1989
G.R. No. L-36187 January 17, 1989
REYNOLDS PHILIPPINE CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and SERG'S PRODUCTS, INC., respondents.
This is a petition for review of the decision dated December 1, 1972 of the Court
of Appeals in "Reynolds Philippine Corporation vs. Serg's Products, Inc." dismissing
the petitioner's collection suit.
In its complaint of June 2, 1966, the petitioner sought to recover from the private
respondent Serg's Products, Inc. the sum of P32,565.62 representing the unpaid
price of aluminum foils and cores sold and delivered by it to the latter.
The private respondent denied liability for payment of the account on the ground
that the aluminum foils and cores were ordered or purchased by Serg's Chocolate
Products, a partnership of Antonio Goquiolay and Luis Sequia Mendoza, not Serg's
Products, Inc., a corporation managed and controlled by Antonio Goquiolay and
his wife Conchita Goquiolay, as majority stockholders and principal officers.
On July 31, 1968, the trial court rendered judgment finding the private respondent
liable and ordered it —
to pay 'Reynolds Philippine Corporation the balance of its account
in the sum of Thirty Two Thousand Five Hundred Sixty Five Pesos
and Sixty-Two Centavos (P32,565.62) with 6% interest per annum
from January 26, 1966, until paid; Two thousand Pesos
(P2,000.00) as attorney's fees, and litigation expenses; and costs
of this suit.' (p. 46, Rollo, pp. 88-89, Record on Appeal.)
Upon private respondent's appeal to the Court of Appeals, that court on December
1, 1972, reversed the trial court and dismissed the complaint on the ground that
petitioner had no cause of action against Serg's Products, Inc. (p. 43, Rollo).
Reynolds is now before Us, seeking a review of the Court of Appeals' decision. The
petition raises a factual issue: Who is the real debtor of the petitioner? Is it the
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partnership of Goquiolay and Mendoza, doing business under the trade name of
"Serg's Chocolate Products,' or the respondent corporation, Serg's Products, Inc.?
Based on the testimony of the witnesses, the trial court held the corporation,
"Serg's Products, Inc.," liable as the real buyer and user of the aluminum foils and
cores. However, the Court of Appeals relied on the sales orders, delivery receipts,
statements of account and demand letters where the purchaser named was
"Serg's Chocolate Products," the partnership.
While it is an established principle that in a petition for review under Rule 45 of
the Rules of Court, the Supreme Court will review only questions of law and that
the factual findings of the Court of Appeals are conclusive upon Us, nevertheless,
there are certain recognized exceptions to that rule. The exceptions are: (1) when
the conclusion is grounded entirely on speculation, surmises and conjectures; (2)
when the inference is manifestly mistaken, absurd, and impossible; (3) where
there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the Court in making its findings, went beyond
the issues of the case, and the same are contrary to the admissions of both the
appellant and the appellee; (6) when the findings of the Appellate Court are
contrary to those of the trial court; (7) when the findings are without citation of
specific evidence on which they are based (Mendoza vs. Court of Appeals, 156
SCRA 597; Manlapaz vs. Court of Appeals, 147 SCRA 238 [1987]; Sacay vs.
Sandiganbayan, 142 SCRA 609 [1986] Guita vs. CA, 139 SCRA 576 [1985]). It was
held that where findings of the Court of Appeals and trial court are contrary to
each other, the Supreme Court may scrutinize the evidence on record (Cruz vs.
CA, 129 SCRA 222 [1984]).
In this case, the trial court which heard the witnesses testify, hence was in a
superior position to assess the probative worth of their evidence, found that
although the commercial documents were indeed in the name of "Serg's Chocolate
Products," the following facts proved that the true purchaser of the aluminum foils
and cores from the petitioner, was "Serg's Products, Inc." not the partnership
denominated "Serg's Chocolate Products:"
(1) The rolls of aluminum foil were ordered and signed for by
Antonio Goquiolay president of Serg's Products, Inc. They were
delivered to, accepted, and used by said corporation in its
chocolate factory at Cainta, Rizal (p. 47,Rollo; p. 8, Brief for
plaintiff-appellee);
 (2) Antonio Goquiolay did not appear in court to shed light on
whether he signed the purchase orders and delivery receipts as
managing partner of "Serg's Chocolate Products," or as president
and general manager of "Serg's Products, Inc." Jesus V. Toledo,
the Chief Accountant of Serg's Products, Inc., admitted, however,
that "we (Serg's products, Inc.) are buying from them (Reynolds)
the aluminum foil." (t.s.n., Dec. 7, 1967, P. 9);
(3) The error in Identifying the customer as 'Serg's Chocolate
Products," instead of Serg's Products, Inc." in the sales orders,
delivery receipts and invoices was caused by Antonio Goquiolay
himself who placed the orders;
(4) The trial court noted that "Serg's Products, Inc." "acted in such
a manner that third persons dealing with it were led to believe
that 'Serg's Products, Inc.' and 'Serg's Chocolate Products' were
one and the same party. Serg's Products, Inc. has its address at
109 Cordillera St., Quezon City, which is also the address of Serg's
Chocolate Products (see Exhibit 'NN'), and the managing partner
of the partnership doing business under the name 'Serg's
Chocolate Products is Antonio Goquiolay who is also the manager
of Serg's Products Inc." (p. 46, Rollo; p. 82, Record on Appeal.)
(5) Serg's Chocolate Products ceased to exist in 1959 for under
the partnership Agreement between Goquiolay and Mendoza (Exh.
"2") the partnership which they formed on March 17, 1954 had a
term of five (5) years, or up to 1959 only. While that term was
renewable for the same period upon agreement of the parties, no
evidence was adduced that it was renewed after it expired in
1959. Having ceased to exist since 1959, the partnership has no
more juridical personality nor capacity to sue and be sued. "Serg's
Chocolate Products" is nothing but a name now which the
manager of Serg's Products, Inc. appears to have used to confuse,
deceive, and delay, if not completely evade, the payment of the
corporation's just debt to the petitioner.
The attempt to make the two factories appear as two separate
businesses, when in reality they are but one, is but a devise to
defeat the ends of the law and should not be permitted to prevail.
Although the coffee factory is a corporation and, by legal fiction,
an entity existing separate and apart from persons composing it, T
and his family, it is settled that this fiction of law, which had been
introduced as a matter of convenience and to subserve the ends
of justice cannot be invoked to further an end subversive of that
purpose. (13 Am. Jur. 160-162; Anno. 1 A.L.R. 612, s. 34 A.L.R.
599.)
Similarly, apropos is the decision of this Court in Telephone Engineering & Service
Company, Inc. vs. Workmen's Compensation Commission, et al., 104 SCRA 354,
where We held:
Petitioner admitted that TESCO and UMACOR are sister companies
operating under one single management and based in the same
building. Although respect for corporate personality as such, is the
general rule, there are exceptions. In appropriate cases, the veil
of corporate fiction may be pierced as when the same is made as
a shield to confuse legitimate issues.
WHEREFORE, the petition for review is granted. The decision of the Court of
Appeals is reversed and set aside and that of the trial court is reinstated. Costs
against the private respondent Serg's Products, Inc.
SO ORDERED.

Those important facts were overlooked by the Court of Appeals.

In La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La

Campana, 93 Phil. 160, where a somewhat similar situation existed as in this case,
We ruled:

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G.R. No. 80039 April 18, 1989
ERNESTO M. APODACA, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and
INTRANS PHILS., INC., respondents.
Does the National Labor Relations Commission (NLRC) have jurisdiction to resolve
a claim for non-payment of stock subscriptions to a corporation? Assuming that it
has, can an obligation arising therefrom be offset against a money claim of an
employee against the employer? These are the issues brought to this court
through this petition for review of a decision of the NLRC dated September 18,
1987.
The only remedy provided for by law from such a decision is a special civil action
for certiorari under Rule 65 of the Rules of Court based on jurisdictional grounds
or on alleged grave abuse of discretion amounting to lack or excess of jurisdiction,
not by way of an appeal by certiorari. Nevertheless, in the interest of justice, this
petition is treated as a special civil action for certiorari.
Petitioner was employed in respondent corporation. On August 28, 1985,
respondent Jose M. Mirasol persuaded petitioner to subscribe to 1,500 shares of
respondent corporation at P100.00 per share or a total of P150,000.00. He made
an initial payment of P37,500.00. On September 1, 1975, petitioner was appointed
President and General Manager of the respondent corporation. However, on
January 2, 1986, he resigned.
On December 19, 1986, petitioner instituted with the NLRC a complaint against
private respondents for the payment of his unpaid wages, his cost of living
allowance, the balance of his gasoline and representation expenses and his bonus
compensation for 1986. Petitioner and private respondents submitted their
position papers to the labor arbiter. Private respondents admitted that there is due
to petitioner the amount of P17,060.07 but this was applied to the unpaid balance
of his subscription in the amount of P95,439.93. Petitioner questioned the set-off
alleging that there was no call or notice for the payment of the unpaid subscription
and that, accordingly, the alleged obligation is not enforceable.
In a decision dated April 28, 1987, the labor arbiter sustained the claim of
petitioner for P17,060.07 on the ground that the employer has no right to withhold
payment of wages already earned under Article 103 of the Labor Code. Upon the
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appeal of the private respondents to public respondent NLRC, the decision of the
labor arbiter was reversed in a decision dated September 18, 1987. The NLRC held
that a stockholder who fails to pay his unpaid subscription on call becomes a
debtor of the corporation and that the set-off of said obligation against the wages
and others due to petitioner is not contrary to law, morals and public policy.
Hence, the instant petition.
The petition is impressed with merit.
Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute
between the stockholder and the corporation as in the matter of unpaid
subscriptions. This controversy is within the exclusive jurisdiction of the Securities
and Exchange Commission. 1
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the
said subject matter under the circumstances of this case, the unpaid subscriptions
are not due and payable until a call is made by the corporation for
payment. 2 Private respondents have not presented a resolution of the board of
directors of respondent corporation calling for the payment of the unpaid
subscriptions. It does not even appear that a notice of such call has been sent to
petitioner by the respondent corporation.
What the records show is that the respondent corporation deducted the amount
due to petitioner from the amount receivable from him for the unpaid
subscriptions. 3 No doubt such set-off was without lawful basis, if not premature.
As there was no notice or call for the payment of unpaid subscriptions, the same is
not yet due and payable.
Lastly, assuming further that there was a call for payment of the unpaid
subscription, the NLRC cannot validly set it off against the wages and other
benefits due petitioner. Article 113 of the Labor Code allows such a deduction from
the wages of the employees by the employer, only in three instances, to wit:
ART. 113. Wage Deduction. — No employer, in his own behalf or
in behalf of any person, shall make any deduction from the wages
of his employees, except:
(a) In cases where the worker is insured with his consent by the
employer, and the deduction is to recompense the employer for
the amount paid by him as premium on the insurance;
 (b) For union dues, in cases where the right of the worker or his
union to checkoff has been recognized by the employer or
authorized in writing by the individual worker concerned; and

(c) In cases where the employer is authorized by law or

regulations issued by the Secretary of Labor. 4

WHEREFORE, the petition is GRANTED and the questioned decision of the NLRC
dated September 18, 1987 is hereby set aside and another judgment is hereby
rendered ordering private respondents to pay petitioner the amount of P17,060.07
plus legal interest computed from the time of the filing of the complaint on
December 19, 1986, with costs against private respondents.

SO ORDERED.

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.R. No. 80863 April 27, 1989
ANTONIO M. VILLANUEVA and FULGENCIO B. LAVAREZ, petitioners,
vs.
HONORABLE ABEDNEGO O. ADRE, Presiding Judge, Regional Trial Court,
Branch 22, 11th Judicial Region, and LUCIO VELAYO, respondents.
SARMIENTO, J.:
The central question in the petition at bar is whether or not the regular courts may
stay an execution decreed by the labor arbiters and what the consequences are of
such a recourse to the courts.
The case began from a complaint, dated January 6, 1977, for recovery of unpaid
thirteenth-month pay filed by the Sarangani Marine and General Workers Union-
ALU with the Department of Labor (Regional Office No. XI, General Santos City)
against the South Cotabato Integrated Port Services, Inc. (SCIPSI), a Philippine
corporation. Later, thirty-seven SCIPSI employees, non-union members
apparently, filed their own complaint. The labor arbiter consolidated the twin
complaints and after hearing, ordered a dismissal on December 29, 1977. On
appeal, however, the National Labor Relations Commission, on June 9, 1981,
reversed and accordingly, ordered the private respondents, SCIPSI and its
president and general, Lucio Velayo, to pay the thirteenth-month pays demanded.
The private respondents' motion for reconsideration was denied, and the decision
has since attained finality.
Thereafter, the parties, on orders of the labor arbiter, were made to appear before
a corporate auditing examiner to determine the private respondents' exact liability.
On October 24, 1986, the corporate auditing examiner submitted an accounting
and found the private respondents liable in the total sum of Pl,134,000.00.
Thereupon, the private respondents interposed an objection and prayed for a
revision. It appears, however, that the private respondents never pursued their
exceptions.1
On January 16,1987, the union moved for execution and pursuant thereto, the
labor arbiter issued a writ of execution. As a result, the sheriff levied on two
parcels of land, both registered in Lucio Velayo's name, with an area of 400 and
979 square meters.
5|Page
On February 14, 1987, both SCIPSI and Velayo petitioned this Court 2 on certiorari
with injunction on the ground, fundamentally that the Department of Labor's
examiner erred in her determination of the private respondents pecuniary
liabilities.
On February 16,1987, Velayo alone filed a petition with the respondent court
(Special Case No. 227) on a cause of action based on an alleged irregular
execution, on the ground that he "was never a party to the labor case" 3 and that
"a corporation (that is, SCIPSI has a separate and distinct personality from this
incorporators, stockholders and officers." 4
On February 17, 1987, the respondent court issued a temporary restraining order
enjoining execution of the judgment in the aforementioned labor cases. On March
5, 1987, the petitioner moved for dismissal for lack of jurisdiction and litis
pendentia.
On the strength of this Court's decision in National Mines Allied Workers Union v.
Vera,5 the trial judge denied the motion to dismiss. Reconsideration having been
likewise denied, the union as well as the labor arbiter (Antonio Villanueva) and the
sheriff (Fulgencio Lavarez) themselves, on October 22, 1987, instituted these
certiorari proceedings. 6
Meanwhile, on April 27,1988, the parties (in G.R. Nos. 7730001) submitted a
Compromise Agreement whereby the private respondents agreed to pay, in
installments, the reduced sum of P637,400.00 to the workers. On May 11, 1988,
we issued a Resolution approving the Compromise Agreement, and considering
the cases (G.R. Nos. 77300-01) closed and terminated. 7
At the same time, we issued (in this petition) a Resolution requiring the private
respondents and/or counsel, Atty. Oscar Dinipol, to show cause why they should
not be held in contempt for forum-shopping. On December 9,1988, Atty. Dinopol
filed a manifestation praying for dismissal "not because it has become moot and
academic in view of the compromise agreement executed by the parties in G.R.
Nos. 77300-01 (but because) the subject or cause of action (thereof) is totally
different from the cause of action in the above-entitled case." 8
On whether or not this case has become moot and academic in view of the
compromise reached in G.R. Nos. 77300-01, the Court rules in the affirmative. It
should be noted that the instant petition has been brought as a result of the
execution of the judgment rendered below, and since the parties, by virtue of the
compromise, have spelled out the manner by which payment shall be made,
execution by means of levy, the question confronting the court herein, may no
longer be carried out. Nevertheless, because of the ethical implications of the acts
of the private respondents, the Court is constrained to render its judgment if only
to forestall future similar acts and for the guidance of the bench and the bar.
We likewise render judgment notwithstanding Atty. Oscar Dinopol's pending
prayer for extension of time to file his comment to our show cause Resolution of
November 7, 1988. We consider his manifestation, dated November 29,1988,
urging us not to dismiss this case for having became moot and academic but
because the petition lacks merit as his comment. We do so for one because it has
been the position of the private respondents that Special Case No. 227 and G.R.
Nos. 77300-01 could stand together and for another, because of the compelling
need to dispose of labor cases with utmost dispatch. We take this as his defense
to that show-cause Resolution. Parenthetically, we find him mistaken for
supposing that our Resolution is based on the simultaneous commencement of
Special Case No. 227 and G.R. Nos. 77300-01. This is not the act that forced
suspicions on our part of efforts by the private respondents to "shop for a friendly
forum". Rather, it is the institution of Special Case No. 227, despite the pendency
of the labor proceedings below, that led us to those suspicions. G.R. Nos. 77300-
01, on the other hand, were brought primarily on the question of the exact
amount SCIPSI is liable to pay. It is on its face, a legitimate ground for certiorari,
and for this reason we accepted the parties compromise reached there, instead of
dismissing it.
There is forum-shopping whenever, as a result of an adverse opinion in one
forum, a party seeks a favorable opinion (other than by appeal or certiorari) in
another. The principle applies not only with respect to suits filed in the courts but
also in connection with litigations commenced in the courts while an administrative
proceeding is pending, as in this case, in order to defeat administrative processes
and in anticipation of an unfavorable administrative ruling and a favorable court
ruling. This is specially so, as in this case, where the court in which the second suit
was brought, has no jurisdiction.
Accordingly, the respondent court must be held to be in error assuming jurisdiction
over Special Case No. 227. It is well-established that the courts cannot enjoin
execution of judgment rendered by the National Labor Relations Commission. 9
The respondent Lucio Velayo's reliance upon National Mines and Allied Workers
Union v. Vera10 is not well-taken. In that case, the properties involved belonged to
third persons, a development that provided a civil dimension to the labor case, and
a development that gave the courts the jurisdiction. In the case at bar, however,
Velayo cannot be said to be a stranger to the proceedings for a number of
reasons. First, and as pointed out by the Solicitor General, and as the records will
6|Page
amply show, he, Velayo, was a party to the proceedings below where he took part
actively in defense of his case. We quote:
... It is not true that Lucio Velayo was not a party in the labor
cases. The caption of the labor cases shows he was a respondent.
The records of the labor cases show that he participated in the
proceedings therein, without raising the issue that he was not a
party nor the employer of the complainants. Thus, the Motion for
Reconsideration dated August 7, 1981 attached to the Petition as
Annex B was filed by both SCIPS and Lucio Velayo. SCIPS and
Velayo discussed the merits of the cases in said motion and there
was nary a mention of the allegation of Velayo now that he not
not a party in the cases nor an employer of the complainants.
Likewise, the Exception and/or Opposition to Report of Examiner
dated November 13, 1986, attached to the Petition as Annex F,
was also filed by both SCIPS and Velayo and, like the Motion for
Reconsideration aforementioned, it does not mention anything
about Velayo not being a party and not being an employer of
complainants. 11
Certainly, he cannot now be heard to say that he was no party to the controversy.
The fact that he was never mentioned in the pleadings before the petitioner-labor
arbiter is of no moment.The fact is that he himself had questioned the findings of
the corporate auditor (in G.R. Nos. 77300-01) and this is enough evidence that he
admits personal liability, although he does not agree with the amount supposedly
due from him. His remonstrances came too late in the day.
But other than estoppel, the law itself stands as a formidable obstacle to Velayo's
claims. In A.C. Ransom Labor Union-CCLU v. NLRC 12 we held that in case of
corporations. It is the president who responds personally for violation of the labor
pay laws. We quote:
Article 273 of the Code provides that:
Any person violating any of the provisions of Article 265 of this
Code shall be punished by a fine of not exceeding five hundred
pesos and/or imprisonment for not less than one (1) day nor more
than six (6) months.
 (b) How can the foregoing provisions be implemented when the
employer is a corporation? The answer is found in Article 212 (c)
of the Labor Code which provides:
(c) 'Employer' of the Labor Code which provides: which 'Employer'
includes any person acting in the interest of an employer, directly
or indirectly. The term shall not include any labor organization or
any of its officers or agents except when acting as employer.
The foregoing was culled from Section 2 of RA 602, the Minimum
Wage Law. Since RANSOM is an artificial person, it must have an
officer who can be presumed to be the employer, being "the
person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held
personally, not to say even criminally, liable for non-payment of
back wages. That is the policy of the law. In the Minimum Wage
Law, Section 15(b) provided:
(b) If any violation of this Act is committed by a corporation, trust,
partnership or association, the manager or in his default, the
person acting as such when the violation took place, shall be
responsible. In the case of a government corporation, the
managing head shall be made responsible, except when shown
that the violation was due to an act or commission of some other
person, over whom he has no control, in which case the latter
shall be held responsible.
In PD 525, where a corporation fails to pay the emergency
allowance therein provided, the prescribed penalty shall be
imposed upon the guilty officer or officers of the corporation.
(c) If the policy of the law were otherwise, the corporation
employer can have devious ways for evading payment of back
wages. In the instant case, it would appear that RANSOM, in
1969, foreesing the possibility or probability of payment of back
wages to the 22 strikers, organized ROSARIO to replace RANSOM,
with the latter to be eventually phased out if the 22 strikers win
their case. RANSOM actually ceased operations on May 1, 1973
after the December 19, 1972 Decision of the Court of Industrial
Relations was promulgated against RANSOM.
7|Page
(d) The record does not clearly Identify the "officer or officers" of
RANSOM directly responsible for failure to pay the back wages of
the 22 strikers. In the absence of definite proof in that regard, we
behave it should be presumed that the responsible officer is the
President of the corporation who can be deemed the chief
operation officer thereof. Thus, in RA 602, criminal responsibility is
with the "Manager or in his default, the person acting as such." In
RANSOM, the President appears to be the Manager.
(e) Considering that non-payment of the back wages of the 22
strikers has been a continuing situation, it is our opinion that the
personal liability of the RANSOM President, at the time the back
wages were ordered to be paid should also be a continuing joint
and several personal liabilities of all who may have thereafter
succeeded to the office of president; otherwise, the 22 striken
may be deprived of their rights by the election of a president
without leviable assets.13
Accordingly, Velayo cannot be excused from payment of SCIPSI's liability by mere
reason of SCIPSI's separate corporate existence. The theory of corporate entity, in
the first place, was not meant to promote unfair objectives or otherwise, to shield
them. This Court has not hesitated in penetrating the veil of corporate fiction
when it would defeat the ends envisaged by law, 14 not to mention the clear
decree of the Labor Code.
And if Velayo truly had a valid objection (to the levy on his properties), he could
have raised it at the earliest hour, and in the course of the labor proceedings
themselves. But, as we earlier indicated, he raised nary a finger there, and he
cannot raise it now, much less in a separate proceeding. He is not only
estopped, litis pendencia is a bar to such a separate action.15
While the instant case has been rendered moot and academic by reason of the
out-of-court settlement between the parties, that development will not absolve
Velayo and/or his counsel, Atty. Oscar Dinopol 16 from charges of forum-shopping.
In Buan v. Lopez, Jr., supra, we declared that forum- shopping is an act of
malpractice that constitutes contempt of court.
In this connection, we reject Atty. Dinopol's pretense that no Identity exists
between Special Case No. 227 and the labor case that had precipitated it. The fact
remains that in Special Case No. 227, he assails the execution of the judgment of
the National Labor Relations Commission, the same relief he could have asked for
in the very labor proceeding. The fact that he likewise prayed for damages therein
will not alter the essence of the petition- to stay execution-and in which the claim
for damages is but an incidental relief.

Clearly, both Velayo and Atty. Dinopol must account for forum-shopping.

WHEREFORE, judgment is rendered: (1) DISMISSING the petition for having

become moot and academic; (2) ORDERING the respondent judge to dismiss
Special Case No. 227; (3) DECLARING the respondent, Lucio Velayo and Atty.
Oscar Dinopol IN CONTEMPT and ORDERING them to pay a fine of Pl,000.00 each
within five (5) days from notice; and (4) SUSPENDING Atty. Oscar Dinopol, for a
period of three (3) months effective from notice, from the practice of law. Let a
copy of this Decision be entered in his record.

THIS DECISION IS IMMEDIATELY EXECUTORY.

IT IS SO ORDERED.

8|Page
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO
and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.
The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of
First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner
in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was
dismissed but in all other respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S.
Lim requiring Lim to pay plaintiff the amount of P311,056.02, with
interest at the rate of 12% per annum compounded monthly; plus
15% of the amount awarded to plaintiff as attorney's fees from
July 2,1966, until full payment is made; plus P70,000.00 moral
and exemplary damages.
It is found in the records that the cross party plaintiffs incurred
additional miscellaneous expenses aside from Pl51,000.00,,making
a total of P184,878.74. Defendant Jacob S. Lim is further required
to pay cross party plaintiff, Bormaheco, the Cervanteses one-half
and Maglana the other half, the amount of Pl84,878.74 with
interest from the filing of the cross-complaints until the amount is
fully paid; plus moral and exemplary damages in the amount of
P184,878.84 with interest from the filing of the cross-complaints
until the amount is fully paid; plus moral and exemplary damages
in the amount of P50,000.00 for each of the two Cervanteses.
9|Page
Furthermore, he is required to pay P20,000.00 to Bormaheco and
the Cervanteses, and another P20,000.00 to Constancio B.
Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff
Pioneer against defendants Bormaheco, the Cervanteses and
Constancio B. Maglana, is dismissed. Instead, plaintiff is required
to indemnify the defendants Bormaheco and the Cervanteses the
amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the
time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana
the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for
this action was filed in good faith. The fact that the properties of
the Bormaheco and the Cervanteses were attached and that they
were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to
protect his rights, he should not be saddled with moral or
exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that
ordered it, in the exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment
prayed for by the plaintiff Pioneer. If an insurance company would
be liable for damages in performing an act which is clearly within
its power and which is the reason for its being, then nobody
would engage in the insurance business. No further claim or
counter-claim for or against anybody is declared by this Court.
(Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered
into and executed a sales contract (Exhibit A) for the sale and purchase of two (2)
DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed
price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry
No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in
G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit
C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the
aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio
Maglana (respondents in both petitions) contributed some funds used in the
purchase of the above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and
D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by
Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements
stipulated that the indemnitors principally agree and bind themselves jointly and
severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses
of whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to pay on
them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed
in favor of Pioneer as deed of chattel mortgage as security for the latter's
suretyship in favor of the former. It was stipulated therein that Lim transfer and
convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered
with the Office of the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil
Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana,
however, filed a third party claim alleging that they are co-owners of the aircrafts,
10 | P a g e
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application
for a writ of preliminary attachment against Lim and respondents, the
Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims
against Lim alleging that they were not privies to the contracts signed by Lim and,
by way of counterclaim, sought for damages for being exposed to litigation and for
recovery of the sums of money they advanced to Lim for the purchase of the
aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer
but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects
the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND
THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE
AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS
DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p.
10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand
to be benefited or injured by the judgment.
 Plaintiff Pioneer's contention that it is representing the reinsurer to
recover the amount from defendants, hence, it instituted the
action is utterly devoid of merit. Plaintiff did not even present any
evidence that it is the attorney-in-fact of the reinsurance
company, authorized to institute an action for and in behalf of the
latter. To qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to be the
present real owner of the right sought to be enforced (Moran, Vol.
I, Comments on the Rules of Court, 1979 ed., p. 155). It has been
held that the real party in interest is the party who would be
benefited or injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil.
125, 131). By real party in interest is meant a present substantial
interest as distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest (Garcia v. David,
67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600,
385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of
Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid
by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to
foreclose extra-judicially one of the subject airplanes and its spare
engine, realizing the total amount of P37,050.00 from the sale of
the mortgaged chattels. Adding the sum of P37,050.00, to the
proceeds of the reinsurance amounting to P295,000.00, it is
patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA
totals to only P298,666.28. To allow plaintiff Pioneer to recover
from defendants the amount in excess of P298,666.28 would be
tantamount to unjust enrichment as it has already been paid by
the reinsurance company of the amount plaintiff has paid to JDA
as surety of defendant Lim vis-a-vis defendant Lim's liability to
JDA. Well settled is the rule that no person should unjustly enrich
himself at the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).
11 | P a g e
The petitioner contends that-(1) it is at a loss where respondent court based its
finding that petitioner was paid by its reinsurer in the aforesaid amount, as this
matter has never been raised by any of the parties herein both in their answers in
the court below and in their respective briefs with respondent court; (Rollo, p. 11)
(2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly
between the petitioner and the re-insurer pursuant to section 91 of the Insurance
Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to
recover from respondents Bormaheco and Maglana; and (4) the principle of unjust
enrichment is not applicable considering that whatever amount he would recover
from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance
money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect
to so much of its obligations to JDA as has been paid with
reinsurance money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the amount
it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the
proceeds of such reinsurance in the sum of P295,000, and paid
with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on this score it no longer has
any right to collect to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance
(sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to
the latter, Pioneer says: The reinsurers opted instead that the
 Pioneer Insurance & Surety Corporation shall pursue alone the
case.. . . . Pioneer Insurance & Surety Corporation is representing
the reinsurers to recover the amount.' In other words, insofar as
the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the
reinsurers for any amount. Lastly, and most important of all,
Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an
action brought by an attorney-in-fact in his own name instead of
that of the principal will not prosper, and this is so even where the
name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court
provides that 'Every action must be prosecuted in
the name of the real party in interest.' This
provision is mandatory. The real party in interest
is the party who would be benefitted or injured by
the judgment or is the party entitled to the avails
of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest, that
there is no law permitting an action to be brought
by an attorney-in-fact. Arroyo v. Granada and
Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco
and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial
Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which
Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount
realized from the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare engine, or a
total of P37,050.00, Pioneer is still overpaid by P33,383.72.
12 | P a g e
Therefore, Pioneer has no more claim against defendants. (Record
on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that cropped up
was the effect of payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has
no basis.
In general a reinsurer, on payment of a loss acquires the same
rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in
general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled
to recover the deficiency from the person causing the loss or
injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.
Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied
in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650
[1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the
insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not
 fully cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the
real party in interest with regard to the portion of the indemnity
paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner
was not the real party in interest in the complaint and, therefore, has no cause of
action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the counter indemnitors. It does
not, however, cite any grounds except its allegation that respondent "Maglanas
defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable to
the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the
spare parts involved, agreed to issue the bond provided that the
same would be mortgaged to it, but this was not possible because
the planes were still in Japan and could not be mortgaged here in
the Philippines. As soon as the aircrafts were brought to the
Philippines, they would be mortgaged to Pioneer Insurance to
cover the bond, and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
13 | P a g e
The various conflicting claims over the mortgaged
properties have impaired and rendered insufficient
the security under the chattel mortgage and there
is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage
there is no other security for the claim sought to be enforced by
this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has
any further action against the defendants as indemnitors to
recover any unpaid balance of the price. The indemnity agreement
was ipso jure extinguished upon the foreclosure of the chattel
mortgage. These defendants, as indemnitors, would be entitled to
be subrogated to the right of Pioneer should they make payments
to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of
the remedy of foreclosure precludes any further action to recover
any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were
as provided in Article 1484 of the New Civil Code, known as the
Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant suit.
Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to
the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA.
 The reason is that Pioneer is actually exercising the rights of JDA
as vendor, having subrogated it in such rights. Nor may the
application of the provision be validly opposed on the ground that
these defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change
of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates
of the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments, the
first of which shall be due and payable 25 August
1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding
three months and the last of which shall be due
and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA, modifying the
maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal
successive three month interval installments the
first of which shall be due and payable 4
September 1965, the remainder of which ... shall
be due and payable on the 4th day ... of each
succeeding months and the last of which shall be
due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of
the last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity
dates, effected twice, were done without the knowledge, much
14 | P a g e
less, would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it believed that
these defendants and defendant Maglana knew of and consented
to the modification of the obligations. But if that were so, there
would have been the corresponding documents in the form of a
written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of
this was the extinguishment of the obligations and of the surety
bond secured by the indemnity agreement which was thereby also
extinguished. Applicable by analogy are the rulings of the
Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco,
55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon
David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the guarantor
extinguishes the guaranty The mere failure on the
part of the creditor to demand payment after the
debt has become due does not of itself constitute
any extension time referred to herein, (New Civil
Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause
of action to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of an express
stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on
every installment, released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from
these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not
entitle him to reimbursement from his co-debtors
if such payment is made after the obligation has
prescribed or became illegal.
 These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the
instant case against them and the attachment and garnishment of
their properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record
on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors
whose agreement was to do business through the corporate
vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents
these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the
failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and
petitioner Lim to incorporate, a de facto partnership among them was created, and
that as a consequence of such relationship all must share in the losses and/or
gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts
given by the respondents to the petitioner as their contributions to the intended
corporation, to wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of
the cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received
the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of
15 | P a g e
the subject airplanes and spare parts (Exhibit 58). In addition, the
cross-party plaintiffs incurred additional expenses, hence, the total
sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of
the stockholders in a defectively incorporated association should
be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon
v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it
is ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v. Perryman, 119
P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to
come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as
members of the company to the property acquired by the
company will be recognized (Smith v. Schoodoc Pond Packing Co.,
84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So,
where certain persons associated themselves as a corporation for
the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to
pay a third the difference in the proportionate value of the land
conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an
action between them for an accounting, and its capital stock was
treated as partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property contributed
by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation
does not necessarily exist, for ordinarily persons cannot be made
to assume the relation of partners, as between themselves, when
their purpose is that no partnership shall exist (London Assur.
Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.
688), and it should be implied only when necessary to do justice
between the parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which is never
legally formed does not become a partner with other subscribers
who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for settlement
of the alleged partnership and contribution (Ward v. Brigham, 127
 Mass. 24). A partnership relation between certain stockholders
and other stockholders, who were also directors, will not be
implied in the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally contracted by the
latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for
his failure to appear during the pretrial despite notification. In his answer, the
petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty. Constancio B. Maglana in
the ownership of the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them. This gives
credence to the cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in
an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then
up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana.
(Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
16 | P a g e
Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant
Lim. Down payments were advanced by defendants Bormaheco
and the Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants, defendant Lim
in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal
capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and
misrepresentation of the other, Jacob Lim, when the herein
plaintiff chattel mortgage (sic) allegedly executed by defendant
Lim, thereby forcing them to file an adverse claim in the form of
third party claim. Notwithstanding repeated oral demands made
by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to
an aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with
them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not in
behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
.R. No. 78413 November 8, 1989
CAGAYAN VALLEY ENTERPRISES, INC., Represented by its President,
Rogelio Q. Lim, petitioner,
vs.
THE HON. COURT OF APPEALS and LA TONDEÑA, INC., respondents.
This petition for review on certiorari seeks the nullification of the decision of the
Court of Appeals of December 5, 1986 in CA-G.R. CV No. 06685 which reversed
the decision of the trial court, and its resolution dated May 5, 1987 denying
petitioner's motion for reconsideration.
The following antecedent facts generative of the present controversy are not in
dispute.
Sometime in 1953, La Tondeña, Inc. (hereafter, LTI for short) registered with the
Philippine Patent Office pursuant to Republic Act No. 623 1 the 350 c.c. white flint
bottles it has been using for its gin popularly known as "Ginebra San Miguel". This
registration was subsequently renewed on December 4, 1974. 2
On November 10, 1981, LTI filed Civil Case No. 2668 for injunction and damages
in the then Branch 1, Court of First Instance of Isabela against Cagayan Valley
Enterprises, Inc. (Cagayan, for brevity) for using the 350 c.c., white flint bottles
with the mark "La Tondeña Inc." and "Ginebra San Miguel" stamped or blown-in
therein by filling the same with Cagayan's liquor product bearing the label "Sonny
Boy" for commercial sale and distribution, without LTI's written consent and in
violation of Section 2 of Republic Act No. 623, as amended by Republic Act No.
5700. On the same date, LTI further filed an ex parte petition for the issuance of a
writ of preliminary injunction against the defendant therein. 3 On November 16,
1981, the court a quo issued a temporary restraining order against Cagayan and
its officers and employees from using the 350 c.c. bottles with the marks "La
Tondeña" and "Ginebra San Miguel." 4
Cagayan, in its answer, 5 alleged the following defenses:
1. LTI has no cause of action due to its failure to comply with
Section 21 of Republic Act No. 166 which requires the giving of
notice that its aforesaid marks are registered by displaying and
printing the words "Registered in the Phil. Patent Office" or "Reg
17 | P a g e
Phil. Pat. Off.," hence no suit, civil or criminal, can be filed against
Cagayan;
2. LTI is not entitled to any protection under Republic Act No. 623,
as amended by Republic Act No. 5700, because its products,
consisting of hard liquor, are not among those contemplated
therein. What is protected under said law are beverages like Coca-
cola, Royal Tru-Orange, Lem-o-Lime and similar beverages the
bottles whereof bear the words "Reg Phil. Pat. Off.;"
3. No reservation of ownership on its bottles was made by LTI in its sales invoices
nor does it require any deposit for the retention of said bottles; and
4. There was no infringement of the goods or products of LTI since Cagayan uses
its own labels and trademark on its product.
In its subsequent pleadings, Cagayan contended that the bottles they are using
are not the registered bottles of LTI since the former was using the bottles marked
with "La Tondeña, Inc." and "Ginebra San Miguel" but without the words "property
of" indicated in said bottles as stated in the sworn statement attached to the
certificate of registration of LTI for said bottles.
On December 18, 1981, the lower court issued a writ of preliminary injunction,
upon the filing of a bond by LTI in the sum of P50,000.00, enjoining Cagayan, its
officers and agents from using the aforesaid registered bottles of LTI. 6
After a protracted trial, which entailed five (5) motions for contempt filed by LTI
against Cagayan, the trial court rendered judgment 7 in favor of Cagayan, ruling
that the complaint does not state a cause of action and that Cagayan was not
guilty of contempt. Furthermore, it awarded damages in favor of Cagayan.
LTI appealed to the Court of Appeals which, on December 5, 1986 rendered a
decision in favor of said appellant, the dispositive portion whereof reads:
WHEREFORE, the decision appealed from is hereby SET ASIDE
and judgment is rendered permanently enjoining the defendant,
its officers and agents from using the 350 c.c. white flint bottles
with the marks of ownership "La Tondeña, Inc." and "Ginebra San
Miguel", blown-in or stamped on said bottles as containers for
defendant's products.
 The writ of preliminary injunction issued by the trial court is
therefore made permanent.
Defendant is ordered to pay the amounts of:
(1) P15,000.00 as nominal or temperate damages;
(2) P50,000.00 as exemplary damages;
(3) P10,000.00 as attorney's fees; and
8
(4) Costs of suit.
On December 23, 1986, Cagayan filed a motion for reconsideration which was
denied by the respondent court in its resolution dated May 5, 1987, hence the
present petition, with the following assignment of errors:
I. The Court of Appeals gravely erred in the
decision granting that "there is, therefore, no
need for plaintiff to display the words "Reg. Phil.
Pat. Off." in order for it to succeed in bringing any
injunction suit against defendant for the illegal
use of its bottles. Rep. Act No. 623, as amended
by Rep. Act No. 5700 simply provides and
The pertinent provisions of Republic Act No. 623, as amended by Republic Act No.
requires that the marks or names shall be
5700, provides:
stamped or marked on the containers."
II. The Court of Appeals gravely erred in deciding
that "neither is there a reason to distinguish
between the two (2) sets of marked bottles-those
which contain the marks "Property of La Tondeña,
Inc., Ginebra San Miguel," and those simply
marked La Tondeña Inc., Ginebra San Miguel'. By
omitting the words "property of" plaintiff did not
open itself to violation of Republic Act No. 623, as
amended, as having registered its marks or
names it is protected under the law."
III. The Honorable Court of Appeals gravely erred
in deciding that the words "La Tondeña, Inc. and
Ginebra San Miguel" are sufficient notice to the
18 | P a g e
defendant which should have inquired from the
plaintiff or the Philippine Patent Office, if it was
lawful for it to re-use the empty bottles of the
plaintiff.
IV. The Honorable Court of Appeals gravely erred
in deciding that defendant-appellee cannot claim
good faith from using the bottles of plaintiff with
marks "La Tondeña, Inc." alone, short for the
description contained in the sworn statement of
Mr. Carlos Palanca, Jr., which was a requisite of
its original and renewal registrations.
V. The Honorable Court of Appeals gravely erred
in accommodating the appeal on the dismissals of
the five (5) contempt charges.
VI. The Honorable Court of Appeals gravely erred
in deciding that the award of damages in favor of
the defendant-appellee, petitioner herein, is not in
order. Instead it awarded nominal or temperate,
exemplary damages and attorney's fees without
proof of bad faith. 9
SECTION 1. Persons engaged or licensed to engage in the
manufacture, bottling, or selling of soda water, mineral or aerated
waters, cider, milk, cream or other lawful beverages in bottles,
boxes, casks, kegs, or barrels and other similar containers, or in
the manufacturing, compressing or selling of gases such as
oxygen, acytelene, nitrogen, carbon dioxide ammonia, hydrogen,
chloride, helium, sulphur, dioxide, butane, propane, freon, melthyl
chloride or similar gases contained in steel cylinders, tanks, flasks,
accumulators or similar containers, with the name or the names of
their principals or products, or other marks of ownership stamped
or marked thereon, may register with the Philippine Patent Office
a description of the names or marks, and the purpose for which
the containers so marked and used by them, under the same
conditions, rules, and regulations, made applicable by law or
regulation to the issuance of trademarks.
 SEC. 2. It shall be unlawful for any person, without the written
consent of the manufacturer, bottler, or seller, who has
succesfully registered the marks of ownership in accordance with
the provisions of the next preceding section, to fill such bottles,
boxes, kegs, barrels, steel cylinders, tanks, flasks, accumulators or
other similar containers so marked or stamped, for the purpose of
sale, or to sell, disposed of, buy or traffic in, or wantonly destroy
the same, whether filled or not, to use the same, for drinking
vessels or glasses or drain pipes, foundation pipes, for any other
purpose than that registered by the manufacturer, bottler or
seller. Any violation of this section shall be punished by a fine of
not more than one thousand pesos or imprisonment of not more
than one year or both.
SEC. 3. The use by any person other than the registered
manufacturer, bottler or seller, without written permission of the
latter of any such bottle, cask, barrel, keg, box, steel cylinders,
tanks, flask, accumulators, or other similar containers, or the
possession thereof without written permission of the
manufacturer, by any junk dealer or dealer in casks, barrels, kegs
boxes, steel cylinders, tanks, flasks, accumulators or other similar
containers, the same being duly marked or stamped and
registered as herein provided, shall give rise to a prima
facie presumption that such use or possession is unlawful.
The above-quoted provisions grant protection to a qualified manufacturer who
successfully registered with the Philippine Patent Office its duly stamped or
marked bottles, boxes, casks and other similar containers. The mere use of
registered bottles or containers without the written consent of the manufacturer is
prohibited, the only exceptions being when they are used as containers for "sisi,"
bagoong," "patis" and similar native products. 10
It is an admitted fact that herein petitioner Cagayan buys from junk dealers and
retailers bottles which bear the marks or names La Tondeña Inc." and "Ginebra
San Miguel" and uses them as containers for its own liquor products. The
contention of Cagayan that the aforementioned bottles without the words
"property of" indicated thereon are not the registered bottles of LTI, since they do
not conform with the statement or description in the supporting affidavits attached
to the original registration certificate and renewal, is untenable.
Republic Act No. 623 which governs the registration of marked bottles and
containers merely requires that the bottles, in order to be eligible for registration,
19 | P a g e
must be stamped or marked with the names of the manufacturers or the names of
their principals or products, or other marks of ownership. No drawings or labels
are required but, instead, two photographs of the container, duly signed by the
applicant, showing clearly and legibly the names and other marks of ownership
sought to be registered and a bottle showing the name or other mark or
ownership, irremovably stamped or marked, shall be submitted. 11
The term "Name or Other Mark of Ownership" 12 means the name of the applicant
or the name of his principal, or of the product, or other mark of ownership. The
second set of bottles of LTI without the words "property of" substantially complied
with the requirements of Republic Act No. 623, as amended, since they bear the
name of the principal, La Tondeña Inc., and of its product, Ginebra San Miguel.
The omitted words "property of" are not of such vital indispensability such that the
omission thereof will remove the bottles from the protection of the law. The owner
of a trade-mark or trade-name, and in this case the marked containers, does not
abandon it by making minor modifications in the mark or name itself. 13 With much
more reason will this be true where what is involved is the mere omission of the
words "property of" since even without said words the ownership of the bottles is
easily Identifiable. The words "La Tondeña Inc." and "Ginebra San Miguel"
stamped on the bottles, even without the words "property of," are sufficient notice
to the public that those bottles so marked are owned by LTI.
The claim of petitioner that hard liquor is not included under the term "other
lawful beverages" as provided in Section I of Republic Act No. 623, as amended by
Republic Act No. 5700, is without merit. The title of the law itself, which reads " An
Act to Regulate the Use of Duly Stamped or Marked Bottles, Boxes, Casks, Kegs,
Barrels and Other Similar Containers" clearly shows the legislative intent to give
protection to all marked bottles and containers of all lawful beverages regardless
of the nature of their contents. The words "other lawful beverages" is used in its
general sense, referring to all beverages not prohibited by law. Beverage is
defined as a liquor or liquid for drinking. 14 Hard liquor, although regulated, is not
prohibited by law, hence it is within the purview and coverage of Republic Act No.
623, as amended.
Republic Act No. 623, as amended, has for its purpose the protection of the health
of the general public and the prevention of the spread of contagious diseases. It
further seeks to safeguard the property rights of an important sector of Philippine
industry. 15 As held by this Court in Destileria Ayala, Inc. vs. Tan Tay & Co.,16 the
purpose of then Act 3070, was to afford a person a means of Identifying the
containers he uses in the manufacture, preservation, packing or sale of his
products so that he may secure their registration with the Bureau of Commerce
and Industry and thus prevent other persons from using them. Said Act 3070 was
substantially reenacted as Republic Act No. 623. 17
The proposition that Republic Act No. 623, as amended, protects only the
containers of the soft drinks enumerated by petitioner and those similar thereto, is
unwarranted and specious. The rule of ejusdem generis cannot be applied in this
case. To limit the coverage of the law only to those enumerated or of the same
kind or class as those specifically mentioned will defeat the very purpose of the
law. Such rule of ejusdem generis is to be resorted to only for the purpose of
determining what the intent of the legislature was in enacting the law. If that
intent clearly appears from other parts of the law, and such intent thus clearly
manifested is contrary to the result which would be reached by the appreciation of
the rule of ejusdem generis, the latter must give way.18
Moreover, the above conclusions are supported by the fact that the Philippine
Patent Office, which is the proper and competent government agency vested with
the authority to enforce and implement Republic Act No. 623, registered the
bottles of respondent LTI as containers for gin and issued in its name a certificate
of registration with the following findings:
It appearing, upon due examination that the applicant is entitled
to have the said MARKS OR NAMES registered under R.A. No. 623,
the said marks or names have been duly registered this day in the
PATENT OFFICE under the said Act, for gin, Ginebra San Miguel. 19
While executive construction is not necessarily binding upon the courts, it is
entitled to great weight and consideration. The reason for this is that such
construction comes from the particular branch of government called upon to
implement the particular law involved. 20
Just as impuissant is petitioners contention that respondent court erred in holding
that there is no need for LTI to display the words "Reg Phil. Pat. Off." in order to
succeed in its injunction suit against Cagayan for the illegal use of the bottles. To
repeat, Republic Act No. 623 governs the registration of marked bottles and
containers and merely requires that the bottles and/or containers be marked or
stamped by the names of the manufacturer or the names of their principals or
products or other marks of ownership. The owner upon registration of its marked
bottles, is vested by law with an exclusive right to use the same to the exclusion of
others, except as a container for native products. A violation of said right gives use
to a cause of action against the violator or infringer.
20 | P a g e
While Republic Act No. 623, as amended, provides for a criminal action in case of
violation, a civil action for damages is proper under Article 20 of the Civil Code
which provides that every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the same. This particular
provision of the Civil Case was clearly meant to complement all legal provisions
which may have inadvertently failed to provide for indemnification or reparation of
damages when proper or called for. In the language of the Code Commission
"(t)he foregoing rule pervades the entire legal system, and renders it impossible
that a person who suffers damage because another has violated some legal
provisions, should find himself without relief." 21 Moreover, under Section 23 of
Republic Act No. 166, as amended, a person entitled to the exclusive use of a
registered mark or tradename may recover damages in a civil action from any
person who infringes his rights. He may also, upon proper showing, be granted
injunction.
It is true that the aforesaid law on trademarks provides:
SEC. 21. Requirements of notice of registration of trade-mark.-The
registrant of a trade-mark, heretofore registered or registered
under the provisions of this Act, shall give notice that his mark is
registered by displaying with the same as used the words
'Registered in the Philippines Patent Office' or 'Reg Phil. Pat. Off.';
and in any suit for infringement under this Act by a registrant
failing so to mark the goods bearing the registered trade-mark, no
damages shall be recovered under the provisions of this Act,
unless the defendant has actual notice of the registration.
Even assuming that said provision is applicable in this case, the failure of LTI to
make said marking will not bar civil action against petitioner Cagayan. The
aforesaid requirement is not a condition sine qua non for filing of a civil action
against the infringer for other reliefs to which the plaintiff may be entitled. The
failure to give notice of registration will not deprive the aggrieved party of a cause
of action against the infringer but, at the most, such failure may bar recovery of
damages but only under the provisions of Republic Act No. 166.
However, in this case an award of damages to LTI is ineluctably called for.
Petitioner cannot claim good faith. The record shows that it had actual knowledge
that the bottles with the blown-in marks "La Tondeña Inc." and "Ginebra San
Miguel" are duly registered. In Civil Case No. 102859 of the Court of First Instance
of Manila, entitled "La Tondeña Inc. versus Diego Lim, doing business under the
name and style 'Cagayan Valley Distillery,' " a decision was rendered in favor of
plaintiff therein on the basis of the admission and/or acknowledgment made by
the defendant that the bottles marked only with the words "La Tondeña Inc." and
"Ginebra San Miguel" are registered bottles of LTI. 22
Petitioner cannot avoid the effect of the admission and/or acknowledgment made
by Diego Lim in the said case. While a corporation is an entity separate and
distinct from its stock-holders and from other corporations with which it may be
connected, where the discreteness of its personality is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons, or in the case of two corporations, merge
them into one. When the corporation is the mere alter ego or business conduit of
a person, it may be disregaded. 23
Petitioner's claim that it is separate and distinct from the former Cagayan Valley
Distillery is belied by the evidence on record. The following facts warrant the
conclusion that petitioner, as a corporate entity, and Cagayan Valley Distillery are
one and the same. to wit: (1) petitioner is being managed by Rogelio Lim, the son
of Diego Lim, the owner and manager of Cagayan Valley Distellery; (2) it is a
family corporation; 24 (3) it is an admitted fact that before petitioner was
incorporated it was under a single proprietorship; 25 (4) petitioner is engaged in
the same business as Cagayan Valley Distillery, the manufacture of wines and
liquors; and (5) the factory of petitioner is located in the same place as the factory
of the former Cagayan Valley Distillery.
It is thus clear that herein petitioner is a mere continuation and successor of
Cagayan Valley Distillery. It is likewise indubitable that the admission made in the
former case, as earlier explained, is binding on it as cogent proof that even before
the filing of this case it had actual knowledge that the bottles in dispute were
registered containers of LTI As held in La Campana Coffee Factory, Inc., et al. vs.
Kaisahan Ng Mga Manggagawa sa La Campana (KKM), et al ., 26 where the main
purpose in forming the corporation was to evade one's subsidiary liability for
damages in a criminal case, the corporation may not be heard to say that it has a
personality separate and distinct from its members, because to allow it to do so
would be to sanction the use of the fiction of corporate entity as a shield to further
an end subversive of justice.
Anent the several motions of private respondent LTI to have petitioner cited for
contempt, we reject the argument of petitioner that an appeal from a verdict of
acquittal in a contempt, proceeding constitutes double jeopardy. A failure to do
something ordered by the court for the benefit of a party constitutes civil
21 | P a g e
contempt. 27
As we held in Converse Rubber Corporation vs. Jacinto Rubber &
Plastics Co., Inc.:
...True it is that generally, contempt proceedings are characterized
as criminal in nature, but the more accurate juridical concept is
that contempt proceedings may actually be either civil or criminal,
even if the distinction between one and the other may be so thin
as to be almost imperceptible. But it does exist in law. It is
criminal when the purpose is to vindicate the authority of the
court and protect its outraged dignity. It is civil when there is
failure to do something ordered by a court to be done for the
benefit of a party (3 Moran Rules of Court, pp. 343-344, 1970 ed.;
see also Perkins vs. Director of Prisons, 58 Phil. 272; Harden vs.
Director of Prisons, 81 Phil. 741.) And with this distinction in mind,
the fact that the injunction in the instant case is manifestly for the
benefit of plaintiffs makes of the contempt herein involved civil,
not criminal. Accordingly, the conclusion is inevitable that
appellees have been virtually found by the trial court guilty of civil
contempt, not criminal contempt, hence, the rule on double
jeopardy may not be invoked. 28
The contempt involved in this case is civil and constructive in nature, it having
arisen from the act of Cagayan in violating the writ of preliminary injunction of the
lower court which clearly defined the forbidden act, to wit:
NOW THEREFORE, pending the resolution of this case by the
court, you are enjoined from using the 350 c.c. white flint bottles
with the marks La Tondeña Inc.,' and 'Ginebra San Miguel' blown-
in or stamped into the bottles as containers for the defendant's
products. 19
On this incident, two considerations must be borne in mind. Firstly, an injunction
duly issued must be obeyed, however erroneous the action of the court may be,
until its decision is overruled by itself or by a higher court. 30Secondly, the
American rule that the power to judge a contempt rests exclusively with the court
contemned does not apply in this Jurisdiction. The provision of the present Section
4, Rule 71 of the Rules of Court as to where the charge may be filed is permissive
in nature and is merely declaratory of the inherent power of courts to punish
contumacious conduct. Said rules do not extend to the determination of the
jurisdiction of Philippine courts. 31 In appropriate case therefore, this Court may, in
the interest of expedient justice, impose sanctions on contemners of the lower
courts.
Section 3 of Republic Act No. 623, as amended, creates a prima facie presumption
against Cagayan for its unlawful use of the bottles registered in the name of LTI
Corollarily, the writ of injunction directing petitioner to desist from using the
subject bottles was properly issued by the trial court. Hence, said writ could not be
simply disregarded by Cagayan without adducing proof sufficient to overcome the
aforesaid presumption. Also, based on the findings of respondent court, and the
records before us being sufficient for arbitrament without remanding the incident
to the court a quo petitioner can be adjudged guilty of contempt and imposed a
sanction in this appeal since it is a cherished rule of procedure for this Court to
always strive to settle the entire controversy in a single proceeding, 32We so
impose such penalty concordant with the preservative principle and as demanded
by the respect due the orders, writs and processes of the courts of justice.

WHEREFORE, judgment is hereby rendered DENYING the petition in this case and
AFFIRMING the decision of respondent Court of Appeals. Petitioner is hereby
declared in contempt of court and ORDERED to pay a fine of One Thousand Pesos
(P1,000.00), with costs.

SO ORDERED.

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G.R. No. 42108 December 29, 1989
OSCAR D. RAMOS and LUZ AGUDO, petitioners,
vs.
HON. COURT OF APPEALS, ADELAIDA RAMOS and LAZARO E.
MENESES, respodents.
The instant petition for review on certiorari impugns the decision of the Court of
Appeals dated October 7, 1975, 1which affirmed in toto the decision of the Court
of First Instance of Tarlac in Civil Case No. 4168, entitled "Adelaida Ramos, et al.
vs. Oscar D. Ramos, et al.," holding that the contracts between the parties are not
ventas con pacto de retro but are equitable mortgages.
Sometime in January 1959, private respondent Adelaida Ramos borrowed from her
brother, petitioner Oscar D. Ramos, the amounts of P 5,000.00 and P 9,000.00 in
connection with her business transaction with one Flor Ramiro, Fred Naboa and
Atty. Ruperto Sarandi involving the recovery of a parcel of land in Tenejeros,
Malabon. The said amount was used to finance the trip to Hawaii of Ramiro,
Naboa and Atty. Sarandi. As security for said loan, private respondent Adelaida
Ramos executed in favor of petitioners two (2) deeds of conditional sale dated
May 27, 1959 and August 30, 1959, of her rights, shares, interests and
participation respectively over Lot No. 4033 covered by Original Certificate of Title
No. 5125 registered in the name of their parents, Valente Ramos and Margarita
Denoga, now deceased; 2 and Lot No. 4221 covered by Transfer Certificate of Title
No. 10788 then registered in the names of Socorro Ramos, Josefina Ramos and
Adelaida Ramos, 3 said properties being of the Cadastral Survey of Paniqui, Tarlac.
Upon the failure of said private respondent as vendor a retro to exercise her right
of repurchase within the redemption period, aforenamed petitioner filed a petition
for consolidation and approval of the conditional sale of Lot No. 4033 in Special
Proceedings No. 5174, entitled "Intestate Estate of the late Margarita
Denoga," 4 and a petition for approval of the pacto de retro sale of Lot No. 4221 in
the former Court of First Instance of Tarlac acting as a cadastral court. 5 On
January 22, 1960, the said probate court issued an order with the following
disposition:
WHEREFORE, the deed of CONDITIONAL SALE executed on May
27, 1959, by Adelaida Ramos in favor of spouses Oscar D. Ramos
and Luz Agudo, conveying to the latter by way of pacto de retro
sale whatever rights and interests the former may have in Lot No.
4033 of the Cadastral Survey of Paniqui, which deed of conditional
sale is known as Document No. 14, Page 26, Book VI, Series of
23 | P a g e
1959, of the notarial register of Notary Public Jose P. Sibal, is
hereby approved. 6
The cadastral Court also issued a similar order dated April 18, 1960, the dispositive
portion of which reads:
WHEREFORE, by way of granting the petition, the Court orders the
consolidation of ownership and dominion in petitioners-spouses Oscar D.
Ramos and Luz Agudo over the rights, shares and interests of Adelaida
Ramos in Lot No. 4221 of the Cadastral Survey of Paniqui, Tarlac, which
the latter sold to the former under a pacto de retro sale executed in a
public instrument known as Document No. 22, Page 28, Book No. VI.
Series of 1959, of the Notarial Registry of Notary Public Jose P. Sibal but
which she failed to repurchase within the period specified in said
Document. 7
Private respondents had been and remained in possession of these properties until
sometime in 1964 when petitioner took possession thereof.
On February 28, 1968, private respondent filed Civil Case No. 4168 with the then
Court of First Instance of Tarlac for declaration of nullity of orders, reformation of
instrument, recovery of possession with preliminary injunction and damages. The
complaint therein alleged that the deeds of conditional sale, dated May 27, 1959
and August 30, 1959, are mere mortgages and were vitiated by misrepresentation,
fraud and undue influence and that the orders dated January 22, 1960 and April
18, 1960, respectively issued by the probate and cadastral courts, were null and
void for lack of jurisdiction. Petitioners, in their answer to the complaint,
specifically deny the allegations of fraud and misrepresentation and interposed as
defense the fact that the questioned conditional sales of May 27, 1959 and August
30, 1959 were voluntarily executed by private respondent Adelaida Ramos and
truly expressed the intention of the parties; that the action, if any, has long
prescribed; that the questioned orders of January 22, 1960 and April 18, 1960,
approving the consolidation of ownership of the lands in question in favor of
petitioner were within the jurisdiction of the lower court, in its capacity as a
probate court insofar as Lot No. 4033 is concerned, and acting as a cadastral court
with respect to Lot No. 4221; and that said lands subject of the conditional sales
were in custodia legis in connection with the settlement of the properties of the
late Margarita Denoga, the predecessor in interest of both petitioners and private
respondents.
On January 7, 1970, the court below issued a pre-trial order to the effect that
petitioners admit the genuineness and due execution of the promissory notes
marked as Exhibits "F" and "F-1 " and that the principal triable issue is whether or
not the documents purporting to be deeds of conditional sale, marked as Exhibits
"B", "B-1" and "G" were in fact intended to be equitable mortgages. 8 In its order
dated February 17, 1971, the trial court also declared: "Both parties agreed and
manifested in open court the principal obligation in the transaction reflected in
Exhibits 'B' and 'B-l' and 'G' is one of loan. The parties differ, however, on the
nature of the security described therein. 9
On May 17, 1971, the court a quo rendered a decision the decretal part of which
reads:
WHEREFORE, judgment is hereby rendered:
1) Denying defendants' motion to dismiss of
February 23, 1970;
2) Declaring Exhibits 'B', 'B-I' and 'G' as loan
transaction secured by real estate mortgages;
3) Annulling and setting aside Exhibits 'D', 'D-l', 'I',
'I-l' and 'I-2';
4) Ordering plaintiffs, jointly and severally to pay
(within ninety [90] days from receipt of a copy of
this judgment) defendants the sum of P 5,000.00
specified in Exhibit 'B', with interest thereon at the
legal rate from November 28, 1959 until full
payment together with the sum of P 9,308.00
specified in Exhibit 'G' with interest thereon at the
legal rate from December 1, 1959 until full
payment, and in default of such payment, let the
properties mortgaged under Exhibits 'B', 'B-1' and
'G' be sold to realize the mortgage debt and
costs; and
5) Dismissing defendants' counter-claim.
With costs against defendants. 10
On June 14, 1971, petitioners appealed said decision to the Court of Appeals
which, on October 7, 1975; affirmed in all respects the judgment of the trial court.
24 | P a g e
Petitioners' motion for reconsideration of said decision was denied on November
27, 1975. 11
On January 8, 1976, petitioners filed the petition at bar anchored on the following
assignments of errors:
1. The Hon. Court of Appeals erred in not
applying the correct provisions of law interpreting
the conditional sales dated May 27, 1959 and
August 30, 1959, Exhibits 'B' and 'G' as equitable
mortgages.
2. That as a consequence of its ruling that the
conditional sales, Exhibits 'B' and 'G', are
equitable mortgages, the Hon. Court of Appeals
erred in ordering the reformation of the same.
3. The Honorable Court of Appeals erred in
holding that the order dated January 22, 1960,
Exhibit C or 2, and the order dated April 18, 1960,
Exhibit H or 6, issued by the probate court in Sp.
Proc. No. 5174 and by the cadastral court in
G.L.R.O. Rec. No. 395, respectively, are null and
void for lack of jurisdiction.
4. The Hon. Court of Appeals erred in not
applying the applicable provisions of law on the
prescription of action and in not dismissing the
complaint filed in the lower court. 12
We find the petition devoid of merit.
Article 1602 of the Civil Code provides:
The contract shall be presumed to be an equitable mortgage, in
any of the following cases:
(1) When the price of a sale with right to
repurchase is unusually inadequate;
 (2) When the vendor remains in possession as
lessee or otherwise;
(3) When upon or after the expiration of the right
to repurchase another instrument extending the
period of redemption or granting a new period is
executed;
(4) When the purchaser retains for himself a part
of the purchase price;
(5) When the vendor binds himself to pay the
taxes on the thing sold;
(6) In any other case where it may be fairly
inferred that the real intention of the parties is
that the transaction shall secure the payment of a
debt or the performance of any other obligation.
In any of the foregoing cases, any money, fruits or other benefit
to be received by the vendee as rent or otherwise shall be
considered as interest which shall be subject to the usury laws.
The Court of Appeals, in holding that the two (2) deeds purporting to be pacto de
retro sale contracts are equitable mortgages, relied on the following factual
findings of the trial court, to wit:
Several undisputed circumstances persuade this Court (that) the
questioned deeds should be construed as equitable mortgages as
contemplated in Article 1602 of the Civil Code, namely: (1)
plaintiff vendor remained in possession until 1964 of the
properties she allegedly sold in 1959 to defendants; (2) the sums
representing the alleged purchase price were actually advanced to
plaintiff by way of loans, as expressly admitted by the parties at
the hearing of February 17, 1971, reflected in an Order of the
same date: and (3) the properties allegedly purchased by
defendant Oscar Ramos and his wife have never been declared for
taxation purposes in their names. Exhibits K, K-1, L and L-1. 13
Even if we indulge the petitioners in their contention that they are justified in not
taking possession of the lots considering that what were allegedly sold to them
were only the rights, shares, interests and participation of private respondent
25 | P a g e
Adelaida Ramos in the said lots which were under administration, 14 however, such
fact will not justify a reversal of the conclusion reached by respondent court that
the purported deeds of sale con pacto de retro are equitable mortgages. Such a
conclusion is buttressed by the other circumstances catalogued by respondent
court especially the undisputed fact that the two deeds were executed by reason
of the loan extended by petitioner Oscar Ramos to private respondent Adelaida
Ramos and that the purchase price stated therein was the amount of the loan
itself.
The above-stated circumstances are more than sufficient to show that the true
intention of the parties is that the transaction shall secure the payment of said
debt and, therefore, shall be presumed to be an equitable mortgage under
Paragraph 6 of Article 1602 hereinbefore quoted. Settled is the rule that to create
the presumption enunciated by Article 1602, the existence of one circumstance is
enough.15 The said article expressly provides therefor "in any of the following
cases," hence the existence of any of the circumstances enumerated therein, not a
concurrence nor an overwhelming number of such circumstances, suffices to give
rise to the presumption that the contract with the right of repurchase is an
equitable mortgage. As aptly stated by the Court of Appeals:
Thus, it may be fairly inferred that the real intention of the parties
is that the transactions in question were entered into to secure
the payment of the loan and not to sell the property (Article 1602,
Civil Code). Under Article 1603 of the Civil Code it is provided that
'in case of doubt, a contract purporting to be a sale with right to
repurchase shall be construed as an equitable mortgage' in this
case, we have no doubt that the transaction between the parties
is that of a loan secured by said properties by way of mortgage.
Hence, we find that Exhibits B and G do not reflect the true and
real intention of the parties and should accordingly be reformed
and construed as equitable mortgages. 16
Equally puerile is the other contention of petitioners that respondent court erred in
not applying the exclusionary parol evidence rule in ascertaining the true
intendment of the contracting parties. The present case falls squarely under one of
the exceptions to said rule as provided in then Section 7 of Rule 130, thus:
xxx xxx xxx
(a) Where a mistake or imperfection of the writing
or its failure to express the true intent and
 agreement of the parties, or the validity of the
agreement is put in issue by the pleadings;17
xxx xxx xxx
Moreover, it is a well entrenched principle in the interpretation of contracts that if
the terms thereof are clear and leave no doubt as to the intention of the
contracting parties the literal meaning of the stipulation shall control but when the
words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former.18
The admission of parol testimony to prove that a deed, absolute in form, was in
fact given and accepted as a mortgage does not violate the rule against the
admission of oral evidence to vary or contradict the terms of a written
instrument.19 Sales with a right to repurchase, as defined by the Civil Code, are
not favored. We will not construe instruments to be sales with a right to
repurchase, with the stringent and onerous effects which follow, unless the terms
of the document and the surrounding circumstances require it. Whenever, under
the terms of the writing, any other construction can fairly and reasonably be
made, such construction will be adopted and the contract will be construed as a
mere loan unless the court can see that, if enforced according to its terms, it is not
an unconscionable one. 20
On the faces thereof, the contracts purport to be sales with pacto de retro;
however, since the same were actually executed in consideration of the aforesaid
loans said contracts are indubitably equitable mortgages. The rule is firmly settled
that whenever it is clearly shown that a deed of sale with pacto de retro, regular
on its face, is given as security for a loan, it must be regarded as an equitable
mortgage. 21
With respect to the orders dated January 22, 1960 and April 18, 1960, issued by
the Court below acting as a probate court and cadastral court, respectively, the
same could not preclude the institution of the case now under review.
A reading of the order of the probate court will show that it is merely an approval
of the deed of conditional sale dated May 27, 1959 executed by petitioner Adelaida
Ramos in favor of petitioners. There is nothing in said order providing for the
consolidation of ownership over the lots allegedly sold to petitioners nor was the
issue of the validity of said contract discussed or resolved therein. "To give
approval" means in its essential and most obvious meaning, to confirm, ratify,
sanction or consent to some act or thing done by another. 22 The approval of the
probate court of the conditional sale is not a conclusive determination of the
26 | P a g e
intrinsic or extrinsic validity of the contract but a mere recognition of the right of
private respondent Adelaida Ramos as an heir, to dispose of her rights and
interests over her inheritance even before partition. 23 As held in Duran, et al., vs.
Duran 24 the approval by the settlement court of the assignment pendente lite,
made by one heir in favor of the other during the course of the settlement
proceedings, is not deemed final until the estate is closed and said order can still
be vacated, hence the assigning heir remains an interested person in the
proceeding even after said approval.
Moreover, the probate jurisdiction of the former court of first instance or the
present regional trial court relates only to matters having to do with the settlement
of the estate and probate of wills of deceased persons, and the appointment and
removal of administrators, executors, guardians and trustees. Subject to settled
exceptions not present in this case, the law does not extend the jurisdiction of a
probate court to the determination of questions of ownership that arise during the
proceeding. The parties concerned may choose to bring a separate action as a
matter of convenience in the preparation or presentation of evidence. 25 Obviously,
the approval by the probate court of the conditional sale was without prejudice to
the filing of the proper action for consolidation of ownership and/or reformation of
instrument in the proper court within the statutory period of prescription.
The same jurisdictional flaw obtains in the order of consolidation issued by the
cadastral court. The court of first instance or the regional trial court, acting as
cadastral court, acts with limited competence. It has no jurisdiction to take
cognizance of an action for consolidation of ownership, much less to issue an
order to that effect, such action must have been filed in the former court of first
instance, now in the regional trial court, in the exercise of its general jurisdiction.
That remedy, and the procedure therefor, is now governed by Rule 64 of the Rules
of Court as a special civil action cognizable by the regional trial court in the
exercise of original general jurisdiction.
Antecedent thereto, Article 1607 of the Civil Code provided for consolidation as
follows:
In case of real property, the consolidation of ownership in the
vendee by virtue of the failure of the vendor to comply with the
provisions of article 1616 shall not be recorded in the Registry of
Property without a judicial order, after the vendor has been duly
heard.
Hence in Crisologo, et al. vs. Centeno, et al., 26 we ruled that said Article 1607
contemplates a contentious proceeding wherein the vendor a retro must be named
respondent in the caption and title of the petition for consolidation of ownership
and duly summoned and heard. An order granting the vendee's petition for
consolidation of ownership, without the vendor a retro being named as
respondent, summoned and heard, is a patent nullity for want of jurisdiction of the
court over the person of the latter.
The questioned order of consolidation issued by the cadastral court, being void for
lack of jurisdiction, is in contemplation of law non-existent and may be wholly
disregarded. Such judgment may be assailed any time, either directly or
collaterally, by means of a separate action or by resisting such judgment in any
action or proceeding whenever it is invoked. 27 It is not necessary to take any step
to vacate or avoid a void judgment; it may simply be ignored. 28
On the issue of prescription, in addition to what has been said, the present case,
having been filed on February 28, 1960, approximately seven (7) years from the
execution of the questioned deeds, was seasonably instituted. The prescriptive
period for actions based upon a written contract and for reformation is ten (10)
years under Article 1144 of the Civil Code. Such right to reformation is expressly
recognized in Article 1365 of the same code. 29
Article 1602 of the Civil Code is designed primarily to curtail the evils brought
about by contracts of sale with right of repurchase, such as the circumvention of
the laws against usury and pactum commissorium. 30 In the present case before
us, to rule otherwise would contravene the legislative intent to accord the vendor
a retro maximum safeguards for the protection of his legal rights under the true
agreement of the parties. The judicial experience in cases of this nature and the
rationale for the remedial legislation are worth reiterating, considering that such
nefarious practices still persist:
It must be admitted that there are some cases where the parties
really intend a sale with right to repurchase. Although such cases
are rare, still the freedom of contract must be maintained and
respected. Therefore, the contract under consideration is
preserved, but with adequate safeguards and restrictions.
One of the gravest problems that must be solved is that raised by
the contract of sale with right of repurchase or pacto de retro. The
evils arising from this contract have festered like a sore on the
body politic. ...
It is a matter of common knowledge that in practically all of the so-called contracts
of sale with right of repurchase, the real intention of the parties is that the
27 | P a g e
pretended purchase-price is money loaned, and in order to secure the payment of
the loan a contract purporting to be a sale with pacto de retro is drawn up. It is
thus that the provisions contained in articles 1859 and 1858 of the present Civil
Code which respectively prohibit the creditor from appropriating the things given
in pledge or mortgage and ordering that said things be sold or alienated when the
principal obligation becomes due, are circumvented.
Furthermore, it is well-known that the practice in these so-called
contracts of sale with pacto de retro is to draw up another
contract purporting to be a lease of the property to the supposed
vendor, who pays in money or in crops a so-called rent. It is,
however, no secret to anyone that this simulated rent is in truth
and in fact interest on the money loaned. In many instances, the
interest is usurious. Thus, the usury law is also circumvented.
It is high time these transgressions of the law were stopped. It is
believed by the Commission that the plan submitted for the
solution of the problem will meet with the approval of an
enlightened public opinion, and in general, of everyone moved by
a sense of justice.
During the deliberations of the Commission the question arose as
to whether the contract of purchase with pacto de retro should be
abolished and forbidden. On first impression, this should be done,
but there is every reason to fear that in such a case the usurious
money-lenders would demand of the borrowers that, although the
real agreement is one of loan secured with a mortgage, the
instrument to be signed should purport to be an absolute sale of
the property involved. Should this happen, the problem would
become aggravated. Moreover, it must be admitted that there are
some cases where the parties really intend a sale with right to
repurchase. Although such cases are rare, still the freedom of
contract must be maintained and respected. Therefore, the
contract under consideration is preserved in the Project of Civil
Code, but with adequate safeguards and restrictions. 31
WHEREFORE, the instant petition is hereby DENIED and the assailed decision of
the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
G.R. No. 75875 December 15, 1989 In 1961, Saniwares, a domestic corporation was incorporated for the primary
purpose of manufacturing and marketing sanitary wares. One of the incorporators,
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and Mr. Baldwin Young went abroad to look for foreign partners, European or
CHARLES CHAMSAY, petitioners, American who could help in its expansion plans. On August 15, 1962, ASI, a
vs. foreign corporation domiciled in Delaware, United States entered into an
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. Agreement with Saniwares and some Filipino investors whereby ASI and the
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, Filipino investors agreed to participate in the ownership of an enterprise which
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. would engage primarily in the business of manufacturing in the Philippines and
CRUZ, respondents. selling here and abroad vitreous china and sanitary wares. The parties agreed that
the business operations in the Philippines shall be carried on by an incorporated
G.R. No. 75951 December 15, 1989 enterprise and that the name of the corporation shall initially be "Sanitary Wares
Manufacturing Corporation."
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R.
LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, The Agreement has the following provisions relevant to the issues in these cases
BALDWIN YOUNG and AVELINO V. CRUX, petitioners, on the nomination and election of the directors of the corporation:
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID 3. Articles of Incorporation
P. WHITTINGHAM, CHARLES CHAMSAY and LUCIANO
SALAZAR, respondents. (a) The Articles of Incorporation of the Corporation shall be
substantially in the form annexed hereto as Exhibit A and, insofar
G.R. Nos. 75975-76 December 15, 1989 as permitted under Philippine law, shall specifically provide for

LUCIANO E. SALAZAR, petitioner, (1) Cumulative voting for directors:

vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V.
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ
and the COURT OF APPEALS, respondents.
These consolidated petitions seek the review of the amended decision of the Court
of Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier
decision dated June 5, 1986, of the then Intermediate Appellate Court and
directed that in all subsequent elections for directors of Sanitary Wares
Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the Filipino stockholders shall not
interfere in ASI's choice of its three (3) nominees; that, on the other hand, the
Filipino stockholders can nominate only six (6) candidates and in the event they
cannot agree on the six (6) nominees, they shall vote only among themselves to
determine who the six (6) nominees will be, with cumulative voting to be allowed
but without interference from ASI.
The antecedent facts can be summarized as follows:
28 | P a g e
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board
of Directors, which shall consist of nine individuals. As long as
American-Standard shall own at least 30% of the outstanding
stock of the Corporation, three of the nine directors shall be
designated by American-Standard, and the other six shall be
designated by the other stockholders of the Corporation. (pp. 51
& 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it
as a minority group, including the grant of veto powers over a number of
corporate acts and the right to designate certain officers, such as a member of the
Executive Committee whose vote was required for important corporate
transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was
also registered with the Board of Investments for availment of incentives with the
condition that at least 60% of the capital stock of the corporation shall be owned
by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American
corporation prospered. Unfortunately, with the business successes, there came a
deterioration of the initially harmonious relations between the two groups.
According to the Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected as it
apparently had other subsidiaries of joint joint venture groups in the countries
where Philippine exports were contemplated. On March 8, 1983, the annual
stockholders' meeting was held. The meeting was presided by Baldwin Young. The
minutes were taken by the Secretary, Avelino Cruz. After disposing of the
preliminary items in the agenda, the stockholders then proceeded to the election
of the members of the board of directors. The ASI group nominated three persons
namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine
investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto
R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then
nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay.
The chairman, Baldwin Young ruled the last two nominations out of order on the
basis of section 5 (a) of the Agreement, the consistent practice of the parties
during the past annual stockholders' meetings to nominate only nine persons as
nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman and
heated arguments ensued. An appeal was made by the ASI
representative to the body of stockholders present that a vote be
taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling
was taken. The Chairman then instructed the Corporate Secretary
to cast all the votes present and represented by proxy equally for
the 6 nominees of the Philippine Investors and the 3 nominees of
ASI, thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI
representative, Mr. Jaqua protested the decision of the Chairman
and announced that all votes accruing to ASI shares, a total of
1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles
Chamsay, and instructed the Secretary to so vote. Luciano E.
Salazar and other proxy holders announced that all the votes
owned by and or represented by them 467,197 shares (p. 27,
29 | P a g e
Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in
favor of Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes equally in
favor of the three ASI nominees, namely, Wolfgang Aurbach, John
Griffin and David Whittingham and the six originally nominated by
Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and
Baldwin Young. The Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David Whittingham
Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting which
was duly seconded. There was also a motion to adjourn (p. 28,
Rollo, AC-G.R. SP No. 05617). This motion to adjourn was
accepted by the Chairman, Baldwin Young, who announced that
the motion was carried and declared the meeting adjourned.
Protests against the adjournment were registered and having
been ignored, Mr. Jaqua the ASI representative, stated that the
meeting was not adjourned but only recessed and that the
meeting would be reconvened in the next room. The Chairman
then threatened to have the stockholders who did not agree to
the decision of the Chairman on the casting of votes bodily thrown
out. The ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares,
decided to continue the meeting at the elevator lobby of the
American Standard Building. The continued meeting was presided
by Luciano E. Salazar, while Andres Gatmaitan acted as Secretary.
On the basis of the cumulative votes cast earlier in the meeting,
the ASI Group nominated its four nominees; Wolfgang Aurbach,
John Griffin, David Whittingham and Charles Chamsay. Luciano E.
Salazar voted for himself, thus the said five directors were
certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the
other six (6) nominees for the four (4) remaining positions of
directors and that the body decided not to break the tie. (pp. 37-
39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the
Securities and Exchange Commission (SEC). The first petition filed was for
preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A.
Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case
No. 2417. The second petition was for quo warranto and application for
receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E.
Salazar and Charles Chamsay against the group of Young and Lagdameo
(petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as
SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the
legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who
rendered a decision upholding the election of the Lagdameo Group and dismissing
the quo warranto petition of Salazar and Chamsay. The ASI Group and Salazar
appealed the decision to the SEC en banc which affirmed the hearing officer's
decision.
The SEC decision led to the filing of two separate appeals with the Intermediate
Appellate Court by Wolfgang Aurbach, John Griffin, David Whittingham and
Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar
(docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the
appellate court in its decision ordered the remand of the case to the Securities and
Exchange Commission with the directive that a new stockholders' meeting of
Saniwares be ordered convoked as soon as possible, under the supervision of the
Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the
appellate court (Court of Appeals) rendered the questioned amended decision.
Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and Charles
Chamsay in G.R. No. 75875 assign the following errors:
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision
on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of
binding contractual agreements entered into by stockholders and
the replacement of the conditions of such agreements with terms
never contemplated by the stockholders but merely dictated by
the CA .
11.2. The Amended decision would likewise sanction the
deprivation of the property rights of stockholders without due
process of law in order that a favored group of stockholders may
be illegally benefitted and guaranteed a continuing monopoly of
the control of a corporation. (pp. 14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE
RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE
DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE
BASIC INTENT OF THE AGREEMENT AND THE LAW.
II

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE
ELECTION OF PRIVATE RESPONDENTS AS MEMBERS OF THE
THAT PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED
BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT THERE
DIRECTORS DURING THE 8 MARCH 1983 ANNUAL
WAS NO ELECTION AT ALL.
STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951)

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS

The issues raised in the petitions are interrelated, hence, they are discussed
FROM EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED
jointly.
BY THE NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING
PETITIONERS AND THE CORPORATION THEY REPRESENT OF
THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW. The main issue hinges on who were the duly elected directors of Saniwares for the
year 1983 during its annual stockholders' meeting held on March 8, 1983. To
answer this question the following factors should be determined: (1) the nature of
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS
the business established by the parties whether it was a joint venture or a
PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH
corporation and (2) whether or not the ASI Group may vote their additional 10%
WERE NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p.
equity during elections of Saniwares' board of directors.
17, Rollo-75875)

30 | P a g e
The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relation depends
upon their actual intention which is determined in accordance with the rules
governing the interpretation and construction of contracts. (Terminal Shares, Inc.
v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v.
California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the
actual intention of the parties should be viewed strictly on the "Agreement" dated
August 15,1962 wherein it is clearly stated that the parties' intention was to form a
corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of
the parties hereto partners or joint venturers in respect of any
transaction hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the
parties' agreement was to establish a joint venture presented by the Lagdameo
and Young Group on the ground that it contravenes the parol evidence rule under
section 7, Rule 130 of the Revised Rules of Court. According to them, the
Lagdameo and Young Group never pleaded in their pleading that the "Agreement"
failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement
have been reduced to writing, it is to be considered as containing
all such terms, and therefore, there can be, between the parties
and their successors in interest, no evidence of the terms of the
agreement other than the contents of the writing, except in the
following cases:
(a) Where a mistake or imperfection of the writing, or its failure to
express the true intent and agreement of the parties or the
validity of the agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
31 | P a g e
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their
Reply and Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed
to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it
appear that the parties thereto disclaim being partners or joint
venturers such disclaimer is directed at third parties and is not
inconsistent with, and does not preclude, the existence of two
distinct groups of stockholders in Saniwares one of which (the
Philippine Investors) shall constitute the majority, and the other
ASI shall constitute the minority stockholder. In any event, the
evident intention of the Philippine Investors and ASI in entering
into the Agreement is to enter into ajoint venture enterprise, and
if some words in the Agreement appear to be contrary to the
evident intention of the parties, the latter shall prevail over the
former (Art. 1370, New Civil Code). The various stipulations of a
contract shall be interpreted together attributing to the doubtful
ones that sense which may result from all of them taken jointly
(Art. 1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (Art. 1371, New
Civil Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that
the parties joined their efforts in furtherance of an enterprise for
their joint profit, the question whether they intended by their
agreement to create a joint adventure, or to assume some other
relation is a question of fact for the jury. (Binder v. Kessler v 200
App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238
SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as
well as the testimonial evidence presented by the Lagdameo and Young Group
shows that the parties agreed to establish a joint venture and not a corporation.
The history of the organization of Saniwares and the unusual arrangements which
govern its policy making body are all consistent with a joint venture and not with
an ordinary corporation. As stated by the SEC:
 According to the unrebutted testimony of Mr. Baldwin Young, he
negotiated the Agreement with ASI in behalf of the Philippine
nationals. He testified that ASI agreed to accept the role of
minority vis-a-vis the Philippine National group of investors, on the
condition that the Agreement should contain provisions to protect
ASI as the minority.
An examination of the Agreement shows that certain provisions
were included to protect the interests of ASI as the minority. For
example, the vote of 7 out of 9 directors is required in certain
enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement].
ASI is contractually entitled to designate a member of the
Executive Committee and the vote of this member is required for
certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the
amendment of the articles and by-laws of Saniwares [Sec. 3 (a)
(iv) and (b) (iii)]. ASI is also given the right to designate the
president and plant manager [Sec. 5 (6)]. The Agreement further
provides that the sales policy of Saniwares shall be that which is
normally followed by ASI [Sec. 13 (a)] and that Saniwares should
not export "Standard" products otherwise than through ASI's
Export Marketing Services [Sec. 13 (6)]. Under the Agreement,
ASI agreed to provide technology and know-how to Saniwares and
the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement
requiring a 7 out of 9 votes of the board of directors for certain
actions, in effect gave ASI (which designates 3 directors under the
Agreement) an effective veto power. Furthermore, the grant to
ASI of the right to designate certain officers of the corporation;
the super-majority voting requirements for amendments of the
articles and by-laws; and most significantly to the issues of tms
case, the provision that ASI shall designate 3 out of the 9
directors and the other stockholders shall designate the other 6,
clearly indicate that there are two distinct groups in Saniwares,
namely ASI, which owns 40% of the capital stock and the
Philippine National stockholders who own the balance of 60%, and
that 2) ASI is given certain protections as the minority
stockholder.
32 | P a g e
Premises considered, we believe that under the Agreement there
are two groups of stockholders who established a corporation with
provisions for a special contractual relationship between the
parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated"
or "elected" in the selection of the nine directors on a six to three ratio. Each
group is assured of a fixed number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture.
Baldwin Young also testified that Section 16(c) of the Agreement that "Nothing
herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder" was merely to
obviate the possibility of the enterprise being treated as partnership for tax
purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and
manufacturing capacities of a local firm are constrained to seek the technology
and marketing assistance of huge multinational corporations of the developed
world. Arrangements are formalized where a foreign group becomes a minority
owner of a firm in exchange for its manufacturing expertise, use of its brand
names, and other such assistance. However, there is always a danger from such
arrangements. The foreign group may, from the start, intend to establish its own
sole or monopolistic operations and merely uses the joint venture arrangement to
gain a foothold or test the Philippine waters, so to speak. Or the covetousness
may come later. As the Philippine firm enlarges its operations and becomes
profitable, the foreign group undermines the local majority ownership and actively
tries to completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to say the least.
To the extent that such subversive actions can be lawfully prevented, the courts
should extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right
of stockholders to enter into agreements regarding the exercise of
their voting rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
 2. An agreement between two or more stockholders, if in writing
and signed by the parties thereto, may provide that in exercising
any voting rights, the shares held by them shall be voted as
therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the
Corporation Code's chapter on close corporations and Saniwares
cannot be a close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders at the time of the
disputed stockholders meeting, these 95 stockholders are not
separate from each other but are divisible into groups
representing a single Identifiable interest. For example, ASI, its
nominees and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the
Chamsay family for 8 stockholders, the Santos family for 9
stockholders, the Dy family for 7 stockholders, etc. If the
members of one family and/or business or interest group are
considered as one (which, it is respectfully submitted, they should
be for purposes of determining how closely held Saniwares is
there were as of 8 March 1983, practically only 17 stockholders of
Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984 and Annex "A"
thereof).
Secondly, even assuming that Saniwares is technically not a close
corporation because it has more than 20 stockholders, the
undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue
or a widely held corporation.
In the United States, many courts have taken a realistic approach
to joint venture corporations and have not rigidly applied
principles of corporation law designed primarily for public issue
corporations. These courts have indicated that express
arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually
applied to corporate entities and with more consideration given to
the nature of the agreement between the joint venturers (Please
see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335;
Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247
US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C.
33 | P a g e
495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903;
Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of
Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958).
These American cases dealt with legal questions as to the extent
to which the requirements arising from the corporate form of joint
venture corporations should control, and the courts ruled that
substantial justice lay with those litigants who relied on the joint
venture agreement rather than the litigants who relied on the
orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint
venture deviate from the traditional pattern of corporation
management. A noted authority has pointed out that just as in
close corporations, shareholders' agreements in joint venture
corporations often contain provisions which do one or more of the
following: (1) require greater than majority vote for shareholder
and director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3)
give to the shareholders control over the selection and retention
of employees; and (4) set up a procedure for the settlement of
disputes by arbitration (See I O' Neal, Close Corporations, 1971
ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P.
16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not
necessarily imply that agreements regarding the exercise of voting
rights are allowed only in close corporations. As Campos and
Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular.
Does this provision necessarily imply that these agreements can
be valid only in close corporations as defined by the Code?
Suppose that a corporation has twenty five stockholders, and
therefore cannot qualify as a close corporation under section 96,
can some of them enter into an agreement to vote as a unit in the
election of directors? It is submitted that there is no reason for
denying stockholders of corporations other than close ones the
right to enter into not voting or pooling agreements to protect
their interests, as long as they do not intend to commit any
 wrong, or fraud on the other stockholders not parties to the
agreement. Of course, voting or pooling agreements are perhaps
more useful and more often resorted to in close corporations. But
they may also be found necessary even in widely held
corporations. Moreover, since the Code limits the legal meaning of
close corporations to those which comply with the requisites laid
down by section 96, it is entirely possible that a corporation which
is in fact a close corporation will not come within the definition. In
such case, its stockholders should not be precluded from entering
into contracts like voting agreements if these are otherwise valid.
(Campos & Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating
to the designation or nomination of directors restricts the right of
the Agreement's signatories to vote for directors, such contractual
provision, as correctly held by the SEC, is valid and binding upon
the signatories thereto, which include appellants. (Rollo No.
75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their
additional equity during elections of Saniwares' board of directors, the Court of
Appeals correctly stated:
As in other joint venture companies, the extent of ASI's
participation in the management of the corporation is spelled out
in the Agreement. Section 5(a) hereof says that three of the nine
directors shall be designated by ASI and the remaining six by the
other stockholders, i.e., the Filipino stockholders. This allocation of
board seats is obviously in consonance with the minority position
of ASI.
Having entered into a well-defined contractual relationship, it is
imperative that the parties should honor and adhere to their
respective rights and obligations thereunder. Appellants seem to
contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may
interfere with the stockholder's rights to cumulative voting as
provided in Section 24 of the Corporation Code. This Court should
not be prepared to hold that any agreement which curtails in any
way cumulative voting should be struck down, even if such
agreement has been freely entered into by experienced
businessmen and do not prejudice those who are not parties
34 | P a g e
thereto. It may well be that it would be more cogent to hold, as
the Securities and Exchange Commission has held in the decision
appealed from, that cumulative voting rights may be voluntarily
waived by stockholders who enter into special relationships with
each other to pursue and implement specific purposes, as in joint
venture relationships between foreign and local stockholders, so
long as such agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to
make a general rule on this question. Rather, all that needs to be
done is to give life and effect to the particular contractual rights
and obligations which the parties have assumed for themselves.
On the one hand, the clearly established minority position of ASI
and the contractual allocation of board seats Cannot be
disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the
second over the first. Upon further reflection, we feel that the
proper and just solution to give due consideration to both factors
suggests itself quite clearly. This Court should recognize and
uphold the division of the stockholders into two groups, and at the
same time uphold the right of the stockholders within each group
to cumulative voting in the process of determining who the
group's nominees would be. In practical terms, as suggested by
appellant Luciano E. Salazar himself, this means that if the Filipino
stockholders cannot agree who their six nominees will be, a vote
would have to be taken among the Filipino stockholders only.
During this voting, each Filipino stockholder can cumulate his
votes. ASI, however, should not be allowed to interfere in the
voting within the Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed to designate
under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board
seats and the stockholder's right to cumulative voting. Moreover,
this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-
Dummy Law (Com. Act No. 108, as amended) and the
 nationalization requirements of the Constitution and the laws if
ASI is allowed to nominate more than three directors. (Rollo-
75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI
Group has the right to vote their additional equity pursuant to Section 24 of the
Corporation Code which gives the stockholders of a corporation the right to
cumulate their votes in electing directors. Petitioner Salazar adds that this right if
granted to the ASI Group would not necessarily mean a violation of the Anti-
Dummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof
which provides:
And provided finally that the election of aliens as members of the
board of directors or governing body of corporations or
associations engaging in partially nationalized activities shall be
allowed in proportion to their allowable participation or share in
the capital of such entities. (amendments introduced by
Presidential Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the
Corporation Code. The point of query, however, is whether or not that provision is
applicable to a joint venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin. It has
no precise legal definition but it has been generally understood to
mean an organization formed for some temporary purpose. (Gates
v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are
similar community of interest in the business, sharing of profits
and losses, and a mutual right of control. Blackner v. Mc Dermott,
176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289
P. 2d. 242 [1955]). The main distinction cited by most opinions in
common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is
thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2
P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74
[1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation
is not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific
35 | P a g e
undertaking. (Art. 1783, Civil Code). It would seem therefore that
under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme
Court has however recognized a distinction between these two
business forms, and has held that although a corporation cannot
enter into a partnership contract, it may however engage in a joint
venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906
[1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts
generally apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev.
(167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of
the question of whether or not the ASI Group may vote their additional equity lies
in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the
parties as regards the allocation of director seats under Section 5 (a) of the
"Agreement," and the right of each group of stockholders to cumulative voting in
the process of determining who the group's nominees would be under Section 3
(a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement
relates to the manner of nominating the members of the board of directors while
Section 3 (a) (1) relates to the manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the
election of members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino
director who would be beholden to them would obliterate their minority status as
agreed upon by the parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting
within the Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed to designate
under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board
seats and the stockholder's right to cumulative voting. Moreover,
 this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-
Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if
ASI is allowed to nominate more than three directors. (At p. 39,
Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is
the consideration as regards the possible domination by the foreign investors of
the enterprise in violation of the nationalization requirements enshrined in the
Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner
Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board
directors in proportion to their share in the capital of the entity. It is to be noted,
however, that the same law also limits the election of aliens as members of the
board of directors in proportion to their allowance participation of said entity. In
the instant case, the foreign Group ASI was limited to designate three directors.
This is the allowable participation of the ASI Group. Hence, in future dealings, this
limitation of six to three board seats should always be maintained as long as the
joint venture agreement exists considering that in limiting 3 board seats in the 9-
man board of directors there are provisions already agreed upon and embodied in
the parties' Agreement to protect the interests arising from the minority status of
the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which
were impliedly affirmed by the appellate court declaring Messrs. Wolfgang
Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo, Baldwin young,
Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee
as the duly elected directors of Saniwares at the March 8,1983 annual
stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No.
75951) object to a cumulative voting during the election of the board of directors
of the enterprise as ruled by the appellate court and submits that the six (6)
directors allotted the Filipino stockholders should be selected by consensus
pursuant to section 5 (a) of the Agreement which uses the word "designate"
meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the
enterprise if the Filipino stockholders are allowed to select their nominees
separately and not as a common slot determined by the majority of their group.
36 | P a g e
Section 5 (a) of the Agreement which uses the word designates in the allocation of
board directors should not be interpreted in isolation. This should be construed in
relation to section 3 (a) (1) of the Agreement. As we stated earlier, section 3(a)
(1) relates to the manner of voting for these nominees which is cumulative
voting while section 5(a) relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed to this procedure,
hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the
cumulative voting procedure cannot, however, be ignored. The validity of the
cumulative voting procedure is dependent on the directors thus elected being
genuine members of the Filipino group, not voters whose interest is to increase
the ASI share in the management of Saniwares. The joint venture character of the
enterprise must always be taken into account, so long as the company exists
under its original agreement. Cumulative voting may not be used as a device to
enable ASI to achieve stealthily or indirectly what they cannot accomplish openly.
There are substantial safeguards in the Agreement which are intended to preserve
the majority status of the Filipino investors as well as to maintain the minority
status of the foreign investors group as earlier discussed. They should be
maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are
DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The amended
decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach
John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are
declared as the duly elected directors of Saniwares at the March 8,1983 annual
stockholders' meeting. In all other respects, the questioned decision is AFFIRMED.
Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.
G.R. No. 58168 December 19, 1989
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-
CABRERA, LUISA MAGSAYSAY-CORPUZ, assisted be her husband, Dr.
Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAY-
DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY,
Special Administratrix of the Estate of the late Genaro F.
Magsaysay respondents.
In this petition for review on certiorari, petitioners seek to reverse and set aside
[1] the decision of the Court of Appeals dated July l3, 1981, 1 affirming that of the
Court of First Instance of Zambales and Olongapo City which denied petitioners'
motion to intervene in an annulment suit filed by herein private respondent, and
[2] its resolution dated September 7, 1981, denying their motion for
reconsideration.
Petitioners are raising a purely legal question; whether or not respondent Court of
Appeals correctly denied their motion for intervention.
The facts are not controverted.
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special
administratix of the estate of the late Senator Genaro Magsaysay, brought before
the then Court of First Instance of Olongapo an action against Artemio
Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank
(FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she
alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel
of land with improvements, known as "Pequena Island", covered by TCT No. 3258;
that after the death of her husband, she discovered [a] an annotation at the back
of TCT No. 3258 that "the land was acquired by her husband from his separate
capital;" [b] the registration of a Deed of Assignment dated June 25, 1976
purportedly executed by the late Senator in favor of SUBIC, as a result of which
TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and
[c] the registration of Deed of Mortgage dated April 28, 1977 in the amount of P
2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the foregoing acts
were void and done in an attempt to defraud the conjugal partnership considering
that the land is conjugal, her marital consent to the annotation on TCT No. 3258
was not obtained, the change made by the Register of Deeds of the titleholders
was effected without the approval of the Commissioner of Land Registration and
that the late Senator did not execute the purported Deed of Assignment or his
37 | P a g e
consent thereto, if obtained, was secured by mistake, violence and intimidation.
She further alleged that the assignment in favor of SUBIC was without
consideration and consequently null and void. She prayed that the Deed of
Assignment and the Deed of Mortgage be annulled and that the Register of Deeds
be ordered to cancel TCT No. 22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for
intervention on the ground that on June 20, 1978, their brother conveyed to them
one-half (1/2 ) of his shareholdings in SUBIC or a total of 416,566.6 shares and as
assignees of around 41 % of the total outstanding shares of such stocks of SUBIC,
they have a substantial and legal interest in the subject matter of litigation and
that they have a legal interest in the success of the suit with respect to SUBIC.
On July 26, 1979, the court denied the motion for intervention, and ruled that
petitioners have no legal interest whatsoever in the matter in litigation and their
being alleged assignees or transferees of certain shares in SUBIC cannot legally
entitle them to intervene because SUBIC has a personality separate and distinct
from its stockholders.
On appeal, respondent Court of Appeals found no factual or legal justification to
disturb the findings of the lower court. The appellate court further stated that
whatever claims the petitioners have against the late Senator or against SUBIC for
that matter can be ventilated in a separate proceeding, such that with the denial
of the motion for intervention, they are not left without any remedy or judicial
relief under existing law.
Petitioners' motion for reconsideration was denied. Hence, the instant recourse.
Petitioners anchor their right to intervene on the purported assignment made by
the late Senator of a certain portion of his shareholdings to them as evidenced by
a Deed of Sale dated June 20, 1978. 2 Such transfer, petitioners posit, clothes
them with an interest, protected by law, in the matter of litigation.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil.
857,862 & 853 (1927), 3petitioners strongly argue that their ownership of 41.66%
of the entire outstanding capital stock of SUBIC entitles them to a significant vote
in the corporate affairs; that they are affected by the action of the widow of their
late brother for it concerns the only tangible asset of the corporation and that it
appears that they are more vitally interested in the outcome of the case than
SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court
affirms the respondent court's holding that petitioners herein have no legal
interest in the subject matter in litigation so as to entitle them to intervene in the
proceedings below. In the case of Batama Farmers' Cooperative Marketing
Association, Inc. v. Rosal, 4 we held: "As clearly stated in Section 2 of Rule 12 of
the Rules of Court, to be permitted to intervene in a pending action, the party
must have a legal interest in the matter in litigation, or in the success of either of
the parties or an interest against both, or he must be so situated as to be
adversely affected by a distribution or other disposition of the property in the
custody of the court or an officer thereof ."
To allow intervention, [a] it must be shown that the movant has legal interest in
the matter in litigation, or otherwise qualified; and [b] consideration must be given
as to whether the adjudication of the rights of the original parties may be delayed
or prejudiced, or whether the intervenor's rights may be protected in a separate
proceeding or not. Both requirements must concur as the first is not more
important than the second. 5
The interest which entitles a person to intervene in a suit between other parties
must be in the matter in litigation and of such direct and immediate character that
the intervenor will either gain or lose by the direct legal operation and effect of the
judgment. Otherwise, if persons not parties of the action could be allowed to
intervene, proceedings will become unnecessarily complicated, expensive and
interminable. And this is not the policy of the law. 6
The words "an interest in the subject" mean a direct interest in the cause of action
as pleaded, and which would put the intervenor in a legal position to litigate a fact
alleged in the complaint, without the establishment of which plaintiff could not
recover. 7
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent,
remote, conjectural, consequential and collateral. At the very least, their interest is
purely inchoate, or in sheer expectancy of a right in the management of the
corporation and to share in the profits thereof and in the properties and assets
thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the
property of the corporation, it does not vest the owner thereof with any legal right
or title to any of the property, his interest in the corporate property being
equitable or beneficial in nature. Shareholders are in no legal sense the owners of
corporate property, which is owned by the corporation as a distinct legal person. 8
38 | P a g e
Petitioners further contend that the availability of other remedies, as declared by
the Court of appeals, is totally immaterial to the availability of the remedy of
intervention.
We cannot give credit to such averment. As earlier stated, that the movant's
interest may be protected in a separate proceeding is a factor to be considered in
allowing or disallowing a motion for intervention. It is significant to note at this
juncture that as per records, there are four pending cases involving the parties
herein, enumerated as follows: [1] Special Proceedings No. 122122 before the CFI
of Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al. v. Subic
Land Corp., et al.", involving the validity of the transfer by the late Genaro
Magsaysay of one-half of his shareholdings in Subic Land Corporation; [2] Civil
Case No. 2577-0 before the CFI of Zambales, Branch III, "Adelaida Rodriguez-
Magsaysay v. Panganiban, etc.; Concepcion Labrador, et al. Intervenors", seeking
to annul the purported Deed of Assignment in favor of SUBIC and its annotation at
the back of TCT No. 3258 in the name of respondent's deceased husband; [3] SEC
Case No. 001770, filed by respondent praying, among other things that she be
declared in her capacity as the surviving spouse and administratrix of the estate of
Genaro Magsaysay as the sole subscriber and stockholder of SUBIC. There,
petitioners, by motion, sought to intervene. Their motion to reconsider the denial
of their motion to intervene was granted; [4] SP No. Q-26739 before the CFI of
Rizal, Branch IV, petitioners herein filing a contingent claim pursuant to Section 5,
Rule 86, Revised Rules of Court. 9 Petitioners' interests are no doubt amply
protected in these cases.
Neither do we lend credence to petitioners' argument that they are more
interested in the outcome of the case than the corporation-assignee, owing to the
fact that the latter is willing to compromise with widow-respondent and since a
compromise involves the giving of reciprocal concessions, the only conceivable
concession the corporation may give is a total or partial relinquishment of the
corporate assets. 10
Such claim all the more bolsters the contingent nature of petitioners' interest in
the subject of litigation.
The factual findings of the trial court are clear on this point. The petitioners cannot
claim the right to intervene on the strength of the transfer of shares allegedly
executed by the late Senator. The corporation did not keep books and
records. 11 Perforce, no transfer was ever recorded, much less effected as to
prejudice third parties. The transfer must be registered in the books of the
corporation to affect third persons. The law on corporations is explicit. Section 63
of the Corporation Code provides, thus: "No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners.
corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares SO ORDERED.
transferred."

And even assuming arguendo that there was a valid transfer, petitioners are
nonetheless barred from intervening inasmuch as their rights can be ventilated
and amply protected in another proceeding.

39 | P a g e
1990
G.R. No. 85266 January 30, 1990
PHILIPPINE VETERANS INVESTMENT DEVELOPMENT
CORPORATION, petitioner,
vs.
COURT OF APPEALS and VIOLETA MONTELIBANO BORRES, respondents.
The concept of piercing the veil of corporate fiction is a mystique to many people,
especially the layman. But it is not as esoteric as all that as this case will
demonstrate.
This case arose when Violeta M. Borres, private respondent herein, was injured in
an accident that was later held by the trial and respondent courts to be due to the
negligence of Phividec Railways, Inc. (PRI). 1 The accident occurred on March 29,
1979. On May 25, 1979, petitioner Philippine Veterans Investment Development
Corporation (PHIVIDEC) sold all its rights and interests in the PRI to the Philippine
Sugar Commission (PHILSUCOM). Two days later, PHILSUCOM caused the creation
of a wholly-owned subsidiary, the Panay Railways, Inc., to operate the railway
assets acquired from PHIVIDEC. On January 21, 1980, Borres filed a complaint for
damages against PRI and Panay Railways Inc. (Panay ), 2 whereupon the latter
filed with leave of court a third-party complaint against the herein petitioner. 3
It alleged that upon the sale to PHILSUCOM of PRI, the corporate name of PRI
was changed to Panay Railways, Inc. It disclaimed liability on the ground that in
the Agreement concluded between PHIVIDEC and PHILSUCOM, it was provided
that:
D. With the exception of the Liabilities and Contracts specified in Annexes
4 and 5 of the preceding paragraph, PHIVIDEC hereby holds PHILSUCOM
harmless from and against any action, claim or liability that may arise out
of or result from acts or omissions, contracts or transactions prior to the
turn-over.
After trial, Judge Ricardo M. Ilarde of the Regional Trial Court of Iloilo held
Phividec Railways, Inc. negligent and so liable to the plaintiff for damages. It also
held that as PRI was a wholly-owned subsidiary of PHIVIDEC, the latter should
answer for PRI's liability. The decision was affirmed on appeal by the respondent
court, 4 which is now faulted for grave abuse of discretion in this petition.
The sole issue raised in this petition is the ruling of the Court of Appeals that:
40 | P a g e
Thus, the piercing of the veil of corporate fiction is called for in the case at
bar. When PRI was sold by PHIVIDEC to PHILSUCOM on May 25, 1979,
the legal fiction of PRI as a separate corporate entity from PHIVIDEC
disappeared pursuant to and in view of the representations and warranties
contained in the agreement of sale between PHIVIDEC and PHILSUCOM,
particularly the stipulation already quoted above, by virtue of which
PHIVIDEC held PHILSUCOM harmless from any claim or liability arising out
of any act or transaction "prior to the turn-over." By virtue of this
provision, PHIVIDEC had expressly assumed liability for any claim arising
before the turn-over of PRI to PHILSUCOM. And since the accident in
question took place before said turn-over and since after said turn-over
PRI ceased to exist (in the sense that its railways operations were taken
over by PHILSUCOM thru the Panay RW) the only logical conclusion is that
PHIVIDEC should be solely liable for the damages to the plaintiff in the
case at bar. Indeed, applying the Koppel precedent just cited, PHIVIDEC
cannot hide behind the veil of corporate fiction in order to evade this
liability, nor could the veil of corporate fiction be made a shield to confuse
claimants such as plaintiff-appellee.
It is the position of the petitioner that PHIVIDEC and PRI are entirely distinct and
separate corporations although the latter is its subsidiary. The transfer of the
shares of stock of PRI to PHILSUCOM did not divest PRI of its juridical personality
or of its capacity to direct its own affairs and conduct its own business under the
control of its own board of directors. By the same token, it is answerable for its
own obligations, which cannot be passed on to the petitioner as its own liability.
To support this stand, the petitioner invokes the case of E.J. Nell v. Pacific
Farms, 5 which, however, it has not accurately quoted.
We must sustain the respondents.
In Koppel v. Yatco, 6 the Court, citing Fletcher, declared that the veil of corporate
fiction may be pierced when it is used to defeat public convenience, justify wrong,
protect fraud, or defend crime. 7 It added that when the corporation is the mere
alter ego or business conduit of a person it may be disregarded, "to prevent
injustice, or the distortion or hiding of the truth, or to let in a just defense."8
The rule is that:
Where it appears that two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary
 to protect the rights of third persons, disregard the legal fiction that two
corporations are distinct entities, and treat them as identical. 9
In Yutivo Sons Hardware Co. v. Court of Tax Appeals, 10
this Court held:
It is an elementary and fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, "when
the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud or defend crime," the law will regard the corporation
as an association of persons, or in the case of two corporations merge
them into one. ... Another rule is that, when the corporation is the "mere
alter ego or business conduit of a person, it may be disregarded."
It is clear from the evidence of record that by virtue of the agreement between
PHIVIDEC and PHILSUCOM, particularly the stipulation exempting the latter from
any "claim or liability arising out of any act or transaction" prior to the turn-over,
PHIVIDEC had expressly assumed liability for any claim against PRI. Since the
accident happened before that agreement and PRI ceased to exist after the turn-
over, it should follow that PHIVIDEC cannot evade its liability for the injuries
sustained by the private respondent.
A contrary conclusion would leave the private respondent without any recourse for
her legitimate claim.1âwphi1 In the interest of justice and equity, and to prevent
the veil of corporate fiction from denying her the reparation to which she is
entitled, that veil must be pierced and PHIVIDEC and PRI regarded as one and the
same entity.

In Commissioner of Internal Revenue v. Norton and Harrison Co., 11 this Court WHEREFORE, the challenged decision is AFFIRMED and the petition is DENIED,
likewise ruled that where a corporation is merely an adjunct, business conduit or with costs against the petitioner. It is so ordered.
alter ego of another corporation the fiction of separate and distinct corporate
entities should be disregarded. Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

In fact, contrary to the suggestion in the petition, what the Court said in the Nell
Case was:

Generally where one corporation sells or otherwise transfers all of its

assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor, except: (1) where the purchaser expressly or
impliedly agrees to assume such debts; (2) where the transaction amounts
to a consolidation or merger of the corporations; (3) where the purchasing
corporation is merely a continuation of the selling corporation; and (4)
where the transaction is entered into fraudulently in order to escape
liability for such debts.

Moreover, as correctly pointed out by the respondent court:

Besides, PHIVIDEC'S act of selling PRI to PHILSUCOM shows that

PHVIDEC had complete control of PRI's business. This circumstance
renders applicable the rule cited by third-party plaintiff-appellee (Costan v.
Manila Electric, 24 F 2nd 383) that if a parent- holding company
(PHIVIDEC in the present case) assumes complete control of the
operations of its subsidiary's business, the separate corporate existence of
the subsidiary must be disregarded, such that the holding company will be
responsible for the negligence of the employees of the subsidiary as if it
were the holding company's own employees.
41 | P a g e
G.R. No. 85416 July 24, 1990
FRANCISCO V. DEL ROSARIO, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and LEONARDO V.
ATIENZA, respondents.
In POEA Case No. 85-06-0394, the Philippine Overseas Employment Administration
(POEA) promulgated a decision on February 4, 1986 dismissing the complaint for
money claims for lack of merit. The decision was appealed to the National Labor
Relations Commission (NLRC), which on April 30, 1987 reversed the POEA decision
and ordered Philsa Construction and Trading Co., Inc. (the recruiter) and Arieb
Enterprises (the foreign employer) to jointly and severally pay private respondent
the peso equivalent of $16,039.00, as salary differentials, and $2,420.03, as
vacation leave benefits. The case was elevated to the Supreme Court, but the
petition was dismissed on August 31, 1987 and entry of judgment was made on
September 24, 1987.
A writ of execution was issued by the POEA but it was returned unsatisfied as
Philsa was no longer operating and was financially incapable of satisfying the
judgment. Private respondent moved for the issuance of an alias writ against the
officers of Philsa. This motion was opposed by the officers, led by petitioner, the
president and general manager of the corporation.
On February 12, 1988, the POEA issued a resolution, the dispositive portion of
which read:
WHEREFORE, premises considered, let an alias writ of Execution
be issued and the handling sheriff is ordered to execute against
the properties of Mr. Francisco V. del -Rosario and if insufficient,
against the cash and/or surety bond of Bonding Company
concerned for the full satisfaction of the judgment awarded.
Petitioner appealed to the NLRC. On September 23, 1988, the NLRC dismissed the
appeal. On October 21, 1988, petitioner's motion for reconsideration was denied.
Thus, this petition was filed on October 28, 1988, alleging that the NLRC gravely
abused its discretion. On November 10, 1988 the Court issued a temporary
restraining order enjoining the enforcement of the NLRC's decision dated
September 23, 1988 and resolution dated October 21, 1988. The petition was
given due course on June 14, 1989.
42 | P a g e
After considering the undisputed facts and the arguments raised in the pleadings,
the Court finds grave abuse of discretion on the part of the NLRC.
The action of the NLRC affirming the issuance of an alias writ of execution against
petitioner, on the theory that the corporate personality of Philsa should be
disregarded, was founded primarily on the following findings of the POEA —
xxx xxx xxx
6. Per the certification issued by the Licensing Division of this
Office, it appears that Philsa Construction & Trading Co., Inc.,
with office address at 126 Pioneer St., Mandaluyong, Metro
Manila, represented by Mr. Francisco V. del Rosario, President and
General Manager, was formerly a registered construction
contractor whose authority was originally issued on July 21, 1978
but was already delisted from the list of agencies/entities on
August 15, 1986 for inactivity;
7. Per another certification issued by the Licensing Division of this
Office, it also appears that another corporation, Philsa
International Placement & Services Corp., composed of practically
the same set of incorporators/stockholders, was registered as a
licensed private employment agency whose license was issued on
November 5, 1981, represented by the same Mr. Francisco V. del
Rosario as its President/ General Manager.
and an application of the ruling of the Court in A.C. Ransom Labor Union-CCLU v.
NLRC, G.R. No. 69494, June 10, 1986, 142 SCRA 269.
However, we find that the NLRC's reliance on the findings of the POEA and the
ruling in A. C. Ransom is totally misplaced.
1. Under the law a corporation is bestowed juridical personality, separate and
distinct from its stockholders [Civil Code, Art. 44; Corporation Code, sec. 2]. But
when the juridical personality of the corporation is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the corporation shall be
considered as a mere association of persons [Koppel (Phil.), Inc. v. Yatco, 77 Phil.
496 (1946), citing 1 Fletcher, Cyclopedia of Corporations, 135-136; see also Palay,
Inc. v. Clave, G.R. No. 56076, September 21, 1983, 124 SCRA 638], and its
responsible officers and/or stockholders shall be held individually liable [Namarco
v. Associated Finance Co., Inc., G.R. No. L-20886, April 27, 1967, 19 SCRA 962].
For the same reasons, a corporation shall be liable for the obligations of a
stockholder [Palacio v. Fely Transportation Company, G.R. No. L-15121, August
31, 1962, 5 SCRA 1011; Emilio Cano Enterprises, Inc. v. Court of Industrial
Relations, G.R. No. L-20502, February 26, 1965, 13 SCRA 290], or a corporation
and its successor-in-interest shall be considered as one and the liability of the
former shall attach to the latter [Koppel v. Yatco, supra; Liddell & Co. v. Collector
of Internal Revenue, G.R. No. L-9687, June 30, 1961, 2 SCRA 632].
But for the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.
In this regard we find the NLRC's decision wanting. The conclusion that Philsa
allowed its license to expire so as to evade payment of private respondent's claim
is not supported by the facts. Philsa's corporate personality therefore remains
inviolable.
Consider the following undisputed facts:
(1) Private respondent filed his complaint with the POEA on June
4, 1985;
(2) The last renewal of Philsa's license expired on October 12,
1985;
(3) The POEA dismissed private respondent's complaint on
February 4, 1986;
(4) Philsa was delisted for inactivity on August 15, 1986; *
(5) The dismissal of the complaint was appealed to the NLRC and
it was only on April 30, 1987 that the judgment awarding
differentials and benefits to private respondent was rendered.
Thus, at the time Philsa allowed its license to lapse in 1985 and even at the time it
was delisted in 1986, there was yet no judgment in favor of private respondent.
An intent to evade payment of his claims cannot therefore be implied from the
expiration of Philsa's license and its delisting.
Neither will the organization of Philsa International Placement and Services Corp.
and its registration with the POEA as a private employment agency imply fraud
since it was organized and registered in 1981, several years before private
respondent filed his complaint with the POEA in 1985. The creation of the second
43 | P a g e
corporation could not therefore have been in anticipation of private respondent's
money claims and the consequent adverse judgment against Philsa
Likewise, substantial identity of the incorporators of the two corporations does not
necessarily imply fraud.
The circumstances of this case distinguish it from those in earlier decisions of the
Court in labor cases where the veil of corporate fiction was pierced.
In La Campana Coffee Factory, Inc. v. Kaisahan ng Manggagawa sa La Campana
(KKM) 93 Phil. 160 (1953), La Campana Coffee Factory, Inc. and La Campana
Gaugau Packing were substantially owned by the same person. They had one
office, one management, and a single payroll for both businesses. The laborers of
the gaugau factory and the coffee factory were also interchangeable, i.e., the
workers in one factory worked also in the other factory.
In Claparols v. Court of Industrial Relations, G.R. No. L-30822, July 31, 1975, 65
SCRA 613, the Claparols Steel and Nail Plant, which was ordered to pay its
workers backwages, ceased operations on June 30, 1957 and was succeeded on
the next day, July 1, 1957 by the Claparols Steel Corporation. Both corporations
were substantially owned and controlled by the same person and there was no
break or cessation in operations. Moreover, all the assets of the steel and nail
plant were transferred to the new corporation.
2. As earlier stated, we also find that, contrary to the NLRC'S holding, the ruling
in A. C. Ransom is inapplicable to this case. In A. C. Ransom, the Court said:
... In the instant case, it would appear that RANSOM, in 1969,
foreseeing the possibility or probability of payment of back wages
to the 22 strikers, organized ROSARIO to replace RANSOM, with
the latter to be eventually phased out if the 22 strikers win their
case. RANSOM actually ceased operations on May 1, 1973, after
the December 19, 1972 Decision of the Court of Industrial
Relations was promulgated against RANSOM. [At p. 274.]
The distinguishing marks of fraud were therefore clearly apparent in A. C. Ransom.
A new corporation was created, owned by the same family, engaging in the same
business and operating in the same compound.
Thus, considering that the non-payment of the workers was a continuing situation,
the Court adjudged its President, the "responsible officer" of the corporation,
personally liable for the backwages awarded, he being the chief operation officer
or "manager" who could be held criminally liable for violations of Republic Act No. WHEREFORE, the petition is GRANTED and the decision and resolution of the
602 (the old Minimum Wage Law.) NLRC, dated September 23, 1988 and October 21, 1988, respectively, in POEA
Case No. 85-06-0394 are SET ASIDE. The temporary restraining order issued by
In the case now before us, not only has there been a failure to establish fraud, but the Court on November 10, 1988 is MADE PERMANENT.
it has also not been shown that petitioner is the corporate officer responsible for
private respondent's predicament. It must be emphasized that the claim for SO ORDERED.
differentials and benefits was actually directed against the foreign employer. Philsa
became liable only because of its undertaking to be jointly and severally bound
with the foreign employer, an undertaking required by the rules of the POEA [Rule
II, sec. 1(d) (3)], together with the filing of cash and surety bonds [Rule 11, sec.
4], in order to ensure that overseas workers shall find satisfaction for awards in
their favor.

At this juncture, the Court finds it appropriate to point out that a judgment against
a recruiter should initially be enforced against the cash and surety bonds filed with
the POEA. As provided in the POEA Rules and Regulations —

... The bonds shall answer for all valid and legal claims arising
from violations of the conditions for the grant and use of the
license or authority and contracts of employment. The bonds shall
likewise guarantee compliance with the provisions of the Labor
Code and its implementing rules and regulations relating to
recruitment and placement, the rules of the Administration and
relevant issuances of the Ministry and all liabilities which the
Administration may impose. ... [Rule II, see. 4.]

Quite evidently, these bonds do not answer for a single specific liability, but for all
sorts of liabilities of the recruiter to the worker and to the POEA. Moreover, the
obligations guaranteed by the bonds are continuing. Thus, the bonds are subject
to replenishment when they are garnished, and failure to replenish shall cause the
suspension or cancellation of the recruiter's license [Rule II, sec. 19]. Furthermore,
a cash bond shall be refunded to a recruiter who surrenders his license only upon
posting of a surety bond of similar amount valid for three (3) years [Rule II, sec.
20]. All these, to ensure recovery from the recruiter.

It is therefore surprising why the POEA ordered execution "against the properties
of Mr. Francisco V. del Rosario and if insufficient, against the cash and/or surety
bond of Bonding Company concerned for the till satisfaction of the judgment
awarded" in complete disregard of the scheme outlined in the POEA Rules and
Regulations. On this score alone, the NLRC should not have affirmed the POEA.

44 | P a g e
 [G.R. No. 82558. August 20, 1990.]
WESTERN AGRO INDUSTRIAL CORPORATION and ANTONIO
RODRIGUEZ, Petitioners, v. HON. COURT OF APPEALS and SIA’S
AUTOMOTIVE AND DIESEL PARTS, INC., Respondents.
Benjamin C. Santos Law Offices, for Petitioners.
Bonifacio, De La Cruz & Bonifacio Law Offices for Private Respondent.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; PRE-TRIAL ORDER; NOTICE THEREOF TO
PARTIES INDISPENSABLE FOR THEM TO BE BOUND THEREBY; CASE AT BAR, AN
EXCEPTION. — The petitioners are correct in stating that notice to the parties of a
Pre-Trial Order is indispensable to afford them an opportunity to check the
accuracy of what transpired during a pre-trial conference. Procedural due process
demands that such notice be served upon the parties in the same manner as other
orders, resolutions and decisions of the court in order that they may become
binding upon the parties. We, however, take exception to the literal application of
the rule in the instant case. The record shows that the petitioners knew all along
the existence of the Pre-trial Order and that the petitioners’ counsel actively
participated in the amendment of the order to change the amount of the
corporation’s liability which was P85,000.00 in the Pre-Trial Order to P84,626.70 as
agreed upon by the parties. The petitioners asked that the admitted amount be
amended to make the obligation reflect the truth. This can be gleaned from the
tenor of the proceedings during the trial of the case on May 24, 1984 where Atty.
Benjamin C. Santos the petitioners’ counsel was present.
2. ID.; RULES OF COURT, SECTION 2 RULE 129 THEREOF; JUDICIAL
ADMISSIONS, CANNOT GENERALLY BE CONTRADICTED; CASE AT BAR AN
EXCEPTION. — The petitioners are bound by their own admissions during the trial.
Section 2, Rule 129 of the Rules of Court provides that "Admissions made by the
parties in the pleadings, or in the course of the trial or other proceedings do not
require proof and cannot be contradicted unless previously shown to have been
made through palpable mistake." The petitioners have not shown that their
admissions were tainted by palpable mistake. They cannot claim that they had no
notice of the pre-trial order. It should be noted, however, that the admission
regarding the amount of liability stated in the Pre-Trial Order pertained only to the
petitioner corporation. This was clarified during the trial. Hence, the parties agreed
during the pre-trial order’s amendment that it was only the petitioner corporation
45 | P a g e
which admitted its indebtedness to the respondent corporation in the amount of
P84,626.70.
3. COMMERCIAL LAW; CORPORATIONS; CORPORATE ENTITY; SOLELY LIABLE
FOR ITS AUTHORIZED CORPORATE ACT. — As a bona fide corporation, WESGRO
should alone be liable for its corporate acts as duly authorized by its officers and
directors. (Caram, Jr. v. Court of Appeals, 151 SCRA 372 [1987]). This is so,
because a corporation "is invested by law with a separate personality, separate
and distinct from that of the persons composing it as well as from any other legal
entity to which it may be related."
4. ID.; ID.; ID.; ID.; NO NECESSITY OF PIERCING CORPORATE VEIL IN CASE AT
BAR. — A corporation is an artificial person and can transact its business only
through its officers or agents. Necessarily, somebody has to act for it. The
separate personality of the corporation may be disregarded, or the veil of
corporate fiction pierced and the individual stockholders may be personally liable
to obligations of the corporation only when the corporation is used "as a cloak or
cover for fraud or illegality, or to work an injustice, or where necessary to achieve
equity or when necessary for the protection of creditors." (Sulo ng Bayan, Inc. v.
Araneta, Inc., 72 SCRA 347 [1976] cited in Tan Boon Bee & Co., Inc. v. Jarencio,
supra). In the case at bar, there is no showing that Antonio Rodriguez, a director
and officer of WESGRO was not authorized by the corporation to enter into
purchase contracts with SIA. Moreover, the respondent corporation has not shown
any circumstances which would necessitate the piercing of the corporate veil so as
to make Rodriguez personally liable for the obligations incurred by the petitioner.
Hence, the inevitable conclusion is that he was acting in behalf of the corporation
when he executed the purchase contracts with the respondent corporation. In
other words, Rodriguez’ acts in representing the petitioner corporation in its
dealings with the respondent corporation are corporate acts for which only the
corporation should be made liable for any obligations arising from them.
DECISION
The petitioners question the binding effect of the pre-trial order in this case and
the liability imposed upon an officer solidarily with the corporation he represented.
The petitioners were ordered by both the trial court and the Court of Appeals to
pay, jointly and severally, the sum of P84,626.70, the interests thereon from June
6, 1983 until paid, twenty-five percent (25%) of the amounts awarded as
attorney’s fees, and costs.
On June 6, 1983 respondent SIA Automotive and Diesel Parts, Inc. (SIA) filed with
the Regional Trial Court of Caloocan City a complaint for "sum of money and
damages" against petitioners Western Agro Industrial Corporation (WESGRO)
and/or Antonio Rodriguez. The complaint alleged that WESGRO is doing business
through Antonio Rodriguez and on different occasions in 1980, 1981 and 1982,
Rodriguez, representing WESGRO bought on credit different automotive spare
parts from the private respondent amounting to P100,753.80; that the said
amount has long become over due and yet the petitioners refused to pay despite
repeated demands. The complaint prayed among others that the defendants
jointly and severally pay the plaintiff: (a) the principal sum of P100,753.80 plus
legal interest and the sum equivalent to 25% in the form of attorney’s fees as
stipulated in the invoices covering the accounts.
In its answer with counterclaim, WESGRO admitted that it bought on credit various
automotive spare parts from the respondent corporation on different occasions in
1980, 1981 and 1982, represented by Antonio Rodriguez but denied that its total
obligation was P100,753.80. WESGRO alleged that this amount is bloated because
it had already made various payments on different dates.
For his part, Antonio Rodriguez filed a motion to dismiss on the ground that the
complaint states no cause of action against him. He alleged that he is a director
and officer of WESGRO and that he entered into the purchase contract with the
respondent corporation in his capacity as officer or agent of WESGRO and
therefore such contract was with WESGRO as a distinct legal entity and did not
confer rights much less liabilities on him.
The trial court denied the motion to dismiss in its order dated November 23, 1983.
The trial court ruled:
"x x x
While it is true that contracts entered into by authorized officers or agents of a
Corporation are contracts of the Corporation as a distinct entity, yet under the
circumstances above-mentioned, the Court finds it necessary to include defendant,
Antonio Rodriguez, as party defendant, for the Court to arrive at a judicious
adjudication on the matter." (Rollo, p. 43)
Rodriguez filed with the then Intermediate Appellate Court a petition for certiorari,
prohibition and mandamus for the review of the aforestated order. The petition
(docketed as Case No. AC-62562) was, however, denied.
In his answer with counterclaim, Rodriguez denied that." . . WESGRO is doing
business through answering defendant such allegation, being misleading as he is
only one of the officers representing WESGRO in various business transactions . .
." (Rollo p. 45) and that." . . his dealings with the plaintiff were always in the
name of WESGRO, a fact which is recognized by the plaintiff." (Rollo, p. 46). He,
46 | P a g e
however, admitted that he had represented WESGRO in purchasing certain spare
parts on credit.
After several postponements, the pre-trial was held on April 9, 1984. On this same
date, the trial court issued a Pre-Trial Order, to wit:
"Parties agreed that the defendant, Western Agro Industrial Corporation ordered
from the plaintiff, automotive spare parts which have not been paid. Payment was
agreed by Western Agro Industrial Corporation and Sia’s Automotive and Diesel
Parts, Inc. that the defendant agreed to pay the plaintiff the sum of P85,000.00,
more or less. The only question now remaining in litigation is the remaining sum of
P15,000.00, more or less." (Original Records, p. 68)
The initial hearing of the case was held on May 24, 1984. Upon agreement of the
parties, the pre-trial order was amended to change the sum of P85,000.00 to
P84,626.70. Upon the initiative of the petitioners’ counsel, the order was further
amended to show that . . . it is only defendant Western Agro Industrial
Corporation that is admitting the liability not the defendant Antonio Rodriguez.
(TSN page 15, May 24, 1984). During the same hearing, the respondent
corporation rested its case after presenting the corporation’s manager Juanito V.
Lim, as its sole witness together with several documents.
On the other hand, the petitioners manifested that after a review of the nature of
the plaintiff’s evidence they decided not to present any evidence. Instead, they
would simply file a memorandum. The motion was granted by the trial court in its
order dated July 5, 1984.
On October 5, 1984, the trial court rendered a decision, the dispositive portion of
which reads:
"WHEREFORE, judgment is rendered in favor of the plaintiff and against the
defendants, ordering defendants to pay jointly and severally to the plaintiff the
sum of P84,626.70 with legal rate of interest from the filing of the complaint on
June 6, 1983 until fully paid; to pay, jointly and severally 25% of the amount
awarded to plaintiff as attorney’s fees; and to pay the costs.
The Counterclaim is DISMISSED" (Original Records, pp. 101-102)
As stated earlier, the trial court’s decision was affirmed by the Court of Appeals. A
motion for reconsideration was denied. Hence, this petition.
The issues raised can be categorized into the following: first, whether or not the
petitioners are bound by the PRE-TRIAL ORDER of the trial court; and second,
whether or not petitioner Antonio Rodriguez can be made solidarily liable with the Court: As a matter of fact, I have issued an order to the effect.
petitioner corporation for debts incurred by the latter.
Atty. Bonifacio: Yes, Your Honor. We have read it. But we are just marking more
Anent the first issue, the petitioners capitalize on the fact that a copy of the pre- or less the admitted amount of P85,000.00.
trial order was not served on them. They theorize that since the Pre-trial Order
was promulgated by the trial court without the direct participation of the parties, Atty. Santos: To be exact, it would appear to be eighty-four thousand . . .
the latter are not bound by the order until such time that the same is served upon
them, otherwise, admissions may be stated in the pre-trial order which were not Court: I have issued an order. Let me see the records. Pre-trial Order — Parties
made at all during the Pre-Trial Conference. The petitioners contend that the trial agreed that the defendant Western Agro Industrial Corporation ordered from the
court erroneously stated that the petitioner corporation admitted its liability. plaintiff, automotive spare parts which have not been paid. Payment was agreed
by Western Agro Industrial Corporation and Sia’s Automotive and Diesel Parts,
The petitioners are correct in stating that notice to the parties of a Pre-Trial Order Incorporated that the defendant agreed to pay the plaintiff the sum of P85,000.00
is indispensable to afford them an opportunity to check the accuracy of what more or less. The only question now remaining in litigation is the remaining sum of
transpired during a pre-trial conference. Procedural due process demands that P15,000.00 more or less. Why do you have to prove the P85,000.00?
such notice be served upon the parties in the same manner as other orders,
resolutions and decisions of the court in order that they may become binding upon Atty. Bonifacio: We are just marking those exhibits, Your Honor.
the parties.
Court: This is the pre-trial order. Just mark those exhibits.
We, however, take exception to the literal application of the rule in the instant
case. The record shows that the petitioners knew all along the existence of the Atty. Bonifacio: The admitted amount is actually P84,626.70, Your Honor. We are
Pre-trial Order and that the petitioners’ counsel actively participated in the not proving the controverted portion of P15,000.00.
amendment of the order to change the amount of the corporation’s liability which
was P85,000.00 in the Pre-Trial Order to P84,626.70 as agreed upon by the Court: What is the use when the defendant had admitted?
parties. The petitioners asked that the admitted amount be amended to make the
obligation reflect the truth. This can be gleaned from the tenor of the proceedings Atty. Bonifacio: This is the controverted portion, Your Honor.
during the trial of the case on May 24, 1984 where Atty. Benjamin C. Santos the
petitioners’ counsel was present and where the following transpired: Court: Precisely, I am asking you to show evidence on the P15,000.00 which is the
controversy.
"Atty. Bonifacio: I will connect the materiality of this, Your Honor, because that is
Atty. Bonifacio: We are now going to that, Your Honor.
included in our complaint in the claim of one hundred thousand something like
that more or less. This amount is deemed included because Western Agro
Court: What about this Worthy Trucking?
Industrial Corporation only admitted more or less eighty-five thousand which is
now the . . .
Atty. Bonifacio: The Worthy Trucking is the sister company of the defendant, Your
Honor.
Court: What is involved here according to you is fifteen thousand.
Court: But that is already admitted by them. They will pay you already. They
Atty. Bonifacio: Yes, Your Honor.
agreed to pay you, is it not? You read your pre-trial order and that has not been
questioned by any of the parties.
Court: Only fifteen thousand pesos (P15,000.00).
Atty. Santos: Except for the exact amount. The order says P85,000.00 more or
Atty. Bonifacio:: Because of your agreement stating to remand this to the lower
less. The order is still correct. You now correct the amount.
court for hearing because that is the only amount involved now.

47 | P a g e
Atty. Santos: Based on the document of plaintiff it is P84,626.70, Your Honor. This
is the amount admitted by defendant Western Agro Industrial only.
Court: Is that correct?
Atty. Bonifacio: Is that correct? Yes, Your Honor. It is because in the pre-trial
order it is P85,000.00 more or less. But the exact amount is P84,626.70.
Court: Order — At the hearing today, the parties agreed that the defendants
Western Agro Industrial Corporation and Antonio Rodriguez are indebted to the
plaintiff in the amount of P84,626.70.
Atty. Santos: May we interrupt at this juncture, Your Honor, it is only defendant
Western Agro Industrial Corporation that is admitting the liability, not the
defendant Antonio Rodriguez.
Court: Remove that Antonio Rodriguez.
WHEREFORE, the pre-trial order dated April 9, 1984 is hereby amended so as to
correct the sum of P85,000.00 to P84,626.70.
Atty. Bonifacio: Yes, Your Honor." (TSN, May 24, 1984, pp. 10-15)
The petitioners are bound by their own admissions during the trial. Section 2, Rule
129 of the Rules of Court provides that "Admissions made by the parties in the
pleadings, or in the course of the trial or other proceedings do not require proof
and cannot be contradicted unless previously shown to have been made through
palpable mistake." The petitioners have not shown that their admissions were
tainted by palpable mistake. They cannot claim that they had no notice of the pre-
trial order.
It should be noted, however, that the admission regarding the amount of liability
stated in the Pre-Trial Order pertained only to the petitioner corporation. This was
clarified during the trial. Hence, the parties agreed during the pre-trial order’s
amendment that it was only the petitioner corporation which admitted its
indebtedness to the respondent corporation in the amount of P84,626.70.
This brings us to the issue as to whether or not Antonio Rodriguez was correctly
made solidarily liable with the petitioner corporation for the P84,626.70 debt
incurred by the latter.
In deciding this issue the appellate court ruled:
48 | P a g e
"x x x
While it is true that contracts entered into by authorized officers or agents of a
corporation are contracts of the corporation as a distinct entity, yet the admission
of appellant Rodriguez that he represented the corporation on different occasions
in 1980, 1981, and 1982 and by reason of this representation defendant WESGRO
bought on credit automotive spare parts amounting to P100,000.00, more or less,
laid the basis for impleading him. The Court a quo was correct to include him as a
proper party to arrive at a `judicious adjudication on the matter.’
"It should also be mentioned here that in defendant’s (Rodriguez) Answer (par. 3),
he admitted having represented WESGRO in various business transactions.
However, defendant WESGRO admitted they are only liable for P47,727.60. Since
there is the problem of who should shoulder the total obligation, the court was
right in impleading defendant Rodriguez.
"Moreover, defendant’s (Rodriguez) motion to dismiss was denied by the court a
quo and its petition for certiorari based on such denial was likewise dismissed by
this Court in AC-GR Sp No. 02562. This Court in its decision dated April 30, 1984
ruled as follows:
‘Considered in that light, we fail to see how respondent Judge could have acted
with grave abuse of discretion in denying petitioner’s motion to dismiss. It was
clearly alleged in the complaint in Case No. C-10798 that petitioner acting for and
in behalf of defendant corporation, incurred the obligation involved. He directly
dealt and transacted with plaintiff corporation, which, trusting in his
representations, agreed to deliver and in fact, delivered the goods on credit.
Petitioner is therefore a proper party whose inclusion as defendant in this case is
necessary if complete relief is to be accorded to party plaintiff.’
In the foregoing instances, it is likewise pertinent to cite Section 13, Rule 3 of the
Rules of Court, which provides:
‘Section 13. Alternative defendants — where the plaintiff is uncertain against
which of several persons he is entitled to relief, he may join any or all of them as
defendants in the alternative although a right to relief against one may be
inconsistent with a right to relief against the other.’" (Rollo, p. 28-29)
It appears, therefore, that the appellate court’s ruling that Antonio Rodriguez is
solidarily liable with WESGRO for the latter’s P84,626.70 obligation to SIA is based
principally on the ground that Rodriguez represented WESGRO in its dealings with
SIA.
It is significant to note that SIA never questioned the legal personality of
WESGRO. Hence, we can assume that WESGRO is a bona fide corporation.
Therefore, as a bona fide corporation, WESGRO should alone be liable for its
corporate acts as duly authorized by its officers and directors. (Caram, Jr. v. Court
of Appeals, 151 SCRA 372 [1987]). This is so, because a corporation "is invested
by law with a separate personality, separate and distinct from that of the persons
composing it as well as from any other legal entity to which it may be related."
(Tan Boon Bee & Co, Inc. v. Jarencio 163 SCRA 205 [1988] citing Yutivo and Sons
Hardware Company v. Court of Tax Appeals, 1 SCRA 160 [1961]; Emilio Cano
Enterprises, Inc. v. Court of Industrial Relations, 13 SCRA 290 [1965]). A
corporation is an artificial person and can transact its business only through its
officers or agents. Necessarily, somebody has to act for it. The separate
personality of the corporation may be disregarded, or the veil of corporate fiction
pierced and the individual stockholders may be personally liable to obligations of
the corporation only when the corporation is used "as a cloak or cover for fraud or
illegality, or to work an injustice, or where necessary to achieve equity or when
necessary for the protection of creditors." (Sulo ng Bayan, Inc. v. Araneta, Inc., 72
SCRA 347 [1976] cited in Tan Boon Bee & Co., Inc. v. Jarencio, supra).

In the case at bar, there is no showing that Antonio Rodriguez, a director and
officer of WESGRO was not authorized by the corporation to enter into purchase
contracts with SIA. Moreover, the respondent corporation has not shown any
circumstances which would necessitate the piercing of the corporate veil so as to
make Rodriguez personally liable for the obligations incurred by the petitioner.
Hence, the inevitable conclusion is that he was acting in behalf of the corporation
when he executed the purchase contracts with the respondent corporation. In
other words, Rodriguez’ acts in representing the petitioner corporation in its
dealings with the respondent corporation are corporate acts for which only the
corporation should be made liable for any obligations arising from them.

WHEREFORE, the instant petition is hereby PARTLY GRANTED. The questioned

decision of the Court of Appeals is modified in that petitioner Antonio Rodriguez is
declared not liable jointly and severally or otherwise with petitioner WESTERN
AGRO INDUSTRIAL CORPORATION for the money awards in favor of respondent
Sia’s Automotive and Diesel Parts, Inc. The decision is affirmed in other respects.

SO ORDERED.

49 | P a g e
 1991
G.R. No. 90580 April 8, 1991
RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND
EVELYN SAW, petitioners,
vs.
HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge
of Branch 43, (Regional Trial Court of Manila), FREEMAN MANAGEMENT
AND DEVELOPMENT CORPORATION, EQUITABLE BANKING
CORPORATION, FREEMAN INCORPORATED, SAW CHIAO LIAN, THE
REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY SHERIFF
ROSALIO G. SIGUA, respondents.
CRUZ, J.:
A collection suit with preliminary attachment was filed by Equitable Banking
Corporation against Freeman, Inc. and Saw Chiao Lian, its President and General
Manager. The petitioners moved to intervene, alleging that (1) the loan
transactions between Saw Chiao Lian and Equitable Banking Corp. were not
approved by the stockholders representing at least 2/3 of corporate capital; (2)
Saw Chiao Lian had no authority to contract such loans; and (3) there was
collusion between the officials of Freeman, Inc. and Equitable Banking Corp. in
securing the loans. The motion to intervene was denied, and the petitioners
appealed to the Court of Appeals.
Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement
which they submitted to and was approved by the lower court. But because it was
not complied with, Equitable secured a writ of execution, and two lots owned by
Freeman, Inc. were levied upon and sold at public auction to Freeman
Management and Development Corp.
The Court of Appeals1 sustained the denial of the petitioners' motion for
intervention, holding that "the compromise agreement between Freeman, Inc.,
through its President, and Equitable Banking Corp. will not necessarily prejudice
petitioners whose rights to corporate assets are at most inchoate, prior to the
dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the
Revised Rules of Court is proper only when one's right is actual, material, direct
and immediate and not simply contingent or expectant."
50 | P a g e
It also ruled against the petitioners' argument that because they had already filed
a notice of appeal, the trial judge had lost jurisdiction over the case and could no
longer issue the writ of execution.
The petitioners are now before this Court, contending that:
1. The Honorable Court of Appeals erred in holding that the petitioners
cannot intervene in Civil Case No. 88-44404 because their rights as
stockholders of Freeman are merely inchoate and not actual, material,
direct and immediate prior to the dissolution of the corporation;
2. The Honorable Court of Appeals erred in holding that the appeal of the
petitioners in said Civil Case No. 88-44404 was confined only to the order
denying their motion to intervene and did not divest the trial court of its
jurisdiction over the whole case.
The petitioners base their right to intervene for the protection of their interests as
stockholders on Everett v. Asia Banking Corp.2 where it was held:
The well-known rule that shareholders cannot ordinarily sue in equity to
redress wrongs done to the corporation, but that the action must be
brought by the Board of Directors, . . . has its exceptions. (If the
corporation [were] under the complete control of the principal defendants,
. . . it is obvious that a demand upon the Board of Directors to institute
action and prosecute the same effectively would have been useless, and
the law does not require litigants to perform useless acts.
Equitable demurs, contending that the collection suit against Freeman, Inc, and
Saw Chiao Lian is essentially in personam and, as an action against defendants in
their personal capacities, will not prejudice the petitioners as stockholders of the
corporation. The Everett case is not applicable because it involved an action filed
by the minority stockholders where the board of directors refused to bring an
action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that
was being sued by the creditor bank.
Equitable also argues that the subject matter of the intervention falls properly
within the original and exclusive jurisdiction of the Securities and Exchange
Commission under P.D. No. 902-A. In fact, at the time the motion for intervention
was filed, there was pending between Freeman, Inc. and the petitioners SEC Case
No. 03577 entitled "Dissolution, Accounting, Cancellation of Certificate of
Registration with Restraining Order or Preliminary Injunction and Appointment of
Receiver." It also avers in its Comment that the intervention of the petitioners
could have only caused delay and prejudice to the principal parties.
On the second assignment of error, Equitable maintains that the petitioners'
appeal could only apply to the denial of their motion for intervention and not to
the main case because their personality as party litigants had not been recognized
by the trial court.
After examining the issues and arguments of the parties, the Court finds that the
respondent court committed no reversible error in sustaining the denial by the trial
court of the petitioners' motion for intervention.
In the case of Magsaysay-Labrador v. Court of Appeals,3 we ruled as follows:
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court,
this Court affirms the respondent court's holding that petitioners herein
have no legal interest in the subject matter in litigation so as to entitle
them to intervene in the proceedings below. In the case of Batama
Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As
clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted
to intervene in a pending action, the party must have a legal interest in
the matter in litigation, or in the success of either of the parties or an
interest against both, or he must be so situated as to be adversely
affected by a distribution or other disposition of the property in the
custody of the court or an officer thereof."
To allow intervention, [a] it must be shown that the movant has legal
interest in the matter in litigation, or otherwise qualified; and [b]
consideration must be given as to whether the adjudication of the rights of
the original parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate proceeding or not. Both
requirements must concur as the first is not more important than the
second.
The interest which entitles a person to intervene in a suit between other
parties must be in the matter in litigation and of such direct and
immediate character that the intervenor will either gain or lose by the
direct legal operation and effect of the judgment. Otherwise, if persons
51 | P a g e
not parties of the action could be allowed to intervene, proceedings will
become unnecessarily complicated, expensive and interminable. And this
is not the policy of the law.
The words "an interest in the subject" mean a direct interest in the cause
of action as pleaded, and which would put the intervenor in a legal
position to litigate a fact alleged in the complaint, without the
establishment of which plaintiff could not recover.
Here, the interest, if it exists at all, of petitioners-movants is indirect,
contingent, remote, conjectural, consequential and collateral. At the very
least, their interest is purely inchoate, or in sheer expectancy of a right in
the management of the corporation and to share in the profits thereof and
in the properties and assets thereof on dissolution, after payment of the
corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the
property of the corporation, it does not vest the owner thereof with any
legal right or title to any of the property, his interest in the corporate
property being equitable or beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person.
On the second assignment of error, the respondent court correctly noted that the
notice of appeal was filed by the petitioners on October 24, 1988, upon the denial
of their motion to intervene, and the writ of execution was issued by the lower
court on January 30, 1989. The petitioners' appeal could not have concerned the
"whole" case (referring to the decision) because the petitioners "did not appeal the
decision as indeed they cannot because they are not parties to the case despite
their being stockholders of respondent Freeman, Inc." They could only appeal the
denial of their motion for intervention as they were never recognized by the trial
court as party litigants in the main case.
Intervention is "an act or proceeding by which a third person is permitted to
become a party to an action or proceeding between other persons, and which
results merely in the addition of a new party or parties to an original action, for
the purpose of hearing and determining at the same time all conflicting claims
which may be made to the subject matter in litigation. 4
It is not an independent proceeding, but an ancillary and supplemental one which,
in the nature of things, unless otherwise provided for by the statute or Rules of
Court, must be in subordination to the main proceeding.5 It may be laid down as a
general rule that an intervenor is limited to the field of litigation open to the
original parties.6

In the case at bar, there is no more principal action to be resolved as a writ of

execution had already been issued by the lower court and the claim of Equitable
had already been satisfied. The decision of the lower court had already become
final and in fact had already been enforced. There is therefore no more principal
proceeding in which the petitioners may intervene.

As we held in the case of Barangay Matictic v. Elbinias:7

An intervention has been regarded, as merely "collateral or accessory or

ancillary to the principal action and not an independent proceedings; and
interlocutory proceeding dependent on and subsidiary to, the case
between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721).
With the final dismissal of the original action, the complaint in intervention
can no longer be acted upon. In the case of Clareza v. Resales, 2 SCRA
455, 457-458, it was stated that:

That right of the intervenor should merely be in aid of the right of

the original party, like the plaintiffs in this case. As this right of the
plaintiffs had ceased to exist, there is nothing to aid or fight for.
So the right of intervention has ceased to exist.

Consequently, it will be illogical and of no useful purpose to grant or even

consider further herein petitioner's prayer for the issuance of a writ
of mandamus to compel the lower court to allow and admit the petitioner's
complaint in intervention. The dismissal of the expropriation case has no
less the inherent effect of also dismissing the motion for intervention
which is but the unavoidable consequence.

The Court observes that even with the denial of the petitioners' motion to
intervene, nothing is really lost to them.1âwphi1The denial did not necessarily
prejudice them as their rights are being litigated in the case now before the
Securities and Exchange Commission and may be fully asserted and protected in
that separate proceeding.

WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so

ordered.

52 | P a g e
G.R. No. 91925 April 16, 1991 2 Mr. Eduardo M. Cojuangco, Jr.

EDUARDO M. COJUANGCO, JR., MANUEL M. COJUANGCO and RAFAEL G. 3 Mr. Enrique M. Cojuangco
ABELLO, petitioners,
vs. 4 Mr. Manuel M. Cojuangco
ANTONIO J. ROXAS, JOSE L. CUISIA, JR., OSCAR HILADO, Presidential
Commission on Good Government (PCGG), SAN MIGUEL CORPORATION 5 Mr. Marcos O. Cojuangco
(SMC) and SANDIGANBAYAN (First Division), respondents.
6 Mr. Jose C. Concepcion
G.R. No. 93005 April 16, 1991
7 Mr. Amado C. Mamuric
EDUARDO M. COJUANGCO, JR., ENRIQUE M. COJUANGCO and MANUEL
M. COJUANGCO, petitioners,
8 Mr. Rodolfo M. Tinsay
vs.
ADOLFO AZCUNA, EDISON COSETENG, PATRICIO PINEDA, Presidential
Commission on Good Government (PCGG), and SAN MIGUEL 9 Mr. Danilo S. Ursua
CORPORATION (SMC), respondents.
10 Mr. Eduardo De Los Angeles
The issue squarely presented by the petitioners is whether or not the Presidential
Commission on Good Government (PCGG) may vote the sequestered shares of 11 Mr. Feliciano Belmonte, Jr.
stock of San Miguel Corporation (SMC) and elect its members of the board of
directors. 12 Mr. Teodoro L. Locsin

In G.R. No. 91925 the facts alleged are undisputed. Petitioners are stockholders of 13 Mr. Domingo Lee
record of SMC as follows —
14 Mr. Philip Ella Juico
Stockholders No. of Shares
15 Mr. Patrick Pineda
Eduardo M. Cojuangco, Jr. 13,225
16 Mr. Adolfo Azcuna
Manuel M. Cojuangco 5,750

Rafael G. Abello 5,750 17 Mr. Edison Coseteng

18 Mr. Jose L. Cuisia, Jr.

On April 18, 1989, the annual meeting of shareholders of SMC was held. Among
the matters taken up was the election of fifteen (15) members of the board of
19 Mr. Oscar Hilado
directors for the ensuing year. Petitioners were among the twenty four (24)
nominees to the board, namely ––
20 Mr. Andres Soriano III
1 Mr. Rafael G. Abello
21 Mr. Eduardo J. Soriano

53 | P a g e
 22 Mr. Francisco C. Eizmendi, Jr. VESTA AGRICULTURAL CORP. 145,475

23 Mr. Benigno P. Toda, Jr. OCEAN SIDE MARITIME ENT., INC. 132,250

PURA ELECTRIC COMPANY, INC. 99,587

24 Mr. Antonio J. Roxas
UNEXPLORED LAND DEVELOPERS, INC. 102,823
On the date of the annual meeting, there were 140,849,970 shares outstanding, of
which 133,224,130 shares, or 94.58%, were present at the meeting, either in PUNONG-BAYAN HOUSING DEVT. CORP. 132,250
person or by proxy. Because of PCGG's claim that the shares of stock were under
sequestration, PCGG was allowed to represent and vote the shares of stocks of the HABAGAT REALTY DEVELOPMENT, INC. 145,822
following shareholders. SPADE ONE RESORTS CORP. 147,040

WINGS RESORTS CORPORATION 104,885

STOCKHOLDER NO. OF SHARES
KALAWAKAN RESORTS, INC. 132,250
PRIMAVERA FARMS, INC. 5,381,543
LABAYUG AIR TERMINALS, INC. 159,106
BLACK STALLION RANCH, INC. 3,587,695
LANDAIR INT'L MARKETING CORP. 168,965
MISTY MOUNTAINS AGRI'L CORP. 3,587,695
SAN ESTEBAN DEVELOPMENT CORP. 167,679
PASTORAL FARMS, INC. 3,587,695
PHILIPPINE TECHNOLOGIES, INC. 132,250
MEADOW LARK PLANTATION, INC. 2,690,771
BALETE RANCH, INC. 166,395
SILVER LEAF PLANTATION, INC. 2,690,771
DISCOVERY REALTY CORP. 169,203
LUCENA OIL FACTORY, INC. 169,174
ARCHIPELAGO REALTY CORP. 167,761
PCY OIL FACTORY, INC. 167,867
SOUTHERN SERVICE TRADERS, INC. 120,480
METROPLEX COMMODITIES, INC. 167,777
ORO VERDE SERVICES, INC. 132,250
KAUNLARAN AGRICULTURAL CORP. 145,475
NORTHEAST CONTRACT TRADERS, INC. 159,536
REDDEE DEVELOPERS, INC. 169,071
DREAM PASTURES, INC. 169,237
AGR'L CONSULTANCY SERV., INC. 167,907
LHL CATTLE CORPORATION 169,216
FIRST UNITED TRANSPORT, INC. 168,963
RANCHO GRANDE, INC. 167,614
VERDANT PLANTATIONS, INC. 145,475
ECHO RANCH, INC. 167,897
CHRISTENSEN PLANTATIONS, INC. 168,920
FAR EAST RANCH, INC. 169,227
NORTHERN CARRIERS CORPORATION 167,891

54 | P a g e
 SOUTHERN STAR CATTLE CORP. 169,095 11. Mr. Francisco C. Eizmendi, Jr. 132,164,470
RADIO AUDIENCE DEVELOPERS
12. Mr. Benigno P. Toda, Jr. 132,147,319
INTEGRATED ORGANIZATION, INC 167,787
13. Mr. Antonio J. Roxas 132,146,107
RADYO PILIPINO CORPORATION 167,777
14. Mr. Jose L. Cuisia, Jr. 132,141,775
EDUARDO M. COJUANGCO, JR. 13,225
15. Mr. Oscar Hilado 132,110,402

TOTAL 27,211,770 16. Mr. Eduardo M. Cojuangco, Jr. 2,280,618

==============
17. Mr. Enrique M. Cojuangco 2,279,729

The above shares are collectively referred to as "corporate shares" in the petition. 18. Mr. Manuel M. Cojuangco 2,279,719

19. Mr. Rafael G. Abello 2,278,863

Representatives of the corporate shares present at the meeting claimed that the
shares are not under sequestration; or that if they are under sequestration, the 20. Mr. Jose C. Concepcion 1,596
PCGG had no right to vote the same. They were overruled.
21. Mr. Marcos O. Cojuangco 875
With PCGG voting the corporate shares, the following was the result of the 22. Mr. Danilo S. Ursua 650
election for members of the SMC board of directors:
23. Mr. Rodolfo M. Tinsay 23
Stockholder No. of Votes 24. Mr. Amado C. Mamuric 0
1. Mr. Eduardo De Los Angeles 135,115,521
The fifteen individuals who received the highest number of votes were declared
2. Mr. Feliciano Belmonte, Jr. 135,312,254 elected.
3. Mr. Teodoro L. Locsin 132,309,520
The PCGG claimed it represented 85,756,279 shares at the meeting including the
4. Mr. Domingo lee 132,308,355 corporate shares which corresponded to 1,286,744,185 votes which in turn were
distributed equally among the fifteen (15) candidates who were declared elected.
5. Mr. Philip Ella Juico 132,301,569

6. Mr. Patrick Pineda 132,284,365 Petitioners allege that the 27,211,770 shares or a total of 408,176,550 votes
representing the corporate shares, were illegally cast by PCGG and should be
7. Mr. Adolfo Azcuna 132,284,364 counted in favor of petitioners so that the results of the election would be as
follows ––
8. Mr. Edison Coseteng 132,284,364

9. Mr. Andres Soriano III 132,182,000 Add:

Votes 408,176,550
10. Mr. Eduardo Soriano 132,173,943 Originally divided by 3 Resulting
Stockholder Credited (136,058,850) Votes

55 | P a g e
 1. Mr. Eduardo M.
Cojuangco, Jr.
2. Mr. Manuel M. Cojuangco
3. Mr. Rafael G. Abello
Stockholder
4. Mr. Eduardo De Los
Angeles
5. Mr. Feliciano Belmonte, Jr.
6. Mr. Teodoro L. Locsin
7. Mr. Domingo Lee
8. Mr. Philip Ella Juico
9. Mr. Patrick Pineda
10. Mr. Adolfo Azcuna
11. Mr. Edison Coseteng
12. Mr. Andres Soriano III
13. Mr. Eduardo Soriano
14. Mr. Francisco C.
Eizmendi, Jr.
15. Mr. Benigno P. Toda, Jr.
16. Mr. Antonio J. Roxas
17. Mr. Jose L. Cuisia, Jr.
18. Mr. Oscar Hilado
19. Mr. Enrique M.
Cojuangco
56 | P a g e
20. Mr. Jose C. Concepcion 1,596
2,280,618 136,058,850 138,339,468
21. Mr. Marcos O. Cojuangco 875
2,279,719 136,058,850 138,338,569
22. Mr. Danilo S. Ursua 650
2,278,863 136,058,850 138,337,713
23. Mr. Rodolfo M. Tinsay 23
Less:
Votes 408,176,550 24. Mr. Amado C. Mamuric 0
Originally divided by 15 Resulting
Credited (27,211,770) Votes The petitioners assert that is they were allowed to vote their corresponding shares
accordingly, then they would obtain enough votes to be elected.
135,115,521 27,211,770 107,903,751
On May 31, 1989, petitioners filed with the Sandiganbayan a petition for quo
132,312,254 27,211,770 105,100,484 warranto impleading as respondents the fifteen (15) candidates who were
declared elected members of the board of directors of SMC for the year 1989-
132,309,520 27,211,770 105,097,750 1990. Summons was issued only as to respondents Antonio J. Roxas, Jose L.
Cuisia, Jr. and Oscar T. Hilado whose election will be affected by the claim of
132,308,355 27,211,770 105,096,585
petitioners if the same were upheld.
132,301,569 27,211,770 105,089,799
In due course, a resolution was rendered by the Sandiganbayan on November 16,
132,284,365 27,211,770 105,072,595 1989, affirming its jurisdiction over the petition but dismissing it for lack of cause
of action on the ground that the PCGG has the right to vote sequestered shares.
132,284,364 27,211,770 105,072,594
132,284,364 27,211,770 105,072,594 Hence, this petition for certiorari, the main thrust of which is that the right to vote
sequestered shares of stock is vested in the actual shareholders not in the PCGG.
132,182,000 27,211,770 104,970,230
Respondents were required to comment on the petition while petitioners were
132,173,943 27,211,770 104,962,173
required to comment on the motion to dismiss filed by respondent SMC. The
required comments and consolidated reply thereto have all now been submitted.
132,164,470 27,211,770 104,952,700
In G.R. No. 93005, the facts alleged are substantially similar in nature. Petitioners
132,147,319 27,211,770 104,935,549 are stockholders of SMC as follows ––
132,146,107 27,211,770 104,934,337
STOCKHOLDER NO. OF SHARES
132,141,775 27,211,770 104,930,005
EDUARDO M. COJUANGCO, JR. 52,900
132,110,402 27,211,770 104,898,632
ENRIQUE M. COJUANGCO 23,000
2,279,729
MANUEL M. COJUANGCO 23,000
On April 17, 1990, the annual meeting of the SMC shareholders was held. Among
the matters taken up was the election of the fifteen (15) members of the board of
directors of SMC for the ensuing year. Petitioners were among the twenty (20)
nominees to the board, namely ––
1. Mr. Andres Soriano III
2. Mr. Francisco C. Eizmendi, Jr.
19. Mr. Enrique M. Cojuangco
20. Mr. Manuel M. Cojuangco
On the date of the meeting, there were 565,916,550 shares outstanding, of which
531,598,051 shares, or 93.58%, were present at the meeting, either in person or
by proxy.1 The PCGG was allowed to represent and vote the following shares of
stock under sequestration:

3. Mr. Eduardo J. Soriano

STOCKHOLDER NO. OF SHARES
4. Mr. Antonio J. Roxas NORTHEAST CONTRACT TRADERS, INC. 638,144

5. Mr. Benigno P. Toda, Jr. LABAYUG AIR TERMINALS, INC. 636,416

SPADE ONE RESORTS CORP. 588,280

6. Mr. Eduardo De Los Angeles
HABAGAT REALTY DEVELOPMENT, INC. 583,280
7. Mr. Feliciano Belmonte, Jr.
PUNONG-BAYAN HOUSING DEV'T CORP. 529,000
8. Mr. Renato Valencia OCEAN SIDE MARITIME ENT., INC. 529,000

9. Mr. Domingo Lee PHILIPPINE TECHNOLOGIES, INC. 529,000

SOUTHERN SERVICE TRADERS, INC. 481,916

10. Mr. Teodoro L. Locsin
WINGS RESORTS CORPORATION 419,536
11. Mr. Oscar Hilado
UNEXPLORED LAND DEVELOPERS, INC. 411,288
12. Mr. Philip Ella Juico PURA ELECTRIC COMPANY, INC. 398,336

13. Mr. Adolfo Azcuna PRIMAVERA FARMS, INC. 21,526,164

BLACK STALLION RANCH, INC. 14,350,772

14. Mr. Edison Coseteng
MISTY MOUNTAIN AGR'L. CORP. 14,350,772
15. Mr. Patricio Pineda
PASTORAL FARMS, INC. 14,350,772
16. Mr. Eduardo M. Cojuangco, Jr. MEADOW LARK PLANTATION, INC. 10,763,080

17. Mr. Marcos O. Cojuangco SILVER LEAF PLANTATION, INC 10,763,080

PCY OIL MANUFACTURING CORP. 671,464

18. Mr. Rafael G. Abello

57 | P a g e
 METROPLEX COMMODITIES, INC. 671,104 EDUARDO M. COJUANGCO, JR. 52,900

LUCENA OIL FACTORY, INC. 676,696

TOTAL 108,846,948
DISCOVERY REALTY CORP. 676,808 ==============
DREAM PASTURES, INC. 676,948
The above shares are once again referred to as "corporate shares" in the petition.
FAR EAST RANCH, INC. 676,908 At the meeting, a representative of the corporate share maintained that they are
LHL CATTLE CORPORATION 676,860 not under sequestration, or if they are under sequestration, the PCGG had no
authority to vote them. Nevertheless, the PCGG was allowed to vote the corporate
ARCHIPELAGO REALTY CORP. 671,040 shares and the result of the election was as follows ––

SOUTHERN STAR CATTLE CORP. 676,376

Stockholder No. of Votes
REDDEE DEVELOPERS, INC. 676,280
1. Andres Soriano III 549,648,661
LANDAIR INT'L. MARKETING CORP. 675,856
2. Francisco C. Eizmendi,Jr. 549,105,318
FIRST UNITED TRANSPORT, INC. 675,848
3. Eduardo J. Soriano 548,864,733
CHRISTENSEN PLANTATION COMPANY 675,680
4. Antonio J. Roxas 548,809,271
AGR'L. CONSULTANCY SERV. INC. 671,624
5. Benigno Toda, Jr. 548,751,713
ECHO RANCH, INC. 671,584
6. Eduardo De Los Angeles 522,678,527
NORTHERN CARRIERS CORPORATION 671,560
7. Feliciano Belmonte 517,170,373
RADIO AUDIENCE DEVELOPERS
INTEGRATED ORGANIZATION, INC 671,148 8. Renato Valencia 517,048,521

RADYO PILIPINO CORPORATION 671,104 9. Domingo Lee 517,014,895

SAN ESTEBAN DEVELOPMENT CORP. 670,452 10. Teodoro L. Locsin, Jr. 516,361,120

BALETE RANCH, INC. 665,576 11. Oscar Hilado 516,197,450

VERDANT PLANTATIONS, INC. 581,900 12. Philip Ella Juico 516,118,723

KAUNLARAN AGRICULTURAL CORP. 581,900 13. Adolfo S. Azcuna 516,105,147

VESTA AGRICULTURAL CORP. 581,900 14. Edison Coseteng 516,047,825

ORO VERDE SERVICES, INC. 529,000 15. Patricio Pineda 515,990,250

KALAWAKAN RESORTS, INC. 529,000 16. Eduardo M. Cojuangco, Jr. 37,335,365

58 | P a g e
 17. Marcos O Cojuangco 73,404 One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or
18. Rafael G. Abello 40,404 provisionally taken over. As already earlier stressed with no little
insistence, the act of sequestration, freezing or provisional takeover of
19. Enrique M. Cojuangco 34,950 property does not import or bring about a divestment of title over said
property; does not make the PCGG the owner thereof. In relation to the
20. Manuel M. Cojuangco 30,955 property sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it can not perform acts of strict
Uncast votes 3,150,231 ownership; and this is specially true in the situations contemplated by the
sequestration rules where, unlike cases of receivership, for example, no
Invalid votes 381,865 court exercises effective supervision or can upon due application and
hearing, grant authority for the performance of acts of dominion.

TOTAL 7,956,960,120
================
The fifteen individuals who received the highest number of votes were declared
elected.
Representatives of the corporate shares manifested that if they were allowed to
vote their shares, the votes corresponding to their shares, a total of 108,846,948
shares, amounting to 1,632,704,220 votes, would have been cast equally, or
544,234, 740 votes each for petitioners Eduardo Cojuangco, Jr., Enrique M.
Cojuangco and Manuel M. Cojuangco, all of whom would have been among those
who received 15 highest number of votes, and that respondents Adolfo S. Azcuna,
Edison Coseteng and Patricio Pineda would not be included therein, and should
thus be ousted from the board of directors.
As the petition under G.R. No. 91925 which was decided adversely by the
Sandiganbayan is now before this Court, and since time is of the essence as
petitioners have been denied the right to vote since 1986, instead of seeking relief
from the Sandiganbayan, the petitioners filed this petition for quo warranto (G.R.
No. 93005), the issues in which are the same as those raised in G.R. No. 91925.
The petitions are impressed with merit.
Nothing is more settled than the ruling of this Court in BASECO VS. PCGG,2 that
the PCGG cannot exercise acts of dominion over property sequestered. It may not
vote sequestered shares of stock or elect the members of the board of directors of
the corporation concerned —
a. PCGG May Not Exercise Acts of Ownership
59 | P a g e
Equally evident is that the resort to the provisional remedies in
question should entail the least possible interference with business
operations or activities so that, in the event that the accusation of the
business enterprise being "ill-gotten" be not proven, it may be returned to
its rightful owner as far as possible in the same condition as it was at the
time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the
property or business sequestered or provisionally taken over, much like a
court-appointed receiver, such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and
generally do such other acts and things as may be necessary to fulfill its
mission as conservator and administrator. In this context, it may in
addition enjoin or restrain any actual or threatened commission of acts by
any person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual its efforts to carry out its task; punish for
direct or indirect contempt in accordance with the Rules of Court; and
seek and secure the assistance of any office, agency or instrumentality of
the government. In the case of sequestered businesses generally, (i.e.,
going concerns, businesses in current operation), as in the case of
sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, "watchdog" or overseer, it is not that of manager,
or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities or
Persons Close to him, Limitations Thereon
 Now, in the special instance of a business enterprise shown by evidence to
have been "taken over by the government of the Marcos Administration or
by entities or persons close to former President Marcos," the PCGG is
given power and authority, as already adverted to, to "provisionally take
(it) over in the public interest or to prevent . . . (its) disposal or
dissipation" and since the term is obviously employed in reference to
going concerns, or business enterprises in operation, something more than
mere physical custody is connoted; the PCGG may in this case exercise
some measure of control in the operation, running, or management of the
business itself. But even in this special situation, the intrusion into
management should be restricted to the minimum degree necessary to
accomplish the legislative will, which is "to prevent the disposal or
dissipation" of the business enterprise. There should be no hasty,
indiscriminate, unreasoned replacement or substitution of management
officials, or change of policies, particularly in respect of viable
establishments. In fact, such a replacement or substitution should be
avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the
PCGG. And it goes without saying that where replacement of management
officers may be called for, the greatest prudence, circumspection, care
and attention should accompany that undertaking to the end that truly
competent, experienced and honest managers may be recruited. There
should be no role to be played in this area by rank amateurs, no matter
how well meaning. The road to hell, it has been said, is paved with good
intentions. The business is not to be experimented or played around with,
not run into the ground, not driven to the bankruptcy, not fleeced not
ruined. Sight should never be lost sight of the ultimate objective of the
whole exercise, which is to turn over the business to the Republic, once
judicially established to be "ill-gotten." Reason dictates that it is only
under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken over
may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances
that the PCGG may properly exercise the prerogative to vote sequestered
stock of corporations, granted to it by the President of the Philippines
through a memorandum dated June 26, 1986. That memorandum
authorizes the PCGG "pending the outcome of proceedings to determine
the ownership of . . . (sequestered) shares of stock," "to vote such shares
of stock as it may have sequestered in corporations at all stockholders"
meetings called for the election of directors, declaration of dividends,
60 | P a g e
amendment of the Articles of Incorporation, etc." The Memorandum
should be construed in such a manner as to be consistent with, and not
contradictory of the Executive Orders earlier promulgated on the same
matter. There should be no exercise of the right to vote simply because
the right exists, or because the stocks sequestered constitute the
controlling or a substantial part of the corporate voting power. The stock
is not to be voted to replace directors, or revise the articles or by-laws, or
otherwise bring about substantial changes in policy, program of practice of
the corporation except for demonstrably weighty and defensible grounds,
and always in the context of the stated purposes of sequestration or
provisional takeover, i.e., to prevent the dispersion or undue disposal of
the corporate assets. Directors are not to be voted out simply because the
power to do so exists. Substitution of directors is not to be done without
reason or rhyme, should indeed be shunned if at all possible, and
undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstances as to assure
that the replacements are truly possessed of competence, experience and
probity
In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos
and were no longer owners of any stock in the firm, if they ever were at
all. This is why, in its Resolution of October 28, 1986; this Court declared
that ––
Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders meeting
for the election of directors as authorized by the Memorandum of the
President . . . (to the PCGG) dated June 26, 1986, particularly, where as in
this case, the government can, through its designated directors, properly
exercise control and management over what appear to be properties and
assets owned and belonging to the government itself and over which the
persons who appear in this case on behalf of BASECO have failed to show
any right or even any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in
the BASECO Board in the management of the company's affairs should
henceforth be guided and governed by the norms herein laid down. They
should never for a moment allow themselves to forget that they are
conservators, not owners of the business; they are fiduciaries trustees, of
 whom the highest degree of diligence and rectitude is, in the premises,
required.3
In BASECO, Mr. Justice Padilla, in his concurring opinion4 asserted that the
removal and election of members of the board of directors are clear acts of
ownership on the part of the shareholders of the corporation, a right that should
be denied the PCGG under ordinary circumstances. Of course, in BASECO, wherein
it appears that Mr. Marcos took possession and control of 95% of the total
ownership thereof which he could not have acquired out of his lawfully gotten
wealth, the PCGG was allowed by the Court to vote the sequestered shares.
Madame Justice Melencio-Herrera in a concurring opinion which in turn was
concurred in by Justice Feliciano, stated that she has no objection to according the
right to vote sequestered stock in case of a take-over of business actually
belonging to the government and whose capitalization comes from public funds
but which, somehow, landed in the hands of private persons, as in the case of
BASECO. She advised caution and prudence in the case of sequestered shares of
an on-going private business enterprise, specially the sensitive ones, since the true
and real ownership of said shares is yet to be determined and proved more
conclusively before the courts.5
Mr. Justice Gutierrez, in a concurring and dissenting opinion, reiterated that the
election of the board of directors is distinctly and unqualifiedly an act of
ownership. He would disallow the voting of shares by the PCGG on the ground
that the same is authoritarian and ultra vires.6
Mr. Justice Cruz also dissented, He asserted that the acts of voting the shares and
reorganizing the board of directors are acts of ownership which clash with the
implacable principles of a free society, foremost of which is due process. 7
The Solicitor General, however, contends in these two cases that if the purpose of
sequestration is to "help prevent the dissipation of the corporation's assets" or to
"preserve" the said assets, the PCGG may resort to "acts of strict ownership," such
as voting the sequestered shares.8
There is no proof or indications showing that the petitioners seek to exercise their
right as stockholders to dissipate, dispose, conceal, destroy, transfer or encumber
their sequestered shares. On the other hand, there is no doubt that petitioners
have the right to vote their shares at the shareholders meeting even if they are
sequestered and that they as stockholders have a right to be voted for as
members of the board of directors of SMC.9
61 | P a g e
Besides, there are other means by which the said shares may be preserved and
their dissipation prevented. The PCGG may restrain their sale, encumbrance,
assignment or any other disposition during the period of sequestration. It may
monitor the business operations of petitioners as to said shares. It need not vote
the shares in order to accomplish its role as conservator.
The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of
strict ownership of sequestered property. It is a mere conservator. It may not vote
the shares in a corporation and elect the members of the board of directors. The
only conceivable exception is in a case of a takeover of a business belonging to
the government or whose capitalization comes from public funds, but which
landed in private hands as in BASECO.
The constitutional right against deprivation of life, liberty and property without due
process of law is so well-known and too precious so that the hand of the PCGG
must be stayed in its indiscriminate takeover of and voting of shares allegedly ill-
gotten in these cases. It is only after appropriate judicial proceedings when a clear
determination is made that said shares are truly ill-gotten when such a takeover
and exercise of acts of strict ownership by the PCGG are justified.
It is true that in G.R. No. 91925 the term of office of the term of office of the
assailed members of the board of directors, private respondents therein, for 1989-
1990 had expired. To this extent said petition may be considered moot and
academic. However, the issue of whether public respondent Sandiganbayan
committed a grave abuse of discretion in rendering the resolution dated November
16, 1989, which affects all subsequent shareholders' meetings and elections of the
members of the board of directors of SMC, is a justiciable controversy that must
be resolved.
As to G.R. No. 93005 the term of office of private respondents as members of the
SMC board of directors will expire on or after another election is held in April 1991.
Thus, the issue raised in G.R. No. 93005 relating to the election of the members of
the board for 1990-1991 pursuant to sequestered shares of stock is a justiciable
issue which should be determined once and for all.
In the light of the foregoing discussion, the Court finds and so holds that the
PCGG has no right to vote the sequestered shares of petitioners including the
sequestered corporate shares. Only their owners, duly authorized representatives
or proxies may vote the said shares. Consequently, the election of private
respondents Adolfo Azcuna, Edison Coseteng and Patricio Pineda as members of
the board of directors of SMC for 1990-1991 should be set aside.
However, petitioners cannot be declared duly elected members of the board of
directors thereby. An election for the purpose should be held where the
questioned shares may be voted by their owners and/or their proxies. Such
election may be held at the next shareholders' meeting in April 1991 or at such
date as may be set under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto officers who
in good faith assumed their duties and responsibilities as duly elected members of
the board of directors of the SMC. They are thereby legally entitled to the
emoluments of the office including salary, fees and other compensation attached
to the office until they vacate the same.10
Nevertheless, the right of the Government, represented by the PCGG, as
conservator of sequestered assets must be adequately protected.
The important rights of stockholders are the following:
a) the right to vote;
b) the right to receive dividends;
c) the right to receive distributions upon liquidation of the corporation;
and
d) the right to inspect the books of the corporation.
It is through the right to vote that the stockholder participates in the management
of the corporation. The right to vote, unlike the rights to receive dividends and
liquidating distributions, is not a passive thing because management or
administration is, under the Corporation Code, vested in the board of directors,
with certain reserved powers residing in the stockholders directly. The board of
directors and executive committee (or management committee) and the corporate
officers selected by the board may make it very difficult if not impossible for the
PCGG to carry out its duties as conservator if the Board or officers do not
cooperate, are hostile or antagonistic to the conservator's objectives.
Thus, it is necessary to achieve a balancing of or reconciliation between the
stockholder's right to vote and the conservator's statutory duty to recover and in
the process thereof, to conserve assets, thought to be ill-gotten wealth, until final
judicial determination of the character of such assets or until a final compromise
agreement between the parties is reached.
62 | P a g e
There are, in the main, two (2) types of situations that need to be addressed. The
first situation arises where the sequestered shares of stock constitute a distinct
minority of the voting shares of the corporation involved, such that the registered
owners of such sequestered shares would in any case be able to vote in only a
minority of the Board of Directors of the corporation. The second situation arises
where the sequestered shares of stock constitute a majority of the voting shares
of the corporation concerned, such that the registered owners of such shares of
stock would in any case be entitled to elect a majority of the Board of Directors of
the corporation involved.
Turning to the first situation, the Court considers and so holds that in order to
enable the PCGG to perform its functions as conservator of the sequestered shares
of stock pending final determination by the courts as to whether or not the same
constitute ill-gotten wealth or a final compromise agreement between the parties,
the PCGG must be represented in the Board of Directors of the corporation and of
its majority-owned subsidiaries or affiliates and in the Executive Committee (or its
equivalent) and the Audit Committee thereof, in at least an ex officio (i.e., non-
voting) capacity. The PCGG representative must have a right of full access to and
inspection of (including the right to obtain copies of) the books, records and all
other papers of the corporation relating to its business, as well as a right to
receive copies of reports to the Board of Directors, its Executive (or equivalent)
and Audit Committees. By such representation and rights of full access, the PCGG
must be able so to observe and monitor the carrying out of the business of the
corporation as to discover in a timely manner any move or effort on the part of the
registered owners of the sequestered stock, alone or in concert with other
shareholders, to conceal, waste and dissipate the assets of the corporation, or the
sequestered shares themselves, and seasonably to bring such move or effort to
the attention of the Sandiganbayan for appropriate action.
In the second situation above referred to, the Court considers and so holds that
the following minimum safeguards must be set in place and carefully maintained
until final judicial resolution of the question of whether or not the sequestered
shares of stock (or, in a proper case, the underlying assets of the corporation
concerned) constitute ill-gotten wealth or until a final compromise agreement
between the parties is reached:
a. An independent comptroller must be appointed by the Board of
Directors upon nomination of the PCGG as conservator.1âwphi1 The
comptroller shall not be removable (nor shall his position be abolished or
his compensation changed) without the consent of the conservator. The
comptroller shall, in addition to his other functions as Such, have charge
of internal audit.
 b. The corporate secretary must be acceptable to the conservator. If the
corporate secretary ceases to be acceptable to the conservator, a new one
must be appointed by the Board of Directors upon nomination of the
conservator.
c. The external auditors of the corporation must be independent and must
be acceptable to the conservator.1âwphi1The independent external
auditors shall not be changed without the consent of the conservator.
d. The conservator must be represented in the Board of Directors and in
the Executive (or equivalent) and Audit Committees of the corporation
involved and of its majority-owned subsidiaries or affiliates. The
representative of the conservator must be a full director (not merely an
honorary or ex oficio director) with the right to vote and all other rights
and duties of a member of the Board of Directors under the Corporation
Code. The conservator's representative shall not be removed from the
Board of Directors (or the mentioned Committees) without the consent of
the conservator. The conservator shall, however, have the right to remove
and change its representative at any time, and the new representative
shall be promptly elected to the Board and its mentioned Committees.
e. All transactions involving the disbursement of corporate funds in excess
of P5 million must have the prior approval of the director representing the
conservator, in order to be valid and effective.
f. The incurring of debt by the corporation, whether in the form of bonds,
debentures commercial paper or any other form, in excess of P5 million,
must have the prior approval of the director representing the conservator,
in order to be valid and effective.
g. The disposition of a substantial part of assets of the corporation
(substantial meaning in excess of P5 million) shall require the prior
approval of the director representing the conservator, in order to be valid
and effective.
h. The above safeguards must be written into the articles of incorporation
and by-laws of the company involved. In other words, the articles of
incorporation and by-laws of the company must be amended so as to
incorporate the above safeguards.
63 | P a g e
i. Any amendment of the articles of incorporation or by-laws of the
company that will modify in any way any of the above safeguards, shall
need the prior approval of the director representing the conservator.
The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is
intended merely to be indicative. The precise amount may differ depending upon
the size of the corporation involved and the reasonable operating requirements of
its business.
Whether a particular case falls within the first or the second type of situation
described above, the following safeguards are indispensably necessary:
1. The sequestered shares and any stock dividends pertaining to such
shares, may not be sold, transferred, alienated, mortgaged, or otherwise
disposed of and no such sale, transfer or other disposition shall be
registered in the books of the corporation, pending final judicial resolution
of the question of ill-gotten wealth or a final compromise agreement
between the parties; and
2. Dividend and liquidating distributions shall not be delivered to the
registered stockholders of the sequestered shares, including stock
dividends pertaining to such shares, but shall instead be deposited in an
escrow, interest-bearing, account in a first class bank or banks, acceptable
to the Sandiganbayan, to be held by such banks for the benefit of
whoever is held by final judicial decision or final compromise agreement,
to be entitled to the shares involved.
The Court is aware that implementation of some of the above safeguards may
require agreement between the registered stockholders and the PCGG as well as
action on the part of the Securities and Exchange Commission. The Court,
therefore, directs petitioners and the PCGG to effect the implementation of this
decision under the supervision and control of the Sandiganbayan so that the right
to vote the sequestered shares and the installation and operation of the
safeguards above-specified may be exercised and effected in a substantially
contemporaneous manner and with all deliberate dispatch.
WHEREFORE, the Petitions are GIVEN DUE COURSE and GRANTED. Private
respondents Adolfo Azcuna, Edison Coseteng and Patricio Pineda are hereby
DIRECTED to vacate their respective offices as members of the Board of Directors
of the SMC as soon as this decision is implemented. Contemporaneously with the
installation of the safeguards above-required to enable the PCGG to perform its
statutory role as conservator of the sequestered shares of stock or assets, the
respondent SMC is hereby ORDERED to allow the petitioners to vote their shares
in person or by proxy and to be voted for as members of the Board of Directors of
the SMC and otherwise to enjoy the rights and privileges of shareholders; and the
PCGG is hereby ENJOINED from voting the sequestered shares of stock except as
otherwise authorized in the safeguards above-required. The questioned order of
the Sandiganbayan dated 16 November 1989 is hereby SET ASIDE; however, the
implementation of this decision shall be carried out under the supervision and
control of the Sandiganbayan. The Court makes no pronouncement as to costs.

SO ORDERED.

64 | P a g e
G.R. No. 80767 April 22, 1991
BOY SCOUTS OF THE PHILIPPINES, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, FORTUNATO ESGUERRA,
ROBERTO MALABORBOR, ESTANISLAO MISA, VICENTE EVANGELISTA,
and MARCELINO GARCIA, respondents.
Julio O. Lopez for petitioner.
FELICIANO, J.:
This Petition for Certiorari is directed at (1) the Decision,1 dated 27 February
1987, and (2) the Resolution2 dated 16 October 1987, both issued by the
National Labor Relations Commission ("NLRC") in Case No. 1637-84.
Private respondents Fortunato C. Esquerra, Roberto O. Malaborbor,
Estanislao M. Misa, Vicente N. Evangelista and Marcelino P. Garcia, had all
been rank-and-file employees of petitioner Boy Scouts of the Philippines
("BSP"). At the time of termination of their services in February 1985, private
respondents were stationed at the BSP Camp in Makiling, Los Baños, Laguna.
The events which led to such termination of services are as follows:
On 19 October 1984, the Secretary-General of petitioner BSP issued Special
Orders Nos. 80, 81, 83, 84 and 85 addressed separately to the five (5) private
respondents, informing them that on 20 November 1984, they were to be
transferred from the BSP Camp in Makiling to the BSP Land Grant in
Asuncion, Davao del Norte. These Orders were opposed by private
respondents who, on 4 November 1984, appealed the matter to the BSP
National President.
On 6 November 1984, petitioner BSP conducted a pre-transfer briefing at its
National Headquarters in Manila. Private respondents were in attendance
during the briefing and they were there assured that their transfer to Davao del
Norte would not involve any diminution in salary, and that each of them would
receive a relocation allowance equivalent to one (1) month's basic pay. This
65 | P a g e
assurance, however, failed to persuade private respondents to abandon their
opposition to the transfer orders issued by the BSP Secretary-General.
On 13 November 1984, a complaint3
(docketed as NLRC Case No. 16-84J) for illegal transfer was filed with the then
Ministry of Labor and Employment, Sub-Regional Arbitration Branch IV, San
Pablo City, Laguna. Private respondents there sought to enjoin implementation
of Special Orders Nos. 80, 81, 83, 84 and 85, alleging, among other things,
that said orders were "indubitable and irrefutable action[s] prejudicial not only
to [them] but to [their] families and [would] seriously affect [their] economic
stability and solvency considering the present cost of living."
On 21 November 1984 (or the day immediately following the date of scheduled
transfer), the BSP Camp Manager in Makiling issued a Memorandum requiring
the five (5) private respondents to explain why they should not be charged
administratively for insubordination. The Memorandum was a direct result of
the refusal by private respondents, two (2) days earlier, to accept from
petitioner BSP their respective boat tickets to Davao del Norte and their
relocation allowances.
Meanwhile, in a letter of the same date, the BSP National President informed
private respondents that their refusal to comply with the Special Orders was
not sufficiently justified and constituted rank disobedience. Memoranda
subsequently issued by the BSP Secretary-General stressed that such refusal
as well as the explanations proffered therefor, were unacceptable and could
altogether result in termination of employment with petitioner BSP. These
warnings notwithstanding, private respondents continued pertinaciously to
disobey the disputed transfer orders.
Petitioner BSP consequently imposed a five-day suspension on the five (5)
private respondents, in the latter part of January 1985. Subsequently, by
Special Order dated 12 February 1985 issued by the BSP Secretary-General,
private respondents' services were ordered terminated effective 15 February
1985.
On 22 February 1985, private respondents amended their original complaint to
include charges of illegal dismissal and unfair labor practice against petitioner
BSP.4
The Labor Arbiter thereafter proceeded to hear the complaint.
In a decision5 dated 31 July 1985, the Labor Arbiter ordered the dismissal of
private respondents' complaint for lack of merit.
On 27 February 1987, however, the ruling of the Labor Arbiter was reversed by
public respondent, NLRC, which held that private respondents had been
illegally dismissed by petitioner BSP. The dispositive portion of the NLRC
decision read:
WHEREFORE, premises considered the Decision appealed from is
hereby SET ASIDE and a new one entered ordering the respondent-
appellee [petitioner BSP] to reinstate the complainants-appellants
[private respondents] to their former positions without loss of seniority
rights and other benefits appurtenant thereto and with full backwages
from the time they were illegally dismissed from the service up to the
date of their actual reinstatement.
SO ORDERED.
The Court notes at the outset that in the Position Paper6 filed by petitioner BSP
with the Labor Arbiter, it was alleged in the second paragraph thereof, that
petitioner is a "civic service, non-stock and non-profit organization, relying
mostly [on] government and public support, existing under and by virtue of
Commonwealth Act No. 111, as amended, by Presidential Decree No. 460 . . .
" A similar allegation was contained in the Brief for Appellee7 and in the
Petition8 and Memorandum9 filed by petitioner BSP with public respondent
NLRC and this Court, respectively. The same allegation, moreover, appeared
in the Comment10 (also treated as the Memorandum) submitted to this Court by
the Solicitor General on behalf of public respondent NLRC; for their part,
private respondents stated in their Appeal Memorandum11 with the NLRC that
petitioner BSP is "by mandate of law a Public Corporation," a statement
reiterated by them in their Memorandum12 before this Court.
In a Resolution dated 9 August 1989, this Court required the parties and the
Office of the Government Corporate Counsel to file a comment on the question
of whether or not petitioner BSP is in fact a government-owned or controlled
corporation.
Petitioner, private respondents, the Office of the Solicitor General and the
Office of the Government Corporate Counsel filed their respective comments.
66 | P a g e
The central issue is whether or not the BSP is embraced within the Civil
Service as that term is defined in Article IX (B) (2) (1) of the 1987 Constitution
which reads as follows:
The Civil Service embraces all branches, subdivisions, instrumentality
mentalities and agencies of the Government, including government-
owned or controlled corporations with original charters.
xxx xxx xxx
The answer to the central issue will determine whether or not private
respondent NLRC had jurisdiction to render the Decision and Resolution which
are here sought to be nullified.
The responses of the parties, on the one hand, and of the Office of the
Solicitor General and the Office of the Government Corporate Counsel, upon
the other hand, in compliance with the Resolution of this Court of 9 August
1989, present a noteworthy uniformity. Petitioner BSP and private respondents
submit substantially the same view "that the BSP is a purely private
organization". In contrast, the Solicitor General and the Government Corporate
Counsel take much the same position, that is, that the BSP is a "public
corporation' or a "quasi-public corporation" and, as well, a "government
controlled corporation." Petitioner BSP's compliance with our Resolution
invokes the following provisions of its Constitution and By-laws:
The Boy Scouts of the Philippines declares that it is an independent,
voluntary, non-political, non-sectarian and non-governmental
organization, with obligations towards nation building and with
international orientation.
The BSP, petitioner stresses, does not receive any monetary or financial
subsidy from the Government whether on the national or local level.13 Petitioner
declares that it is a "purely private organization" directed and controlled by its
National Executive Board the members of which are, it is said, all "voluntary
scouters," including seven (7) Cabinet Secretaries.14
Private respondents submitted a supplementary memorandum arguing that
while petitioner BSP was created as a public corporation, it had lost that status
when Section 2 of Commonwealth Act No. 111 as amended by P.D. No. 460
conferred upon it the powers which ordinary private corporations organized
under the Corporation Code have:
 Sec. 2. The said corporation shall have perpetual succession with
power to sue and be sued; to hold such real and personal estate as
shall be necessary for corporate purposes, and to receive real and
personal property by gift, devise, or bequest; to adopt a seal, and to
alter or destroy the same at pleasure; to have offices and conduct its
business and affairs in the City of Manila and in the several provinces;
to make and adopt by-laws, rules and regulations not inconsistent with
the laws of the Philippines, and generally to do all such acts and things
(including the establishment of regulations for the election of
associates and successors: as may be necessary to carry into effect
the provisions of the Act and promote the purposes of said corporation.
Private respondents also point out that the BSP is registered as a private
employer with the Social Security System and that all its staff members and
employees are covered by the Social Security Act, indicating that the BSP had
lost its personality or standing as a public corporation. It is further alleged that
the BSP's assets and liabilities, official transactions and financial statements
have never been subjected to audit by the government auditing office, i.e., the
Commission on Audit, being audited rather by the private auditing firm of Sycip
Gorres Velayo and Co. Private respondents finally state that the appointments
of BSP officers and staff were not approved or confirmed by the Civil Service
Commission.
The views of the Office of the Solicitor General and the Office of the
Government Corporate Counsel on the above issue appeared to be generally
similar. The Solicitor General's Office, although it had appeared for the NLRC
and filed a Comment on the latter's behalf on the merits of the Petition
for Certiorari, submitted that the BSP is a government-owned or controlled
corporation, having been created by virtue of Commonwealth Act No. 111
entitled "An Act to Create a Public Corporation to be known as the Boy Scouts
of the Philippines and to Define its Powers and Purposes." The Solicitor
General stressed that the BSP was created in order to "promote, through
organization, and cooperation with other agencies the ability of boys to do
things for themselves and others, to train them in scoutcraft, and to teach them
patriotism, courage, self-reliance, and kindred virtues, using the methods
which are now in common use by boy scouts."5 He further noted that the BSP's
objectives and purposes are "solely of a benevolent character and not for
pecuniary profit by its members.16 The Solicitor General also underscored the
extent of government participation in the BSP under its charter as reflected in
the composition of its governing body:
67 | P a g e
The governing body of the said corporation shall consist of a National
Executive Board composed of (a) the President of the Philippines or
his representative; (b) the charter and life members of the Boy Scouts
of the Philippines; (c) the Chairman of the Board of Trustees of the
Philippine Scouting Foundation; (d) the Regional Chairman of the
Scout Regions of the Philippines; (e) the Secretary of Education and
Culture, the Secretary of Social Welfare, the Secretary of National
Defense, the Secretary of Labor, the Secretary of Finance, the
Secretary of Youth and Sports, and the Secretary of local Government
and Community Development; (f) an equal number of individuals from
the private sector; (g) the National President of the Girl Scouts of the
Philippines; (h) one Scout of Senior age from each Scout Region to
represent the boy membership; and (i) three representatives of the
cultural minorities. Except for the Regional Chairman who shall be
elected by the Regional Scout Councils during their annual meetings,
and the Scouts of their respective regions, all members of the National
Executive Board shall be either by appointment or cooption, subject to
ratification and confirmation by the Chief Scout, who shall be the Head
of State. . . .17 (Emphasis supplied)
The Government Corporate Counsel, like the Solicitor General, describes the
BSP as a "public corporation" but, unlike the Solicitor General, suggests that
the BSP is more of a "quasi corporation" than a "public corporation." The BSP,
unlike most public corporations which are created for a political purpose, is not
vested with political or governmental powers to be exercised for the public
good or public welfare in connection with the administration of civil
government. The Government Corporate Counsel submits, more specifically,
that the BSP falls within the ambit of the term "government-owned or controlled
corporation" as defined in Section 2 of P.D. No. 2029 (approved on 4 February
1986) which reads as follows:
A government-owned or controlled corporation is a stock or a non-
stock corporation, whether performing governmental or proprietary
functions, which is directly chartered by special law or if organized
under the general corporation law is owned or controlled by the
government directly, or indirectly through a parent corporation or
subsidiary corporation, to the extent of at least a majority of its
outstanding capital stock or its outstanding voting capital stock.
xxx xxx xxx
(Emphasis supplied)
Examining the relevant statutory provisions and the arguments outlined above,
the Court considers that the following need to be considered in arriving at the
appropriate legal characterization of the BSP for purposes of determining
whether its officials and staff members are embraced in the Civil Service.
Firstly, BSP's functions as set out in its statutory charter do have a public
aspect. BSP's functions do relate to the fostering of the public virtues of
citizenship and patriotism and the general improvement of the moral spirit and
fiber of our youth. The social value of activities like those to which the BSP
dedicates itself by statutory mandate have in fact, been accorded constitutional
recognition. Article II of the 1987 Constitution includes in the "Declaration of
Principles and State Policies," the following:
Sec. 13. The State recognizes the vital role of the youth in nation-
building and shall promote and protect their physical, moral, spiritual,
intellectual, and social well-being. It shall inculcate in the youth
patriotism and nationalism, and encourage their involvement in public
and civic affairs.
At the same time, BSP's sanctions do not relate to the governance of any part
of territory of the Philippines; BSP is not a public corporation in the same
sense that municipal corporations or local governments are public
corporations. BSP's functions can not also be described as proprietary
functions in the same sense that the functions or activities of government-
owned or controlled corporations like the National Development Company or
the National Steel Corporation can be described as proprietary or "business-
like" in character. Nevertheless, the public character of BSP's functions and
activities must be conceded, for they pertain to the educational, civic and
social development of the youth which constitutes a very substantial and
important part of the nation.
The second aspect that the Court must take into account relates to the
governance of the BSP. The composition of the National Executive Board of
the BSP includes, as noted from Section 5 of its charter quoted earlier,
includes seven (7) Secretaries of Executive Departments. The seven (7)
Secretaries (now six [6] in view of the abolition of the Department of Youth and
Sports and merger thereof into the Department of Education, Culture and
Sports) by themselves do not constitute a majority of the members of the
National Executive Board. We must note at the same time that the
appointments of members of the National Executive Board, except only the
appointments of the Regional Chairman and Scouts of Senior age from the
various Scout Regions, are subject to ratification and confirmation by the Chief
Scout, who is the President of the Philippines. Vacancies to the Board are
68 | P a g e
filled by a majority vote of the remaining members thereof, but again subject to
ratification and confirmation by the Chief Scout.18 We must assume that such
confirmation or ratification involves the exercise of choice or discretion on the
part of ratifying or confirming power. It does appears therefore that there is
substantial governmental (i.e., Presidential) participation or intervention in the
choice of the majority of the members of the National Executive Board of the
BSP.
The third aspect relates to the character of the assets and funds of the BSP.
The original assets of the BSP were acquired by purchase or gift or other
equitable arrangement with the Boy Scouts of America, of which the BSP was
part before the establishment of the Commonwealth of the Philippines. The
BSP charter, however, does not indicate that such assets were public or statal
in character or had originated from the Government or the State. According to
petitioner BSP, its operating funds used for carrying out its purposes and
programs, are derived principally from membership dues paid by the Boy
Scouts themselves and from property rentals. In this respect, the BSP appears
similar to private non-stock, non-profit corporations, although its charter
expressly envisages donations and contributions to it from the Government
and any of its agencies and instrumentalities.19 We note only that BSP funds
have not apparently heretofore been regarded as public funds by the
Commission on Audit, considering that such funds have not been audited by
the Commission.
While the BSP may be seen to be a mixed type of entity, combining aspects of
both public and private entities, we believe that considering the character of its
purposes and its functions, the statutory designation of the BSP as "a public
corporation" and the substantial participation of the Government in the
selection of members of the National Executive Board of the BSP, the BSP, as
presently constituted under its charter, is a government-controlled corporation
within the meaning of Article IX. (B) (2) (1) of the Constitution.
We are fortified in this conclusion when we note that the Administrative Code
of 1987 designates the BSP as one of the attached agencies of the
Department of Education, Culture and Sports ("DECS").20 An "agency of the
Government" is defined as referring to any of the various units of the
Government including a department, bureau, office, instrumentality,
government-owned or-controlled corporation, or local government or distinct
unit therein.21"Government instrumentality" is in turn defined in the 1987
Administrative Code in the following manner:
 Instrumentality –– refers to any agency of the National
Government, not integrated within the department framework, vested
with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying
operational autonomy usually through a charter. This term
includesregulatory agencies, chartered institutions and government-
owned or controlled corporations.22 (Emphasis supplied)
The same Code describes a "chartered institution" in the following terms:
Chartered institution –– refers to any agency organized or operating
under a special charter, and vested by law with functions relating to
specific constitutional policies or objectives. This term includes the
state universities and colleges, and the monetary authority of the
State.23 (Emphasis supplied)
We believe that the BSP is appropriately regarded as "a government
instrumentality" under the 1987 Administrative Code.
It thus appears that the BSP may be regarded as both a "government
controlled corporation with an original charter" and as an "instrumentality" of
the Government within the meaning of Article IX (B) (2) (1) of the Constitution.
It follows that the employees of petitioner BSP are embraced within the Civil
Service and are accordingly governed by the Civil Service Law and
Regulations.
It remains only to note that even before the effectivity of the 1987 Constitution
employees of the BSP already fell within the scope of the Civil Service.
In National Housing Corporation v. Juco,24 decided in 1985, the Court,
speaking through Mr. Justice Gutierrez, held:
There should no longer be any question at this time that employees of
government-owned or controlled corporations are governed by the civil
service law and civil service rules and regulations.
Section 1, Article XII-B of the [19731 Constitution specifically provides:
The Civil Service embraces every branch, agency, subdivision and
instrumentality of the Government, including every government-owned
or controlled corporation. . . .
69 | P a g e
The 1935 Constitution had a similar provision in its Section 1, Article
XII which stated:
A Civil Service embracing all branches and subdivisions of the
Government shall be provided by law. 1âw phi 1
The inclusion of "government-owned or controlled corporations" within
the embrace of the civil service shows a deliberate effort of the framers
to plug an earlier loophole which allowed government-owned or
controlled corporations to avoid the full consequences of the all
encompassing coverage of the civil service system. The same explicit
intent is shown by the addition of "agency" and "instrumentality" to
branches and subdivisions of the Government. All offices and firms of
the government are covered. The amendments introduced in 1973 are
not idle exercises or meaningless gestures. They carry the strong
message that civil service coverage is broad and all-embracing insofar
as employment in the government in any of its governmental or
corporate arms is concerned.25
The complaint in NLRC Case No. 1637-84 having been filed on 13 November
1984, when the 1973 Constitution was still in force, our ruling in Juco applies in
the case at bar.26
In view of the foregoing, we hold that both the Labor Arbiter and public
respondent NLRC had no jurisdiction over the complaint filed by private
respondents in NLRC Case No. 1637-84; neither labor agency had before it
any matter which could validly have been passed upon by it in the exercise of
original or appellate jurisdiction. The appealed Decision and Resolution in this
case, having been rendered without jurisdiction, vested no rights and imposed
no liabilities upon any of the parties here involved. That neither party had
expressly raised the issue of jurisdiction in the pleadings poses no obstacle to
this ruling of the Court, which may motu proprio take cognizance of the issue
of existence or absence of jurisdiction and pass upon the same.27
ACCORDINGLY, the Decision of the Labor Arbiter dated 31 July 1985, and the
Decision dated 27 February 1987 and Resolution dated 16 October 1987,
issued by public respondent NLRC, in NLRC Case No. 1637-84, are hereby
SET ASIDE. All other orders and resolutions rendered in this case by the
Labor Arbiter and the NLRC are likewise SET ASIDE. No pronouncement as to
costs.