,

for one to be considered as a corporate officer, the position must, if not
listed in the by-laws, have been created by the corporation's board of
directors, and the occupant thereof appointed or elected by the same
board of directors or stockholders. This is the implication of the ruling
in Tabang v. National Labor Relations Commission, which reads:
The president, vice president, secretary and treasurer are
commonly regarded as the principal or executive officers of a
corporation, and modern corporation statutes usually designate
them as the officers of the corporation. However, other offices
are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under
 the by-laws of a corporation to create additional offices as may
be necessary.
It has been held that an 'office' is created by the charter of the
corporation and the officer is elected by the directors or
stockholders. On the other hand, an 'employee' usually occupies
no office and generally is employed not by action of the
directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to
such employee.
This ruling was reiterated in the subsequent cases of Ongkingco v.
National Labor Relations Commission and De Rossi v. National Labor
Relations Commission.
The position of vice-president for administration and finance,
which Coros used to hold in the corporation, was not created by the
corporations board of directors but only by its president or executive
vice-president pursuant to the by-laws of the corporation. Moreover,
Coros appointment to said position was not made through any act of the
board of directors or stockholders of the corporation. Consequently, the
position to which Coros was appointed and later on removed from, is not
a corporate office despite its nomenclature, but an ordinary office in the
corporation.
Coros alleged illegal dismissal therefrom is, therefore, within the
jurisdiction of the labor arbiter.
WHEREFORE, the petition for certiorari is hereby DISMISSED.
SO ORDERED.
The CA denied the petitioners motion for reconsideration on April 2,
2003.[13]

Issue

Thus, the petitioners are now before the Court for a review on certiorari,
positing that the respondent was a stockholder/member of the Matlings Board of
Directors as well as its Vice President for Finance and Administration; and that the
CA consequently erred in holding that the LA had jurisdiction.

The decisive issue is whether the respondent was a corporate officer of Matling or
not. The resolution of the issue determines whether the LA or the RTC had
jurisdiction over his complaint for illegal dismissal.
 Ruling

The appeal fails.

I
The Law on Jurisdiction in Dismissal Cases

As a rule, the illegal dismissal of an officer or other employee of a private

employer is properly cognizable by the LA. This is pursuant to Article 217 (a) 2 of
the Labor Code, as amended, which provides as follows:

Article 217. Jurisdiction of the Labor Arbiters and the

Commission. - (a) Except as otherwise provided under this Code, the
Labor Arbiters shall have original and exclusive jurisdiction to hear
and decide, within thirty (30) calendar days after the submission of the
case by the parties for decision without extension, even in the absence of
stenographic notes, the following cases involving all workers, whether
agricultural or non-agricultural:

1. Unfair labor practice cases;

2. Termination disputes;

3. If accompanied with a claim for reinstatement, those cases that

workers may file involving wages, rates of pay, hours of work and other
terms and conditions of employment;

4. Claims for actual, moral, exemplary and other forms of

damages arising from the employer-employee relations;

5. Cases arising from any violation of Article 264 of this Code,

including questions involving the legality of strikes and lockouts; and

6. Except claims for Employees Compensation, Social Security,

Medicare and maternity benefits, all other claims arising from employer-
employee relations, including those of persons in domestic or household
service, involving an amount exceeding five thousand pesos (P5,000.00)
regardless of whether accompanied with a claim for reinstatement.
 (b) The Commission shall have exclusive appellate jurisdiction
over all cases decided by Labor Arbiters.

(c) Cases arising from the interpretation or implementation of

collective bargaining agreements and those arising from the
interpretation or enforcement of company personnel policies shall be
disposed of by the Labor Arbiter by referring the same to the grievance
machinery and voluntary arbitration as may be provided in said
agreements. (As amended by Section 9, Republic Act No. 6715, March
21, 1989).

Where the complaint for illegal dismissal concerns a corporate officer,

however, the controversy falls under the jurisdiction of the Securities and
Exchange Commission (SEC), because the controversy arises out of intra-
corporate or partnership relations between and among stockholders, members, or
associates, or between any or all of them and the corporation, partnership, or
association of which they are stockholders, members, or associates, respectively;
and between such corporation, partnership, or association and the State insofar as
the controversy concerns their individual franchise or right to exist as such entity;
or because the controversy involves the election or appointment of a director,
trustee, officer, or manager of such corporation, partnership, or association.[14] Such
controversy, among others, is known as an intra-corporate dispute.

Effective on August 8, 2000, upon the passage of Republic Act No.

[15]
8799, otherwise known as The Securities Regulation Code, the SECs jurisdiction
over all intra-corporate disputes was transferred to the RTC, pursuant to Section
5.2 of RA No. 8799, to wit:

5.2. The Commissions jurisdiction over all cases enumerated under

Section 5 of Presidential Decree No. 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the exercise of its authority
may designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year from
the enactment of this Code. The Commission shall retain jurisdiction
 over pending suspension of payments/rehabilitation cases filed as of 30
June 2000 until finally disposed.

Considering that the respondents complaint for illegal dismissal was

commenced on August 10, 2000, it might come under the coverage of Section 5.2
of RA No. 8799, supra, should it turn out that the respondent was a corporate, not
a regular, officer of Matling.

II
Was the Respondents Position of Vice President
for Administration and Finance a Corporate Office?

We must first resolve whether or not the respondents position as Vice President for
Finance and Administration was a corporate office. If it was, his dismissal by the
Board of Directors rendered the matter an intra-corporate dispute cognizable by the
RTC pursuant to RA No. 8799.

The petitioners contend that the position of Vice President for Finance and
Administration was a corporate office, having been created by Matlings President
pursuant to By-Law No. V, as amended,[16] to wit:

BY LAW NO. V

Officers

The President shall be the executive head of the corporation; shall

preside over the meetings of the stockholders and directors; shall
countersign all certificates, contracts and other instruments of the
corporation as authorized by the Board of Directors; shall have full
power to hire and discharge any or all employees of the
corporation; shall have full power to create new offices and to
appoint the officers thereto as he may deem proper and necessary in
the operations of the corporation and as the progress of the business
and welfare of the corporation may demand; shall make reports to the
directors and stockholders and perform all such other duties and
functions as are incident to his office or are properly required of him by
the Board of Directors. In case of the absence or disability of the
 President, the Executive Vice President shall have the power to exercise
his functions.

The petitioners argue that the power to create corporate offices and to
appoint the individuals to assume the offices was delegated by Matlings Board of
Directors to its President through By-Law No. V, as amended; and that any office
the President created, like the position of the respondent, was as valid and effective
a creation as that made by the Board of Directors, making the office a corporate
office. In justification, they cite Tabang v. National Labor Relations
Commission,[17] which held that other offices are sometimes created by the charter
or by-laws of a corporation, or the board of directors may be empowered under the
by-laws of a corporation to create additional officers as may be necessary.
The respondent counters that Matlings By-Laws did not list his position as Vice
President for Finance and Administration as one of the corporate offices; that
Matlings By-Law No. III listed only four corporate officers, namely: President,
Executive Vice President, Secretary, and Treasurer; [18] that the corporate offices
contemplated in the phrase and such other officers as may be provided for in the
by-laws found in Section 25 of the Corporation Code should be clearly and
expressly stated in the By-Laws; that the fact that Matlings By-Law No. III dealt
with Directors & Officerswhile its By-Law No. V dealt with Officers proved that
there was a differentiation between the officers mentioned in the two provisions,
with those classified under By-Law No. V being ordinary or non-
corporate officers; and that the officer, to be considered as a corporate officer,
must be elected by the Board of Directors or the stockholders, for the President
could only appoint an employee to a position pursuant to By-Law No. V.

We agree with respondent.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum.--Immediately after their

election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the
by-laws. Any two (2) or more positions may be held concurrently by the
 same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall
be valid as a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board

meetings.

Conformably with Section 25, a position must be expressly mentioned in the

By-Laws in order to be considered as a corporate office. Thus, the creation of an
office pursuant to or under a By-Law enabling provision is not enough to make a
position a corporate office. Guerrea v. Lezama,[19] the first ruling on the matter,
held that the only officers of a corporation were those given that character either by
the Corporation Code or by the By-Laws; the rest of the corporate officers could
be considered only as employees or subordinate officials. Thus, it was held
in Easycall Communications Phils., Inc. v. King:[20]

An office is created by the charter of the corporation and the officer is

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

In this case, respondent was appointed vice president for nationwide

expansion by Malonzo, petitioner's general manager, not by the board of
directors of petitioner. It was also Malonzo who determined the
compensation package of respondent. Thus, respondent was an
employee, not a corporate officer. The CA was therefore correct in
ruling that jurisdiction over the case was properly with the NLRC, not
the SEC (now the RTC).
 This interpretation is the correct application of Section 25 of
the Corporation Code, which plainly states that the corporate officers are the
President, Secretary, Treasurer and such other officers as may be provided for in
the By-Laws. Accordingly, the corporate officers in the context of PD No. 902-A
are exclusively those who are given that character either by the Corporation
Codeor by the corporations By-Laws.

A different interpretation can easily leave the way open for the Board of
Directors to circumvent the constitutionally guaranteed security of tenure of the
employee by the expedient inclusion in the By-Laws of an enabling clause on the
creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency
administering the Corporation Code, adopted a similar interpretation of Section 25
of the Corporation Code in its Opinion dated November 25, 1993,[21] to wit:

Thus, pursuant to the above provision (Section 25 of the

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

Moreover, the Board of Directors of Matling could not validly delegate the
power to create a corporate office to the President, in light of Section 25 of
the Corporation Code requiring the Board of Directors itself to elect the corporate
officers. Verily, the power to elect the corporate officers was a discretionary
power that the law exclusively vested in the Board of Directors, and could not be
delegated to subordinate officers or agents.[22] The office of Vice President for
Finance and Administration created by Matlings President pursuant to By Law No.
V was an ordinary, not a corporate, office.
To emphasize, the power to create new offices and the power to appoint the
officers to occupy them vested by By-Law No. V merely allowed Matlings
President to create non-corporate offices to be occupied by ordinary employees of
Matling. Such powers were incidental to the Presidents duties as the executive
head of Matling to assist him in the daily operations of the business.

The petitioners reliance on Tabang, supra, is misplaced. The statement in Tabang,

to the effect that offices not expressly mentioned in the By-Laws but were created
pursuant to a By-Law enabling provision were also considered corporate offices,
was plainly obiter dictum due to the position subject of the controversy being
mentioned in the By-Laws. Thus, the Court held therein that the position was a
corporate office, and that the determination of the rights and liabilities arising from
the ouster from the position was an intra-corporate controversy within the SECs
jurisdiction.

In Nacpil v. Intercontinental Broadcasting Corporation,[23] which may be the more

appropriate ruling, the position subject of the controversy was not expressly
mentioned in the By-Laws, but was created pursuant to a By-Law enabling
provision authorizing the Board of Directors to create other offices that the Board
of Directors might see fit to create. The Court held there that the position was a
corporate office, relying on the obiter dictum in Tabang.
Considering that the observations earlier made herein show that the soundness of
their dicta is not unassailable, Tabang and Nacpil should no longer be controlling.

III
Did Respondents Status as Director and
Stockholder Automatically Convert his Dismissal
into an Intra-Corporate Dispute?

Yet, the petitioners insist that because the respondent was a Director/stockholder of
Matling, and relying on Paguio v. National Labor Relations
Commission and Ongkingko v. National Labor Relations Commission,[25] the
[24]

NLRC had no jurisdiction over his complaint, considering that any case for illegal
dismissal brought by a stockholder/officer against the corporation was an intra-
corporate matter that must fall under the jurisdiction of the SEC conformably with
the context of PD No. 902-A.

The petitioners insistence is bereft of basis.

To begin with, the reliance on Paguio and Ongkingko is misplaced. In both rulings,
the complainants were undeniably corporate officers due to their positions being
expressly mentioned in the By-Laws, aside from the fact that both of them had
been duly elected by the respective Boards of Directors. But the herein respondents
position of Vice President for Finance and Administration was not expressly
mentioned in the By-Laws; neither was the position of Vice President for Finance
and Administration created by Matlings Board of Directors. Lastly, the President,
not the Board of Directors, appointed him.

True it is that the Court pronounced in Tabang as follows:

Also, an intra-corporate controversy is one which arises between a

stockholder and the corporation. There is no distinction, qualification or
any exemption whatsoever. The provision is broad and covers all kinds
of controversies between stockholders and corporations.[26]

However, the Tabang pronouncement is not controlling because it is too sweeping

and does not accord with reason, justice, and fair play. In order to determine
whether a dispute constitutes an intra-corporate controversy or not, the Court
considers two elements instead, namely: (a) the status or relationship of the parties;
and (b) the nature of the question that is the subject of their controversy.This was
our thrust in Viray v. Court of Appeals:[27]

The establishment of any of the relationships mentioned above will not

necessarily always confer jurisdiction over the dispute on the SEC to the
exclusion of regular courts. The statement made in one case that the rule
admits of no exceptions or distinctions is not that absolute. The better
policy in determining which body has jurisdiction over a case would be
to consider not only the status or relationship of the parties but also the
nature of the question that is the subject of their controversy.
 Not every conflict between a corporation and its stockholders involves
corporate matters that only the SEC can resolve in the exercise of its
adjudicatory or quasi-judicial powers. If, for example, a person leases an
apartment owned by a corporation of which he is a stockholder, there
should be no question that a complaint for his ejectment for non-
payment of rentals would still come under the jurisdiction of the regular
courts and not of the SEC. By the same token, if one person injures
another in a vehicular accident, the complaint for damages filed by the
victim will not come under the jurisdiction of the SEC simply because of
the happenstance that both parties are stockholders of the same
corporation. A contrary interpretation would dissipate the powers of the
regular courts and distort the meaning and intent of PD No. 902-A.

In another case, Mainland Construction Co., Inc. v. Movilla,[28] the Court

reiterated these determinants thuswise:
In order that the SEC (now the regular courts) can take cognizance of a
case, the controversy must pertain to any of the following relationships:

a) between the corporation, partnership or association and the

public;

b) between the corporation, partnership or association and its

stockholders, partners, members or officers;
c) between the corporation, partnership or association and the
State as far as its franchise, permit or license to operate is
concerned; and
d) among the stockholders, partners or associates themselves.
The fact that the parties involved in the controversy are all
stockholders or that the parties involved are the stockholders and the
corporation does not necessarily place the dispute within the ambit of the
jurisdiction of SEC. The better policy to be followed in determining
jurisdiction over a case should be to consider concurrent factors such as
the status or relationship of the parties or the nature of the question that
is the subject of their controversy. In the absence of any one of these
factors, the SEC will not have jurisdiction. Furthermore, it does not
necessarily follow that every conflict between the corporation and its
stockholders would involve such corporate matters as only the SEC can
resolve in the exercise of its adjudicatory or quasi-judicial powers.[29]
 The criteria for distinguishing between corporate officers who may be
ousted from office at will, on one hand, and ordinary corporate employees who
may only be terminated for just cause, on the other hand, do not depend on the
nature of the services performed, but on the manner of creation of the office. In the
respondents case, he was supposedly at once an employee, a stockholder, and a
Director of Matling. The circumstances surrounding his appointment to office must
be fully considered to determine whether the dismissal constituted an intra-
corporate controversy or a labor termination dispute. We must also consider
whether his status as Director and stockholder had any relation at all to his
appointment and subsequent dismissal as Vice President for Finance and
Administration.

Obviously enough, the respondent was not appointed as Vice President for Finance
and Administration because of his being a stockholder or Director of Matling. He
had started working for Matling on September 8, 1966, and had been employed
continuously for 33 years until his termination on April 17, 2000, first as a
bookkeeper, and his climb in 1987 to his last position as Vice President for Finance
and Administration had been gradual but steady, as the following sequence
indicates:

1966 Bookkeeper
1968 Senior Accountant
1969 Chief Accountant
1972 Office Supervisor
1973 Assistant Treasurer
1978 Special Assistant for Finance
1980 Assistant Comptroller
1983 Finance and Administrative Manager
1985 Asst. Vice President for Finance and Administration
1987 to April 17, 2000 Vice President for Finance and
Administration

Even though he might have become a stockholder of Matling in 1992, his

promotion to the position of Vice President for Finance and Administration in
1987 was by virtue of the length of quality service he had rendered as an employee
of Matling. His subsequent acquisition of the status of Director/stockholder had no
relation to his promotion. Besides, his status of Director/stockholder was
unaffected by his dismissal from employment as Vice President for Finance and
Administration.
In Prudential Bank and Trust Company v. Reyes,[30] a case involving a lady
bank manager who had risen from the ranks but was dismissed, the Court held that
her complaint for illegal dismissal was correctly brought to the NLRC, because she
was deemed a regular employee of the bank. The Court observed thus:

It appears that private respondent was appointed Accounting Clerk

by the Bank on July 14, 1963. From that position she rose to become
supervisor. Then in 1982, she was appointed Assistant Vice-President
which she occupied until her illegal dismissal on July 19, 1991. The
banks contention that she merely holds an elective position and that
in effect she is not a regular employee is belied by the nature of her
work and her length of service with the Bank. As earlier stated, she
rose from the ranks and has been employed with the Bank since 1963
until the termination of her employment in 1991. As Assistant Vice
President of the Foreign Department of the Bank, she is tasked, among
others, to collect checks drawn against overseas banks payable in foreign
currency and to ensure the collection of foreign bills or checks
purchased, including the signing of transmittal letters covering the same.
It has been stated that the primary standard of determining regular
employment is the reasonable connection between the particular activity
performed by the employee in relation to the usual trade or business of
the employer. Additionally, an employee is regular because of the nature
of work and the length of service, not because of the mode or even the
reason for hiring them. As Assistant Vice-President of the Foreign
Department of the Bank she performs tasks integral to the operations of
the bank and her length of service with the bank totaling 28 years speaks
volumes of her status as a regular employee of the bank. In fine, as a
regular employee, she is entitled to security of tenure; that is, her
services may be terminated only for a just or authorized cause. This
being in truth a case of illegal dismissal, it is no wonder then that the
Bank endeavored to the very end to establish loss of trust and confidence
and serious misconduct on the part of private respondent but, as will be
discussed later, to no avail.

WHEREFORE, we deny the petition for review on certiorari, and affirm the
decision of the Court of Appeals.
Costs of suit to be paid by the petitioners.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-68544 October 27, 1986

LORENZO C. DY, ZOSIMO DY, SR., WILLIAM IBERO, RICARDO GARCIA AND RURAL BANK
OF AYUNGON, INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION AND EXECUTIVE LABOR ARBITER ALBERTO
L. DALMACION, AND CARLITO H. VAILOCES, respondents.

Marcelino C. Maximo and Ramon Barrameda for petitioners.

Carlito H. Vailoces for private respondent.

NARVASA, J.:

Petitioners assail in this Court the resolution of the National Labor Relations Commission (NLRC)
dismissing their appeal from the decision of the Executive Labor Arbiter 1 in Cebu City which found private
respondent to have been illegally dismissed by them.

Said private respondent, Carlito H. Vailoces, was the manager of the Rural Bank of Ayungon
(Negros Oriental), a banking institution duly organized under Philippine laws. He was also a director
and stockholder of the bank.

On June 4, 1983, a special stockholders' meeting was called for the purpose of electing the
members of the bank's Board of Directors. Immediately after the election the new Board proceeded
to elect the bank's executive officers.

Pursuant to Article IV of the bank's by-laws, 2 providing for the election by the entire membership of the Board of the
executive officers of the bank, i.e., the president, vice-president, secretary, cashier and bank manager, in that board meeting of June 4,
1983, petitioners Lorenzo Dy, William Ibero and Ricardo Garcia were elected president, vice-president and corporate secretary, respectively.
Vailoces was not re-elected as bank manager, 3 Because of this development, the Board, on July 2, 1983, passed Resolution No. 5, series of
1983, relieving him as bank manager.

On August 3, 1983, Vailoces filed a complaint for illegal dismissal and damages with the Ministry of
Labor and Employment against Lorenzo Dy and Zosimo Dy, Sr. The complaint was amended on
September 22, 1983 to include additional respondents-William Ibero, Ricardo Garcia and the Rural
Bank of Ayungon, and additional causes of action for underpayment of salary and non-payment of
living allowance.

In his complaint and position paper, Vailoces asserted that Lorenzo Dy, after obtaining control of the
majority stock of the bank by buying the shares of Marcelino Maximo, called an illegal stockholders'
meeting and elected a Board of Directors controlled by him; that after its illegal constitution, said
Board convened on July 2, 1983 and passed a resolution dismissing him as manager, without giving
him the opportunity to be heard first; that his dismissal was motivated by Lorenzo Dy's desire to take
over the management and control of the bank, not to mention the fact that he (Dy) harbored ill
feelings against Vailoces on account of the latter's filing of a complaint for violation of the corporation
code against him and another complaint for compulsory recognition of natural child with damages
against Zosimo Dy, Sr. 4

In their answer, Lorenzo Dy, et al. denied the charge of illegal dismissal. They pointed out that
Vailoces' position was an elective one, and he was not re-elected as bank manager because of the
Board's loss of confidence in him brought about by his absenteeism and negligence in the
performance of his duties; and that the Board's action was taken to protect the interest of the bank
and was "designed as an internal control measure to secure the check and balance of authority
within the organization." 5

The Executive Labor Arbiter found that Vailoces was:

(a) Illegally dismissed, first not because of absenteeism and negligence, but of the
resentment of petitioners against Vailoces which arose from the latter's filing of the
cases for recognition as natural child against Zosimo Dy, Sr. and for violation of the
corporation code against Lorenzo Dy; and second, because he was not afforded the
due process of law when he was dismissed during the Board meeting of July 2, 1983
the validity of which is seriously doubted;

(b) Not paid his cost of living allowance; and

(c) Underpaid with only P500 monthly salary,

and consequently ordered the individual petitioners — Lorenzo Dy and Zosimo Dy-but not the Bank
itself, to:

(a) Pay Vailoces jointly and severally, the sum of P111,480.60 representing his
salary differentials, cost of living allowances, back wages from date of dismissal up to
the date of the decision (November 29, 1983), moral and exemplary damages, and
attorney's fees; and

(b) Reinstate Vailoces to his position as bank manager, with additional backwages
from December 1, 1983 on the adjusted salary rate of P620.00 r month until he is
actually reinstated, plus cost-of-living allowance. 6

Lorenzo Dy, et al. appealed to the NLRC, assigning error to the decision of the Labor Arbiter on
various grounds, among them: that Vailoces was not entitled to notice of the Board meeting of July
2, 1983 which decreed his relief because he was no longer a member of the Board on said date; that
he nonetheless had the opportunity to refute the charges against him and seek a formal investigation
because he received a copy of the minutes of said meeting while he was still the bank manager (his
removal was to take effect only on August 15, 1983), instead of which he simply abandoned the
work he was supposed to perform up to the effective date of his relief; and that the matter of his
relief was within the adjudicatory powers of the Securities and Exchange Commission.7

The NLRC, however bypassed the issues raised and simply dismissed the appeal for having been
filed late. It ruled that:

The record shows that a copy of the decision sent by registered mail to respondents'
counsel, Atty. Edmund Tubio, was received on January 11, 1984 by a certain Atty.
Ramon Elesteria, a law office partner of Atty. Tubio. ... This fact is corroborated by
the certification issued by the Postmaster of Dumaguete City... Moreover, the same
 is admitted by no less than Atty. Ramon Elesteria himself in his affidavit. It further
appears in the record that on January 30, 1984 a certain Atty. Francisco Zerna, a
new lawyer engaged by the respondents for the appeal, received a copy of the
decision in this case as certified by Julia Pepito in an affidavit subscribed before the
Senior Labor Arbitration Specialist. The appeal was filed only on February 17, 1984.

Considering that it was a law partner of the respondents' counsel who received on
January 11, 1984 the registered letter, his actual receipt thereof completes the
service. ... And even assuming that such was not a valid service, since the
respondents received another copy of the decision on January 30, 1984, through
their newly engaged counsel, it is therefore our opinion that the appeal herein was
filed out of time, whether the time is reckoned from the receipt by Atty. Elesteria or
Atty. Zerna, and, for this reason, we can not give due course to his appeal. 8

In this Court, petitioners assail said ruling as an arbitrary deprivation of their right to appeal through
unreasonable adherence to procedural technicality. They argue that they should not be bound by the
service of the Labor Arbiter's decision by Atty. Elesteria on January 11, 1984 or by Atty. Zerna on
January 30, 1984, because neither lawyer was authorized to accept service for their counsel Atty.
Tubio, and that their 10 day period of appeal should be counted from February 10, 1984 when they
actually received the copy of the decision from Atty. Zerna. On the merits, they assert that the
Arbiter's finding of illegal dismissal was without evidentiary basis, that it was error to impose the
obligation to pay damages upon the individual petitioners, instead of the Rural Bank of Ayungon,
which was Vailoces' real employer, and that the damages awarded are exorbitant and oppressive.

While the comment of Vailoces traverses the averments of the petition, that of the Solicitor General
on behalf of public respondents perceives the matter as an intracorporate controversy of the class
described in Section 5, par. (c), of Presidential Decree No. 902-A, namely:

(c) Controversies in the election or appointments of directors, trustees, officers or

managers of such corporations, partnerships or associations.

explicitly declared to be within the original and exclusive jurisdiction of the Securities and Exchange
Commission, and recommends that the questioned resolution of the NLRC as well as the decision of
the Labor Arbiter be set aside as null and void.9

In truth, the issue of jurisdiction is decisive and renders unnecessary consideration of the other
questions raised.

There is no dispute that the position from which private respondent Vailoces claims to have been
illegally dismissed is an elective corporate office. He himself acquired that position through election
by the bank's Board of Directors at the organizational meeting of November 17, 1979. 10 He lost that
position because the Board that was elected in the special stockholders' meeting of June 4, 1983 did not re-elect him. And when Vailoces, in
his position paper submitted to the Labor Arbiter, impugned said stockholders' meeting as illegally convoked and the Board of Directors
thereby elected as illegally constituted, 11 he made it clear that at the heart of the matter was the validity of the directors' meeting of June 4,
1983 which, by not re-electing him to the position of manager, in effect caused termination of his services.

The case thus falls squarely within the purview of Section 5, par. (c), No. 902-A just cited. In PSBA
vs. Leaño, 12 this Court, confronted with a similar controversy, ruled that the Securities and Exchange Commission, not the NLRC, has
jurisdiction:

It was at a Board regular monthly meeting held on August 1, 1981, that three
directors were elected to fill vacancies. And, it was at the regular Board meeting of
September 5, 1981 that all corporate positions were declared vacant in order to
effect a reorganization, and at the ensuing election of officers, Tan was not re-
elected as Executive Vice-President.

Basically, therefore, the question is whether the election of directors on August 1,

1981 and the election of officers on September 5, 1981, which resulted in Tan's
failure to be re-elected, were validly held. This is the crux of the question that Tan
has raised before the SEC. Even in his position paper before the NLRC, Tan alleged
that the election on August 1, 1981 of the three directors was in contravention of the
PSBA By-Laws providing that any vacancy in the Board shall be filled by a majority
vote of the stockholders at a meeting specially called for the purpose. Thus, he
concludes, the Board meeting on September 5, 1981 was tainted with irregularity on
account of the presence of illegally elected directors without whom the results could
have been different.

Tan invoked the same allegations in his complaint filed with the SEC. So much so,
that on December 17, 1981, the SEC (Case No. 2145) rendered a Partial Decision
annulling the election of the three directors and ordered the convening of a
stockholders' meeting for the purpose of electing new members of the Board. The
correctness of d conclusion is not for us to pass upon in this case. Tan was present
at said meeting and again sought the issuance of injunctive relief from the SEC.

The foregoing indubitably show that, fundamentally, the controversy is intra-

corporate in nature. It revolves around the election of directors, officers or managers
of the PSBA, the relation between and among its stockholders, and between them
and the corporation. Private respondent also contends that his "ouster" was a
scheme to intimidate him into selling his shares and to deprive him of his just and fair
return on his investment as a stockholder received through his salary and allowances
as Executive Vice-President. Vis-a-vis the NLRC, these matters fall within the
jurisdiction of the SEC. Presidential Decree No. 902-A vests in the Securities and
Exchange Commission:

... Original and exclusive jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts, of the board of directors, business

associates, its officers or partners, amounting to fraud and misrepresentation) which
may be detrimental to the interest of the public and/or of the stockholders, partners,
members of associations or organizations registered with the Commission.

b) Controversies arising out of intracorporate or partnership relations, between and

among stockholders, members or associates; between any of all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association
and the state insofar as it concerns their individual franchise or right to exist as such
entity;

c) Controversies in the election or appointments of directors, trustees, officers or

managers of such corporations, partnership or associations.

This is not a case of dismissal. The situation is that of a corporate office having been
declared vacant, and of Tan's not having been elected thereafter. The matter of
whom to elect is a prerogative that belongs to the Board, and involves the exercise of
deliberate choice and the faculty of discriminative selection. Generally speaking, the
 relationship of a person to corporation, whether as officer or as agent or employee, is
not determined by the nature of the services performed, but by the incidents of the
relationship as they actually exist.

Respondent Vailoces' invocation of estoppel as against petitioners with respect to the issue of
jurisdiction is unavailing. In the first place, it is not quite correct to state that petitioners did not raise
the point in the lower tribunal. Although rather off handedly, in their appeal to the NLRC they called
attention to the Labor Arbiter's lack of jurisdiction to rule on the validity of the meeting of July 2,
1983, but the dismissal of the appeal for alleged tardiness effectively precluded consideration of that
or any other question raised in the appeal. More importantly, estoppel cannot be invoked to prevent
this Court from taking up the question of jurisdiction, which has been apparent on the face of the
pleadings since the start of litigation before the Labor Arbiter. It is well settled that the decision of a
tribunal not vested with appropriate jurisdiction is null and void. Thus, in Calimlim vs. Ramirez, 13 this
Court held:

A rule that had been settled by unquestioned acceptance and upheld in decisions so
numerous to cite is that the jurisdiction of a court over the subject matter of the action
is a matter of law and may not be conferred by consent or agreement of the parties.
The lack of jurisdiction of a court may be raised at any stage of the proceedings,
even on appeal. This doctrine has been qualified by recent pronouncements which
stemmed principally from the ruling in the cited case of Sibonghanoy. It is to be
regretted, however, that the holding in said case had been applied to situations which
were obviously not contemplated therein. The exceptional circumstances involved
in Sibonghanoy which justified the departure from the accepted concept of non-
waivability of objection to jurisdiction has been ignored and, instead a blanket
doctrine had been repeatedly upheld that rendered the supposed ruling
in Sibonghanoy not as the exception, but rather the general rule, virtually
overthrowing altogether the time-honored principle that the issue of jurisdiction is not
lost by waiver or by estoppel.

xxx xxx xxx

It is neither fair nor legal to bind a party by the result of a suit or proceeding which
was taken cognizance of in a court which lacks jurisdiction over the same
irrespective of the attendant circumstances. The equitable defense of estoppel
requires knowledge or consciousness of the facts upon which it is based . The same
thing is true with estoppel by conduct which may be asserted only when it is shown,
among others, that the representation must have been made with knowledge of the
facts and that the party to whom it was made is ignorant of the truth of the matter (De
Castro vs. Gineta, 27 SCRA 623). The filing of an action or suit in a court that does
not possess jurisdiction to entertain the same may not be presumed to be deliberate
and intended to secure a ruling which could later be annulled if not favorable to the
party who filed such suit or proceeding in a court that lacks jurisdiction to take
cognizance of the same, such act may not at once be deemed sufficient basis of
estoppel. It could have been the result of an honest mistake or of divergent
interpretation of doubtful legal provisions. If any fault is to be imputed to a party
taking such course of action, part of the blame should be placed on the court which
shall entertain the suit, thereby lulling the parties into believing that they pursued
their remedies in the correct forum. Under the rules, it is the duty of the court to
dismiss an action 'whenever it appears that court has no jurisdiction over the subject
matter.' (Section 2, Rule 9, Rules of Court) Should the Court render a judgment
without jurisdiction, such judgment may be impeached or annulled for lack of
 jurisdiction (Sec. 30, Rule 132, Ibid), within ten (10) years from the finality of the
same (Art. 1144, par. 3, Civil Code).

To be sure, petitioners failed to raise the issue of jurisdiction in their petition before this Court. But
this, too, is no hindrance to the Court's considering said issue.

The failure of the appellees to invoke anew the aforementioned solid ground of want of jurisdiction of
the lower court in this appeal should not prevent this Tribunal to take up that issue as the lack of
jurisdiction of the lower court is apparent upon the face of the record and it is fundamental that a
court of justice could only validly act upon a cause of action or subject matter of a case over which it
has jurisdiction and said jurisdiction is one conferred only by law; and cannot be acquired through, or
waived by, any act or omission of the parties (Lagman vs. CA, 44 SCRA 234 [1972]); hence may be
considered by this court motu proprio (Gov't. vs. American Surety Co., 11 Phil. 203 [1908])... 14

These considerations make inevitable the conclusion that the judgment of the Labor Arbiter and the
resolution of the NLRC are void for lack of cause of jurisdiction, and this Court must set matters
aright in the exercise of its judicial power. It is of no moment that Vailoces, in his amended
complaint, seeks other relief which would seemingly fan under the jurisdiction of the Labor Arbiter,
because a closer look at these-underpayment of salary and non-payment of living allowance-shows
that they are actually part of the perquisites of his elective position, hence, intimately linked with his
relations with the corporation. The question of remuneration, involving as it does, a person who is
not a mere employee but a stockholder and officer, an integral part, it might be said, of the
corporation, is not a simple labor problem but a matter that comes within the area of corporate affairs
and management, and is in fact a corporate controversy in contemplation of the Corporation Code.

WHEREFORE, the questioned decision of the Labor Arbiter and the Resolution of the NLRC
dismissing petitioners' appeal from said decision are hereby set aside because rendered without
jurisdiction. The amended complaint for illegal dismissal, etc., basis of said decision and Resolution,
is ordered dismissed, without prejudice to private respondent's seeking recourse in the appropriate
forum.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-104033 December 27, 1993

NOE S. ANDAYA, petitioner,

vs.
LISANDRO C. ABADIA, RENE R. CRUZ, VICTOR M. PUNZALAN, LYSIAS C. CABUSAO, JOSE
O. BARNUEVO, JOSE M. FORONDA, LAMBERTO TORRES, EDGAR C. GALVANTE, EMERSON
C. TANGAN, PRIMITIVO A. SOMERA, and BENJAMIN N. SANTOS, SR., respondents.

Bernardo P. Fernandez and Doroteo B. Daguna for petitioner.

M.M. Lazaro & Associates for respondents.

BELLOSILLO, J.:

Maintaining that the Regional Trial Court (RTC) and not the securities and Exchange Commission
(SEC) has jurisdiction over his complaint, petitioner argues that the court a quo 1 should not have
dismissed Civil Case No. Q-91-10470 filed by him against herein respondents, who were original
defendants in the court below. He asserts that "actually, the complaint is based not so much on
plaintiff's attempted removal but rather on the manner of his removal and the consequent effects
thereof." 2 Specifically, he alleges in his petition that —

Before the Regional Trial Court, Branch 101, Quezon City, in an action denominated
"Injunction and Damages with Restraining Order and/or Preliminary Injunction",
docketed as Civil Case No. Q-91-10470 of said Court, petitioner NOE S. ANDAYA,
as plaintiff, sued respondents LISANDRO C. ABADIA, RENE R. CRUZ, VICTOR M.
PUNZALAN, LYSIAS C. CABUSAO, JOSE O. BARNUEVO, JOSE M. FORONDA,
LAMBERTO TORRES, EDGAR C. GALVANTE, EMERSON, C. TANGAN,
PRIMITIVO A. SOMERA AND BENJAMIN N. SANTOS, SR., as defendants, alleging
. . . that said respondents, as directors of the Armed Forces and Police Savings and
Loan Association, Inc., (AFPSLAI) . . . acting in concerts and pursuant to an illegal
and nefarious scheme to oust petitioner from his then positions as President and
General Manager of the AFPSLAI, with grave abuse of authority and in gross and
deliberate violation of the norms of human relations and of petitioner's right to due
process, illegally, maliciously and with evident bad faith, convened a meeting of the
AFPSLAI Board of Directors and illegally reorganized the management of AFPSLAI
by ousting and removing, without just and lawful cause, petitioner from his positions
therein, causing petitioner moral and exemplary damages, and praying . . . for the
issuance of a temporary restraining order . . . and . . . a writ of preliminary injunction,
restraining respondents from implementing the result of the irregularity convened and
illegally conducted reorganization of the management of AFPSLAI, as well as
 respondents Punzalan and Tangan from assuming and taking over from petitioner
the offices of President and General Manager of said AFPSLAI and from performing
and exercising the functions and powers thereof pending final determination of the
case.3

On 30 October 1991, the trial court granted the prayer of petition for temporary restraining order and
set the hearing on the injunctive relief.4

On 4 November 1991, respondents filed an Urgent Motion to Dismiss on the ground that the
complaint raised intra-corporate controversies over which the Securities and Exchange Commission,
and not the court a quo, has exclusive original jurisdiction. 5 On 5 November 1991, respondents filed
an Urgent Motion to Lift Restraining Order and Opposition to Preliminary Injunction. 6 Petitioner filed
a Consolidated Opposition to Urgent Motion to Dismiss and Motion to Lift Restraining Order with
Reply to Opposition to Preliminary Injunction and Reiteration of Motions for Contempt (for violation of
the Temporary Restraining Order), arguing that "the case is mainly based not on petitioner's
attempted removal per se but rather on the manner of his removal and the effect thereof, which was
done anti-socially, oppressively, in gross violation of the norms of human relations and without giving
petitioner his due . . ."7

On 12 November 1991, before the trial court could rule on the motion to dismiss, petitioner filed an
amended complaint impleading as additional defendants then Central bank Governor Jose L. Cuisia,
Jr., Central Bank SRDC Managing Director Ricardo P. Lirio and Central Bank SES Acting Director
Candon B. Guerrero. 8 On 13 November 1991, respondents filed an Omnibus Motion
contending, inter alia, that the filing of an amended complaint seeking to confer jurisdiction on the
court was improper and should not be allowed.9

On 14 November 1991, Judge Pedro T. Santiago of the court a quo issued an order dismissing the
case for lack of jurisdiction insofar as herein respondents were concerned and denied petitioner's
motions to declare respondents in contempt of court. While the order mentioned the amended
complaint, it made no express disposition thereon. It simply ruled that —

Evidently, the prayers for damages and injunction are predicated on corporate
matters. It should be stressed at this point that the subject causes of action stated in
the complaint, from the alleged illegal notices of meetings to the election and tenure
of officers, are matters covered by the AFPSLAI By-Laws. Specifically, on the
allegation that the plaintiff was ousted and removed in a votation by the AFPSLAI
Board of Directors, whether rightly or without just cause, this is covered by the
AFPSLAI By-Laws, Sec. 3, that: "All executive officers shall hold office at the
pleasure of the Board, and all other officers, agents and employees shall hold office
for such time as it is provided for in their contract of employment and if none is
provided, at the pleasure of the Board (emphasis supplied).

The specific law, P.D. No. 902-A, defines and vests jurisdiction over corporate matter
in the Securities and Exchange Commission in no uncertain terms, Section 3, to be
"absolute jurisdiction, supervision and control over all corporations." In the case at
bar, AFPSLAI is a corporation and the alleged causes of action in the complaint are
clearly corporate matters.

The damages sought as a consequence of the alleged corporate wrongs committed

by the defendants becomes merely incidental. The other relief for injunction prayed
for is also within the jurisdictional power of the SEC (Sec. 6, P.D. 902-A).
 In resume therefore, the very allegations in the complaint being indubitably corporate
matters militate against the jurisdiction of this Court over the instant case. 10

On 18 November 1991, petitioner moved to reconsider the 14 November 1991 order arguing, among
others, that "since the case under Amended Complaints impleads parties-defendant not in any way
connected with the AFPSLAI, any apparent corporate element in the case is swept
away." 11 Respondents filed an opposition thereto, and on 10 February 1992, the court a quo denied
the motion for reconsideration as well as the motion to dismiss the amended complaint earlier filed
by defendants Cuisia, et al., holding that —

. . . the fact remains that the substance and essence of the complaint against the
original 11 defendants in both the first and the amended complaint are the same —
that the said defendants are being held civilly liable for their corporate acts in the
AFPSLAI.

Consequently, the Court finds no reason to change its lack of resolution dismissing
the instant complaint FOR LACK OF JURISDICTION insofar as the original
defendants are concerned, namely: Lisandro C. Abadia, Rene R. Cruz, Victor M.
Punzalan, Lysias C. Cabusao, Jose O. Barnuevo, Jose M. Foronda, Lamberto
Torres, Edgar C. Galvante, Emerson C. Tangan, Primitivo A. Somera, Benjamin N.
Santos, Sr.

. . . . Thus, where the defendants Abadia, et al., were dismissed from the case, it
does not necessarily follow that the whole case, specifically the amended complaint,
is also dismissed as the allegations therein insofar as the defendants Cuisia, et al. . .
. . are concerned, are within the context of the jurisdiction of this Court. The matter
does not only present a case of splitting the causes of action, which is frowned upon,
but a matter of jurisdiction. This Court has no jurisdiction on corporate matters as in
the case of defendants Abadia, et al. . . . . but no so, however, in the case of
defendants Cuisia, et al . . . . where their alleged acts stated in the amended
complaint fall within the jurisdiction of the Court. 12

Petitioner now comes to us on appeal praying for the reversal of the orders of the court dated 14
November 1991 and 10 February 1992 insofar as the case against herein respondents is concerned.

The allegations against herein respondents in the amended complaint unquestionably reveal intra-
corporate controversies cleverly concealed, although unsuccessfully, by use of civil law terms and
phrases. The amended complaint impleads herein respondents who, in their capacity as directors of
AFPSLAI, allegedly convened an illegal meeting and voted for the reorganization of management
resulting in petitioner's ouster as corporate officer. While it may be said that the same corporate acts
also give rise to civil liability for damages, it does not follow that the case is necessarily taken out of
the jurisdiction of the SEC as it may award damages which can be considered consequential in the
exercise of its adjudicative powers. Besides, incidental issues that properly fall within the authority of
a tribunal may also be considered by it to avoid multiplicity of actions. Consequently, in intra-
corporate matters such as those affecting the corporation, its directors, trustees, officers,
shareholders, the issue of consequential damages may just as well be resolved and adjudicated by
the SEC.

Moreover, mere allegations of violation of the provisions of the Civil Code on human relations do not
necessarily call for the application of the provisions of the Civil Code in place of AFPSLAI By-Laws.
In De Tavera v. Philippine Tuberculosis Society, Inc., 13 ruled —
 Petitioner cannot likewise seek relief from the general provisions on the New Civil
Code on Human Relations nor from the fundamental principles of the New
Constitution on preservation of human dignity. While these provisions present some
basic principles that are to be observed for the rightful relationship between human
beings and the stability of social order, these are merely guides for human conduct in
the absence of specific legal provisions and definite contractual stipulations. In the
case at bar, the Code of By-Laws of the Society contains a specific provision
governing the term of office of petitioner. The same necessarily limits her right under
the new Civil Code and the New Constitution upon acceptance of the appointment.

The determination of the rights of petitioner arising from the alleged illegal convening of the meeting
of AFPSLAI Board of Directors and his subsequent ouster from corporate offices as a result of the
voting for the reorganization of management are obviously intra-corporate controversies subject to
the jurisdiction of SEC as provided in P.D. No. 902-A which states:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations . . . it shall have original and exclusive
jurisdiction to hear and decide cases involving . . . . (b) Controversies arising out of
intra-corporate . . . relations . . . . (c) Controversies in the election or appointment of
directors, trustees, officers or managers of such corporations . . . .

The same may also be said of petitioner's prayer for damages, considering that his right thereto
either depends on, or is inextricably linked with, the resolution of the corporate controversies. For
instance, the prayer for moral damages is grounded on "defendants' gross and evident bad faith,
insidious machinations and conspirational acts, false and derogatory misinterpretations and
imputations against plaintiff and other malevolent and illegal acts calculated to realize and
accomplish the threatened illegal removal of plaintiff from his positions aforesaid . . . .;" 14while the
prayer for exemplary damages is dependent on alleged respondents' "concerted illegal effort to
maliciously set him up for, and fraudulently consummate, his illegal ouster from his positions in the
AFPSLAI . . . ." 15

Even the supposed allegations of violation of the provisions of the Civil Code on human relations, as
in par. 7 of the Complaint which states that "certain parties, including defendant SANTOS,
"masterminded a plot to degrade plaintiff and to denigrate his accomplishments in the AFPSLAI by
spreading false and derogatory rumors against plaintiff," are all treated in the complaint as mere
components of the general scheme allegedly perpetrated by respondents as directors to oust him
from his corporate offices, and not as causes of action independent of intra-corporate matters.
Moreover, the injunction prayed for in the complaint is within the jurisdiction of SEC pursuant to Sec.
6, par. (a), of P.D. 902-A which states: "(i)n order to effectively exercise such jurisdiction, the
Commission shall possess the following powers . . . . (t)o issue preliminary or permanent injunction,
whether prohibitory or mandatory, in all cases in which it has jurisdiction . . . ."

In his Supplemental Appeal by Certiorari With Prayer for Issuance of Preliminary Injunction or
Restraining Order, 16petitioner refers to allegations in pars. 7, 11, 15 and 16 17 of the complaint which
supposedly disclose that the case is within the jurisdiction of the court a quo. Petitioner wilily, but
unavailingly, tries to mangle his complaint, dismember its parts, and present to us only those
paragraphs which he considers are beyond the jurisdiction of SEC.

We are not distracted by this artful maneuver. In giving utmost importance to these paragraphs and
in treating them as his strongest arguments to support his position, petitioner unwittingly exposes his
achilles' heel. These paragraphs themselves show that the allegations of violations of the rules on
human relations also fall within the jurisdiction of SEC because they are treated merely as
ingredients of "malevolent and illegal acts calculated to realize and accomplish the threatened illegal
removal of plaintiff from his (corporate) positions."

In sum, what petitioner filed against respondents before the court a quo was an intra-corporate case
under the guise of an action for injunction and damages.

Petitioner also seeks reversal of the assailed orders on the alleged procedural infirmity that "despite
the filing of an Amended Complaint before a responsive pleading has been filed, which superseded
the original complaint and rendered respondents' Motion to Dismiss the original complaint functus
oficio, the Court a quo without first admitting the Amended Complaint and merely upon respondents'
Omnibus Motion . . . dismissed the case as against respondents."

First of all, under Sec. 2, Rule 10, Rules of Court, the filing of an amended complaint before answer
is an undisputed right of plaintiff, hence, there is no need for the court to allow its admission. 18 Quite
obviously, any statement admitting such amended complaint may reasonably be considered a
superfluity. Considered in this light, the court a quo could not be faulted for not making any
statement admitting the amended complaint.

It appears however that the Omnibus Motion (seeking dismissal of the Amended Complaint) was
already filed when the court a quo rendered the order of 14 November 1991 resolving, not the
Omnibus Motion, but the Urgent Motion to Dismiss (seeking dismissal of the original Complaint).
Ordinarily, the filing of the Omnibus Motion should render the Urgent Motion to Dismiss
superseded. 19 Petitioner thus posits that the court a quo was precluded from acting not only on the
Urgent Motion to Dismiss because it was deemed superseded, but also on the Omnibus Motion
because no hearing was had thereon thus leaving the assailed orders without basis to lean on.
Where in this case, however, the Omnibus Motion already comprehended the lone issue raised in
the Urgent Motion to Dismiss (i.e., the court has no jurisdiction over intra-corporate matters) and
upon which ground the court a quo dismissed the case against respondents, the previous
hearing 20 on the Urgent Motion to Dismiss may cure the defect of absence of hearing on the
Omnibus Motion but only insofar as said issue was concerned. What is important is that petitioner
was heard on that issue, hence, due process was observed. Moreover, the Omnibus Motion made
an express statement adopting the arguments in the Urgent Motion to Dismiss. While this practice of
adopting another pleading is not necessarily encouraged, 21 the peculiar circumstances of this case
demand the application of liberality. Besides, even if the Urgent Motion to Dismiss may have been
deemed superseded, the Court is not precluded from considering the same which still remains in the
record. The withdrawal of motions or pleadings from the record cannot easily be implied. 22

The foregoing notwithstanding, remedial rights and privileges under the Rules of Court are utterly
useless in a forum that has no jurisdiction over the case. It should be noted that the court a
quo dismissed the case against respondents on the ground that it has no jurisdiction over the subject
matter thereof which mainly involves intra-corporate controversies.

Jurisdiction over subject matter is essential in the sense that erroneous assumption thereof may put
at naught whatever proceedings the court might have had. Hence, even on appeal, and even if the
parties do not raise the issue of jurisdiction, the reviewing court is not precluded from ruling that it
has no jurisdiction over the case. It is elementary that jurisdiction is vested by law and cannot be
conferred or waived by the parties or even by the judge. It is also irrefutable that a court may at any
stage of the proceedings dismiss the case for want of jurisdiction. For this matter, the ground of lack
of jurisdiction in dismissing a case is not waivable. Hence, the last sentence of Sec. 2, Rule 9, Rules
of Court, expressly states: "Whenever it appears that the court has no jurisdiction over the subject
matter, it shall dismiss the action."
We note that Sec. 2, Rule 9 uses the word "shall," leaving the court no choice under the given
situation but to dismiss the case. The same Rule also uses the phrase "whenever it appears," which
means at anytime after the complaint or amended complaint is filed, because the lack of jurisdiction
may be apparent from the allegations therein. Hence, from the foregoing, even if no answer or
motion to dismiss is filed the court may dismiss the case for want of jurisdiction. In this sense,
dismissal for lack jurisdiction may be ordered by the court motu propio. Applying this notion to the
case at bar, with the dismissal of the case against respondents for lack of jurisdiction, it then
becomes inconsequential whether the court acted on the Urgent Motion to Dismiss or on the
Omnibus Motion without the requisite notice as provided in Secs. 4 and 6 of Rule 15 of the Rules of
Court. The determination of lack of jurisdiction over respondents being apparent from the face of the
amended complaint, the defect of want of prior notice and hearing of the Omnibus Motion could not
by itself confer jurisdiction upon the court a quo.

WHEREFORE, finding no reversible error committed by the court a quo, the instant petition is
DISMISSED and the assailed orders of 14 November 1991 and 10 February 1992 are AFFIRMED.
Costs against petitioner.

SO ORDERED.
 FIRST DIVISION

[G.R. No. 126891. August 5, 1998]

LIM TAY, petitioner vs., COURT OF APPEALS, GO FAY AND CO. INC.,
SY GUIOK, and THE ESTATE OF ALFONSO LIM, respondents.

DECISION
PANGANIBAN, J.:

The duty of a corporate secretary to record transfers of stocks is ministerial.

However, he cannot be compelled to do so when the transferees title to said shares has
no prima facie validity or is uncertain. More specifically, a pledgee, prior to foreclosure
and sale, does not acquire ownership rights over the pledged shares and thus cannot
compel the corporate secretary to record his alleged ownership of such shares on the
basis merely of the contract of pledge. Similarly, the SEC does not acquire jurisdiction
over a dispute when a partys claim to being a shareholder is, on the face of the
complaint, invalid or inadequate or is otherwise negated by the very allegations of such
complaint. Mandamus will not issue to establish a right, but only to enforce one that is
already established.

Statement of the Case

These are the principles used by this Court in resolving this Petition for Review on
Certiorari before us assailing the October 24, 1996 Decision [1] of the Court of
Appeals[2] in CA-GR SP No. 40832, the dispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is DENIED DUE
COURSE and is hereby DISMISSED. With costs against the [p]etitioner.[3]

By the foregoing disposition, the Court of Appeals effectively affirmed the March 7,
1996 Decision[4] of the Securities and Exchange Commission (SEC) en banc:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing the
appeal on the ground that mandamus will only issue upon a clear showing of ownership
over the assailed shares of stock, [t]he determination of which, on the basis of the
foregoing facts, is within the jurisdiction of the regular courts and not with the SEC. [5]

The SEC en banc upheld the August 16, 1993 Decision[6] of SEC Hearing Officer
Rolando C. Malabonga, which dismissed the action for mandamus filed by petitioner.
 The Facts

As found by the Court of Appeals, the facts of the case are as follows:

x x x On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan

from the [p]etitioner in the amount of P40,000 payable within six (6) months.
To secure the payment of the aforesaid loan and interest thereon,
Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner
whereby he pledged his three hundred (300) shares of stock in the Go Fay &
Company Inc., Respondent Corporation, for brevitys sake. Respondent Guiok
obliged himself to pay interest on said loan at the rate of 10% per annum from
the date of said contract of pledge. On the same date, Alfonso Sy Lim secured
a loan from the [p]etitioner in the amount of P40,000 payable in six (6)
months. To secure the payment of his loan, Sy Lim executed a Contract of
Pledge covering his three hundred (300) shares of stock in Respondent
Corporation. Under said contract, Sy Lim obliged himself to pay interest on his
loan at the rate of 10% per annum from the date of the execution of said
contract.

Under said Contracts of Pledge, Respondent[s] Guiok and Sy Lim

covenanted, inter alia, that:

3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to
the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and the PLEDGEE is hereby authorized and empowered at his option
to transfer the said shares of stock on the books of the corporation to his own
name and to hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the proceeds
of the sale to the payment of the said sum and interest, in the manner
hereinabove provided;

4. In the event of the foreclosure of this pledge and the sale of the pledged
certificate, any surplus remaining in the hands of the PLEDGEE after the
payment of the said sum and interest, and the expenses, if any, connected
with the foreclosure sale, shall be paid by the PLEDGEE to the PLEDGOR;

5. Upon payment of the said amount and interest in full, the PLEDGEE will, on
demand of the PLEDGOR, redeliver to him the said shares of stock by
surrendering the certificate delivered to him by the PLEDGOR or by
retransferring each share to the PLEDGOR, in the event that the PLEDGEE,
under the option hereby granted, shall have caused such shares to be
transferred to him upon the books of the issuing company. (idem, supra)

Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank
and delivered the same to the [p]etitioner.[7]
However, Respondent Guiok and Sy Lim failed to pay their respective loans and the
accrued interests thereon to the [p]etitioner. In October, 1990, the [p]etitioner filed a
Petition for Mandamus against Respondent Corporation, with the SEC entitled Lim Tay
versus Go Fay & Company, Inc., SEC Case No. 03894, praying that:

PRAYER

WHEREFORE, premises considered, it is respectfully prayed that an order be

issued directing the corporate secretary of [R]espondent Go Fay & Co., Inc. to
register the stock transfers and issue new certificates in favor of Lim Tay. It is
likewise prayed that [R]espondent Go Fay & Co., Inc[.] be ordered to pay all
dividends due and unclaimed on the said certificates to [P]laintiff Lim Tay.

Plaintiff further prays for such other relief just and equitable in the premises.
(page 34, Rollo)

The [p]etitioner alleged, inter alia, in his Petition that the controversy between
him as stockholder and the Respondent Corporation was intra-corporate in
view of the obstinate refusal of the corporate secretary of Respondent
Corporation to record the transfer of the shares of stock of Respondent Guiok
and Sy Lim in favor of and under the name of the [p]etitioner and to issue new
certificates of stock to the [p]etitioner.

The Respondent Corporation filed its Answer to the Complaint and alleged, as
Affirmative Defense, that:

AFFIRMATIVE DEFENSE

7. Respondent repleads and incorporates herein by reference the foregoing

allegations.

8. The Complaint states no cause of action against [r]espondent.

9. Complainant is not a stockholder of [r]espondent. Hence, the Honorable
Commission has no jurisdiction to enter the present controversy since their
[sic] is no intracorporate relationship between complainant and respondent.

10. Granting arguendo that a pledge was constituted over the shareholdings
of Sy Guiok in favor of the complainant and that the former defaulted in the
payment of his obligations to the latter, the same did not automatically vest [i]n
complainant ownership of the pledged shares. (page 37, Rollo)

In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of
Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-In-
Intervention with the SEC alleging, inter alia, that:

xxx

3. Deny specifically the allegation under paragraph 5 of the Complaint that,

failure to pay the loan within the contract period automatically foreclosed the
pledged shares of stocks and that the share of stocks are automatically
purchased by the plaintiff, for being false and distorted, the truth being that
pursuant to the [sic] paragraph 3 of the contract of pledges, Annexes A and B,
it is clear that upon failure to pay the amount within the stipulated period, the
pledgee is authorized to foreclose the pledge and thereafter, to sell the same
to satisfy the loan. [H]owever, to this point in time, plaintiff has not performed
any operative act of foreclosing the shares of stocks of [i]ntervenors in
accordance with the Chattel Mortgage law, [n]either was there any sale of
stocks -- by way of public or private auction -- made after foreclosure in favor
of the plaintiff to speak about, and therefore, the respondent company could
not be force[d] to [sic] by way of mandamus, to transfer the subject shares of
stocks from the name of your [i]ntervenors to that of the plaintiff in the
absence of clear and legal basis for such;

4. DENY specifically the allegations under paragraphs 6, 7 and 8 of the

complaint as to the existence of the alleged intracorporate dispute between
plaintiff and company for being without proper and legal basis.In the first
place, plaintiff is not a stockholder of the respondent corporation; there was no
foreclosure of shares executed in accordance with the Chattel Mortgage Law
whatsoever; there were no sales consumated that would transfer to the
plaintiff the subject shares of stocks and therefore, any demand to transfer the
shares of stocks to the name of the plaintiff has no legal basis. In the second
place, [i]ntervenors had been in the past negotiating possible compromise and
at the same time, had tendered payment of the loan secured by the subject
pledges but plaintiff refused unjustifiably to oblige and accept payment o[r]
even agree on the computation of the principal amount of the loan and
interest on top of a substantial amount offered just to settle and compromise
the indebtedness of [i]ntervenors;

II. SPECIAL AFFIRMATIVE DEFENSES

Intervenors replead by way of reference all the foregoing allegations to form

part of the special affirmative defenses;

5. This Honorable Commission has no jurisdiction over the person of the

respondent and nature of the action, plaintiff having no personality at all to
compel respondent by way of mandamus to perform certain corporate
function[s];

6. The complaint states no cause of action;

7. That respondent is not [a] real party in interest;

8. The appropriation of the subject shares of stocks by plaintiff, without

compliance with the formality of law, amounted to [p]actum commis[s]orium
therefore, null and void;

9. Granting for the sake of argument only that there was a valid foreclosure
and sale of the subject st[o]cks in favor of the plaintiff -- which [i]ntervenors
deny -- still paragraph 5 of the contract allows redemption, for which
intervenors are willing to redeem the share of stocks pledged;

10. Even the Chattel Mortgage law allowed redemption of the [c]hattel
foreclosed;

11. As a matter of fact, on several occasions, [i]ntervenors had made

representations with the plaintiff for the compromise and settlement of all the
obligations secured by the subject pledges -- even offering to pay
compensation over and above the value of the obligations, interest[s] and
dividends accruing to the share of stocks but, plaintiff unjustly refused to
accept the offer of payment; (pages 39-42, Rollo)

The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in

their favor, as follows:
 IV. PRAYER

It is respectfully prayed to this Honorable Commission after due hearing, to

dismiss the case for lack of merit, ordering plaintiff to accept payment for the
loans secured by the subject shares of stocks and to pay plaintiff:

1. The sum of P50,000.00, as moral damages;

2. the sum of P50,000.00, as attorneys fees; and,

3. costs of suit.

Other reliefs just and equitable [are] likewise prayed for. (pages 42-43, Rollo)

After due proceedings, the [h]earing [o]fficer promulgated a Decision

dismissing [p]etitioners Complaint on the ground that although the SEC had
jurisdiction over the action, pursuant to the Decision of the Supreme Court in
the case of Rural Bank of Salinas, et al. versus Court of Appeals, et al.,
210 SCRA 510, he failed to prove the legal basis for the secretary of the
Respondent Corporation to be compelled to register stock transfers in favor of
the [p]etitioner and to issue new certificates of stock under his name (pages
67-77, Rollo). The [p]etitioner appealed the Decision of the [h]earing [o]fficer
to the SEC, but, on March 7, 1996, the SEC promulgated a Decision,
dismissing [p]etitioners appeal on the grounds that: (a) the issue between the
[p]etitioner and the [r]espondents being one involving the ownership of the
shares of stock pledged by Respondent Guiok and Sy Lim, the SEC had no
jurisdiction over the action filed by the [p]etitioner; (b) the latter had no cause
of action for mandamus against the Respondent Corporation, the right of
ownership of the [p]etitioner over the 300 shares of stock pledged by
Respondent Guiok and Sy Lim not having been as yet, established,
preparatory to the institution of said Petition for Mandamus with the SEC.

Ruling of the Court of Appeals

On the issue of jurisdiction, the Court of Appeals ruled:

In ascertaining whether or not the SEC had exclusive jurisdiction over [p]etitioners
action, the [a]ppellate [c]ourt must delve into and ascertain: (a) whether or not there is a
need to enlist the expertise and technical know-how of the SEC in resolving the issue of
the ownership of the shares of stock; (b) the status of the relationships of the parties;
[and] (c) the nature of the question that is the subject of the controversy. Where the
controversy is purely a civil matter resoluble by civil law principles and there is no need
for the application of the expertise and technical know-how of the SEC, then the regular
courts have jurisdiction over the action.[8] [citations omitted]

On the issue of whether mandamus can be availed of by the petitioner, the Court of
Appeals agreed with the SEC, viz.:

x x x [T]he [p]etitioner failed to establish a clear and legal right to the writ of mandamus
prayed for by him. x x x Mandamus will not issue to enforce a right which is in
substantial dispute or to which a substantial doubt exists x x x. The principal function of
the writ of mandamus is to command and expedite, and not to inquire and adjudicate
and, therefore it is not the purpose of the writ to establish a legal right, but to enforce
one which has already been established.[9] [citations omitted]

The Court of Appeals debunked petitioners claim that he had acquired ownership
over the shares by virtue of novation, holding that respondents indorsement and
delivery of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and
that petitioners receipt of dividends was in compliance with Article 2102 of the same
Code. Petitioners claim that he had acquired ownership of the shares by virtue of
prescription was likewise dismissed by Respondent Court in this wise:

The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to recover the
shares of stock from the [p]etitioner accrued only from the time they paid their loans and
the interests thereon and [made] a demand for their return.[10]

Hence, the petitioner brought before us this Petition for Review on Certiorari in
accordance with Rule 45 of the Rules of Court.[11]

Assignment of Errors

Petitioner submits, for the consideration of this Court, these issues: [12]

(a) Whether the Securities and Exchange Commission had jurisdiction over
the complaint filed by the petitioner; and

(b) Whether the petitioner is entitled to the relief of mandamus as against the
respondent Go Fay & Co., Inc.

In addition, petitioner contends that it has acquired ownership of the shares through
extraordinary prescription, pursuant to Article 1132 of the Civil Code, and through
respondents subsequent acts, which amounted to a novation of the contracts of pledge.
Petitioner also claims that there was dacion en pago, in which the shares of stock were
deemed sold to petitioner, the consideration for which was the extinguishment of the
loans and the interests thereon. Petitioner likewise claims that laches bars respondents
from recovering the subject shares.

The Courts Ruling

The petition has no merit.

First Issue: Jurisdiction of the SEC

Claiming that the present controversy is intra-corporate and falls within the
exclusive jurisdiction of the SEC, petitioner relies heavily on Abejo v. De
la Cruz,[13] which upheld the jurisdiction of the SEC over a suit filed by an unregistered
stockholder seeking to enforce his rights. He also seeks support from Rural Bank of
Salinas, Inc. v. Court of Appeals,[14] which ruled that the right of a transferee or an
assignee to have stocks transferred to his name was an inherent right flowing from his
ownership of the said stocks.
The registration of shares in a stockholders name, the issuance of stock certificates,
and the right to receive dividends which pertain to the said shares are all rights that flow
from ownership. The determination of whether or not a shareholder is entitled to
exercise the above-mentioned rights falls within the jurisdiction of the SEC. However, if
ownership of the shares is not clearly established and is still unresolved at the time the
action for mandamus is filed, then jurisdiction lies with the regular courts.
Section 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as
follows:

SEC. 5. In addition to the regulatory and adjudicative functions of the

Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:

(a) Devices or schemes employed by or any acts of the board of directors,

business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of stockholders, partners, members of associations or organizations
registered with the Commission;

(b) Controversies arising out of intra-corporate or partnership relations,

between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity;

(c) Controversies in the election or appointment of directors, trustees, officers

or managers of such corporations, partnerships or associations.

(d) Petitions of corporations, partnerships or associations to be declared in the

state of suspension of payments in cases where the corporation, partnership
or association possesses property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases
where the corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the Management Committee created pursuant
to this decree.[15]

Thus, a controversy among stockholders, partners or associates themselves [16] is

intra-corporate in nature and falls within the jurisdiction of the SEC.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint.[17] In the present case, however,
petitioners claim that he was the owner of the shares of stock in question has no prima
facie basis.
In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. The Complaint
contained the following pertinent averments:
xxx

3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three

hundred (300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as
security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00)
Philippine currency, the sum of which was payable within six (6) months [with
interest] at ten percentum (10%) per annum from the date of the execution of the
contract; a copy of this Contract of Pledge is attached as Annex A and made part
hereof;

4. On the same date January 8, 1980, under a similar Contract of Pledge, Lim
Tay received three hundred (300) shares of stock of Go Fay & Co., Inc. from
Alfonso Sy Lim as security for the payment of a loan of [f]orty [t]housand
[p]esos (P40,000.00) Philippine currency, the sum of which was payable
within six (6) months [with interest] at ten percentum (10%) per annum from
the date of the execution of the contract; a copy of this Contract of Pledge is
attached as Annex B and made part hereof;
5. By the express terms of the agreements, upon failure of the borrowers to
pay the stated amounts within the contract period, the pledge is foreclosed
and the shares of stock are purchased by [p]laintiff, who is expressly
authorized and empowered to transfer the duly endorsed shares of stock on
the books of the corporation to his own name; x x x[18] (underscoring supplied)

However , the contracts of pledge, which were made integral parts of the Complaint,
contain this common proviso:

3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to
the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and the PLEDGEE is hereby authorized and empowered at his option,
to transfer the said shares of stock on the books of the corporation to his own
name and to hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the proceeds
of the sale to the payment of the said sum and interest, in the manner
hereinabove provided;

This contractual stipulation, which was part of the Complaint, shows that plaintiff
was merely authorized to foreclose the pledge upon maturity of the loans, not to own
them. Such foreclosure is not automatic, for it must be done in a public or private
sale. Nowhere did the Complaint mention that petitioner had in fact foreclosed the
pledge and purchased the shares after such foreclosure. His status as a mere pledgee
does not, under civil law, entitle him to ownership of the subject shares. It is also
noteworthy that petitioners Complaint did not aver that said shares were acquired
through extraordinary prescription, novation or laches. Moreover, petitioners claim,
subsequent to the filing of the Complaint, that he acquired ownership of the said shares
through these three modes is not indubitable and still has to be resolved. In fact, as will
be shown, such allegation has no merit. Manifestly, the Complaint by itself did not
contain any prima facie showing that petitioner was the owner of the shares of
stocks. Quite the contrary, it demonstrated that he was merely a pledgee, not an
owner. Accordingly, it failed to lay down a sufficient basis for the SEC to exercise
jurisdiction over the controversy. In fact, the very allegations of the Complaint and its
annexes negated the jurisdiction of the SEC.
Petitioners reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank
of Salinas, Inc. v. Court of Appeals is misplaced. In Abejo, the Abejo spouses sold to
Telectronic Systems, Inc. shares of stock in Pocket Bell Philippines, Inc. Subsequent to
such contract of sale, the corporate secretary, Norberto Braga, refused to record the
transfer of the shares in the corporate books and instead asked for the annulment of the
sale, claiming that he and his wife had a preemptive right over some of the shares, and
that his wifes shares were sold without consideration or consent.
 At the time the Bragas questioned the validity of the sale, the contract had already
been perfected, thereby demonstrating that Telectronic Systems, Inc. was already
the prima facie owner of the shares and, consequently, a stockholder of Pocket Bell
Philippines, Inc. Even if the sale were to be annulled later on, Telectronic Systems, Inc.
had, in the meantime, title over the shares from the time the sale was perfected until the
time such sale was annulled. The effects of an annulment operate prospectively and do
not, as a rule retroact to the time the sale was made. Therefore, at the time the Bragas
questioned the validity of the transfers made by the Abejos, Telectronic Systems, Inc.
was already a prima facie shareholder of the corporation, thus making the dispute
between the Bragas and the Abejos intra-corporate in nature.Hence, the Court held that
the issue is not on ownership of shares but rather the non-performance by the corporate
secretary of the ministerial duty of recording transfers of shares of stock of the
corporation of which he is secretary.[19]
Unlike Abejo, however, petitioners ownership over the shares in this case was not
yet perfected when the Complaint was filed. The contract of pledge certainly does not
make him the owner of the shares pledged. Further, whether prescription effectively
transferred ownership of the shares, whether there was a novation of the contracts of
pledge, and whether laches had set in were difficult legal issues, which were unpleaded
and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect
the transfer, in his favor, of the shares pledged to him.
In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the
shares in favor of the respondents in that case. When the corporate secretary refused to
register the transfer, an action for mandamus was instituted. Subsequently, a motion for
intervention was filed, seeking the annulment of the deeds of assignment on the
grounds that the same were fictitious and antedated, and that they were in fact
donations because the considerations therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were
already prima facie shareholders when the deeds of assignment were questioned. If the
said deeds were to be annulled later on, respondents would still be considered
shareholders of the corporation from the time of the assignment until the annulment of
such contracts.

Second Issue: Mandamus Will Not

Issue to Establish a Right

Petitioner prays for the issuance of a writ of mandamus, directing the corporate
secretary of respondent corporation to have the shares transferred to his name in the
corporate books, to issue new certificates of stock and to deliver the corresponding
dividends to him.[20]
In order that a writ of mandamus may issue, it is essential that the person
petitioning for the same has a clear legal right to the thing demanded and that it is the
imperative duty of the respondent to perform
the act required. It neither confers powers nor imposes duties and is never issued in
doubtful cases. It is simply a command to exercise a power already possessed and to
perform a duty already imposed.[21]
In the present case, petitioner has failed to establish a clear legal right. Petitioners
contention that he is the owner of the said shares is completely without merit. Quite the
contrary and as already shown, he does not have any ownership rights at all. At the
time petitioner instituted his suit at the SEC, his ownership claim had no prima facie leg
to stand on. At best, his contention was disputable and uncertain. Mandamus will not
issue to establish a legal right, but only to enforce one that is already clearly
established.

Without Foreclosure and

Purchase at Auction, Pledgee
Is Not the Owner of Pledged Shares

Petitioner initially argued that ownership of the shares pledged had passed to him,
upon Respondents Sy Guiok and Sy Lims failure to pay their respective loans. But on
appeal, petitioner claimed that ownership over the shares had passed to him, not via the
contracts of pledge, but by virtue of prescription and by respondents subsequent acts
which amounted to a novation of the contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire ownership of the
shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states:

The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale shall
be made at a public auction, and with notification to the debtor and the owner
of the thing pledged in a proper case, stating the amount for which the public
sale is to be held. If at the first auction the thing is not sold, a second one with
the same formalities shall be held; and if at the second auction there is no
sale either, the creditor may appropriate the thing pledged. In this case he
shall be obliged to give an acquaintance for his entire claim.

Furthermore, the contracts of pledge contained a common proviso, which we quote

again for the sake of clarity:

3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to
the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and the PLEDGEE is hereby authorized and empowered at his option
to transfer the said shares of stock on the books of the corporation to his own
name, and to hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the proceeds
of the sale to the payment of the said sum and interest, in the manner
hereinabove provided;[22]

There is no showing that petitioner made any attempt to foreclose or sell the shares
through public or private auction, as stipulated in the contracts of pledge and as
required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not
have passed to him. The pledgor remains the owner during the pendency of the pledge
and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same
Code:

Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner of the
thing pledged in order to recover it from, or defend it against a third person.

No Ownership
by Prescription

Petitioner did not acquire the shares by prescription either. The period of
prescription of any cause of action is reckoned only from the date the cause of action
accrued.
Since a cause of action requires as an essential element not only a legal right of the
plaintiff and a correlative obligation of the defendant, but also an act or omission of the
defendant in violation of said legal right, the cause of action does not accrue until the
party obligated refuses, expressly or impliedly, to comply with its duty.[23] Accordingly, a
cause of action on a written contract accrues when a breach or violation thereof occurs.
Under the contracts of pledge, private respondents would have a right to ask for the
redelivery of their certificates of stock upon payment of their debts to petitioner,
consonant with Article 2105 of the Civil Code, which reads:

The debtor cannot ask for the return of the thing pledged against the will of the creditor,
unless and until he has paid the debt and its interest, with expenses in a proper case. [24]

Thus, the right to recover the shares based on the written contract of pledge
between petitioner and respondents would arise only upon payment of their respective
loans. Therefore, the prescriptive period within which to demand the return of the thing
pledged should begin to run only after the payment of the loan and a demand for the
thing has been made, because it is only then that respondents acquire a cause of action
for the return of the thing pledged.
 Prescription should not begin to run on the action to demand the return of the thing
pledged while the loan still exists. This is because the right to ask for the return of the
thing pledged will not arise so long as the loan subsists. In the present case, the
prescriptive period did not begin to run when the loan became due. On the other hand, it
is petitioners right to demand payment that may be in danger of prescription.
Petitioner contends that he can be deemed to have acquired ownership over the
certificates of stock through extraordinary prescription, as provided for in Article 1132 of
the Civil Code which states:

Art. 1132. The ownership of movables prescribes through uninterrupted

possession for four years in good faith.

The ownership of personal property also prescribes through uninterrupted

possession for eight years, without need of any other condition. x x x.

Petitioners argument is untenable. What is required by Article 1132 is possession in

the concept of an owner. In the present case, petitioners possession of the stock
certificates came about because they were delivered to him pursuant to the contracts of
pledge. His possession as a pledgee cannot ripen into ownership by prescription. As
aptly pointed out by Justice Jose C. Vitug:

Acquisitive prescription is a mode of acquiring ownership by a possessor

through the requisite lapse of time. In order to ripen into ownership,
possession must be in the concept of an owner, public, peaceful and
uninterrupted. Thus, possession with a juridical title, such as by a usufructory,
a trustee, a lessee, agent or a pledgee, not being in the concept of an owner,
cannot ripen into ownership by acquisitive prescription unless the juridical
relation is first expressly repudiated and such repudiation has been
communicated to the other party.[25]

Petitioner expressly repudiated the pledge, only when he filed his Complaint and
claimed that he was not a mere pledgee, but that he was already the owner of the
shares. Based on the foregoing, petitioner has not acquired the certificates of stock
through extraordinary prescription.

No Novation
in Favor of Petitioner

Neither did petitioner acquire the shares by virtue of a novation of the contract of
pledge. Novation is defined as the extinguishment of an obligation by a subsequent one
which terminates it, either by changing its object or principal conditions, by substituting a
new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.[26] Novation of a contract must not be presumed. In the absence of an express
agreement, novation takes place only when the old and the new obligations are
incompatible on every point.[27]
In the present case, novation cannot be presumed by (a) respondents indorsement
and delivery of the certificates of stock covering the 600 shares, (b) petitioners receipt of
dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any
action to recover the shares since 1980.
Respondents indorsement and delivery of the certificates of stock were pursuant to
paragraph 2 of the contract of pledge which reads:

2. The said certificates had been delivered by the PLEDGOR endorsed in

blank to be held by the PLEDGEE under the pledge as security for the
payment of the aforementioned sum and interest thereon accruing.[28]

This stipulation did not effect the transfer of ownership to petitioner. It was merely in
compliance with Article 2093 of the Civil Code,[29] which requires that the thing pledged
be placed in the possession of the creditor or a third person of common agreement; and
Article 2095,[30] which states that if the thing pledged are shares of stock, then the
instrument proving the right pledged must be delivered to the creditor.
Moreover, the fact that respondents allowed the petitioner to receive dividends
pertaining to the shares was not meant to relinquish ownership thereof. As stated by
respondent corporation, the same was done pursuant to an agreement between the
petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the Civil
Code which provides:

If the pledge earns or produces fruits, income, dividends, or interests, the

creditor shall compensate what he receives with those which are owing him;
but if none are owing him, or insofar as the amount may exceed that which is
due, he shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and the earnings of the right
pledged.

Novation cannot be inferred from the mere fact that petitioner has not, since 1980,
instituted any action to recover the shares. Such action is, in fact, premature, as the
loan is still outstanding. Besides, as already pointed out, novation is never presumed or
inferred.

No Dacion en Pago
in Favor of Petitioner

Neither can there be dacion en pago, in which the certificates of stock are deemed
sold to petitioner, the consideration for which is the extinguishment of the loans and the
accrued interests thereon. Dacion en pago is a form of novation in which a change
takes place in the object involved in the original contract. Absent an explicit agreement,
petitioner cannot simply presume dacion en pago.

Laches Not
a Bar to Petitioner

Petitioner submits that the inaction of the individual respondents with respect to the
recovery of the shares of stock serves to bar them from asserting rights over said
shares on the basis of laches.[31]
Laches has been defined as the failure or neglect, for an unreasonable length of
time, to do that which by exercising due diligence could or should have been done
earlier; it is negligence or omission to assert a right within a reasonable time, warranting
a presumption that the party entitled to assert it either has abandoned it or declined to
assert it.[32]
In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the
time to demand payment of the debt. More important, under the contracts of pledge,
petitioner could have foreclosed the pledges as soon as the loans became due. But for
still unknown or unexplained reasons, he failed to do so, preferring instead to pursue his
baseless claim to ownership.
WHEREFORE, the petition is hereby DENIED and the assailed Decision
is AFFIRMED. Costs against petitioner.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-18805 August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE

PHILIPPINES,plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO
GARCIA,3 and LEONOR MOLL, defendants-appellees.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant.

L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna,
Montecillo and Belo for defendants-appellees.

SANCHEZ, J.:

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental
organization on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation
and development of the coconut industry in the Philippines. On August 1, 1946, NACOCO's charter
was amended [Republic Act 5] to grant that corporation the express power "to buy, sell, barter,
export, and in any other manner deal in, coconut, copra, and dessicated coconut, as well as their by-
products, and to act as agent, broker or commission merchant of the producers, dealers or
merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve coconut
producers by securing advantageous prices for them, to cut down to a minimum, if not altogether
eliminate, the margin of middlemen, mostly aliens.4

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro
Garcia were members of the Board; defendant Leonor Moll became director only on December 22,
1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the
scores of contracts executed by general manager Kalaw are the disputed contracts, for the delivery
of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b.,
delivery: August and September, 1947. This contract was later assigned to Louis Dreyfus &
Co. (Overseas) Ltd.

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton,
f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract was also
assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery:
September, 1947.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f.,
Los Angeles, California, delivery: November, 1947.
 (e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long
tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00
per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery:
November and December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific
ports, delivery: December, 1947 and January, 1948. This contract was assigned to Pacific
Vegetable Co.

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific
ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature
supervened. Four devastating typhoons visited the Philippines: the first in October, the second and
third in November, and the fourth in December, 1947. Coconut trees throughout the country suffered
extensive damage. Copra production decreased. Prices spiralled. Warehouses were destroyed.
Cash requirements doubled. Deprivation of export facilities increased the time necessary to
accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board
for approval. It was not until December 22, 1947 when the membership was completed. Defendant
Moll took her oath on that date. A meeting was then held. Kalaw made a full disclosure of the
situation, apprised the board of the impending heavy losses. No action was taken on the contracts.
Neither did the board vote thereon at the meeting of January 7, 1948 following. Then, on January 11,
1948, President Roxas made a statement that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks that confronted private companies, that
NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter,
that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance.
They unanimously approved the contracts hereinbefore enumerated.

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers Tons Delivered Undelivered

Pacific Vegetable Oil 2,386.45 4,613.55

Spencer Kellog None 1,000

Franklin Baker 1,000 500

Louis Dreyfus 800 2,200

Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850

Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245

TOTALS 7,091.45 9,408.55

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil
Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00;
Spencer Kellog & Sons, P159,040.00.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance
of Manila, upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case
4459); P287,028.00; for the balance on the August 14 contract (Civil Case 4398), P75,098.63; for
that per the September 12 contract reduced to judgment (Civil Case 4322, appealed to this Court in
L-2829), P447,908.40. These cases culminated in an out-of-court amicable settlement when the
Kalaw management was already out. The corporation thereunder paid Dreyfus P567,024.52
representing 70% of the total claims. With particular reference to the Dreyfus claims, NACOCO put
up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did
not have license to do business here; and (2) failure to deliver was due to force majeure, the
typhoons. To project the utter unreasonableness of this compromise, we reproduce in haec
verba this finding below:

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co.
(Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of
P345,654.68 wherein defendant set up same defenses as above, plaintiff accepted
a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same proportion, the claim
of Dreyfus against NACOCO should have been compromised for only P10,000.00, if at all.
Now, why should defendants be held liable for the large sum paid as compromise by the
Board of Liquidators? This is just a sample to show how unjust it would be to hold
defendants liable for the readiness with which the Board of Liquidators disposed of the
NACOCO funds, although there was much possibility of successfully resisting the claims, or
at least settlement for nominal sums like what happened in the Syjuco case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52
from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro
Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code
(now Article 2176, new Civil Code); and defendant board members, including Kalaw, with bad faith
and/or breach of trust for having approved the contracts. The fifth amended complaint, on which this
case was tried, was filed on July 2, 1959. Defendants resisted the action upon defenses hereinafter
in this opinion to be discussed.

The lower court came out with a judgment dismissing the complaint without costs as well as
defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the
sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO.

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but adversely decided by, the court
below, arrest our attention. On appeal, defendants renew their bid. And this, upon established
jurisprudence that an appellate court may base its decision of affirmance of the judgment below on a
point or points ignored by the trial court or in which said court was in error.6

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators
has lost its legal personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1)
under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation
Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct "such disposition of
its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of
the corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation whose
corporate existence is terminated, "shall nevertheless be continued as a body corporate for three
years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its capital stock, but not for the purpose of continuing the
business for which it was established;" and (3) under Section 78 of the Corporation Law, by virtue of
which the corporation, within the three year period just mentioned, "is authorized and empowered to
convey all of its property to trustees for the benefit of members, stockholders, creditors, and others
interested."8

It is defendants' pose that their case comes within the coverage of the second method. They reason
out that suit was commenced in February, 1949; that by Executive Order 372, dated November 24,
1950, NACOCO, together with other government-owned corporations, was abolished, and the Board
of Liquidators was entrusted with the function of settling and closing its affairs; and that, since the
three year period has elapsed, the Board of Liquidators may not now continue with, and prosecute,
the present case to its conclusion, because Executive Order 372 provides in Section 1 thereof that
—

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation,
the National Tobacco Corporation, the National Food Producer Corporation and the former
enemy-owned or controlled corporations or associations, . . . are hereby abolished. The said
corporations shall be liquidated in accordance with law, the provisions of this Order, and/or in
such manner as the President of the Philippines may direct; Provided, however, That each of
the said corporations shall nevertheless be continued as a body corporate for a period of
three (3) years from the effective date of this Executive Order for the purpose of prosecuting
and defending suits by or against it and of enabling the Board of Liquidators gradually to
settle and close its affairs, to dispose of and, convey its property in the manner hereinafter
provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible
within the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by or against a
corporation abate when it ceases to be an entity capable of suing or being sued" (Fisher, The
Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris Secundum likewise is authority for
the statement that "[t]he dissolution of a corporation ends its existence so that there must be
statutory authority for prolongation of its life even for purposes of pending litigation"9and that suit
"cannot be continued or revived; nor can a valid judgment be rendered therein, and a judgment, if
rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement
of pending actions follows as a matter of course upon the expiration of the legal period for
liquidation, 11 unless the statute merely requires a commencement of suit within the added
time. 12 For, the court cannot extend the time alloted by statute. 13

We, however, express the view that the executive order abolishing NACOCO and creating the Board
of Liquidators should be examined in context. The proviso in Section 1 of Executive Order 372,
whereby the corporate existence of NACOCO was continued for a period of three years from the
effectivity of the order for "the purpose of prosecuting and defending suits by or against it and of
enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and convey its
property in the manner hereinafter provided", is to be read not as an isolated provision but in
conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked
to the existence of the Board of Liquidators and its function of closing the affairs of the various
government owned corporations, including NACOCO.

By Section 2 of the executive order, while the boards of directors of the various corporations were
abolished, their powers and functions and duties under existing laws were to be assumed and
exercised by the Board of Liquidators. The President thought it best to do away with the boards of
directors of the defunct corporations; at the same time, however, the President had chosen to see to
it that the Board of Liquidators step into the vacuum. And nowhere in the executive order was there
any mention of the lifespan of the Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators may, under
section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such
manner as the President of the Philippines may direct." By Section 4, when any property, fund, or
project is transferred to any governmental instrumentality "for administration or continuance of any
project," the necessary funds therefor shall be taken from the corresponding special fund created in
Section 5. Section 5, in turn, talks of special funds established from the "net proceeds of the
liquidation" of the various corporations abolished. And by Section, 7, fifty per centum of the fees
collected from the copra standardization and inspection service shall accrue "to the special fund
created in section 5 hereof for the rehabilitation and development of the coconut industry." Implicit in
all these, is that the term of life of the Board of Liquidators is without time limit. Contemporary history
gives us the fact that the Board of Liquidators still exists as an office with officials and numerous
employees continuing the job of liquidation and prosecution of several court actions.

Not that our views on the power of the Board of Liquidators to proceed to the final determination of
the present case is without jurisprudential support. The first judicial test before this Court is National
Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the
corporation, already dissolved, commenced suit within the three-year extended period for liquidation.
That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the
corporation. She failed to account for that money. Defendant moved to dismiss, questioned the
corporation's capacity to sue. The lower court ordered plaintiff to include as co-party plaintiff, The
Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372.
Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider.
Ground: excusable negligence, in that its counsel prepared the amended complaint, as directed, and
instructed the board's incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo,
to mail the original thereof to the court and a copy of the same to defendant's counsel. She mailed
the copy to the latter but failed to send the original to the court. This motion was rejected below.
Plaintiff came to this Court on appeal. We there said that "the rule appears to be well settled that, in
the absence of statutory provision to the contrary, pending actions by or against a corporation are
abated upon expiration of the period allowed by law for the liquidation of its affairs." We there said
that "[o]ur Corporation Law contains no provision authorizing a corporation, after three (3) years from
the expiration of its lifetime, to continue in its corporate name actions instituted by it within said
period of three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that case
that the Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the
complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for
the settlement of its affairs is what impelled the President to create a Board of Liquidators, to
continue the management of such matters as may then be pending." 15 We accordingly directed the
record of said case to be returned to the lower court, with instructions to admit plaintiff's amended
complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its
assets in the hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on
behalf of the government. It was an express trust. The legal interest became vested in the trustee —
the Board of Liquidators. The beneficial interest remained with the sole stockholder — the
government. At no time had the government withdrawn the property, or the authority to continue the
present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the hand of the
Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section 78
of the Corporation Law — the third method of winding up corporate affairs — find application.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in
this case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their
nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and
may not be deemed to have survived after his death.18 They say that the controlling statute is
Section 5, Rule 87, of the 1940 Rules of Court.19which provides that "[a]ll claims for money against
the decedent, arising from contract, express or implied", must be filed in the estate proceedings of
the deceased. We disagree.

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the
questioned contracts without prior approval of the board of directors, to the damage and prejudice of
plaintiff; and is against Kalaw and the other directors for having subsequently approved the said
contracts in bad faith and/or breach of trust." Clearly then, the present case is not a mere action for
the recovery of money nor a claim for money arising from contract. The suit involves alleged tortious
acts. And the action is embraced in suits filed "to recover damages for an injury to person or
property, real or personal", which survive. 20

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There,
plaintiffs sought to recover damages from defendant Llemos. The complaint averred that Llemos had
served plaintiff by registered mail with a copy of a petition for a writ of possession in Civil Case 4824
of the Court of First Instance at Catbalogan, Samar, with notice that the same would be submitted to
the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice served,
plaintiffs proceeded to the said court of Samar from their residence in Manila accompanied by their
lawyers, only to discover that no such petition had been filed; and that defendant Llemos maliciously
failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain, causing
them mental anguish and undue embarrassment. Defendant died before he could answer the
complaint. Upon leave of court, plaintiffs amended their complaint to include the heirs of the
deceased. The heirs moved to dismiss. The court dismissed the complaint on the ground that the
legal representative, and not the heirs, should have been made the party defendant; and that,
anyway, the action being for recovery of money, testate or intestate proceedings should be initiated
and the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the
Rules of Court, those concerning claims that are barred if not filed in the estate settlement
proceedings (Rule 87, sec. 5) and those defining actions that survive and may be prosecuted
against the executor or administrator (Rule 88, sec. 1), it is apparent that actions for
damages caused by tortious conduct of a defendant (as in the case at bar) survive the death
of the latter. Under Rule 87, section 5, the actions that are abated by death are: (1) claims for
funeral expenses and those for the last sickness of the decedent; (2) judgments for money;
and (3) "all claims for money against the decedent, arising from contract express or implied."
None of these includes that of the plaintiffs-appellants; for it is not enough that the claim
against the deceased party be for money, but it must arise from "contract express or
implied", and these words (also used by the Rules in connection with attachments and
 derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-
194,

"to include all purely personal obligations other than those which have their source
in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a
decedent's executors or administrators, and they are: (1) actions to recover real and
personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to
recover damages for an injury to person or property. The present suit is one for damages
under the last class, it having been held that "injury to property" is not limited to injuries to
specific property, but extends to other wrongs by which personal estate is injured or
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously
cause a party to incur unnecessary expenses, as charged in this case, is certainly injury to
that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No
cogent reason exists why we should break away from the views just expressed. And, the conclusion
remains: Action against the Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia
survives.

The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the
controverted contracts without the prior approval of the corporation's directorate. Plaintiff leans
heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the
duties of the general manager, the obligation: "(b) To perform or execute on behalf of the
Corporation upon prior approval of the Board, all contracts necessary and essential to the proper
accomplishment for which the Corporation was organized."

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general
manager's position in the corporate structure. A rule that has gained acceptance through the years is
that a corporate officer "intrusted with the general management and control of its business, has
implied authority to make any contract or do any other act which is necessary or appropriate to the
conduct of the ordinary business of the corporation. 21 As such officer, "he may, without any special
authority from the Board of Directors perform all acts of an ordinary nature, which by usage or
necessity are incident to his office, and may bind the corporation by contracts in matters arising in
the usual course of business. 22

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the
powers of a general manager, given the cited provision of the NACOCO by-laws requiring prior
directorate approval of NACOCO contracts.

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this
enterprise are copra sales for future delivery. The movement of the market requires that sales
agreements be entered into, even though the goods are not yet in the hands of the seller. Known in
business parlance as forward sales, it is concededly the practice of the trade. A certain amount of
speculation is inherent in the undertaking. NACOCO was much more conservative than the
exporters with big capital. This short-selling was inevitable at the time in the light of other factors
such as availability of vessels, the quantity required before being accepted for loading, the labor
needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity.
Copra could not stay long in its hands; it would lose weight, its value decrease. Above all,
NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to be executed on
short notice — at times within twenty-four hours. To be appreciated then is the difficulty of calling a
formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.

Long before the disputed contracts came into being, Kalaw contracted — by himself alone as
general manager — for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw
signed some 60 such contracts for the sale of copra to divers parties. During that period, from those
copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was NACOCO's board of
directors that, on December 5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in
recognition of the signal achievement rendered by him in putting the Corporation's business on a
self-sufficient basis within a few months after assuming office, despite numerous handicaps and
difficulties."

These previous contract it should be stressed, were signed by Kalaw without prior authority from the
board. Said contracts were known all along to the board members. Nothing was said by them. The
aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the difficulties
attendant to forward sales by leaving the adoption of means to end, to the sound discretion of
NACOCO's general manager Maximo M. Kalaw.

Liberally spread on the record are instances of contracts executed by NACOCO's general manager
and submitted to the board after their consummation, not before. These agreements were not
Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon after NACOCO
was chartered. It was a contract of lease executed on November 16, 1940 by the then general
manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in
Soriano Building On November 14, 1946, NACOCO, thru its general manager Kalaw, sold 3,000
tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22, 1947, when
the controversy over the present contract cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of
the latter. On the same date, the board gave its nod to a contract for renewal of the services of Dr.
Manuel L. Roxas. In fact, also on that date, the board requested Kalaw to report for action all copra
contracts signed by him "at the meeting immediately following the signing of the contracts." This
practice was observed in a later instance when, on January 7, 1948, the board approved two
previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a certain
"GNAPO".

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of
Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such
ratification was necessary because, as stated by Kalaw in that same meeting, "under an existing
resolution he is authorized to give a brokerage fee of only 1% on sales of copra made through
brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three export contracts,
and 2% on three others, for the sale of copra were approved by the board with a proviso authorizing
the general manager to pay a commission up to the amount of 1-1/2% "without further action by the
Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000
tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage
commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2,000
tons of copra.

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by
the board, not the sales contracts themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling fixed by the board.
Knowledge by the board is also discernible from other recorded instances. 1äwphï1.ñët

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow
downward trend but belief was entertained that the nadir might have already been reached and an
improvement in prices was expected. In view thereof, Kalaw informed the board that "he intends to
wait until he has signed contracts to sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current:
The copra market appeared to have become fairly steady; it was not expected that copra prices
would again rise very high as in the unprecedented boom during January-April, 1947; the prices
seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated by
the trends. Kalaw continued to say that "the Corporation has been closing contracts for the sale of
copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the
practice of the management to close contracts of sale first before buying. The General
Manager replied that this practice is generally followed but that it is not always possible to do
so for two reasons:

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease
buying even when it does not have actual contracts of sale since the suspension of buying
by the Nacoco will result in middlemen taking advantage of the temporary inactivity of the
Corporation to lower the prices to the detriment of the producers.

(2) The movement of the market is such that it may not be practical always to wait for the
consummation of contracts of sale before beginning to buy copra.

The General Manager explained that in this connection a certain amount of speculation is
unavoidable. However, he said that the Nacoco is much more conservative than the other
big exporters in this respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter
of general practice, custom, and policy, the general manager may bind the company without formal
authorization of the board of directors. 26 In varying language, existence of such authority is
established, by proof of the course of business, the usage and practices of the company and by
the knowledge which the board of directors has, or must bepresumed to have, of acts and doings of
its subordinates in and about the affairs of the corporation. 27 So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in
other instances where the power was in fact exercised. 28

x x x Thus, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to represent the corporation
may be implied from the manner in which he has been permitted by the directors to manage
its business.29

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate
and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board
approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval
on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid
aside the by-law requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on
January 30, 1948, though it is our (and the lower court's) belief that ratification here is nothing more
than a mere formality.

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized
act or contract by its officers or others relates back to the time of the act or contract ratified, and is
equivalent to original authority;" and that " [t]he corporation and the other party to the transaction are
in precisely the same position as if the act or contract had been authorized at the time." 30 The
language of one case is expressive: "The adoption or ratification of a contract by a corporation is
nothing more or less than the making of an original contract. The theory of corporate ratification
is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to
a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the
moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus
purged of whatever vice or defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of
prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize
equitable considerations. And, the conclusion inevitably is that the embattled contracts remain valid.

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach
of trust" in the board's ratification of the contracts without prior approval of the board. For, in reality,
all that we have on the government's side of the scale is that the board knew that the contracts so
confirmed would cause heavy losses.

As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior
approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first
thrown on the way only when the contracts turned out to be unprofitable for NACOCO.

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach
of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud.34 Applying
this precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral
obliquity," or "conscious doing of wrong," or "breach of a known duty," or "Some motive or interest or
ill will" that "partakes of the nature of fraud."

Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve
their own private interests, or to pocket money at the expense of the corporation. 35 We have had
occasion to affirm that bad faith contemplates a "state of mind affirmatively operating with furtive
design or with some motive of self-interest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding,
141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in
Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the reported cases,
although there are many dicta not easily reconcilable, yet I have found no judgment or decree which
has held directors to account, except when they have themselves been personally guilty of some
fraud on the corporation, or have known and connived at some fraud in others, or where such fraud
might have been prevented had they given ordinary attention to their duties. . . ." Plaintiff did not
even dare charge its defendant-directors with any of these malevolent acts.

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of
fairness. They did not think of raising their voice in protest against past contracts which brought in
enormous profits to the corporation. By the same token, fair dealing disagrees with the idea that
similar contracts, when unprofitable, should not merit the same treatment. Profit or loss resulting
from business ventures is no justification for turning one's back on contracts entered into. The truth,
then, of the matter is that — in the words of the trial court — the ratification of the contracts was "an
act of simple justice and fairness to the general manager and the best interest of the corporation
whose prestige would have been seriously impaired by a rejection by the board of those contracts
which proved disadvantageous." 37

The directors are not liable." 38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions.
Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers
could not be expected. NACOCO was not alone in this misfortune. The record discloses that private
traders, old, experienced, with bigger facilities, were not spared; also suffered tremendous losses.
Roughly estimated, eleven principal trading concerns did run losses to about P10,300,000.00.
Plaintiff's witness Sisenando Barretto, head of the copra marketing department of NACOCO,
observed that from late 1947 to early 1948 "there were many who lost money in the
trade." 39 NACOCO was not immune from such usual business risk.

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus &
Co. by pleading in its answers force majeure as an affirmative defense and there vehemently
asserted that "as a result of the said typhoons, extensive damage was caused to the coconut trees
in the copra producing regions of the Philippines and according to estimates of competent
authorities, it will take about one year until the coconut producing regions will be able to produce
their normal coconut yield and it will take some time until the price of copra will reach normal levels;"
and that "it had never been the intention of the contracting parties in entering into the contract in
question that, in the event of a sharp rise in the price of copra in the Philippine market produce
by force majeure or by caused beyond defendant's control, the defendant should buy the copra
contracted for at exorbitant prices far beyond the buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from
permitting plaintiff to stray away therefrom, to charge now that the damage suffered was because of
Kalaw's negligence, or for that matter, by reason of the board's ratification of the contracts. 41

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual
obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts involved
delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO was still able
to deliver a little short of 50% of the tonnage required under the contracts.

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of
damage and wrong is here absent. There cannot be an actionable wrong if either one or the other is
wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which would link
Kalaw's acts — ratified by the board — to a matrix for defraudation of the government. Kalaw is clear
of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that
he had authority to enter into the contracts, that he did so in the best interests of the corporation; that
he entered into the contracts in pursuance of an overall policy to stabilize prices, to free the
producers from the clutches of the middlemen. The prices for which NACOCO contracted in the
disputed agreements, were at a level calculated to produce profits and higher than those prevailing
in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to think
that one would sign (a) contract when you are going to lose money" and that no contract was
executed "at a price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing,
NACOCO envisioned a profit of around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with
NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and
quotations from abroad were guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the
coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in
his duty. He exerted efforts to stave off losses. He asked the Philippine National Bank to implement
its commitment to extend a P400,000.00 loan. The bank did not release the loan, not even the sum
of P200,000.00, which, in October, 1947, was approved by the bank's board of directors. In
frustration, on December 12, 1947, Kalaw turned to the President, complained about the bank's
short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO
eventually faltered in its contractual obligations.

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem
to be supported by the fact that even as the contracts were being questioned in Congress and in the
NACOCO board itself, President Roxas defended the actuations of Kalaw. On December 27, 1947,
President Roxas expressed his desire "that the Board of Directors should reelect Hon. Maximo M.
Kalaw as General Manager of the National Coconut Corporation." 47 And, on January 7, 1948, at a
time when the contracts had already been openly disputed, the board, at its regular meeting,
appointed Maximo M. Kalaw as acting general manager of the corporation.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc.,
L-15092, May 18, 1962:

"They (the directors) hold such office charged with the duty to act for the corporation according to
their best judgment, and in so doing they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation should be operated at a loss
during a business depression, or closed down at a smaller loss, is a purely business and economic
problem to be determined by the directors of the corporation, and not by the court. It is a well known
rule of law that questions of policy of management are left solely to the honest decision of officers
and directors of a corporation, and the court is without authority to substitute its judgment for the
judgment of the board of directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable by the courts." (Fletcher on
Corporations, Vol. 2, p. 390.) 48

Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 160273 January 18, 2008

CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS, JULIUS Z. NERI,
DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA and JOSE B. SALA, petitioners,
vs.
RICARDO F. ELIZAGAQUE, respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, assailing the Decision1 dated January 31, 2003 and Resolution dated
October 2, 2003 of the Court of Appeals in CA-G.R. CV No. 71506.

The facts are:

Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation operating as a non-profit and
non-stock private membership club, having its principal place of business in Banilad, Cebu City.
Petitioners herein are members of its Board of Directors.

Sometime in 1987, San Miguel Corporation, a special company proprietary member of CCCI,
designated respondent Ricardo F. Elizagaque, its Senior Vice President and Operations Manager for
the Visayas and Mindanao, as a special non-proprietary member. The designation was thereafter
approved by the CCCI’s Board of Directors.

In 1996, respondent filed with CCCI an application for proprietary membership. The application was
indorsed by CCCI’s two (2) proprietary members, namely: Edmundo T. Misa and Silvano Ludo.

As the price of a proprietary share was around the P5 million range, Benito Unchuan, then president
of CCCI, offered to sell respondent a share for only P3.5 million. Respondent, however, purchased
the share of a certain Dr. Butalid for only P3 million. Consequently, on September 6, 1996, CCCI
issued Proprietary Ownership Certificate No. 1446 to respondent.

During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board of Directors, action on
respondent’s application for proprietary membership was deferred. In another Board meeting held on
July 30, 1997, respondent’s application was voted upon. Subsequently, or on August 1, 1997,
respondent received a letter from Julius Z. Neri, CCCI’s corporate secretary, informing him that the
Board disapproved his application for proprietary membership.

On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of

reconsideration. As CCCI did not answer, respondent, on October 7, 1997, wrote another letter of
reconsideration. Still, CCCI kept silent. On November 5, 1997, respondent again sent CCCI a letter
inquiring whether any member of the Board objected to his application. Again, CCCI did not reply.

Consequently, on December 23, 1998, respondent filed with the Regional Trial Court (RTC), Branch
71, Pasig City a complaint for damages against petitioners, docketed as Civil Case No. 67190.

After trial, the RTC rendered its Decision dated February 14, 2001 in favor of respondent, thus:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. Ordering defendants to pay, jointly and severally, plaintiff the amount of P2,340,000.00 as
actual or compensatory damages.

2. Ordering defendants to pay, jointly and severally, plaintiff the amount of P5,000,000.00 as
moral damages.

3. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as
exemplary damages.

4. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as
and by way of attorney’s fees and P80,000.00 as litigation expenses.

5. Costs of suit.

Counterclaims are hereby DISMISSED for lack of merit.

SO ORDERED.2

On appeal by petitioners, the Court of Appeals, in its Decision dated January 31, 2003, affirmed the
trial court’s Decision with modification, thus:

WHEREFORE, premises considered, the assailed Decision dated February 14, 2001 of the
Regional Trial Court, Branch 71, Pasig City in Civil Case No. 67190 is hereby AFFIRMED
with MODIFICATION as follows:

1. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount

of P2,000,000.00 as moral damages;

2. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount

of P1,000,000.00 as exemplary damages;

3. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the mount

of P500,000.00 as attorney’s fees and P50,000.00 as litigation expenses; and

4. Costs of the suit.

The counterclaims are DISMISSED for lack of merit.

SO ORDERED.3
On March 3, 2003, petitioners filed a motion for reconsideration and motion for leave to set the
motion for oral arguments. In its Resolution4 dated October 2, 2003, the appellate court denied the
motions for lack of merit.

Hence, the present petition.

The issue for our resolution is whether in disapproving respondent’s application for proprietary
membership with CCCI, petitioners are liable to respondent for damages, and if so, whether their
liability is joint and several.

Petitioners contend, inter alia, that the Court of Appeals erred in awarding exorbitant damages to
respondent despite the lack of evidence that they acted in bad faith in disapproving the latter’s
application; and in disregarding their defense of damnum absque injuria.

For his part, respondent maintains that the petition lacks merit, hence, should be denied.

CCCI’s Articles of Incorporation provide in part:

SEVENTH: That this is a non-stock corporation and membership therein as well as the right
of participation in its assets shall be limited to qualified persons who are duly accredited
owners of Proprietary Ownership Certificates issued by the corporation in accordance with its
By-Laws.

Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:

SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the admission of new
members of the Club shall be as follows:

(a) Any proprietary member, seconded by another voting proprietary member, shall submit to
the Secretary a written proposal for the admission of a candidate to the "Eligible-for-
Membership List";

(b) Such proposal shall be posted by the Secretary for a period of thirty (30) days on the
Club bulletin board during which time any member may interpose objections to the admission
of the applicant by communicating the same to the Board of Directors;

(c) After the expiration of the aforesaid thirty (30) days, if no objections have been filed or if
there are, the Board considers the objections unmeritorious, the candidate shall be qualified
for inclusion in the "Eligible-for-Membership List";

(d) Once included in the "Eligible-for-Membership List" and after the candidate shall have
acquired in his name a valid POC duly recorded in the books of the corporation as his own,
he shall become a Proprietary Member, upon a non-refundable admission fee of P1,000.00,
provided that admission fees will only be collected once from any person.

On March 1, 1978, Section 3(c) was amended to read as follows:

(c) After the expiration of the aforesaid thirty (30) days, the Board may, by unanimous vote
of all directors present at a regular or special meeting, approve the inclusion of the
candidate in the "Eligible-for-Membership List".
As shown by the records, the Board adopted a secret balloting known as the "black ball system" of
voting wherein each member will drop a ball in the ballot box. A white ball represents conformity to
the admission of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as
amended, cited above, a unanimous vote of the directors is required. When respondent’s application
for proprietary membership was voted upon during the Board meeting on July 30, 1997, the ballot
box contained one (1) black ball. Thus, for lack of unanimity, his application was disapproved.

Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve
or disapprove an application for proprietary membership. But such right should not be exercised
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on Human Relations provide
restrictions, thus:

Article 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.

Article 21. Any person who willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

In GF Equity, Inc. v. Valenzona,5 we expounded Article 19 and correlated it with Article 21, thus:

This article, known to contain what is commonly referred to as the principle of abuse of
rights, sets certain standards which must be observed not only in the exercise of one's rights
but also in the performance of one's duties. These standards are the following: to act with
justice; to give everyone his due; and to observe honesty and good faith. The law, therefore,
recognizes a primordial limitation on all rights; that in their exercise, the norms of human
conduct set forth in Article 19 must be observed. A right, though by itself legal because
recognized or granted by law as such, may nevertheless become the source of some
illegality. When a right is exercised in a manner which does not conform with the
norms enshrined in Article 19 and results in damage to another, a legal wrong is
thereby committed for which the wrongdoer must be held responsible. But while Article
19 lays down a rule of conduct for the government of human relations and for the
maintenance of social order, it does not provide a remedy for its violation. Generally, an
action for damages under either Article 20 or Article 21 would be proper. (Emphasis in the
original)

In rejecting respondent’s application for proprietary membership, we find that petitioners violated the
rules governing human relations, the basic principles to be observed for the rightful relationship
between human beings and for the stability of social order. The trial court and the Court of Appeals
aptly held that petitioners committed fraud and evident bad faith in disapproving respondent’s
applications. This is contrary to morals, good custom or public policy. Hence, petitioners are liable
for damages pursuant to Article 19 in relation to Article 21 of the same Code.

It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-Laws requiring the
unanimous vote of the directors present at a special or regular meeting was not printed on the
application form respondent filled and submitted to CCCI. What was printed thereon was the original
provision of Section 3(c) which was silent on the required number of votes needed for admission of
an applicant as a proprietary member.

Petitioners explained that the amendment was not printed on the application form due to economic
reasons. We find this excuse flimsy and unconvincing. Such amendment, aside from being
extremely significant, was introduced way back in 1978 or almost twenty (20) years before
respondent filed his application. We cannot fathom why such a prestigious and exclusive golf
country club, like the CCCI, whose members are all affluent, did not have enough money to cause
the printing of an updated application form.

It is thus clear that respondent was left groping in the dark wondering why his application was
disapproved. He was not even informed that a unanimous vote of the Board members was required.
When he sent a letter for reconsideration and an inquiry whether there was an objection to his
application, petitioners apparently ignored him. Certainly, respondent did not deserve this kind of
treatment. Having been designated by San Miguel Corporation as a special non-proprietary member
of CCCI, he should have been treated by petitioners with courtesy and civility. At the very least, they
should have informed him why his application was disapproved.

The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper
norm. When the right is exercised arbitrarily, unjustly or excessively and results in damage to
another, a legal wrong is committed for which the wrongdoer must be held responsible.6 It bears
reiterating that the trial court and the Court of Appeals held that petitioners’ disapproval of
respondent’s application is characterized by bad faith.

As to petitioners’ reliance on the principle of damnum absque injuria or damage without injury,
suffice it to state that the same is misplaced. In Amonoy v. Gutierrez,7 we held that this principle
does not apply when there is an abuse of a person’s right, as in this case.

As to the appellate court’s award to respondent of moral damages, we find the same in order. Under
Article 2219 of the New Civil Code, moral damages may be recovered, among others, in acts and
actions referred to in Article 21. We believe respondent’s testimony that he suffered mental anguish,
social humiliation and wounded feelings as a result of the arbitrary denial of his application.
However, the amount of P2,000,000.00 is excessive. While there is no hard-and-fast rule in
determining what would be a fair and reasonable amount of moral damages, the same should not be
palpably and scandalously excessive. Moral damages are not intended to impose a penalty to the
wrongdoer, neither to enrich the claimant at the expense of the defendant.8 Taking into consideration
the attending circumstances here, we hold that an award to respondent of P50,000.00, instead
of P2,000,000.00, as moral damages is reasonable.

Anent the award of exemplary damages, Article 2229 allows it by way of example or correction for
the public good. Nonetheless, since exemplary damages are imposed not to enrich one party or
impoverish another but to serve as a deterrent against or as a negative incentive to curb socially
deleterious actions,9 we reduce the amount from P1,000,000.00 to P25,000.00 only.

On the matter of attorney’s fees and litigation expenses, Article 2208 of the same Code provides,
among others, that attorney’s fees and expenses of litigation may be recovered in cases when
exemplary damages are awarded and where the court deems it just and equitable that attorney’s
fees and expenses of litigation should be recovered, as in this case. In any event, however, such
award must be reasonable, just and equitable. Thus, we reduce the amount of attorney’s fees
(P500,000.00) and litigation expenses (P50,000.00) to P50,000.00 and P25,000.00, respectively.

Lastly, petitioners’ argument that they could not be held jointly and severally liable for damages
because only one (1) voted for the disapproval of respondent’s application lacks merit.

Section 31 of the Corporation Code provides:

SEC. 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
 gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors, or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons. (Emphasis ours)

WHEREFORE, we DENY the petition. The challenged Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 71506 are AFFIRMED with modification in the sense that (a) the award
of moral damages is reduced from P2,000,000.00 to P50,000.00; (b) the award of exemplary
damages is reduced from P1,000,000.00 to P25,000.00; and (c) the award of attorney’s fees and
litigation expenses is reduced from P500,000.00 and P50,000.00 to P50,000.00 and P25,000.00,
respectively.

Costs against petitioners.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 6217 December 26, 1911

CHARLES W. MEAD, plaintiff-appellant,

vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION
COMPANY,defendant-appellants.

Haussermann, Cohn & Fisher and A. D. Gibbs for plaintiff.

James J. Peterson and O'Brien & DeWitt for defendant McCullough.

TRENT, J.:

This action was originally brought by Charles W. Mead against Edwin C. McCullough, Thomas L.
Hartigan, Frank E. Green, and Frederick H. Hilbert. Mead has died since the commencement of the
action and the case is now going forward in the name of his administrator as plaintiff.

The complaint contains three causes of action, which are substantially as follows: The first, for
salary; the second, for profits; and the third, for the value of the personal effects alleged to have
been left Mead and sold by the defendants.

A joint and several judgment was rendered by default against each and all of the defendants for the
sum of $3,450.61 gold. The defendant McCullough alone having made application to have this
judgment set aside, the court granted this motion, vacating the judgment as to him only, the
judgment as to the other three defendants remaining undisturbed. 1aw phi 1.net

At the new trial, which took place some two or three years later and after the death of Mead, the
judgment was rendered upon merits, dismissing the case as to the first and second causes of action
and for the sum of $1,200 gold in the plaintiff's favor on the third cause of action. From this judgment
both parties appealed and have presented separate bills of exceptions. No appeal was taken by the
defendant McCullough from the ruling of the court denying a recovery on his cross complaint.

On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion unless it is
otherwise stated) and the defendant organized the "Philippine Engineering and Construction
Company," the incorporators being the only stockholders and also the directors of said company,
with general ordinary powers. Each of the stockholders paid into the company $2,000 mexican
currency in cash, with the exception of Mead, who turned over to the company personal property in
lieu of cash.

Shortly after the organization, the directors held a meeting and elected the plaintiff as general
manager. The plaintiff held this position with the company for nine months, when he resigned to
accept the position of engineer of the Canton and Shanghai Railway Company. Under the
organization the company began business about April 1, 102. itc-alf

The contract and work undertaken by the company during the management of Mead were the
wrecking contract with the Navy Department at Cavite for the raising of the Spanish ships sunk by
Admiral Dewey; the contract for the construction of certain warehouses for the quartermaster
department; the construction of a wharf at Fort McKinley for the Government; The supervision of the
construction of the Pacific Oriental Trading Company's warehouse; and some other odd jobs not
specifically set out in the record.

Shortly after the plaintiff left the Philippine Islands for China, the other directors, the defendants in
this case, held a meeting on December 24, 1903, for the purpose of discussing the condition of the
company at that time and determining what course to pursue. They did on that date enter into the
following contract with the defendant McCullough, to wit: 1awphil.net

For value received, this contract and all the rights and interests of the Philippine Engineering
and construction Company in the same are hereby assigned to E. C. McCullough of Manila,
P. I.

(Sgd.) E. C. McCULLOUGH,
President, Philippine Engineering and
Construction Company.

(Sgd.) F. E. GREEN, Treasurer.

(Sgd.) THOMAS L. HARTIGAN, Secretary.

The contract reffered to in the foregoing document was known as the wrecking contract with the
naval authorities.

On the 28th of the same month, McCullough executed and signed the following instrumental:

For value received, and having the above assignment from my associates in the Philippine
Engineering and Construction Company, I hereby transfer my right, title, and interest in the
within contract, with the exception of one sixth, which I hereby retain, to R. W. Brown, H. D.
C. Jones, John T. Macleod, and T. H. Twentyman.

The assignees of the wrecking contract, including McCullough, formed was not known as the "Manila
Salvage Association." This association paid to McCullough $15,000 Mexican Currency cash for the
assignment of said contract. In addition to this payment, McCullough retained a one-sixth interest in
the new company or association.

The plaintiff insists that he was received as general manager of the first company a salary which was
not to be less than $3,500 gold (which amount he was receiving as city engineer at the time of the
corporation of the company), plus 20 per cent of the net profits which might be derived from the
business; while McCullough contends that the plaintiff was to receive only his necessary expenses
unless the company made a profit, when he could receive $3,500 per year and 20 per cent of the
profits. The contract entered into between the board of directors and the plaintiffs as to the latter's
salary was a verbal one. The plaintiff testified that this contract was unconditional and that his salary,
which was fixed at $3,500 gold, was not dependent upon the success of the company, but that his
share of the profits was to necessarily depend upon the net income. On the other hand, McCullough,
Green and Hilbert testify that the salary of the plaintiff was to be determined according to whether or
not the company was successful in its operations; that if the company made gains, he was to receive
$3,5000 gold, and a percentage, but that if the company did not make any profits, he was to receive
only his necessary living expenses.

It is strongly urged that the plaintiff would not have accepted the management of the company upon
such conditions, as he was receiving from the city of Manila a salary of $3,500 gold. This argument
is not only answered by the positive and direct testimony of three of the defendants, but also by the
circumstances under which this company was organized and principal object, which was the raising
of the Spanish ships. The plaintiff put no money into the organization, the defendants put but little:
just sufficient to get the work of raising the wrecks under way. This venture was a risky one. All the
members of the company realized that they were undertaking a most difficult and expensive project.
If they were successful, handsome profits would be realized; while if they were unsuccessful, all the
expenses for the hiring of machinery, launches, and labor would be a total loss. The plaintiff was in
complete charge and control of this work and was to receive, according to the great preponderance
of the evidence, in case the company made no profits, sufficient amount to cover his expenses,
which included his room, board, transportation, etc. The defendants were to furnish money out of
their own private funds to meet these expenses, as the original $8,000 Mexican currency was soon
exhausted in the work thus undertaken. So the contract entered into between the directors and the
plaintiff as to the latter's salary was a contingent one.

It is admitted that the plaintiff received $1.500 gold for his services, and whether he is entitled to
receive an additional amount depends upon the result of the second cause of action.

The second cause of action is more difficult to determine. On this point counsel for the plaintiff has
filed a very able and exhaustive brief, dealing principally with the facts.

It is urged that the net profits accruing to the company after the completion of all the contracts
(except the salvage contract) made before the plaintiff resigned as manager and up to the time the
salvage contract was transferred to McCullough and from him to the new company, amounted to
$5,628.37 gold. This conclusion is reached, according to the memorandum of counsel for the plaintiff
which appears on pages 38 and 39 of the record, in the following manner:

Profits from the construction of warehouses for the $6,962.54

Government
Profits from the construction of the wall at Fort 500.00
McKinley

Profits from the inspection of the construction of 1,000.00

the P. O. T. warehouse
Profits obtained from the projects (according to 1,000.00
Mead's calculations)

Total 9,462.54

In this same memorandum, the expense for the operation of the company during Mead's
management, consisting of rents, the hire of one muchacho, the publication of various notices, the
salary of an engineer for four months, and plaintiff's salary for nine months, amounts to $3,834.17
gold. This amount, deducted from the sum total of profits, leaves $5,628.37 gold.
Counsel for the plaintiff, in order to show conclusively as they assert that the company, after paying
all expenses and indebtedness, had a considerable balance to its credit, calls attention to Exhibit K.
This balance reads as follows:

Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering and Construction
Company.

Then follow the debits and credits, with a balance in favor of the company of $10,728.44 Mexican
currency. This account purports to cover the period from July 1, 1902, to April 1, 1903. Ledger No. 3,
above mentioned, is that the defendant McCullough and not one of the books of the company.

It was this exhibit that the lower court based its conclusion when it found that on January 25, 1903,
after making the transfer of the salvage contract to McCullough, the company was in debt $2,278.30
gold. The balance of $10,728.44 Mexican currency deducted from the $16,439.40 Mexican currency
(McCullough's losses in the Manila Salvage Association) leaves $2,278.30 United States currency at
the then existing rate of exchange. In Exhibit K, McCullough charged himself with the $15,000
Mexican currency which he received from his associates in the new company, but did not credit
himself with the $16,439.40 Mexican currency, losses in said company, for the reason that on April
1, 1903, said losses had not occurred. It must be borne in mind that Exhibit K is an abstract from a
ledger.

The defendant McCullough, in order to show in detail his transactions with the old company,
presented Exhibits 1 and 2. These accounts read as follows:

Detailed account of the receipts and disbursements of E. C. McCullough and the Philippine
Engineering and Construction Company.

Then follow the debits ad credits. These two accounts cover the period from March 5 1902, to June
9, 1905. According to Exhibit No. 1, the old company was indebted to McCullough in the sum of
$14,918.75 Mexican currency, and according to Exhibit No. 2 he indebtedness amounted to
$6,358.15 Mexican currency. The debits and credits in these two exhibits are exactly the me with the
following exceptions; I Exhibit No. 1, McCullough credits himself with the $10,000 Mexican currency
(the amount borrowed from the bank and deposited with the admiral as a guarantee for the faithful
performance of the salvage contract); while in Exhibit No. 2 he credits himself with this $10,000 and
at he same time charges himself with this amount. In the same exhibit (No. 2) he credits himself with
$16,439.40 Mexican currency, his losses in the new company, received from said company.
Eliminating entirely from these two exhibits the $10,000 Mexican currency, the $15,000 Mexican
currency, and the $16,39.40 Mexican currency, the balance shown in McCullough's favor is exactly
the same in both exhibits. This balance amounts to $4,918.75 Mexian currency.

According to McCullough's accounts in Exhibits 1 and 2 the profits derived from the construction of
the Government warehouse amounted to $4,005.02 gold, while the plaintiff contends that these
profits amounted to $6,962.54 gold. The plaintiff, during his management of the old company, made
a contract with the Government for the construction of these are house and commenced work. After
he resigned and left for China, McCullough took charge of and completed the said warehouse.
McCullough gives a complete, detailed statements of express for the completion of this work,
showing the dates, to whom paid, and for what purpose. He also gives the various amounts he
received from the Government with the amounts of the receipt of the same. On the first examination,
McCullough testified that the total amount received from the Government for the construction of
these warehouse was $1,123 gold. The case was suspended for the purpose of examination the
records of the Auditor and the quater master, to determine the exact amount paid for this work. As a
result of this examination, the vouchers show an additional amount of about $5,000 gold, paid in
checks. These checks show that the same were endorsed by the plaintiff and collected by him from
the Hongkong and Shanghai Banking Corporation. This money was not handled by McCullough and
as it was collected by the plaintiff, it must be presumed, in the absence of proof, that it was
disbursed by him. McCullough did not charge himself with the $2,5000 gold, alleged to have been
profits from the construction of the wall at Fort McKinley, the inspection of the construction of the P.
O. T. warehouse, and other projects. This work was done under the management of the plaintiff and
it is not shown that the profits from these contracts ever reached the ands of McCullough.
McCullough was not the treasurer of the company at that time. The other items which the plaintiff
insist that McCullough had no right to credit himself with are the following:

Date To whom paid. Amount (Mex. currency).

Jan. 30, 1903 Green $2,000.00

Feb. 2, 1903 McCullough 1,300.00
Feb. 2, 1903 Green 1,027.92
Feb. 19, 1905 P. O. T. Co. note 2,236.80

May 23, 1905 Hilbert 1,856.02

June 9, 1905 Hartigan 1,225.00

McCullough says that these amounts represents cash borrowed from the evidence parties to carry
on the operations of the old company while it was trying to raise the sunken vessels. There is no
proof to the contrary, and McCullough's testimony on this point is strongly corroborated by the fact
that the work done by the company in attempting to raise theses vessels was it first undertaking. The
company had made no profits while tat work was going on under the management of the plaintiff, but
its expenses greatly exceeded that of the original $8,000 Mexican currency. It was necessary to
borrow money to continue that work. These amounts, having been borrowed, were outstanding
debts when McCullough took charge for the purpose of completing the warehouses and winding up
the business of the old company. These amounts do not represent payments or refunds of the
original capital. McCullough did not credit himself with any amount for his services for supervising
the completion of the warehouses, nor for liquidating or winding up the company's affairs. We think
that the amount of $4,918.75 Mexican currency, balance in McCullough's favor up to this point,
represents a fair, equitable, and just settlement.

So far we have referred to the Philippine Engineering and Construction Company as the "company,"
without any attempt to define its legal status.

The plaintiff and defendants organized this company with a capital stock of $100,000 Mexican
currency, each paying in on the organization $2,000 Mexican currency. The remainder, $9,000,
according to the articles of agreement, were to be offered to the public in shares of $100 Mexican
currency, each. The names of all the organizers appear in the articles of agreement, which articles
were duly inscribed in the commercial register. The purpose for which this organization was affected
were to engage in general engineering and construction work, and operating under the name of the
"Philippine Engineering and Construction Company." during its active existence, it engaged in the
business of attempting to rise the sunken Spanish fleet, constructing under contract warehouses and
a wharf for the United States Government, supervising the construction of a warehouse for a private
firm, and some assay work. It was, therefore, an industrial civil partnership, as distinguished from a
commercial one; a civil partnership in the mercantile form, an anonymous partnership legally
constituted in the city of Manila.
The articles of agreement appeared in a public document and were duly inscribed in the commercial
register. To the extent of this inscription the corporation partook of the form of a mercantile one and
as such must e governed by articles 151 to 174 of the Code of Commerce, in so far as these
provisions are not in conflict with the Civil Code (art. 1670, Civil Code); but the direct and principal
law applicable is the Civil Code. Those provisions of the Code of Commerce are applicable
subsidiary.

This partnership or stock company (sociedad anonima) upon the execution of the public instrument
in which is articles of agreement appear, and the contribution of funds and personal property,
became a juridicial person — an artificial being, invisible, intangible and existing only in
contemplation of law — with the power to hold, buy, and ell property, and to use and be sued — a
corporation — not a general copartnership nor a limited copartnership. (Arts. 37, 38,1656 of the Civil
Code; Compania Agricola de Ultimar vs. Reyes et al., 4 Phil. Rep., 2; and Chief Justice Marshall's
definition of a corporation, 17 U. S., 518.)

The inscribing of its articles of agreement in the commercial register was not necessary to make it a
juridicial person — a corporation. Such inscription only operated to show that it partook of the form of
a commercial corporation. (Compania Agricola de Ultimar vs. Reyes et al., supra.)

Did a majority of the stockholders, who were at the same time a majority of the directors of this
corporation, have the power under the law and its articles of agreement, to sell or transfer to one of
its members the assets of said corporation?

In the first article of the statutes of incorporation it is stated tat by virtue of a public document the
organizers, whose names are given in full, agreed to form a sociedad anonima. Article II provides
that the organizers should be the directors an administrators until the second general meeting, and
until their successors were duly elected and installed. The third provides that the sociedad should
run for ninety-nine years from the date of the execution of its articles of agreement. Article IV sets
forth the object or purpose of the organization. Article V makes the capital $100,000 Mexican
currency, divided into one thousand shares at $100 Mexican currency each. Article VI provides that
each shareholder should be considered as a coowner in the assets of the company and entitled to
participate in the profits in proportion to the amount of his stock. Article VII fixed the time of holding
general meetings and the manner of calling special meetings of the stockholders. Article VIII
provides that the board of directors shall be elected annually. Article IX provides for the filing of
vacancies in the board of directors. Article X provides that "the board of directors shall elect the
officers of the sociedad and have under is charge the administration of the said sociedad." Article XI:
"In all the questions with reference to the administration of the affairs of the sociedad, it shall be
necessary to secure the unanimous vote of the board of directors, and at least three of said board
must be provides that all of the stock, except that which was divided among the organizers should
remain in the treasury subject to the disposition of the board of directors. Article XIII reads: "In all the
meetings of the stockholders, a majority vote of the stockholders present shall be necessary to
determine any question discussed." The fourteenth articles authorizes the board of directors to adopt
such rules and regulations for the government of the sociedad as it should deem proper, which were
not in conflict with its statutes.

When the sale or transfer heretofore mentioned took place, there were present four directors, all of
whom gave their consent to that sale or transfer. The plaintiff was then about and his express
consent to make this transfer or sale was not obtained. He was, before leaving, one of the directors
in this corporation, and although he had resigned as manager, he had not resigned as a director. He
accepted the position of engineer of the Canton and Shanghai Railway Company, knowing that his
duties as such engineer would require his whole time and attention and prevent his returning to the
Philippine Islands for at least a year or more. The new position which he accepted in China was
incompatible with his position as director in the Philippine Engineering and Construction Company, a
corporation whose sphere of operations was limited to the Philippine Islands. These facts are
sufficient to constitute an abandoning or vacating of hid position as director in said corporation. (10
Cyc., 741.) Consequently, the transfer or sale of the corporation's assets to one of its members was
made by the unanimous consent of all the directors in the corporation at that time.

There were only five stockholders in this corporation at any time, four of whom were the directors
who made the sale, and the other the plaintiff, who was absent in China when the said sale took
place. The sale was, therefore, made by the unanimous consent of four-fifths of all the stockholders.
Under the articles of incorporation, the stockholders and directors had general ordinary powers.
There is nothing in said articles which expressly prohibits the sale or transfer of the corporate
property to one of the stockholders of said corporation.

Is there anything in the law which prohibits such a sale or transfer? To determine this question, it is
necessary to examine, first, the provisions of the Civil Code, and second, those provisions (art. 151
to 174) of the Code o ] Commerce.

Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation. There is
nothing in these articles which expressly or impliedly prohibits the sale of corporate property to one
of its members, nor a dissolution of a corporation in this manner. Neither is there anything in articles
151 to 174 of the Code of Commerce which prohibits the dissolution of a corporation by such sale or
transfer.

The articles of incorporation must include:

xxx xxx xxx

The submission to the vote of the majority of the meeting of members, duly called and held,
of such matters as may properly be brought before the same. (No. 10, art. 151, Code of
Commerce.)

Article XIII of the corporation's statutes expressly provides that "in all the meetings of the
stockholders, a majority vote of the stockholders present shall be necessary to determine any
question discussed."

The sale or transfer to one of its members was a matter which a majority of the stockholders could
very properly consider. But it i said that if the acts and resolutions of a majority of the stockholders in
a corporation are binding in every case upon the minority, the minority would be completely wiped
out and their rights would be wholly at the mercy of the abuses of the majority.

Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there
are exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without
such a limit the will of the majority would be absolute and irresistible and might easily degenerate
into an arbitrary tyranny. The reason for these limitations is that in every contract of partnership (and
a corporation can be something fundamental and unalterable which is beyond the power of the
majority of the stockholders, and which constitutes the rule controlling their actions. this rule which
must be observed is to be found in the essential compacts of such partnership, which gave served
as a basis upon which the members have united, and without which it is not probable that they would
have entered not the corporation. Notwithstanding these limitations upon the power of the majority of
the stockholders, their (the majority's) resolutions, when passed in good faith and for a just cause,
deserve careful consideration and are generally binding upon the minority.
Eixala, in his work entitled "Instituciones del Derecho Mercantil de España," speaking of sociedades
anonimas, says:

The resolutions of the boards passed by a majority vote are valid . . . and authority for
passing such resolutions is unlimited, provided that the original contract is not broken by
them, the partnership funds not devoted to foreign purposes, or the partnerships
transformed, or changes made which are against public policy or which infringe upon the
rights of third persons.

The supreme court of Spain, in its decision dated June 30, 1888, said:

In order to be valid and binding upon dissenting members, it s an indispensable requisite that
resolutions passed by a general meeting of stockholders conform absolutely to the contracts
and conditions of the articles of the association, which are to be strictly construed.

That resolutions passed within certain limitations by a majority of the stockholders of a corporation
are binding upon the minority, is therefore recognized by the Spanish authorities.

Power of private corporation to alienate property. — This power of absolute alienability of

corporate property applies especially to private corporations that are established solely for
the purpose of trade or manufacturing and in which he public has no direct interest. While
this power is spoken of as belonging to the corporation it must be observed that the
authorities point out that the trustees or directors of a corporation do not possess the power
to dispose of the corporate property so as to virtually end the existence of the corporation
and prevent it from carrying on the business for which it was incorporated. (Thompson on
Corporation, second edition, sec. 2416, and cases cited thereunder.)

Power to dispose of all property. — Where there are no creditors, and no stockholder
objects, a corporation, as against all other persons but the state, may sell and dispose of all
its property. The state in its sovereign capacity may question the power of the corporation to
do so, but with these exceptions such as a sale is void. A rule of general application is that a
corporation of a purely private business character, one which owes no special duty to the
public, and is not given the right of eminent domain, where exigencies of its business require
it or when the circumstances are such that it can no longer continue the business with profit,
may sell and dispose of all its property, pay its debts, divide the remaining assets and wind
up the affairs of the corporation. (Id., sec. 2417.)

When directors or officers may dispose of all the property. — It is within the dominion of the
managing officers and agents of the corporation to dispose of all the corporate property
under certain circumstances; and this may be done without reference to the assent or
authority of the stockholders. This disposition of the property may be temporarily by lease, or
permanently by absolute conveyance. But it can only be done in the course of the corporate
business and for the furtherance of the purposes of the incorporation. The board of directors
possess this power when the corporation becomes involved and by reason of its
embarrassed or insolvent condition is unable either to pay its debts or to secure capital and
funds for the further prosecution of its enterprise, and especially where creditors are pressing
their claims and demands and are threatening to or have instituted actions to enforce their
claims. This power of the directors to alienate the property is conceded where it is regarded
as of imperative necessity. (If., sec. 2418, and case cited.)

When majority stockholder may dispose of all corporate property. — Another rule that
permits a majority of the stockholders to dispose of all the corporate property and wind up
 the business, is where the corporation has became insolvent, and the disposition of the
property is necessary to pay the debt; or where from any cause the business is a failure, and
the best interest of the corporation and all the stockholders require it, then the majority have
clearly the power to dispose of all the property even as against the protests of a minority. It
would be a harsh rule that could permit one stockholder, or any minority of the stockholders,
to hold the majority to their investment where the continuation of the business would be at a
loss and where there was no prospect or hope that the enterprise could be made profitable.
The rule as stated by some courts is that the majority stockholders may dispose of the
property when just cause exists; and this just cause is usually defined to be the
unprofitableness of the business and where its continuation would be ruinous to the
corporation and against the interest of stockholders. (Id., sec. 2424, and cases cited.)

Nothing is better settled in the law of corporations than the doctrine that a corporation has
the same capacity and power as a natural person to dispose of the convey its property, real
or personal, provided it does not do so for a purpose which is foreign to the objects for which
it was created, and provided, further, it violates no charter or statutory restriction, on rule of
law based upon public policy. . . .This power need not be expressly conferred upon a
corporation by its charter. It is implied as an incident to its ownership of property, unless
there is some clear restriction in this charter or in some statute. (Clark and Marshall's Private
Corporations, sec. 152, and cases cited.)

A purely private business corporation, like a manufacturing or trading company, which is not
given the right of eminent domain, and which owes no special duties to the public, may
certainly sell and convey absolutely the whole of its property, when the exigencies of its
business require it to do so, or when the circumstances are such that it can no longer
profitably continue its business, provided the transaction is not in fraud of the rights of
creditors, or in violation of charter or statutory restrictions. And, by the weight of authority,
this may be done a majority of the stockholders against the dissent of the minority. (Id., sec.
160, and cases cited.)

The above citations are taken from the works of the most eminent writers on corporation law. The
citation of cases in support of the rules herein announced are too numerous to insert.

From these authorities it appears to be well settled, first, that a private corporation, which owes no
special duty to the public and which has not been given the right of eminent domain, has the
absolute right and power as against the whole world except the state, to sell and dispose of all of its
property; second, that the board of directors, has the power, without referrence to the assent or
authority of the stockholders, when the corporation is in failing circumstances or insolvent or when it
can no longer continue the business with profit, and when it is regarded as an imperative necessity;
third, that a majority of the stockholders or directors, even against the protest of the minority, have
this power where, from any cause, the business is a failure and the best interest of the corporation
and all the stockholders require it.

May officer or directors of the corporation purchase the corporate property? The authorities are not
uniform on this question, but on the general proposition whether a director or an officer may deal
with the corporation, we think the weight of authority is that he may. (Merrick vs. Peru Coal Co., 61
Ill., 472; Harts et al. vs. Brown et al., 77 Ill., 226; Twin-Lick Oil Company vs. Marbury, 91 U.S., 587;
Whitwell vs, Warner, 20 Vt., 425; Smith vs. Lansing, 22 N.Y., 520; City of St. Loius vs. Alexander, 23
Mo., 483; Beach et al vs. Miller, 130 Ill., 162.)

While a corporation remains solvent, we can see no reason why a director or officer, by the authority
of a majority of the stockholders or board of managers, may not deal with the corporation, loan it
money or buy property from it, in like manner as a stranger. So long as a purely private corporation
remains solvent, its directors are agents or trustees for the stockholders. They owe no duties or
obligations to others. But the moment such a corporation becomes insolvent, its directors are
trustees of all the creditors, whether they are members of the corporation or not, and must manage
its property and assets with strict regard to their interest; and if they are themselves creditors while
the insolvent corporation is under their management, they will not be permitted to secure to
themselves by purchasing the corporate property or otherwise any personal advantage over the
other creditors. Nevertheless, a director or officer may in good faith and for an adequate
consideration purchase from a majority of the directors or stockholders the property even of an
insolvent corporation, and a sale thus made to him is valid and binding upon the minority. (Beach et
al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall., 299;
Curran vs. State of Arkansas, 15 How., 304; Richards vs. New Hamphshire Insurance Company, 43
N. H., 263; Morawetz on Corporations (first edition), sec. 579; Haywood vs. Lincoln Lumber
Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage Company,
21 Fed. Rep., 577.)

In the case of the Twin-Lick Oil Company vs. Marbury, supra, the complaint was a corporation
organized under the laws of West Virginia, engaged in the business of raising and selling petroleum.
It became very much embarrased and a note was given secured by a deed of trust, conveying all the
property rights, and franchise of the corporation to William Thomas to secure the payment of said
note, with the usual power of sale in default of payment. The property was sold under the deed of
trust; was bought in by defendant's agent for his benefit, and conveyed to him the same year. The
defendant was at the time of these transactions a stockholder and director in the company. At the
time the defendant's money became due there was no apparent possibility of the corporation's
paying it at any time. The corporation was then insolvent. The property was sold by the trustee and
bough in by the defendant at a fair and open sale and at a reasonable price. The sale and purchase
was the only mode left to the defendant to make his money. The court said:

That a director of a joint-stock corporation occupies one of those fiduciary relations where his
dealings with the subject-matter of his trust or agency, and with the beneficiary or party
whose interest is confided to his care, is viewed with jealousy by the courts, and may be set
aside on slight grounds, is a doctrine founded on the soundest morality, and which has
received the clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, 715;
Drury vs. Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs.
Sherman, 30 Barb., 553; Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The
general doctrine, however, in regard to contracts of this class, is, not that they are absolutely
void, but that they are voidable at the election of the party whose interest has been so
represented by the party claiming under it. We say, this is the general rule; for there may be
cases where such contracts would be void ab initio; as when an agent to sell buys of himself,
and by his power of attorney conveys to himself that which he was authorized to sell. but
even here, acts which amount t a ratification by the principal may validate the sale.

The present case is not one of that class. While it is true that the defendant, a s a director of
the corporation, was bound by all those rules of conscientious fairness which courts of equity
have imposed as the guides for dealing in such cases, it can not be maintained that any rule
forbids one director among several from loaning money to the corporation when the money is
needed, and the transaction is open, and otherwise free from blame. No adjudged case has
gone so far as this. Such a doctrine, while it would afford little protection to the corporation
against actual fraud or oppression, would deprive it of the air of those most interested in
giving aid judiciously, and best qualified to judge of the necessity of that aid, and of the
extent to which it may safely be given.
 There are in such a transaction three distinct parties whose interest is affected by it; namely,
the lender, the corporation, and the stockholders of the corporation.

The directors are the officers or agents of the corporation, and represent the interests of the
abstract legal entity, and of those who own the shares of its stock. One of the objects of
creating a corporation by law is to enable it to make contracts; and these contracts may be
made with its stockholders as well as with others. In some classes of corporations, as in
mutual insurance companies, the main object of the act of the incorporation is to enable the
company to make contracts which its stockholders, or with persons who become
stockholders by the very act of making the contract of insurance. It is very true, that as a
stockholder, in making a contract of any kind with the corporation of which he is a member, is
in some sense dealing with a creature of which he is a part, and holds a common interest
with the other stockholders, who, with him, constitute the whole of that artificial entity, he is
properly held to a larger measure of candor and good faith than if he were not a stockholder.
So, when the lender is a director, charged, with others, with the control and management of
the affairs of the corporation, representing in this regard the aggregated interest of all the
stockholders, his obligation, if he becomes a party to a contract with the company, to candor
and fair dealing, is increased in the precise degree that his representative character has
given him power and control derived from the confidence reposed in him by the stockholders
who appointed him their agent. If he should be a sole director, or one of a smaller number
vested with certain powers, this obligation would be still stronger, and his acts subject to
more severe scrutiny, and their validity determined by more rigid principles of morality, and
freedom from motives of selfishness. All this falls far short, however, of holding that no such
contract can be made which will be valid; . . . .

In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the court said:

As a strictly legal question, the right of a board of directors of a corporation to apply it

property to the payment of its debts, and the right of the majority of stockholders present at a
meeting called for the purpose to ratify such action and to dissolve the corporation, can not
be questioned.

But were such action is taken at the instance, and through the influence of the president of
the corporation, and were the debt to which the property is applied is one for which he is
himself primarily liable, and specially where he subsequently acquires, in his personal right,
the proerty thus disposed of, such circumstances undoubtedly subject his acts to severe
scrutiny, and oblige him to establish that he acted with the utmost candor and fair-dealing for
the interest of the corporation, and without taint of selfish motive.

The sale or transfer of the corporate property in the case at bar was made by three directors who
were at the same time a majority of stockholders. If a majority of the stockholders have a clear and a
better right to sell the corporate property than a majority of the directors, then it can be said that a
majority of the stockholders made this sale or transfer to the defendant McCullough.

What were the circumstances under which said sale was made? The corporation had been going
from bad to worse. The work of trying to raise the sunken Spanish fleet had been for several months
abandoned. The corporation under the management of the plaintiff had entirely failed in this
undertaking. It had broken its contract with the naval authorities and the $10,000 Mexican currency
deposited had been confiscated. It had no money. It was considerably in debt. It was a losing
concern and a financial failure. To continue its operation meant more losses. Success was
impossible. The corporation was civilly dead and had passed into the limbo of utter insolvency. The
majority of the stockholders or directors sold the assets of this corporation, thereby relieving
themselves and the plaintiff of all responsibility. This was only the wise and sensible thing for them to
do. They acted in perfectly good faith and for the best interests of all the stockholders. "It would be a
harsh rule that would permit one stockholder, or any minority of stockholders to hold a majority to
their investment where a continuation of the business would be at a loss and where there was no
prospect or hope that the enterprise would be profitable."

The above sets forth the condition of this insolvent corporation when the defendant McCullough
proposed to the majority of stockholders to take over the assets and assume all responsibility for the
payment of the debts and the completion of the warehouses which had been undertaken. The assets
consisted of office furniture of a value of less than P400, the uncompleted contract for the
construction of the Government warehouses, and the wrecking contract. The liabilities amounted to
at least $19,645.74 Mexican currency. $9,645.74 Mexican currency of this amount represented
borrowed money, and $10,000 Mexican currency was the deposit with the naval authorities which
had been confiscated and which was due the bank. McCullough's profits on the warehouse contract
amounted to almost enough to the pay the amounts which the corporation had borrowed from its
members. The wrecking contract which had been broken was of no value to the corporation for the
reason that the naval authorities absolutely refused to have anything further to do with the Philippine
Engineering and Construction Company. They the naval authorities) had declined to consider the
petition of the corporation for an extension in which to raise the Spanish fleet, and had also refused
to reconsider their action in confiscating the deposit. They did agree, however, that if the defendant
McCullough would organize a new association, that they would give the new concern an extension
of time and would reconsider the question of forfeiture of the amount deposited. Under these
circumstances and conditions, McCullough organized the Manila Salvage Company, sold five-sixth
of this wrecking contract to the new company for $15,000 Mexican currency and retained one-sixth
as his share of the stock in the new concern. The Manila Salvage company paid to the bank the
$10,000 Mexican currency which had been borrowed to deposit with the naval authorities, and
began operations. All of the $10,000 Mexican currency so deposited was refund to the new company
except P2,000. The new association failed and McCullough, by reason of this failure, lost over
$16,000 Mexican currency. These facts show that McCullough acted in good faith in purchasing the
old corporation's assets, and that he certainly paid for the same a valuable consideration.

But cancel for the plaintiff say: "The board of directors possessed only ordinary powers of
administration (Article X of the Articles of incorporation), which in no manner empowered it either to
transfer or to authorize the transfer of the assets of the company to McCullough (art. 1773, Civil
Code; decisions of the supreme court of Spain of April 2, 1862, and July 8, 1903)."

Article X of the articles of incorporation above referred to provides that the board of directors shall
elect the officers of the corporation and "have under its charge the administration of the said
corporation." Articles XI reads: "In all the questions with reference to the administration of the affairs
of the corporation, it shall be necessary to secure the unanimous vote of the board of directors, and
at least three of said board must be present in order to constitute a legal meeting." It will be noted
that article X statute a legal meeting." It will be noted that Article X placed the administration of the
affairs of the corporation in the hands of the board of directors. If Article XI had been omitted, it is
clear that under the rules which govern business of that character, and in view of the fact that before
the plaintiff left this country and abandoned his office as director, there were only five directors in the
corporation, then three would have been sufficient to constitute a quorum and could perform all the
duties and exercise all the powers conferred upon the board under this article. It would not have
been necessary to obtain the consent of all three of such members which constituted the quorum in
order that a solution affecting the administration of the corporation should be binding, as two votes
— a majority of the quorum — would have been sufficient for this purpose. (Buell vs. Buckingham &
Co., 16 Iowa, 284; 2 Kent. Com., 293; Cahill vs. Kalamazoo Mutual Insurance Company, 2 Doug.
(Mich.), 124; Sargent vs. Webster, 13 Met., 497; In re Insurance Company, 22 Wend., 591; Ex
parte Wilcox, 7 Cow., 402; id., 527, note a.)
It might appear on first examination that the organizers of this corporation when they asserted the
first part of Article XI intended that no resolution affecting the administration of the affairs should be
binding upon the corporation unless the unanimous consent of the entire board was first obtained;
but the reading of the last part of this same article shows clearly that the said organizers had no
such intention, for they said: "At least three of said board must be present in order to constitute a
legal meeting." Now, if three constitute a legal meeting, three were sufficient to transact business,
three constituted the quorum, and, under the above-cited authorities, two of the three would be
sufficient to pass binding resolutions relating to the administration of the corporation.

If the clause "have under in charge and administer the affairs of the corporation" refers to the
ordinary business transactions of the corporation and does not include the power to sell the
corporate property and to dissolve the corporation when it becomes insolvent — a change we admit
organic and fundamental — then the majority of the stockholders in whom the ultimate and
controlling power lies must surely have the power to do so.

Article 1713 of the Civil Code reads:

An agency stated in general terms only includes acts of administration.

In order to compromise, alienate, mortgage, or execute any other act of strict ownership an
express commission is required.

This article appears in title 9, chapter 1 of the Civil Code, which deals with the character, form, and
kind of agency. Now, were the positions of Hilbert, Green, Hartigan, and McCullough that the agents
within the meaning of the article above quoted when the assets of the corporation were transferred
or sold to McCullough? If so, it would appear from said article that in order to make the sale valid, an
express commission would be required. This provision of law is based upon the broad principles of
sound reason and public policy. There is a manifest impropriety in allowing the same person to act
as the agent of the seller and to become himself the buyer. In such cases, there arises so often a
conflict between duty and interest. "The wise policy of the law put the sting of a disability into the
temptation, as a defensive weapon against the strength of the danger which lies in the situation."

Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transfer of the assets
of the insolvent corporation was made, but they were also directors and stockholders. In addition to
being a creditor, McCullough sustained the corporation the double relation of a stockholder and
president. The plaintiff was only a stockholder. He would have been a creditor to the extent of his
unpaid salary if the corporation had been a profitable instead of a losing concern.

But as we have said when the sale or transfer under consideration took place, there were three
directors present, and all voted in favor of making this sale. It was not necessary for the president,
McCullough, to vote. There was a quorum without him: a quorum of the directors, and at the same
time a majority of the stockholders.

A corporation is essential a partnership, except in form. "The directors are the trustees or managing
partners, and the stockholders are the cestui que trust and have a joint interest in all the property
and effects of the corporation." (Per Walworth, Ch., in Robinson vs. Smith, 3 Paige, 222, 232;
5 idem, 607; Slee vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld., 320.)

The Philippine Engineering and Construction Company was an artificial person, owning its property
and necessarily acting by its agents; and these agents were the directors. McCullough was then an
agent or a trustee, and the stockholders the principal. Or say (as corporation was insolvent) that he
was an agent or trustee and the creditors were the beneficiaries. This being the true relation, then
the rules of the law (art. 1713 of the Civil Code) applicable to sales and purchases by agents and
trustees would not apply to the purchase in question for the reason that there was a quorum without
McCullough, and for the further reason that an officer or director of a corporation, being an agent of
an artificial person and having a joint interest in the corporate property, is not such an agent as that
treated of in article 1713 of the Civil Code.

Again, McCullough did not represent the corporation in this transaction. It was represented by a
quorum of the board of directors, who were at the same time a majority of the stockholders.
Ordinarily, McCullough's duties as president were to preside at the meetings, rule on questions of
order, vote in case of a tie, etc. He could not have voted in this transaction because there was no tie.

The acts of Hilbert, Green, Hartigan, and McCullough in this transaction, in view of the relations
which they bore to the corporation, are subject to the most severe scrutiny. They are obliged to
establish that they acted with the utmost candor and fair dealing for the interest of the corporation,
and without taint motives. We have subjected their conduct to this test, and, under the evidence, we
believe it has safely emerged from the ordeal.

Transaction which only accomplish justice, which are done in good faith and operate legal
injury to no one, lack the characteristics of fraud and are not to be upset because the
relations of the parties give rise to suspicions which are fully cleared away. (Hancock vs.
Holbrook, supra.)

We therefore conclude that the sale or transfer made by the quorum of the board of directors — a
majority of the stockholders — is valid and binding upon the majority-the plaintiff. This conclusion is
not in violation of the articles of incorporation of the Philippine Engineering and Construction
Company. Nor do we here announce a doctrine contrary to that announced by the supreme court of
Spain in its decisions dated April 2, 1862, and July 8, 1903.

As to the third cause of action, it is insisted: First, that the court erred in holding the defendant
McCullough responsible for the personal effects of the plaintiff; and second, that the court erred in
finding that the effects left by the plaintiff were worth P2,400.

As we have said, the plaintiff was the manager of the Philippine Engineering Company from April 1,
1902, up to January 1, 1903. Sometimes during the previous month of December he resigned to
accept a position in China, but did not leave Manila until about January 20. He remained in Manila
about twenty days after he severed his connection with the company. He lived in rooms in the same
building which was rented by the company and were the company had its offices. When he started
for China he left his personal effects in those rooms, having turned the same over to one Paulsen.
Testifying on this point the plaintiff said:

Q. To whom did you turn over these personal effects on leaving here? — A. To Mr. Paulsen.

Q. Have you demanded payment of this sum [referring to the value of his personal effects]?
— A. On leaving for China I gave Mr. Haussermann power of attorney to represent me in this
case and demand payment.

Q. Please state whether or not you have an inventory of these effects. — A. I had an
inventory which was in my possession but it was lost when the company took all of the books
and carried them away from the office.

Q. Can you give a list or a partial list of your effect? — A. I remember some of the items.
There was a complete bedroom set, two marble tables, one glass bookcase, chairs, all of the
 household effects I used when I was living in the Botanical Garden as city engineer, one
theodolite, which I bought after commencing work with the company.

Q. How much do you estimate to be the total reasonable value of these effects? — A. The
total would not be less than $1,200 gold.

Counsel for the plaintiff, on page 56 of their brief, say:

Mr. McCullough, in his testimony (pp. 39 and 40) admits full knowledge of and participation in
the removal and sale of the effects and states that he took the proceeds and considered
them part of the assets of the company. He further admits that Mr. Haussermann made a
demand for the proceeds of Mr. Mead's personal effects (p. 44).

McCullough's testimony, referred by the counsel, is as follows:

Q. At the time Mr. Mead left for China, in the building where the office was and in the office,
there were left some of the personal effects of Mr. Mead. What do you know about these
effects, a list of which is Exhibit B? — A. Nothing appearing in this Exhibit B was never
delivered to the Philippine Engineering and Construction Company, according to my list.

Q. Do you know what became of these effects? — A. No, sir. I have no idea. I never saw
them. I never heard these effects talked about. I only heard something said about certain
effects which Mr. Mead had in his living room.

Q. Do you know what became of the bed of Mr. Mead? — A. I know there were effects, such
as a bed, washstand, chairs, table, and other things, which are used in a living room, and
that they were in Mr. Mead's room. These effects were sent to the warehouse of the Pacific
Oriental Trading Company, together with the office furniture. We had to vacate the building
where the offices were and we had to take out everything therein. These things were
deposited in the warehouse of the Pacific Oriental Trading Company and were finally sold by
that company and the money turned over to me.

Q. How much? — A. P49.97.

Q. What did you do with this money? — A. I took it and considered it part of the assets of the
company. All of the other effects of the office were sold at the same time and brought
P347.16.

Q. Did Mr. Mead leave anyone in charge of his effects when he left Manila? — A. I think he
left Paulsen in charge, but Paulsen did not take these effects, so when we vacated the office
we had to move them.

Q. Did Paulsen continue occupying the living room where these effects were and did he use
these effects? — A. I do not know because I was in the office for three months before we
vacated.

Q. Don't you know that it is a fact that Mr. Haussermann, as representative of Mr. Mead,
demanded of you and the company the payment of the salary which was due Mr. Mead and
the value of his personal effects? — A. Yes, sir.

As to the value of these personal effects, Hartigan, testifying as witness for the defendant, said:
 I think the personal effects were sold for P50. His personal effects consisted of ordinary
articles, such as a person would use who had to be going from one place to another all the
time, as Mr. Mead. I know that all those effects were sold for less than P100, if I am not
mistaken.

The foregoing is the material testimony with reference to the defendant McCullough's responsibility
and the value of the personal effects of the plaintiff.

McCullough was a member of the company and was responsible as such for the rents where the
offices were located. The company had no further use for the building after the plaintiff resigned. The
vacating of the building was the proper thing to do. The office furniture was removed and stored in a
place where it cost nothing for rents. When Hilbert, member of the company, went to the office to
remove the company's office furniture, he found no one in charge of the plaintiff's personal effects.
He took them and stored them in the same place and later sold them, together with the office
furniture, and turned the entire amount over to defendant McCullough.

Paulsen, in whose charge Mead left his effects, apparently took no interest in caring for them. Was
the company to leave Mead's personal effects in that building and take the chances of having to
continue to pay rents, solely on account of the plaintiff's property remaining there? The company had
reason to believe that it would have to continue paying these rents, as they had rented the building
and authorized the plaintiff to occupy rooms therein.

The plaintiff knew when he left for China that he would be away a long time. He had accepted a
position of importance, and which he knew would require his personal attention. He did not gather up
his personal effects, but left them in the room in charge of Paulsen. Paulsen took no interest in
caring for them, but apparently left these effects to take care of them selves. The plaintiff did not
even carry with him an inventory of these effects, but attempted on the trial to give a list of them and
did give a partial list of the things he left in his room; but it is not shown that all this things were there
when Herbert removed the office furniture and some of the plaintiff's effects. The fact that the plaintiff
remained in Manila some twenty days after resigning and never cared for his own effects but left
them in the possession of an irresponsible person, shows extreme negligence on his part. He
exhibited a reckless indifference to the consequences of leaving his effects in the lease premises.
The law imposes on every person the duty of using ordinary care against injury or damages. What
constitutes ordinary care depends upon the circumstances of each particular case and the danger
reasonably to be apprehended.

McCullough did not have anything personally to do with these effects at any time. He only accepted
the money which Herbert turned over to him. He, personally, did not contribute in any way
whatsoever to the loss of the property, neither did he as a member of the corporation do so.

The plaintiff gave an estimate of the value of the effects which he left in his rooms and placed this
value at P2,400. He did not give a complete list of the effects so left, neither did he give the value of
a single item separately. The plaintiff's testimony is so indefinite and uncertain that i t is impossible to
determine with any degree of certainty just what these personal effects consisted of and their values,
especially when we take into consideration the significant fact that these effects were abondoned by
Paulsen. On the other hand, w have before us the positive testimony of Hilbert as to the amount
received for the plaintiff's personal effects, the testimony of Hartigan that the same were sold for less
than P100, and the testimony of McCullough as to the amount turned over to him by Herbert.

So we conclude that the great preponderance of evidence as to the value of these effects is in the
favor of the contention of the defendant. Their value therefore be fixed at P49.97.
For these reasons the judgment appealed from as to the first and second causes of action is hereby
affirmed. Judgment appealed from as to the third cause of action is reduced to P49.97, without
costs.

Arellano, C.J., Torres, Mapa, Carson and Moreland, JJ., concur.

 FIRST DIVISION

[G.R. No. 118342. January 5, 1998]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT

OF APPEALS and LYDIA CUBA, respondents.

[G.R. No. 118367. January 5, 1998]

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT

BANK OF THE PHILIPPINES and AGRIPINA P.
CAPERAL, respondents.

DECISION
DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint [1] filed against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by
Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of
Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBPs
appropriation of CUBAs rights, title, and interests over a 44-hectare fishpond located in
Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the
annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the
annulment of DBPs sale of the subject fishpond to Caperal; (4) the restoration of her
rights, title, and interests over the fishpond; and (5) the recovery of damages, attorneys
fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the
following facts, which were embodied in the pre-trial order:[2]
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new)
dated May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines
in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms
stated in the Promissory Notes dated September 6, 1974; August 11, 1975; and
April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment
of her Leasehold Rights;
 4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the
terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP
appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question, defendant DBP, in turn, executed a Deed of
Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the
same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the
Manager DBP, Dagupan City dated November 6, 1979 and December 20,
1979. DBP thereafter accepted the offer to repurchase in a letter addressed to
plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a
new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by
the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding
her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of
Conditional Sale, she entered with the DBP a temporary arrangement whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as stated in
temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated
March 13, 1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold
Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the
fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding
dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant
Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-
A on December 28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the
pre-trial order. [3]
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to itself
CUBAs leasehold rights over the fishpond in question without foreclosure proceedings
was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on
an affirmative resolution. DBP stressed that it merely exercised its contractual right
under the Assignments of Leasehold Rights, which was not a contract of
mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBPs taking
possession and ownership of the property without foreclosure was plainly violative of
Article 2088 of the Civil Code which provides as follows:

ART. 2088. The creditor cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and
void.

It disagreed with DBPs stand that the Assignments of Leasehold Rights were
not contracts of mortgage because (1) they were given as security for loans, (2)
although the fishpond land in question is still a public land, CUBAs leasehold rights and
interest thereon are alienable rights which can be the proper subject of a mortgage; and
(3) the intention of the contracting parties to treat the Assignment of Leasehold Rights
as a mortgage was obvious and unmistakable; hence, upon CUBAs default, DBPs only
right was to foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold
Rights for being a clear case of pactum commissorium expressly prohibited and
declared null and void by Article 2088 of the Civil Code. It then concluded that since
DBP never acquired lawful ownership of CUBAs leasehold rights, all acts of ownership
and possession by the said bank were void. Accordingly, the Deed of Conditional Sale
in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale
in favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed
by Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found ample evidence on record that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the fishpond
area but also from the adjoining big house; and that when CUBAs son and caretaker
went there on 15 September 1985, they found the said house unoccupied and
destroyed and CUBAs personal belongings, machineries, equipment, tools, and other
articles used in fishpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when CUBA and her
men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond
with 250,000 pieces of bangus fish (milkfish), all of which died because the DBP
representatives prevented CUBAs men from feeding the fish. At the conservative price
of P3.00 per fish, the gross value would have been P690,000, and after deducting 25%
of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss
of P517,500. It then set the aggregate of the actual damages sustained by CUBA
at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBAs
leasehold rights. Such representation induced the said Bureau to terminate CUBAs
leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And
considering that by reason of her unlawful ejectment by DBP, CUBA suffered moral
shock, degradation, social humiliation, and serious anxieties for which she became sick
and had to be hospitalized the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000 attorneys fees in
view of the considerable expenses she incurred for lawyers fees and in view of the
finding that she was entitled to exemplary damages.
In its decision of 31 January 1990, [4] the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of
defendant Development Bank of the Philippines in appropriating for its
own interest, without any judicial or extra-judicial foreclosure, plaintiffs
leasehold rights and interest over the fishpond land in question under
her Fishpond Lease Agreement No. 2083 (new);

2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by

and between the defendant Development Bank of the Philippines and
plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission of the
Development Bank of the Philippines relative to said sale (Exhs. 16
and 26) as void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by

and between the Development Bank of the Philippines and defendant
Agripina Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement
No. 2083-A dated December 28, 1984 of defendant Agripina Caperal
(Exh. 23) and the Assignment of Leasehold Rights dated February 12,
1985 executed by defendant Agripina Caperal in favor of the defendant
Development Bank of the Philippines (Exh. 24) as void ab initio;

4. ORDERING defendant Development Bank of the Philippines and

defendant Agripina Caperal, jointly and severally, to restore to plaintiff
the latters leasehold rights and interests and right of possession over
the fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given
by plaintiff;

5. ORDERING defendant Development Bank of the Philippines to pay to

plaintiff the following amounts:

a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE

HUNDRED PESOS (P1,067,500.00), as and for actual damages;
 b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as
moral damages;

c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for

exemplary damages;

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00)

PESOS, as and for attorneys fees;

6. And ORDERING defendant Development Bank of the Philippines to

reimburse and pay to defendant Agripina Caperal the sum of ONE
MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX
HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS
(P1,532,610.75) representing the amounts paid by defendant Agripina
Caperal to defendant Development Bank of the Philippines under their
Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that defendant
Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the
claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code
because DBP appeared to be the sole creditor to CUBA - cession presupposes plurality
of debts and creditors; (3) the deeds of assignment represented the voluntary act of
CUBA in assigning her property rights in payment of her debts, which amounted to a
novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was
estopped from questioning the assignment of the leasehold rights, since she agreed to
repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of
the deed of assignment was an express authority from CUBA for DBP to sell whatever
right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits
for lack of evidence, but agreed with the trial court as to the actual damages
of P1,067,500. It, however, deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and attorneys fees, from P100,000
to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cubas leasehold rights and interest under Fishpond Lease Agreement
No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed
of conditional sale between CUBA and DBP; and (4) the deed of conditional sale
between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the
assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered
DBP to turn over possession of the property to Caperal as lawful holder of the leasehold
rights and to pay CUBA the following amounts: (a) P1,067,500 as actual
damages; P50,000 as moral damages; and P50,000 as attorneys fees.
Since their motions for reconsideration were denied,[6] DBP and CUBA filed separate
petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral
damages and attorneys fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment was
a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the
deed of assignment effected a novation of the promissory notes; (c) in holding that
CUBA was estopped from questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in
reducing the amounts of moral damages and attorneys fees, in deleting the award of
exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans
totalling P335,000, each of which was covered by a promissory note. In all of these
notes, there was a provision that: In the event of foreclosure of the mortgage securing
this notes, I/We further bind myself/ourselves, jointly and severally, to pay the
deficiency, if any. [7]
Simultaneous with the execution of the notes was the execution of Assignments of
Leasehold Rights [8] where CUBA assigned her leasehold rights and interest on a 44-
hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the
deeds of assignment constantly referred to the assignor (CUBA) as borrower; the
assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided that failure to
comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed. And, condition no.
33 provided that if foreclosure is actually accomplished, the usual 10% attorneys fees
and 10% liquidated damages of the total obligation shall be imposed. There is,
therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by
way of security for the payment of the loans; thus:

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights.

In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an
assignment to guarantee an obligation is in effect a mortgage.
We find no merit in DBPs contention that the assignment novated the promissory
notes in that the obligation to pay a sum of money the loans (under the promissory
notes) was substituted by the assignment of the rights over the fishpond (under the
deed of assignment). As correctly pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could stand together.The former was
only an accessory to the latter. Contrary to DBPs submission, the obligation to pay a
sum of money remained, and the assignment merely served as security for the loans
covered by the promissory notes. Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the loans were granted. Also, the
last paragraph of the assignment stated: The assignor further reiterates and states all
terms, covenants, and conditions stipulated in the promissory note or notes covering the
proceeds of this loan, making said promissory note or notes, to all intent and purposes,
an integral part hereof.
Neither did the assignment amount to payment by cession under Article 1255 of the
Civil Code for the plain and simple reason that there was only one creditor, the
DBP. Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtors property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil
Code, which reads: Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales. It bears stressing
that the assignment, being in its essence a mortgage, was but a security and not a
satisfaction of indebtedness.[10]
We do not, however, buy CUBAs argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:

12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power and
authority to take actual possession of the property above-described, together
with all improvements thereon, subject to the approval of the Secretary of
Agriculture and Natural Resources, to lease the same or any portion thereof
and collect rentals, to make repairs or improvements thereon and pay the
same, to sell or otherwise dispose of whatever rights the Assignor has or
might have over said property and/or its improvements and perform any other
act which the Assignee may deem convenient to protect its interest. All
expenses advanced by the Assignee in connection with purpose above
indicated which shall bear the same rate of interest aforementioned are also
guaranteed by this Assignment. Any amount received from rents,
administration, sale or disposal of said property may be supplied by the
Assignee to the payment of repairs, improvements, taxes, assessments and
other incidental expenses and obligations and the balance, if any, to the
payment of interest and then on the capital of the indebtedness secured
hereby. If after disposal or sale of said property and upon application of total
amounts received there shall remain a deficiency, said Assignor hereby binds
himself to pay the same to the Assignee upon demand, together with all
interest thereon until fully paid. The power herein granted shall not be revoked
as long as the Assignor is indebted to the Assignee and all acts that may be
executed by the Assignee by virtue of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a

property mortgaged by way of security for the payment of the principal obligation, and
(2) there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period.[11]
Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBAs failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had [w]ithout foreclosure
proceedings, whether judicial or extrajudicial, appropriated the [l]easehold [r]ights of
plaintiff Lydia Cuba over the fishpond in question. Its contention that it limited itself to
mere administration by posting caretakers is further belied by the deed of conditional
sale it executed in favor of CUBA. The deed stated:

WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in

its favor by the herein vendees [Cuba spouses] the former acquired all the
rights and interest of the latter over the above-described property;

The title to the real estate property [sic] and all improvements thereon shall
remain in the name of the Vendor until after the purchase price, advances and
interest shall have been fully paid. (Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBAs leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its
act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not
provide that CUBAs default would operate to vest in DBP ownership of the said
rights. Besides, an assignment to guarantee an obligation, as in the present case, is
virtually a mortgage and not an absolute conveyance of title which confers ownership on
the assignee.[12]
 At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing
of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBPs act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases,[13] estoppel cannot give
validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet,
in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouces] to pay their loan amortizations.[14] This only goes to show that DBP was aware
of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries cancelled CUBAs original lease permit, approved the
deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which
were predicated on such false representation, as well as the subsequent acts
emanating from DBPs appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the floodgates to circumvention of Article 2088
of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135, as amended. [15] With more reason
that the sale of property given as security for the payment of a debt be set aside if there
was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the income derived from the operation
of the fishpond in question and apply the said income in accordance with condition no.
12 of the deed of assignment which provided: Any amount received from rents,
administration, may be applied to the payment of repairs, improvements, taxes,
assessment, and other incidental expenses and obligations and the balance, if any, to
the payment of interest and then on the capital of the indebtedness.
We shall now take up the issue of damages.
Article 2199 provides:

Except as provided by law or by stipulation, one is entitled to an adequate

compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory
damages.

Actual or compensatory damages cannot be presumed, but must be proved with

reasonable degree of certainty.[16] A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must depend upon competent
proof that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof.[17] It must point out specific facts which could
afford a basis for measuring whatever compensatory or actual damages are borne.[18]
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual
damages consisting of P550,000 which represented the value of the alleged lost articles
of CUBA and P517,500 which represented the value of the 230,000 pieces of bangus
allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and the
adjoining house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved
by clear evidence. Other than the testimony of CUBA and her caretaker, there was no
proof as to the existence of those items before DBP took over the fishpond in
question. As pointed out by DBP, there was not inventory of the alleged lost items
before the loss which is normal in a project which sometimes, if not most often, is left to
the care of other persons. Neither was a single receipt or record of acquisition
presented.
Curiously, in her complaint dated 17 May 1985, CUBA included losses of property
as among the damages resulting from DBPs take-over of the fishpond. Yet, it was only
in September 1985 when her son and a caretaker went to the fishpond and the
adjoining house that she came to know of the alleged loss of several articles. Such
claim for losses of property, having been made before knowledge of the alleged actual
loss, was therefore speculative. The alleged loss could have been a mere afterthought
or subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000
pieces of bangus which died when DBP took possession of the fishpond in March 1979,
the same was not called for.Such loss was not duly proved; besides, the claim therefor
was delayed unreasonably. From 1979 until after the filing of her complaint in court in
May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her
letter dated 24 October 1979,[19] she declared:

1. That from February to May 1978, I was then seriously ill in Manila and
within the same period I neglected the management and supervision of the
cultivation and harvest of the produce of the aforesaid fishpond thereby
resulting to the irreparable loss in the produce of the same in the amount of
about P500,000.00 to my great damage and prejudice due to fraudulent acts
of some of my fishpond workers.
 Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBPs take-over there was a
total of 230,000 pieces of bangus, but all of which died because of DBPs
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient
basis.
In view, however, of DBPs act of appropriating CUBAs leasehold rights which was
contrary to law and public policy, as well as its false representation to the then Ministry
of Agriculture and Natural Resources that it had foreclosed the mortgage, an award of
moral damages in the amount of P50,000 is in order conformably with Article 2219(10),
in relation to Article 21, of the Civil Code. Exemplary or corrective damages in the
amount of P25,000 should likewise be awarded by way of example or correction for the
public good.[20] There being an award of exemplary damages, attorneys fees are also
recoverable.[21]
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV
No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral
damages, which is hereby sustained. The 31 January 1990 Decision of the Regional
Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting
aside the finding that condition no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of moral
damages from P100,000 to P50,000; the exemplary damages, from P50,000
to P25,000; and the attorneys fees, from P100,000 to P20,000. The Development Bank
of the Philippines is hereby ordered to render an accounting of the income derived from
the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for the
determination of each partys financial obligation to one another.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-57767 January 31, 1984

ALBERTO S. SUNIO and ILOCOS COMMERCIAL CORPORATION, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION, NEMESIO VALENTON, SANTOS DEL
ROSARIO, VICENTE TAPUCOL, ANDRES SOLIS, CRESCENCIO SOLLER, CECILIO LABUNI,
SOTERO L. TUMANG, in his capacity as Asst. Regional Director for Arbitration, Regional
Office No. 1, Ministry of Labor & Employment, and AMBROSIO B. SISON, in his capacity as
Acting Regional Sheriff, Regional Office No. 1, Ministry of Labor & Employment, respondents.

Yolanda Bustamante for petitioners.

The Solicitor General for respondent NLRC.

Benjamin F. Baterina for private respondents,

MELENCIO-HERRERA, J.:

In this special civil action for certiorari and Prohibition with Preliminary Injunction, petitioners Alberto
Sunio and Ilocos Commercial Corporation seek to set aside the Resolution of March 24, 1981 of the
National Labor Relations Commission (NLRC), which affirmed the Decision of the Assistant Regional
Director, dated November 5, 1979, in NLRC Case No. RB-1-1228-78, directing petitioners and
Cabugao Ice Plant Incorporated to reinstate private respondents to their former position without loss
of seniority and privileges and to pay them backwages from February 1, 1978 to the date of their
actual reinstatement.

The controversy arose from the following antecedents:

On July 30,1973, EM Ramos & Company, Inc. (EMRACO for brevity) and Cabugao Ice Plant, Inc.
(CIPI for short), sister corporations, sold an ice plant to Rizal Development and Finance Corporation
RDFC with a mortgage on the same properties constituted by the latter in favor of the former to
secure the payment of the balance of the purchase price. 1

By virtue of that sale, EMRACO-CIPI terminated the services of all their employees including private
respondents herein, and paid them their separation pay. RDFC hired its own own employees and
operated the plant.

On November 28, 1973, RDFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC
headed by its President and General Manager, petitioner Alberto S. Sunio. Petitioners also hired
their own employees as private respondents were no longer in the plant. The sale was subject to the
mortgage in favor of EMRACO-CIPI. Both RDFC-ICC failed to pay the balance of the purchase
price, as a consequence of which, EMRACO-CIPI instituted extrajudicial foreclosure proceedings.
The properties were sold at public auction on August 30, 1974, the highest bidders being EMRACO
CIPI. On the same date, said companies obtained an ex-parte Writ of Possession from the Court of
First Instance of Ilocos Sur in Civil Case No. 3026-V.

On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to Nilo Villanueva, suspect to
the right of redemption of RDFC. Nilo Villanueva then re-hired private respondents.

On August 27, 1975, RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva,
EMRACO-CIPI were unable to turn over possession to RDFC and/or petitioners, prompting the latter
to file a complaint for recovery of possession against EMRACO-CIPI with the then Court of First
Instance of Ilocos Sur (Civil Case No. 81-KC). Nilo Villanueva intervened

Said Court ordered the issuance of a Writ of Preliminary Mandatory Injunction placing RDFC in
possession of the ice plant. EMPRACO-CIPI and Villanueva appealed to the Court of Appeals (CA-
GR No. 05880- SP which upheld the questionee, Order. A Petition for certiorari with this Court (L-
46376) assailing that Resolution was denied for lack of merit or January 6, 1978.

On February 1, 1978, RDFC and petitioners finally obtains possession of the ice plant by virtue of
the Mandatory Injunction previously issued, which ordered defendant "particularly Nilo C. Villanueva
and his agents representatives, or any person found in the premises to vacate and surrender the
property in litigation." 2 Petitioners did not re-employ private respondents.

Private respondents filed complaints against petitioners for illegal dismissal with the Regional Office,
Ministry of Labor & Employment, San Fernando, La Union.

On November 5, 1979, the Assistant Regional Director rendered a decision the decretal portion of
which reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, respondents Cabugao Ice

Plant, Inc., Ilocos Commercial Corporation and/or Alberto Sunio, are hereby directed
to reinstate the complainants to their former positions without loss of seniority
privileges and to pay their backwages from February 1, 1978 to the date when they
are actually reinstated

Petitioners appealed to the NLRC, which affirmed the Regional Director's decision and dismissed the
appeal for lack of merit on March 24, 1981 reasoning that when RDFC took possession of the
property and private respondents were terminated in 1973, the latter already had a vested right to
their security of tenure, and when they were rehired those rights continued. 3

Petitioners are now before us assailing the Asst. Regional Director's Decision, dated November 5,
1979, the Resolution of the NLRC, Second Division, dated March 24, 1981, as well as the Writ of
Execution issued pursuant thereto dated July 14, 1981, for P156,720.80 representing backwages.
They raise as lone issue:

That respondent National Labor Relations Commission and/or Asst. Regional

Director Sotero Tumang acted in excess of jurisdiction and/or with grave abuse of
discretion amounting to lack of jurisdiction in rendering the decision and the
resolution in NLRC Case No. RB-1-1228-78, and in ordering the execution of said
decision
We issued a Temporary Restraining Order to maintain the status quo, resolved to give due course to
the Petition, and required the parties to submit their respective Briefs. Only petitioners have
complied.

Did public respondents' act with grave abuse of on amounting to lack of jurisdiction in ordering the
reinstatement of private respondents and the payment of their backwages?

Petitioners deny any employer-employee relationship with private respondents arguing that no privity
of contract exists between them, the latter being the employees of Nilo Villanueva who re-hired them
when he took over the operation of the ice plant from CIPI; that private respondents should go after
Nilo Villanueva for whatever rights they may be entitled to, or the CIPI which is still existing, that no
succession of rights and obligations took place between Villanueva and petitioners as the transfer of
possession was a consequence of the exercise of the right of redemption; that the amount of
backwages was determined without petitioners being given a chance to be heard and that granting
that respondents are entitled to the reliefs adjudged, such award cannot be enforced against
petitioner Sunio, who was impleaded in the complaint as the General Manager of ICC.

Public respondent, in its Comment, countered that the sale of a business of 'a going concern does
not ipso factoterminate employer-employee relations when the successor-employer continues the
business operation of the predecessor-employer in an essentially unchanged manner. Private
respondents argue that the change of management or ownership of a business entity is not one of
the just causes for the termination of services of employees under Article 283 of the Labor Code, as
amended. Both respondents additionally claim that petitioner Sunio, as the General Manager of ICC
and owner of one half (1/2) of its interest, is personally liable for his malicious act of illegally
dismissing private respondents, for no ground exists to justify their termination.

We sustain petitioners.

It is true that the sale of a business of a going concern does not ipso facto terminate the employer-
employee relations insofar as the successor-employer is concerned, and that change of ownership
or management of an establishment or company is not one of the just causes provided by law for
termination of employment. The situation here, however, was not one of simple change of
ownership. Of note is the fact that when, on July 30, 1973, EMRACO-CIPI sold the plant to RDFC,
CIPI had terminated the services of its employees, including herein private respondents, giving them
their separation pay which they had accepted. When RDFC took over ownership and management,
therefore, it hired its own employees, not the private respondents, who were no longer there. RDFC
subsequently sold the property to petitioners on November 28, 1973. But by reason of their failure to
pay the balance of the purchase price, EMRACO-CIPI foreclosed on the mortgage over the ice plant;
the property was sold at public auction to EMRACO-CIPI as the highest bidders, and they eventually
re-possessed the plant on August 30, 1974. During all the period that RDFC and petitioners were
operating the plant from July 30, 1973 to August 30, 1974, they had their own employees. CIPI-
EMRACO then sold the plant, also on August 30, 1974, to Nilo Villanueva, subject to RDFC's right of
redemption. Nilo Villanueva then rehired private respondents as employees of the plant, also in
1974.

In 1975, RDFC redeemed the property and demanded possession but EMRACO-CIPI and Nilo
Villanueva resisted so that petitioners were compelled to sue for recovery of possession, obtaining it,
however, only in 1978.

Under those circumstances, it cannot be justifiably said that the plant together with its staff and
personnel moved from one ownership to another. No succession of employment rights and
obligations can be said to have taken place between EMRACO-CIPI-Nilo Villanueva, on the one
hand, and petitioners on the other. Petitioners eventually acquired possession by virtue of the
exercise of their right of redemption and of a Mandatory Injunction in their favor which ordered Nilo
Villanueva and "any person found in the premises" to vacate. What is more, when EMRACO-CIPI
sold the ice plant to RDFC in 1973, private respondents' employment was terminated by EMRACO-
CIPI and they were given their separation pay, which they accepted. During the thirteen months,
therefore, that RDFC and petitioners were in possession and operating the plant up to August, 1974,
they hired their own employees, not the private respondents. In fact, it may even be said that private
respondents had slept on their rights when they failed to contest such termination at the time of sale,
if they believed they had rights to protect. Further, Nilo Villanueva rehired private respondents in
August, 1974, subject to a resolutory condition. That condition having arisen, the rights of private
respondents who claim under him mast be deemed to have also ceased.

Private respondents can neither successfully invoke security of tenure in their favor. Their tenure
should not be reckoned from 1967 because they were already terminated in 1973. Private
respondents were only rehired in 1974 by Nilo Villanueva. Petitioners took over by judicial process in
1978 so that private respondents had actually only four years of rehired employment with Nilo
Villanueva, during all of which period, petitioners fought hard against Nilo Villanueva to recover
possession of the plant. Insofar as petitioners are concerned therefore, there was no tenurial
security to speak of that would entitle private respondents to reinstatement and backwages. We
come now to the personal liability of petitioner, Sunio, who was made jointly and severally
responsible with petitioner company and CIPI for the payment of the backwages of private
respondents. This is reversible error. The Assistant Regional Director's Decision failed to disclose
the reason why he was made personally liable. Respondents, however, alleged as grounds thereof,
his being the owner of one-half (1/2) interest of said corporation, and his alleged arbitrary dismissal
of private respondents. Petitioner Sunio was impleaded in the Complaint his capacity as General
Manager of petitioner corporation. where appears to be no evidence on record that he acted
maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was
within the scope of his authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate and distinct from those of
the persons composing it as well as from that of any other legal entity to which it may be
related. 4 Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. 5 Petitioner Sunio, therefore, should not have been made personally answerable for the
payment of private respondents' back salaries.

WHEREFORE, the assailed Decision and Resolution, dated November 5, 1979 and March 24, 1981,
respectively, and the consequent Writ of Execution are hereby SET ASIDE and the Temporary
Restraining Order heretofore issued by this Court hereby made permanent. Public respondents are
hereby ordered to return to petitioners the latter's levied properties in their possession. No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-69494 May 29, 1987

A.C. RANSOM LABOR UNION-CCLU, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, First Division A.C. RANSOM (PHIIS.)
CORPORATION RUBEN HERNANDEZ, MAXIMO C. HERNANDEZ, SR., PORFIRIO R.
VALENCIA, LAURA H. CORNEJO, FRANCISCO HERNANDEZ, CELESTINO C. HERNANDEZ
and MA. ROSARIO HERNANDEZ, respondents.

RESOLUTION

MELENCIO-HERRERA, J.:

In a joint Decision in two earlier cases rendered by the then Court of Industrial Relations (CIR) on
August 19, 1972, it declared in the dispositive portion thereof:

IN VIEW OF ALL THE FOREGOING, ... the A.C. Ransom Philippine Corporation is
guilty of unfair labor practice of interference and discrimination herein above held and
specified; ordering said corporation, its officers and agents to cease and desist from
committing the same: finding the strike legal and justified; and to reinstate
immediately ... , to their respective positions with backwages from July 25, 1969 until
actually reinstated, without loss of seniority rights and other privileges appurtenant to
their employment. (Emphasis supplied). 1

This Court affirmed that Decision when it denied the Petition for Review filed by RANSOM on February 26, 1973 in G.R. Nos. L-36226-68.

The backwages due the 22 employees having been computed at P 199,276.00 by the (CIR)
Examiner, successive Motions for Execution were filed by the UNION on January 27, 1973 and
March 1, 1973, all of which RANSOM opposed stressing its "precarious financial position if
immediate execution of the backwages would be ordered." Upon the UNION's Motion of April 22,
1973 asking the CIR that RANSOM be ordered to deposit with the Court the backwages due them.
RANSOM manifested that it did not have the necessary funds to deposit and asked that the
employees' earnings elsewhere during this suspension be deducted. After several hearings, a
recomputation was made and the award of P199,276.00 was reduced to P 164,984.00. 2

The records show that, upon application filed by RANSOM on April 2, 1973, it was granted clearance
by the Secretary of Labor on June 7, 1973 to cease operation and terminate employment effective
May 1, 1973, without prejudice to the right of subject employees to seek redress of grievances under
existing laws and decrees. 3 The reasons given by RANSOM for the clearance application were
financial difficulties on account of obligations incurred prior to 1966.
On January 21, 1974, the UNION filed another Motion for Execution alleging that although RANSOM
had assumed a posture of suffering from business reverse, its officers and principal stockholders
had organized a new corporation, the Rosario Industrial Corporation (thereinafter called ROSARIO),
using the same equipment, personnel, business stocks and the same place of business. For its part,
RANSOM declared that ROSARIO is a distinct and separate corporation, which was organized long
before these instant cases were decided adversely against RANSOM.

It appears that sometime in 1969, ROSARIO, a closed corporation, was, in fact, established. It was
engaged in the same line of business as RANSOM with the same Hernandez family as the owners,
the same officers, the same President, the same counsel and the same address at 555 Quirino
Avenue, Paranaque, Rizal. The compound, building, plant, equipment, machinery, laboratory and
bodega were the same as those occupied and used by RANSOM. The UNION claims that
ROSARIO thrives to this day.

Writs of execution were issued successively against RANSOM on June 23, 1976, and February 17,
1977, to no avail.

On December 18, 1978, the UNION again filed an ex-parte Motion for Writ of Execution and
Garnishment praying that the Writ issue against the Officers/Agents of RANSOM personally and or
their estates, as the case may be, considering their success in hiding or shielding the assets of said
company. RANSOM countered that the CIR Decision, dated August 19, 1972, could no longer be
enforced by mere Motion because more than five (5) years had already lapsed.

Acting on the Motion, Labor Arbiter Tito F. Genilo issued, on March 11, 1980, an Order, the pertinent
part of which reads:

Under the circumstances and pursuant to the decision aforementioned, especially

that portion holding the respondent corporation's officers and agents liable, the
following officers of the respondent corporation — as appears in the record-are
hereby deemed included parties respondents in their official capacity:

a) Ruben Hernandez (President, per his testimony on August 21, 1974);

b) Maximo C. Hernandez, Jr. (Director);

c) Porfirio N. Valencia (Director);

d) Laura H. Cornejo (Director);

e) Francisco Hernandez (Chairman of the Board);

f) Celestino C. Hernandez (Director); and

g) Ma. Rosario Hernandez (Director).

Consequently, let a writ of execution be issued for P 164,984.00 against respondent

corporation and its officers/agents enumerated above.

SO ORDERED. (Emphasis supplied) 4

It appears that among the persons named in the aforequoted Order, Ma. Rosario Hernandez died in
1971; Francisco Hernandez died in 1977: and Celestino C. Hernandez passed away in 1979. And
Maximo Hernandez who was named in the CIR Decision, died in 1966. 5

The NLRC, on appeal, modified the Decision by relieving the officers and agents of liability as
follows:

As to the liability of the respondent's officers and agents, we agree with the
contention of the respondent-appellant that there is nothing in the order dated March
11, 1980 that would justify the holding of the individual officers and agents of
respondent in their personal capacity. As a general rule, officers of the corporation
are not liable personally for the official acts unless they have exceeded the scope of
their authority. In the absence of evidence showing that the officers mentioned in the
Order of the Labor Arbiter dated March 11, 1980 have exceeded their authority, the
writ of execution can not be enforced against them, especially' so since they were not
given a chance to be heard.

WHEREFORE, the Order appealed from is hereby affirmed, except as modified

above.

SO ORDERED. 6

Reconsideration sought by the UNION from the NLRC was denied, hence this special civil action of
Certiorari.

On June 10, 1986, this Court promulgated its Decision, the dispositive portion of which decrees:

WHEREFORE, the questioned Decision of the National Labor Relations Commission

is SET ASIDE, and the Order of the Labor Arbiter Tito F. Genilo of March 11, 1980 is
reinstated with the modification that personal liability for the backwages due the 22
strikers shall be limited to Ruben Hernandez, who was President of RANSOM in
1974, jointly and severally with other Presidents of the same corporation who had
been elected as such after 1972 or up to the time the corporate life was terminated.

Both parties have moved for reconsideration. Private respondents point out that they were never
impleaded as parties in the Trial Court, and that their personal liabilities were never at issue; that
judgment holding Ruben Hernandez personally liable is tantamount to deprivation of property without
due process of law; and that he was not an officer of the corporation at the time the unfair labor
practices were committed.

The UNION on the other hand, in its own Motion for Reconsideration, prays that the veil of corporate
fiction be pierced and that the Decision be modified, in that all the individual private respondents and
not only the President, should be held jointly and severally liable with RANSOM. On November 4,
1986, it further filed an Urgent Motion for Preliminary Mandatory Injunction "directing private
respondents to deposit the amount of P 199,276.00 or to put up a supersedeas bond of the same
sum."

Incontrovertible is the fact that RANSOM was found guilty by the CIR, in its Decision of August 19,
1972, of unfair labor practice; that its officers and agents were ordered to cease and desist from
further committing acts constitutive of the same, and to reinstate immediately the 22 union members
to their respective positions with backwages from July 25, 1969 until actually reinstated.
The CIR Decision became final, conclusive, and executory after this Court denied the RANSOM
petition for review in 1973. In other words, this Court upheld that portion of the judgment ordering
the officers and agents of RANSOM to reinstate the laborers concerned, with backwages. The
inclusion of the officers and agents was but proper since a corporation, as an artificial being, can act
only through them. It was also pursuant to the CIR Act (CA No. 103 ), 7 the Industrial Peace Act (R.A.
875) 8 the Minimum Wage Law (R.A. 602). 9 Consequently, when, in resolving the UNION's Motion
for Writ of Execution and Garnishment in the Order of March 11, 1980, Labor Arbiter Genilo named
the seven (17) private respondents herein as the RANSOM officers and agents, who should be held
liable (supra), he merely implemented the already final and executory CIR decision of August 19,
1972. The NLRC, on appeal to it by RANSOM, could not have modified the CIR Decision, as
affirmed by this Court, by relieving RANSOM's officers and agents of liability. It is also for that reason
that in our Decision of June 10, 1986 we set aside said NLRC Decision and reinstated the Order of
Labor Arbiter Genilo, with modification, in that we limited liability for backwages due the 22 UNION
members to the President of RANSOM in 1974 jointly and severally with other Presidents of the
same corporation who had been elected as such after 1972 or up to the time the corporation life was
terminated, since the President should also be deemed included in the term "employer. "

The foregoing, however, limits the scope of liability and deviates from the CIR Decision, affirmed by
this Court in 1973, holding the officers and agents of RANSOM liable. In other words, the officers
and agents listed in the Genilo Order except for those who have since passed away, should, as
affirmed by this Court, be held jointly and severally liable for the payment of backwages to the 22
strikers.

This finding does not ignore the legal fiction that a corporation has a personality separate and
distinct from its stockholders and members, for, as this Court had held "where the incorporators and
directors belong to a single family, the corporation and its members can be considered as one in
order to avoid its being used as an instrument to commit injustice," 10 or to further an end subversive of
justice. 11 In the case of Claparols vs. CIR 12 involving almost similar facts as in this case, it was also held that the shield of corporate fiction
should be pierced when it is deliberately and maliciously designed to evade financial obligations to employees. To the same effect was this
Court's rulings in still other cases:

When the notion of legal entity is used as a means to perpetrate fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, and or confuse legitimate issues the veil which protects the corporation will
be lifted (Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 846 [1968]; Republic vs. Razon,
20 SCRA 234 [1967]; A.D. Santos, Inc. vs. Vasquez, 22 SCRA 1156 [1968];
Telephone Eng'g. & Service Company, Inc. vs. WCC, 104 SCRA 354 [1981]).

The alleged bankruptcy of RANSOM furnishes no justification for non-payment of backwages to the
employees concerned taking into consideration Article 110 of the Labor Code, which provides:

ART. 110. Worker preference in case of bankruptcy. - In the event of bankruptcy or

liquidation of an employer's business, his workers shall enjoy first preference as
regards wages due them for services rendered during the period prior to the
bankruptcy or liquidation, any provision of law to the contrary notwithstanding.
Unpaid wages shag be paid in full before other creditors may establish any claim to a
share in the assets of the employer.

The term "wages" refers to all remunerations, earnings and other benefits in terms of money
accruing to the employees or workers for services rendered. They are to be paid in full before other
creditors may establish any claim to a share in the assets of the employer.
 Section 10. Payment of wages in case of bankruptcy.-Unpaid wages earned by the
employees before the declaration of bankruptcy or judicial liquidation of the
employer's business shall be given first preference and shall be paid in full before
other creditors may establish any claim to a share in the assets of the employer. 13

The foregoing provisions are but in consonance with the principles of social justice and protection to
labor guaranteed by past and present Constitutions and are not really being given any retroactive
effect when applied herein.

The Decision of the CIR was rendered on August 19, 1972. Clearance to RANSOM to cease
operations and terminate employment granted by the Secretary of Labor was made effective on May
1, 1973. The right of the employees concerned to backwages awarded them, therefore, had already
vested at the time and even before clearance was granted. Note should also be taken of the fact that
the clearance was without prejudice to the right of subject employees to seek redress of grievances
under existing laws and decrees.

The worker preference applies even if the employer's properties are encumbered by means of a
mortgage contract, as in this case. So that, when machinery and equipment of RANSOM were sold
to Revelations Manufacturing Corporation for P 2M in 1975, the right of the 22 laborers to be paid
from the proceeds should have been recognized, even though it is claimed that those proceeds were
turned over to the Commercial Bank and Trust Company (Comtrust) in payment of RANSOM
obligations, since the workers' preference is over and above the claim of other creditors.

The contention, therefore, of the heirs of the late Maximo C. Hernandez, Sr. that since they paid
from their own personal funds the balance of the amount owing by RANSOM to Comtrust they are
the "preferential creditors" of RANSOM, is clearly without merit. Workers are to be paid in full before
other creditors may establish any claim to a share in the assets of the employer.

... even if the employer's properties are encumbered by means of a mortgage

contract, still the workers' wages which enjoy first preference in case of bankruptcy or
liquidation are duly protected by an automatic first lien over and above all other
earlier encumbrances on the said properties. Otherwise, workers' wages may be
imperilled by foreclosure of mortgages, and as a consequence, the aforecited
provision of the New Labor Code would be rendered meaningless. 14

Aggravating RANSOM's clear evasion of payment of its financial obligations is the organization of a "run-away corporation," ROSARIO, in
1969 at the time the unfair labor practice case was pending before the CIR by the same persons who were the officers and stockholders of
RANSOM, engaged in the same line of business as RANSOM, producing the same line of products, occupying the same compound, using
the same machineries, buildings, laboratory, bodega and sales and accounts departments used by RANSOM, and which is still in existence.
Both corporations were closed corporations owned and managed by members of the same family. Its organization proved to be a convenient
instrument to avoid payment of backwages and the reinstatement of the 22 workers. This is another instance where the fiction of separate
and distinct corporate entities should be disregarded.

It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial obligation to its
employees.

... When a notion of legal entity is used to. defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association
or persons, or, in the case of two corporations, will merge them into one. 15

The corporation will be treated merely as an aggregation of individuals or, where there are two corporations, they will
be merged as one, the one being merely regarded as part of the instrumentality of the other. 16
The UNION's plea, therefore, for the reinstatement of the 22 strikers in ROSARIO should be favorably heard. However, ROSARIO shall have
the option to award them separation pay equivalent to one-half month for every year of service actually rendered by the 22 strikers.

The plea of the UNION for the restoration of the original computation of P199,276.00 or to grant the
22 Union members three (3) years backwages is rejected. It is the amount of P164,984.00 as
backwages, which was the subject of the Writ of Execution issued by the Labor Arbiter pursuant to
the CIR Decision of 1972.

With the conclusions arrived at, the UNION's Urgent Motion for a Writ of Preliminary Mandatory
Injunction directing private respondents to deposit the amount due as backwages in the meantime,
need no longer be acted on.

A final and executory Decision in favor of the UNION obtained in 1972 and affirmed by this Court in
1973 has remained unsatisfied to this date despite no less than ten (10) Motions for Execution over
a period of fourteen (14) years, not to mention the fact that this is the second time that this case is
before this Court. The detriment and prejudice caused the employees concerned is subversive of the
ends of justice. This protracted litigation must end and labor should now enjoy the just deserts of its
legal victory.

ACCORDINGLY, private respondents' Motion for Reconsideration is hereby denied with FINALITY;
the Motion for Reconsideration filed by petitioner is granted in part; and the dispositive portion of the
Decision, dated June 10, 1986, is hereby amended to read as follows:

WHEREFORE, the questioned Decision of the National Labor Relations Commission

is SET ASIDE, and the Order of Labor Arbiter Tito F. Genilo of March 11, 1980 is
reinstated with the modification that Rosario Industrial Corporation and its officers
and agents are hereby held jointly and severally liable with the surviving private
respondents for the payment of the backwages due the 22 union members.

Rosario Industrial Corporation is hereby ordered to reinstate the 22 union members

or, if this is not possible, to award them separation pay equivalent at least to one (1)
month pay or to one (1) month salary for every year of service actually rendered by
them with A.C. Ransom (Phils). Corporation, whichever is higher.

This decision is immediately executory.

SO ORDERED.