[G.R. No. 171993 : December 12, 2011] Secretary.
Secretary. Its Board of Directors, however, may, from time to time, appoint such other officers
MARC II MARKETING, INC. AND LUCILA v. JOSON, PETITIONERS, VS. ALFREDO M.
JOSON, RESPONDENT.
DECISION
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners
Marc II Marketing, Inc. and Lucila V. Joson assailed the Decision [1] dated 20 June 2005 of the
Court of Appeals in CA-G.R. SP No. 76624 for reversing and setting aside the Resolution [2] of
the National Labor Relations Commission (NLRC) dated 15 October 2002, thereby affirming the
Labor Arbiter's Decision [3] dated 1 October 2001 finding herein respondent Alfredo M. Joson's
dismissal from employment as illegal. In the questioned Decision, the Court of Appeals upheld
the Labor Arbiter's jurisdiction over the case on the basis that respondent was not an officer but
a mere employee of petitioner Marc II Marketing, Inc., thus, totally disregarding the latter's
allegation of intra-corporate controversy. Nonetheless, the Court of Appeals remanded the case
to the NLRC for further proceedings to determine the proper amount of monetary awards that
should be given to respondent.cralaw
Assailed as well is the Court of Appeals Resolution [4] dated 7 March 2006 denying their Motion
for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and
existing under and by virtue of the laws of the Philippines. It is primarily engaged in buying,
marketing, selling and distributing in retail or wholesale for export or import household
appliances and products and other items. [5] It took over the business operations of Marc
Marketing, Inc. which was made non-operational following its incorporation and registration with
the Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila) is the
President and majority stockholder of petitioner corporation. She was also the former President
and majority stockholder of the defunct Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager,
incorporator, director and stockholder of petitioner corporation.
The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated, [6] respondent has already been
engaged by petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the
General Manager of petitioner corporation. It was formalized through the execution of a
Management Contract [7] dated 16 January 1994 under the letterhead of Marc Marketing,
Inc. [8] as petitioner corporation is yet to be incorporated at the time of its execution. It was
explicitly provided therein that respondent shall be entitled to 30% of its net income for his work
as General Manager. Respondent will also be granted 30% of its net profit to compensate for
the possible loss of opportunity to work overseas. [9]
Pending incorporation of petitioner corporation, respondent was designated as the General
Manager of Marc Marketing, Inc., which was then in the process of winding up its business. For
occupying the said position, respondent was among its corporate officers by the express
provision of Section 1, Article IV [10] of its by-laws. [11]
On 15 August 1994, petitioner corporation was officially incorporated and registered with the
SEC. Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to
discharge his duties as General Manager but this time under petitioner corporation.
Pursuant to Section 1, Article IV [12] of petitioner corporation's by-laws, [13] its corporate officers
are as follows: Chairman, President, one or more Vice-President(s), Treasurer and
Page 1 of 40
as it may determine to be necessary or proper.
Per an undated Secretary's Certificate, [14] petitioner corporation's Board of Directors conducted
a meeting on 29 August 1994 where respondent was appointed as one of its corporate officers
with the designation or title of General Manager to function as a managing director with other
duties and responsibilities that the Board of Directors may provide and authorized. [15]
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations,
as evidenced by an Affidavit of Non-Operation [16] dated 31 August 1998, due to poor sales
collection aggravated by the inefficient management of its affairs. On the same date, it formally
informed respondent of the cessation of its business operation. Concomitantly, respondent was
apprised of the termination of his services as General Manager since his services as such would
no longer be necessary for the winding up of its affairs. [17]
Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against
petitioners before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-
99.
In his complaint, respondent averred that petitioner Lucila dismissed him from his employment
with petitioner corporation due to the feeling of hatred she harbored towards his family. The
same was rooted in the filing by petitioner Lucila's estranged husband, who happened to be
respondent's brother, of a Petition for Declaration of Nullity of their Marriage. [18]
For the parties'™ failure to settle the case amicably, the Labor Arbiter required them to submit
their respective position papers. Respondent complied but petitioners opted to file a Motion to
Dismiss grounded on the Labor Arbiter's lack of jurisdiction as the case involved an intra-
corporate controversy, which jurisdiction belongs to the SEC [now with the Regional Trial Court
(RTC)]. [19] Petitioners similarly raised therein the ground of prescription of respondent's
monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order [20] deferring the resolution of
petitioners' Motion to Dismiss until the final determination of the case. The Labor Arbiter also
reiterated his directive for petitioners to submit position paper. Still, petitioners did not
comply. Insisting that the Labor Arbiter has no jurisdiction over the case, they instead filed an
Urgent Motion to Resolve the Motion to Dismiss and the Motion to Suspend Filing of Position
Paper.
In an Order [21] dated 15 February 2001, the Labor Arbiter denied both motions and declared
final the Order dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five
days from receipt thereof within which to file position paper, otherwise, their Motion to Dismiss
will be treated as their position paper and the case will be considered submitted for decision.
Petitioners, through counsel, moved for extension of time to submit position paper. Despite the
requested extension, petitioners still failed to submit the same. Accordingly, the case was
submitted for resolution.
On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal
portion reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered declaring [respondent's]
dismissal from employment illegal. Accordingly, [petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent position without loss of
seniority rights, benefits, and privileges;
 2. Jointly and severally liable to pay [respondent's] unpaid wages in the
amount of P450,000.00 per month from [26 March 1996] up to time of
dismissal in the total amount of P6,300,000.00;
3. Jointly and severally liable to pay [respondent's] full backwages in the
amount of P450,000.00 per month from date of dismissal until actual
reinstatement which at the time of promulgation amounted to
P21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of
P100,000.00 and attorney's fees in the amount of 5% of the total monetary
award. [22] [Emphasis supplied.
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners' Motion to Dismiss by
finding the ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that
petitioners failed to adduce evidence to prove that the present case involved an intra-corporate
controversy. Also, respondent's money claim did not arise from his being a director or
stockholder of petitioner corporation but from his position as being its General Manager. The
Labor Arbiter likewise held that respondent was not a corporate officer under petitioner
corporation's by-laws. As such, respondent's complaint clearly arose from an employer-
employee relationship, thus, subject to the Labor Arbiter's jurisdiction.
The Labor Arbiter then declared respondent's dismissal from employment as
illegal. Respondent, being a regular employee of petitioner corporation, may only be dismissed
for a valid cause and upon proper compliance with the requirements of due process. The
records, though, revealed that petitioners failed to present any evidence to justify respondent's
dismissal.
Aggrieved, petitioners appealed the aforesaid Labor Arbiter's Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving
credence to the Secretary's Certificate, which evidenced petitioner corporation's Board of
Directors'™ meeting in which a resolution was approved appointing respondent as its corporate
officer with designation as General Manager. Therefrom, the NLRC reversed and set aside the
Labor Arbiter's Decision dated 1 October 2001 and dismissed respondent's Complaint for want
of jurisdiction. [23]
The NLRC enunciated that the validity of respondent's appointment and termination from the
position of General Manager was made subject to the approval of petitioner corporation's Board
of Directors. Had respondent been an ordinary employee, such board action would not have
been required. As such, it is clear that respondent was a corporate officer whose dismissal
involved a purely intra-corporate controversy. The NLRC went further by stating that
respondent's claim for 30% of the net profit of the corporation can only emanate from his right of
ownership therein as stockholder, director and/or corporate officer. Dividends or profits are paid
only to stockholders or directors of a corporation and not to any ordinary employee in the
absence of any profit sharing scheme. In addition, the question of remuneration of a person who
is not a mere employee but a stockholder and officer of a corporation is not a simple labor
problem. Such matter comes within the ambit of corporate affairs and management and is an
intra-corporate controversy in contemplation of the Corporation Code. [24]
When respondent's Motion for Reconsideration was denied in another Resolution [25] dated 23
January 2003, he filed a Petition for Certiorari with the Court of Appeals ascribing grave abuse of
discretion on the part of the NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the
Labor Arbiter has jurisdiction over the present controversy. It upheld the finding of the Labor
Arbiter that respondent was a mere employee of petitioner corporation, who has been illegally
Page 2 of 40
dismissed from employment without valid cause and without due process. Nevertheless, it
ordered the records of the case remanded to the NLRC for the determination of the appropriate
amount of monetary awards to be given to respondent. The Court of Appeals, thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED
to have jurisdiction over the controversy. The records are REMANDED to the NLRC for further
proceedings to determine the appropriate amount of monetary awards to be adjudged in favor of
[respondent]. Costs against the [petitioners] in solidum. [26]
Petitioners moved for its reconsideration but to no avail. [27]
Petitioners are now before this Court with the following assignment of errors:
I.
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN
DECIDING THAT THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-
CORPORATE MATTER WHICH IS COGNIZABLE BY THE SECURITIES AND EXCHANGE
COMMISSION/REGIONAL TRIAL COURT.
II.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE,
STILL THE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO
EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON
AND MARC II MARKETING, INC. [PETITIONER CORPORATION].
III.
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE,
THE COURT OF APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER
COMMITTED GRAVE ABUSE OF DISCRETION IN AWARDING MULTI-MILLION PESOS IN
COMPENSATION AND BACKWAGES BASED ON THE PURPORTED GROSS INCOME OF
[PETITIONER CORPORATION].
IV.
THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF
DISCRETION IN NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA]
SHOULD NOT BE HELD SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE
AND BAD FAITH ON HER PART. [28]
Petitioners fault the Court of Appeals for having sustained the Labor Arbiter's finding that
respondent was not a corporate officer under petitioner corporation's by-laws. They insist that
there is no need to amend the corporate by-laws to specify who its corporate officers are. The
resolution issued by petitioner corporation's Board of Directors appointing respondent as
General Manager, coupled with his assumption of the said position, positively made him its
corporate officer. More so, respondent's position, being a creation of petitioner corporation's
Board of Directors pursuant to its by-laws, is a corporate office sanctioned by the Corporation
Code and the doctrines previously laid down by this Court. Thus, respondent's removal as
petitioner corporation's General Manager involved a purely intra-corporate controversy over
which the RTC has jurisdiction.
Petitioners further contend that respondent's claim for 30% of the net profit of petitioner
corporation was anchored on the purported Management Contract dated 16 January 1994. It
should be noted, however, that said Management Contract was executed at the time petitioner
corporation was still nonexistent and had no juridical personality yet. Such being the case,
respondent cannot invoke any legal right therefrom as it has no legal and binding effect on
petitioner corporation. Moreover, it is clear from the Articles of Incorporation of petitioner
corporation that respondent was its director and stockholder. Indubitably, respondent's claim for
his share in the profit of petitioner corporation was based on his capacity as such and not by
virtue of any employer-employee relationship.
Petitioners further avow that even if the present case does not pose an intra-corporate
controversy, still, the Labor Arbiter's multi-million peso awards in favor of respondent were
erroneous. The same was merely based on the latter's self-serving computations without any
supporting documents.
Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner
corporation. There was neither allegation nor iota of evidence presented to show that she acted
with malice and bad faith in her dealings with respondent. Moreover, the Labor Arbiter, in his
Decision, simply concluded that petitioner Lucila was jointly and severally liable with petitioner
corporation without making any findings thereon. It was, therefore, an error for the Court of
Appeals to hold petitioner Lucila solidarily liable with petitioner corporation.
From the foregoing arguments, the initial question is which between the Labor Arbiter or the
RTC, has jurisdiction over respondent's dismissal as General Manager of petitioner
corporation. Its resolution necessarily entails the determination of whether respondent as
General Manager of petitioner corporation is a corporate officer or a mere employee of the latter.
While Article 217(a)2 [29] of the Labor Code, as amended, provides that it is the Labor Arbiter
who has the original and exclusive jurisdiction over cases involving termination or dismissal of
workers when the person dismissed or terminated is a corporate officer, the case automatically
falls within the province of the RTC. The dismissal of a corporate officer is always regarded as a
corporate act and/or an intra-corporate controversy. [30]
[31]
Under Section 5 of Presidential Decree No. 902-A, intra-corporate controversies are those
controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity. It also includes controversies in the
election or appointments of directors, trustees, officers or managers of such corporations,
partnerships or associations. [32]
Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the
controversy, the status or relationship of the parties and the nature of the question that is the
subject of their controversy must be taken into consideration. [33]
In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential
Decree No. 902-A, corporate officers are those officers of a corporation who are given that
character either by the Corporation Code or by the corporation's by-laws. Section 25 [34] of
the Corporation Code specifically enumerated who are these corporate officers, to wit: (1)
president; (2) secretary; (3) treasurer; and (4) such other officers as may be provided for in
the by-laws. [35]
The aforesaid Section 25 of the Corporation Code, particularly the phrase 'œsuch other officers
as may be provided for in the by-laws,' has been clarified and elaborated in this Court'™s
Page 3 of 40
recent pronouncement in Matling Industrial and Commercial Corporation v. Coros, where it held,
thus:
Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in
order to be considered as a corporate office. Thus, the creation of an office pursuant to or
under a [b]y-[l]aw enabling provision is not enough to make a position a corporate office.
[In] Guerrea v. Lezama [citation omitted] the first ruling on the matter, held that the only officers
of a corporation were those given that character either by the Corporation Code or by the
[b]y-[l]aws; the rest of the corporate officers could be considered only as employees or
subordinate officials. Thus, it was held in Easycall Communications Phils., Inc. v. King [citation
omitted]:
An "office" is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an employee occupies no office and generally
is employed not by the action of the directors or stockholders but by the managing officer of
the corporation who also determines the compensation to be paid to such employee.
xxxx
This interpretation is the correct application of Section 25 of the Corporation Code, which
plainly states that the corporate officers are the President, Secretary, Treasurer and such other
officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the
context of PD No. 902-A are exclusively those who are given that character either by the
Corporation Code or by the corporation's [b]y[l]aws.
A different interpretation can easily leave the way open for the Board of Directors to
circumvent the constitutionally guaranteed security of tenure of the employee by the
expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering the
Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code
in its Opinion dated November 25, 1993 [citation omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the
corporate officers enumerated in the by-laws are the exclusive Officers of the corporation
and the Board has no power to create other Offices without amending first the corporate
[b]y-laws. However, the Board may create appointive positions other than the positions of
corporate Officers, but the persons occupying such positions are not considered as
corporate officers within the meaning of Section 25 of the Corporation Code and are not
empowered to exercise the functions of the corporate Officers, except those functions lawfully
delegated to them. Their functions and duties are to be determined by the Board of
Directors/Trustees. [36] [Emphasis supplied.]
A careful perusal of petitioner corporation's by-laws, particularly paragraph 1, Section 1, Article
IV, [37] would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2)
President; (3) one or more Vice-President; (4) Treasurer; and (5) Secretary. [38] The position of
General Manager was not among those enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporation's by-laws, empowered its Board of
Directors to appoint such other officers as it may determine necessary or proper. [39] It is by
virtue of this enabling provision that petitioner corporation's Board of Directors allegedly
approved a resolution to make the position of General Manager a corporate office, and,
thereafter, appointed respondent thereto making him one of its corporate officers. All of these
acts were done without first amending its by-laws so as to include the General Manager in its
roster of corporate officers.
With the given circumstances and in conformity with Matling Industrial and Commercial
Corporation v. Coros, this Court rules that respondent was not a corporate officer of petitioner
corporation because his position as General Manager was not specifically mentioned in the
roster of corporate officers in its corporate by-laws. The enabling clause in petitioner
corporation's by-laws empowering its Board of Directors to create additional officers, i.e.,
General Manager, and the alleged subsequent passage of a board resolution to that effect
cannot make such position a corporate office. Matling clearly enunciated that the board of
directors has no power to create other corporate offices without first amending the corporate by-
laws so as to include therein the newly created corporate office. Though the board of directors
may create appointive positions other than the positions of corporate officers, the persons
occupying such positions cannot be viewed as corporate officers under Section 25 of the
Corporation Code. [40] In view thereof, this Court holds that unless and until petitioner
corporation's by-laws is amended for the inclusion of General Manager in the list of its corporate
officers, such position cannot be considered as a corporate office within the realm of Section 25
of the Corporation Code.
This Court considers that the interpretation of Section 25 of the Corporation Code laid down
in Matling safeguards the constitutionally enshrined right of every employee to security of
tenure. To allow the creation of a corporate officer position by a simple inclusion in the
corporate by-laws of an enabling clause empowering the board of directors to do so can result in
the circumvention of that constitutionally well-protected right. [41]
It is also of no moment that respondent, being petitioner corporation's General Manager, was
given the functions of a managing director by its Board of Directors. As held in Matling, the only
officers of a corporation are those given that character either by the Corporation Code or by the
corporate by-laws. It follows then that the corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be regarded as mere employees or
subordinate officials. [42] Respondent, in this case, though occupying a high ranking and vital
position in petitioner corporation but which position was not specifically enumerated or
mentioned in the latter's by-laws, can only be regarded as its employee or subordinate
official. Noticeably, respondent's compensation as petitioner corporation's General Manager
was set, fixed and determined not by the latter's Board of Directors but simply by its President,
petitioner Lucila. The same was not subject to the approval of petitioner corporation's Board of
Directors. This is an indication that respondent was an employee and not a corporate officer.
To prove that respondent was petitioner corporation's corporate officer, petitioners presented
before the NLRC an undated Secretary's Certificate showing that corporation's Board of
Directors approved a resolution making respondent's position of General Manager a corporate
office. The submission, however, of the said undated Secretary's Certificate will not change the
fact that respondent was an employee. The certification does not amount to an amendment of
the by-laws which is needed to make the position of General Manager a corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned
in that undated Secretary's Certificate and the latter itself were obvious fabrications, a mere
afterthought. Here we quote with conformity the Court of Appeals findings on this matter stated
in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29
August 1994], why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26
August 1999], when it could have been the best evidence that [herein respondent] was a
corporate officer? Secondly, why did they report the [respondent] instead as [herein petitioner
corporation's] employee to the Social Security System [(SSS)] on [11 October 1994] or a later
Page 4 of 40
date than their [29 August 1994] board resolution? Thirdly, why is there no indication that the
[respondent], the person concerned himself, and the [SEC] were furnished with copies of said
board resolution? And, lastly, why is the corporate [S]ecretary's [C]ertificate not notarized in
keeping with the customary procedure? That is why we called it manipulative evidence as it was
a shameless sham meant to be thrown in as a wild card to muddle up the [D]ecision of the Labor
Arbiter to the end that it be overturned as the latter had firmly pointed out that [respondent] is not
a corporate officer under [petitioner corporation's by-laws]. Regrettably, the [NLRC] swallowed
the bait hook-line-and sinker. It failed to see through its nature as a belatedly manufactured
evidence. And even on the assumption that it were an authentic board resolution, it did
not make [respondent] a corporate officer as the board did not first and properly create
the position of a [G]eneral [M]anager by amending its by-laws.
(2) The scope of the term "officer"• in the phrase "and such other officers as may be provided
for in the by-laws"] (Sec. 25, par. 1), would naturally depend much on the provisions of the by-
laws of the corporation. (SEC Opinion, [4 December 1991.]) If the by-laws enumerate the
officers to be elected by the board, the provision is conclusive, and the board is without power to
create new offices without amending the by-laws. (SEC Opinion, [19 October 1971.])
(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be
classified as an employee although he has always been considered as one of the principal
officers of a corporation [citing De Leon, H. S., The Corporation Code of the Philippines
Annotated, 1993 Ed., p. 215.] [43] [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner corporation will not
automatically make the case fall within the ambit of intra-corporate controversy and be subjected
to RTC's jurisdiction. To reiterate, not all conflicts between the stockholders and the corporation
are classified as intra-corporate. Other factors such as the status or relationship of the parties
and the nature of the question that is the subject of the controversy [44] must be considered in
determining whether the dispute involves corporate matters so as to regard them as intra-
corporate controversies. [45] As previously discussed, respondent was not a corporate officer of
petitioner corporation but a mere employee thereof so there was no intra-corporate relationship
between them. With regard to the subject of the controversy or issue involved herein, i.e.,
respondent's dismissal as petitioner corporation's General Manager, the same did not present or
relate to an intra-corporate dispute. To note, there was no evidence submitted to show that
respondent's removal as petitioner corporation's General Manager carried with it his removal as
its director and stockholder. Also, petitioners' allegation that respondent's claim of 30% share of
petitioner corporation's net profit was by reason of his being its director and stockholder was
without basis, thus, self-serving. Such an allegation was tantamount to a mere speculation for
petitioners' failure to substantiate the same.
In addition, it was not shown by petitioners that the position of General Manager was offered to
respondent on account of his being petitioner corporation's director and stockholder. Also, in
contrast to NLRC's findings, neither petitioner corporation's by-laws nor the Management
Contract stated that respondent's appointment and termination from the position of General
Manager was subject to the approval of petitioner corporation's Board of Directors. If, indeed,
respondent was a corporate officer whose termination was subject to the approval of its Board of
Directors, why is it that his termination was effected only by petitioner Lucila, President of
petitioner corporation? The records are bereft of any evidence to show that respondent's
dismissal was done with the conformity of petitioner corporation's Board of Directors or that the
latter had a hand on respondent's dismissal. No board resolution whatsoever was ever
presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying
the General Manager position, was not a corporate officer of petitioner corporation rather he was
merely its employee occupying a high-ranking position.

Accordingly, respondent's dismissal as petitioner corporation's General Manager did not amount
to an intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter
and not with the RTC.
Having established that respondent was not petitioner corporation's corporate officer but merely
its employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now
determine if respondent's dismissal from employment is illegal.
It was not disputed that respondent worked as petitioner corporation's General Manager from its
incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his
dismissal was petitioner corporation's cessation of business operations due to poor sales
collection aggravated by the inefficient management of its affairs.
In termination cases, the burden of proving just and valid cause for dismissing an employee from
his employment rests upon the employer. The latter's failure to discharge that burden would
necessarily result in a finding that the dismissal is unjustified. [46]
Under Article 283 of the Labor Code, as amended, one of the authorized causes in
terminating the employment of an employee is the closing or cessation of operation of
the establishment or undertaking. Article 283 of the Labor Code, as amended, reads, thus:
ART. 283. Closure of establishment and reduction of personnel. '“ The employer may also
terminate the employment of any employee due to the installation of labor saving-devices,
redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers and the Department of Labor
and Employment at least one (1) month before the intended date thereof. x x x In case of
retrenchment to prevent losses and in cases of closures or cessation of operations of
establishment or undertaking not due to serious business losses or financial reverses,
the separation pay shall be equivalent to one (1) month pay or to at least one-half (1/2)
month pay for every year of service, whichever is higher. A fraction of at least six (6)
months shall be considered one (1) whole year. [Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of operations of establishment or
undertaking may either be due to serious business losses or financial reverses or
otherwise. If the closure or cessation was due to serious business losses or financial reverses,
it is incumbent upon the employer to sufficiently and convincingly prove the same. If it is
otherwise, the employer can lawfully close shop anytime as long as it was bona fide in character
and not impelled by a motive to defeat or circumvent the tenurial rights of employees and as
long as the terminated employees were paid in the amount corresponding to their length of
service. [47]
Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a
valid cessation of business operations: (a) service of a written notice to the employees
and to the Department of Labor and Employment (DOLE) at least one month before the
intended date thereof; (b) the cessation of business must be bona fide in character; and
(c) payment to the employees of termination pay amounting to one month pay or at least
one-half month pay for every year of service, whichever is higher.
In this case, it is obvious that petitioner corporation's cessation of business operations was not
due to serious business losses. Mere poor sales collection, coupled with mismanagement of its
affairs does not amount to serious business losses. Nonetheless, petitioner corporation can still
validly cease or close its business operations because such right is legally allowed, so long as it
Page 5 of 40
was not done for the purpose of circumventing the provisions on termination of employment
embodied in the Labor Code. [48] As has been stressed by this Court in Industrial Timber
Corporation v. Ababon, thus:
Just as no law forces anyone to go into business, no law can compel anybody to continue the
same. It would be stretching the intent and spirit of the law if a court interferes with
management's prerogative to close or cease its business operations just because the business
is not suffering from any loss or because of the desire to provide the workers continued
employment. [49]cralaw
A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and
ceased business operations beginning 30 June 1997. This was evidenced by a notarized
Affidavit of Non-Operation dated 31 August 1998. There was also no showing that the cessation
of its business operations was done in bad faith or to circumvent the Labor Code. Nevertheless,
in doing so, petitioner corporation failed to comply with the one-month prior written notice
rule. The records disclosed that respondent, being petitioner corporation's employee, and the
DOLE were not given a written notice at least one month before petitioner corporation ceased its
business operations. Moreover, the records clearly show that respondent's dismissal was
effected on the same date that petitioner corporation decided to stop and cease its
operation. Similarly, respondent was not paid separation pay upon termination of his
employment.
As respondent's dismissal was not due to serious business losses, respondent is entitled to
payment of separation pay equivalent to one month pay or at least one-half month pay for every
year of service, whichever is higher. The rationale for this was laid down in Reahs Corporation
v. National Labor Relations Commission, [50] thus:
The grant of separation pay, as an incidence of termination of employment under Article
283, is a statutory obligation on the part of the employer and a demandable right on the
part of the employee, except only where the closure or cessation of operations was due to
serious business losses or financial reverses and there is sufficient proof of this fact or
condition. In the absence of such proof of serious business losses or financial reverses,
the employer closing his business is obligated to pay his employees and workers their
separation pay.
The rule, therefore, is that in all cases of business closure or cessation of operation or
undertaking of the employer, the affected employee is entitled to separation pay. This is
consistent with the state policy of treating labor as a primary social economic force,
affording full protection to its rights as well as its welfare. The exception is when the
closure of business or cessation of operations is due to serious business losses or financial
reverses duly proved, in which case, the right of affected employees to separation pay is lost for
obvious reasons. [51] [Emphasis supplied.]
As previously discussed, respondent's dismissal was due to an authorized cause, however,
petitioner corporation failed to observe procedural due process in effecting such
dismissal. In Culili v. Eastern Telecommunications Philippines, Inc., [52] this Court made the
following pronouncements, thus:
x x x there are two aspects which characterize the concept of due process under the Labor
Code: one is substantive '” whether the termination of employment was based on the provision
of the Labor Code or in accordance with the prevailing jurisprudence; the other is procedural '”
the manner in which the dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:
(d) In all cases of termination of employment, the following standards of due process shall be
substantially observed:
xxxx
For termination of employment as defined in Article 283 of the Labor Code, the requirement of
due process shall be deemed complied with upon service of a written notice to the
employee and the appropriate Regional Office of the Department of Labor and
Employment at least thirty days before effectivity of the termination, specifying the
ground or grounds for termination.
In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:
The requirement of law mandating the giving of notices was intended not only to enable the
employees to look for another employment and therefore ease the impact of the loss of their jobs
and the corresponding income, but more importantly, to give the Department of Labor and
Employment (DOLE) the opportunity to ascertain the verity of the alleged authorized cause of
termination. [53] [Emphasis supplied].
The records of this case disclosed that there was absolutely no written notice given by petitioner
corporation to the respondent and to the DOLE prior to the cessation of its business
operations. This is evident from the fact that petitioner corporation effected respondent's
dismissal on the same date that it decided to stop and cease its business operations. The
necessary consequence of such failure to comply with the one-month prior written notice rule,
which constitutes a violation of an employee's right to statutory due process, is the payment of
indemnity in the form of nominal damages. [54] In Culili v. Eastern Telecommunications
Philippines, Inc., this Court further held:
In Serrano v. National Labor Relations Commission [citation omitted], we noted that 'œa job is
more than the salary that it carries.'• There is a psychological effect or a stigma in immediately
finding one'™s self laid off from work. This is exactly why our labor laws have provided for
mandating procedural due process clauses. Our laws, while recognizing the right of
employers to terminate employees it cannot sustain, also recognize the employee's right
to be properly informed of the impending severance of his ties with the company he is
working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed
upon employers who fail to comply with the procedural due process requirements in terminating
its employees. In Agabon v. National Labor Relations Commission [citation omitted], this Court
reverted back to the doctrine in Wenphil Corporation v. National Labor Relations
Commission [citation omitted] and held that where the dismissal is due to a just or
authorized cause, but without observance of the due process requirements, the dismissal
may be upheld but the employer must pay an indemnity to the employee. The sanctions to
be imposed however, must be stiffer than those imposed in Wenphil to achieve a result fair to
both the employers and the employees.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from
Agabon, held that since there is a clear-cut distinction between a dismissal due to a just cause
and a dismissal due to an authorized cause, the legal implications for employers who fail to
comply with the notice requirements must also be treated differently:
Page 6 of 40
Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282
but the employer failed to comply with the notice requirement, the sanction to be imposed upon
him should be tempered because the dismissal process was, in effect, initiated by an act
imputable to the employee; and (2) if the dismissal is based on an authorized cause under
Article 283 but the employer failed to comply with the notice requirement, the sanction should be
stiffer because the dismissal process was initiated by the employer's exercise of his
management prerogative. [55] [Emphasis supplied.]
Thus, in addition to separation pay, respondent is also entitled to an award of nominal
damages. In conformity with this Court's ruling in Culili v. Eastern Telecommunications
Philippines, Inc. and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food
Processing Corporation v. Pacot, [56] this Court fixed the amount of nominal damages to
P50,000.00.
With respect to petitioners' contention that the Management Contract executed between
respondent and petitioner Lucila has no binding effect on petitioner corporation for having been
executed way before its incorporation, this Court finds the same meritorious.
Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement of corporate existence. - A private corporation formed or organized
under this Code commences to have corporate existence and juridical personality and is
deemed incorporated from the date the Securities and Exchange Commission issues a
certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate under
the name stated in the articles of incorporation for the period of time mentioned therein, unless
said period is extended or the corporation is sooner dissolved in accordance with
law. [Emphasis supplied.]
Logically, there is no corporation to speak of prior to an entity'™s incorporation. And no contract
entered into before incorporation can bind the corporation.
As can be gleaned from the records, the Management Contract dated 16 January 1994 was
executed between respondent and petitioner Lucila months before petitioner corporation's
incorporation on 15 August 1994. Similarly, it was done when petitioner Lucila was still the
President of Marc Marketing, Inc. Undeniably, it cannot have any binding and legal effect on
petitioner corporation. Also, there was no evidence presented to prove that petitioner
corporation adopted, ratified or confirmed the Management Contract. It is for the same reason
that petitioner corporation cannot be considered estopped from questioning its binding effect
now that respondent was invoking the same against it. In no way, then, can it be enforced
against petitioner corporation, much less, its provisions fixing respondent's compensation as
General Manager to 30% of petitioner corporation's net profit. Consequently, such percentage
cannot be the basis for the computation of respondent's separation pay. This finding, however,
will not affect the undisputed fact that respondent was, indeed, the General Manager of
petitioner corporation from its incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to
conduct further proceedings for the sole purpose of determining the compensation that
respondent was actually receiving during the period that he was the General Manager of
petitioner corporation, this, for the proper computation of his separation pay.
As regards petitioner Lucila's solidary liability, this Court affirms the same.
As a rule, corporation has a personality separate and distinct from its officers, stockholders and
members such that corporate officers are not personally liable for their official acts unless
it is shown that they have exceeded their authority. However, this corporate veil can be
pierced when the notion of the legal entity is used as a means to perpetrate fraud, an illegal act,
as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues. Under
the Labor Code, for instance, when a corporation violates a provision declared to be penal in
nature, the penalty shall be imposed upon the guilty officer or officers of the corporation. [57]
Based on the prevailing circumstances in this case, petitioner Lucila, being the President of
petitioner corporation, acted in bad faith and with malice in effecting respondent's dismissal from
employment. Although petitioner corporation has a valid cause for dismissing respondent due to
cessation of business operations, however, the latter's dismissal therefrom was done abruptly by
its President, petitioner Lucila. Respondent was not given the required one-month prior written
notice that petitioner corporation will already cease its business operations. As can be gleaned
from the records, respondent was dismissed outright by petitioner Lucila on the same day that
petitioner corporation decided to stop and cease its business operations. Worse, respondent
was not given separation pay considering that petitioner corporation's cessation of business was
not due to business losses or financial reverses.cralaw
WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7
March 2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are
hereby AFFIRMED with the MODIFICATION finding respondent's dismissal from employment
legal but without proper observance of due process. Accordingly, petitioner corporation, jointly
and solidarily liable with petitioner Lucila, is hereby ordered to pay respondent the following; (1)
separation pay equivalent to one month pay or at least one-half month pay for every year of
service, whichever is higher, to be computed from the commencement of employment until
termination; and (2) nominal damages in the amount of P50,000.00.
This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct
further proceedings for the sole purpose of determining the compensation that respondent was
actually receiving during the period that he was the General Manager of petitioner corporation
for the proper computation of his separation pay.
Costs against petitioners. SO ORDERED.
[G.R. No. 43350. December 23, 1937.]
CAGAYAN FISHING DEVELOPMENT CO., Inc., Plaintiff-Appellant, v. TEODORO
SANDIKO, Defendant-Appellee.
Arsenio P. Dizon for Appellant.
Sumulong, Lavides & Sumulong for Appellee.
SYLLABUS
1. CORPORATIONS; TRANSFER MADE TO A NON-EXISTENT CORPORATION; JURIDICAL
CAPACITY TO ENTER INTO A CONTRACT. — The transfer made by T to the C. F. D. Co., Inc.,
was, effected on May 31, 1930 and the actual incorporation of said company was effected later
on (October 22, 1930. In other words, the transfer was made almost five months before the
incorporation of the company. Unquestionably, a duly organized corporation has the power to
purchase and hold such real property as the purposes for which such corporation was formed
may permit and for this purpose may enter into such contracts as may be necessary. But before
a corporation may be said to be lawfully organized, many things have to be done. Among other
things, the law requires the filing of articles of incorporation. Although there is a presumption that
Page 7 of 40
all the requirements of law have been complied with in the case before us it can not be denied
that the plaintiff was not yet incorporated when it entered into take contract of sale The contract
itself referred to the plaintiff as "una sociodad en vias de incorporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not possess juridical
capacity to enter into the contract.
2. ID.; ID.; ID. — Corporation are creatures of the law, and can only, come into existence in the
manner prescribed by law. General laws authorizing the formation of corporations are general
offers to any persons who may bring themselves within their provisions; and if conditions
precedent are prescribed in the statute, or certain acts are required to be done, they are terms of
the offer, and must be complied wish substantially before legal corporate existence can be
acquired. That a corporation should have a full and complete organization and existence as an
entity before it can enter Into any kind of a contract or transact any business, would seem to be
self-evident.
3. ID.; ID.; ID. — A corporation, until organized, has no life and, therefore, no faculties. It is, as it
were, a child in venture sa mere. This is not saying, that under no circumstances may the acts of
promoters of a corporation he ratified by the corporation if and when subsequently organized.
There are, of course, exceptions, but under the peculiar facts and circumstances of the present
case the doctrine of ratification should not be extended because to do so would result in injustice
or fraud to the candid and unwary.
DECISION
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the
defendant from the plaintiff’s complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao,
town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the
land records of Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment
of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the
Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second
mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same
lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the
same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,900. These mortgages were registered and annotations thereof
appear at the back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Traspaso de
Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him were
sold to the plaintiff company, said to be under process of incorporation, in consideration of one
peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon
and, to the condition that the certificate of title to said lands shall not be transferred to the name
of the plaintiff company until the latter has fully and completely paid Tabora’s indebtedness to
the Philippine National Bank.
The plaintiff company filed its articles of incorporation with the Bureau of Commerce and
Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of
directors of the said company adopted a resolution (Exhibit G) authorizing its president, Jose
Ventura, to sell the four parcels of land in question to Teodoro Sandiko for P42,000. Exhibits B,
C and D were thereafter made and executed. Exhibit B is a deed of sale executed before a
notary public by the terms of which the plaintiff sold, ceded and transferred to the defendant all
its rights, titles and interest in and to the four parcels of land described in transfer certificate of
title No. 217 for P25,300; and the defendant in turn obligated himself to shoulder the three
mortgages hereinbefore referred to. Exhibit C is a promissory note for P25,300 drawn by the
defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a
deed of mortgage executed before a notary public in accordance with which the four parcels of
land were given as security for the payment of the promissory note, Exhibit C. All these three
instruments were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January
25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be
rendered against the defendant for the sum of P25,300, with interest at the legal rate from the
date of the filing of the complaint, and the costs of the suit. After trial, the court below, on
December 18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff.
Plaintiff presented a motion for new trial on January 14, 1935, which motion was denied by the
trial court on January 19 of the same year. After due exception and notice, plaintiff has appealed
to this court and makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below reached the conclusion that
Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree
with this conclusion, we have however voted to affirm the judgment appealed from for reasons
which we shall presently state.
The transfer made by Tabora to the Cagayan Fishing Development Co., Inc., plaintiff herein,
was effected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was
effected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five
months before the incorporation of the company. Unquestionably, a duly organized corporation
has the power to purchase and hold such real property as the purposes for which such
corporation was formed may permit and for this purpose may enter into such contracts as may
be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may
be said to be lawfully organized, many things have to be done. Among other things, the law
requires the filing of articles of incorporation (secs. 6 et seq., Act No. 1459). Although there is a
presumption that all the requirements of law have been complied with (sec. 334, par. 31, Code
of Civil Procedure), in the case before us it can not be denied that the plaintiff was not yet
incorporated when it entered into the contract of sale, Exhibit A. The contract itself referred to
the plaintiff as "una sociedad en vias de incorporacion." It was not even a de facto corporation at
the time. Not being in legal existence then, it did not possess juridical capacity to enter into the
contract.
"Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general laws authorizing the formation of
corporations are general offers to any persons who may bring themselves within their provisions;
and if conditions precedent are prescribed in the statute, or certain acts are required to be done,
they are terms of the offer, and must be complied with substantially before legal corporate
existence can be acquired." (14 C. J., sec. 111, p. 118.)
"That a corporation should have a full and complete organization and existence as an entity
before it can enter into any kind of a contract or transact any business, would seem to be self
evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless so authorized by
the charter. Until organized as authorized by the charter there is not a corporation, nor does it
possess franchises or faculties for it or others to exercise, until it acquires a complete existence."
(Gent v. Manufacturers and Merchants’ Mutual Insurance Company, 107 Ill., 652, 658.)
Page 8 of 40
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not only between
Manuel Tabora and a non-existent corporation but between Manuel Tabora as owner of four
parcels of land on the one hand and the same Manuel Tabora, his wife and others, as mere
promoters of a corporation on the other hand. For reasons that are self-evident, these promoters
could not have acted as agents for a projected corporation since that which had no legal
existence could have no agent. A corporation, until organized, has no life and therefore no
faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no
circumstances may the acts of promoters of a corporation be ratified by the corporation if and
when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps.,
permanent edition, 1931, vol. I, secs. 207 et seq.) , but under the peculiar facts and
circumstances of the present case we decline to extend the doctrine of ratification which would
result in the commission of injustice or fraud to the candid and unwary. (Massachusetts rule,
Abbott v. Hapgood, 150 Mass., 248; 22 N. E., 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193;
citing English cases; Koppel v. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke
Envelope Co. v. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that
Manuel Tabora was the registered owner of the four parcels of land, which he succeeded in
mortgaging to the Philippine National Bank so that he might have the necessary funds with
which to convert and develop them into fishery. He appeared to have met with financial
reverses. He formed a corporation composed of himself, his wife, and a few others. From the
articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock
subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q.
de Tabora; and out of the P43,300, amount paid on subscriptions, P42,100 is made to appear as
paid by Tabora and P200 by his wife. Both Tabora and his wife were directors and the latter was
treasurer as well. In fact, to this day, the lands remain inscribed in Tabora’s name. The
defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit
B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of
land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits
(Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and
in both cases a writ of attachment against the four parcels of land was issued. The Philippine
National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko
and succeeded in making him sign Exhibits B, C, and D and in making him, among other things,
assume the payment of Tabora’s indebtedness to the Philippine National Bank. The promissory
note, Exhibit C, was made payable to the plaintiff company so that it may not be attached by
Tabora’s creditors, two of whom had obtained writs of attachment against the four parcels of
land.
If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it
follows that it did not possess any resultant right to dispose of them by sale to the defendant,
Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from Manuel Tabora
to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A,
was subject to a condition precedent (condicion suspensiva), namely, the payment of a
mortgage debt of the said Tabora to the Philippine National Bank, and that this condition not
having been complied with by the Cagayan Fishing Development Company, Inc., the transfer
was ineffective. (Art. 1114, Civil Code; Wise & Co. v. Kelly and Lim, 37 Phil., 696; Manresa, vol.
8, p. 141.) However, having arrived at the conclusion that the transfer by Manuel Tabora to the
Cagayan Fishing Development Company, Inc. was null because at the time it was effected the
corporation was non-existent, we deem it unnecessary to discuss this point.
The decision of the lower court is accordingly affirmed, with costs against the appellant. So
ordered.
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

[G.R. No. L-28740. February 24, 1981.]
FERMIN Z. CARAM, JR., Petitioner, v. CLARO L. LAURETA, Respondent.
Paredes, Poblador and Nazareno, Azada and Tomacruz for Petitioner.
Andres Law Office for Respondent.
DECISION
FERNANDEZ, J.:
This is a petition for certiorari to review the decision of the Court of Appeals promulgated on
January 29, 1968 in CA-G.R. NO. 35721-R entitled "Claro L. Laureta, plaintiff-appellee versus
Marcos Mata, Codidi Mata and Fermin Caram, Jr., defendants-appellant; Tampino (Mansaca),
Et. Al. Intervenors-appellants," affirming the decision of the Court of First Instance of Davao in
Civil Case No. 3083. 1
On June 25, 1959, Claro L. Laureta filed in the Court of First Instance of Davao an action for
nullity, recovery of ownership and/or reconveyance with damages and attorney’s fees against
Marcos Mata, Codidi Mata, Fermin Z. Caram Jr. and the Register of Deeds of Davao City. 2
On June 10, 1945, Marcos Mata conveyed a large tract of agricultural land covered by Original
Certificate of Title No. 3019 in favor of Claro Laureta, plaintiff, the respondent herein. The deed
of absolute sale in favor of the plaintiff was not registered because it was not acknowledged
before a notary public or any other authorized officer. At the time the sale was executed, there
was no authorized officer before whom the sale could be acknowledged inasmuch as the civil
government in Tagum, Davao was not as yet organized. However, the defendant Marcos Mata
delivered to Laureta the peaceful and lawful possession of the premises of the land together with
the pertinent papers thereof such as the Owner’s Duplicate Original Certificate of Title No. 3019,
sketch plan, tax declaration, tax receipts and other papers related thereto. 3 Since June 10,
1945, the plaintiff Laureta had been and is still in continuous, adverse and notorious occupation
of said land, without being molested, disturbed or stopped by any of the defendants or their
representatives. In fact, Laureta had been paying realty taxes due thereon and had introduced
improvements worth not less than P20,000.00 at the time of the filing of the complaint. 4
On May 5, 1947, the same land covered by Original Certificate of Title No. 3019 was sold by
Marcos Mata to defendant Fermin Z. Caram Jr., petitioner herein. The deed of sale in favor of
Caram was acknowledged before Atty. Abelardo Aportadera. On May 22, 1947, Marcos Mata,
through Attys. Abelardo Aportadera and Gumercindo Arcilla, filed with the Court of First Instance
of Davao a petition for the issuance of a new Owner’s Duplicate of Original Certificate of Title
No. 3019, alleging as ground therefor the loss of said title in the evacuation place of defendant
Marcos Mata in Magugpo, Tagum, Davao. On June 5, 1947, the Court of First Instance of Davao
issued an order directing the Register of Deeds of Davao to issue a new Owner’s Duplicate
Certificate of Title No. 3019 in favor of Marcos Mata and declaring the lost title as null and void.
On December 9, 1947, the second sale between Marcos Mata and Fermin Caram Jr. was
registered with the Register of Deeds. On the same date, Transfer Certificate of Title No. 140
was issued in favor of Fermin Caram Jr. 5
Page 9 of 40
On August 29, 1959, the defendants Marcos Mata and Codidi Mata filed their answer with
counterclaim admitting the existence of a private absolute deed of sale of his only property in
favor of Claro L. Laureta but alleging that he signed the same as he was subjected to duress,
threat and intimidation for the plaintiff was the commanding officer of the 10th division USFIP,
operating in the unoccupied areas of Northern Davao with its headquarters at Project No. 7 (Km.
60 Davao-Agusan Highways), in the Municipality of Tagum, Province of Davao; that Laureta’s
words and requests were laws; that although the defendant Mata did not like to sell his property
or sign the document without even understanding the same, he was ordered to accept P650.00
Mindanao Emergency Notes; and that due to his fear of harm or danger that will happen to him
or to his family, if he refused, he had no other alternative but to sign the document. 6
The defendants Marcos Mata and Codidi Mata also admit the existence of a record in the
Registry of Deeds regarding a document allegedly signed by him in favor of his co-defendant
Fermin Caram Jr. but denies that he ever signed the document for he knew before hand that he
had signed a deed of sale in favor of the plaintiff and that the plaintiff was in possession of the
certificate of title; that if ever his thumb mark appeared in the document purportedly alienating
the property to Fermin Caram Jr., his consent was obtained through fraud and misrepresentation
for the defendant Mata is illiterate and ignorant and did not know what he was signing; and that
he did not receive a consideration for the said sale. 7
The defendant Fermin Caram Jr. filed his answer on October 23, 1959 alleging that he has no
knowledge or information about the previous encumbrances, transactions, and alienations in
favor of plaintiff until the filing of the complaints. 8
The trial court rendered a decision dated February 29, 1964, the dispositive portion of which
reads: 9
"1. Declaring that the deed of sale, Exhibit A, executed by Marcos Mata in favor of Claro L.
Laureta stands and prevails over the deed of sale, Exhibit F, in favor of Fermin Caram Jr.;
"2. Declaring as null and void the deed of sale Exhibit F, in favor of Fermin Caram Jr.;
"3. Directing Marcos Mata to acknowledge the deed of sale, Exhibit A, in favor of Claro L.
Laureta;.
"4. Directing Claro L. Laureta to secure the approval of the Secretary of Agriculture and Natural
Resources on the deed, Exhibit A, after Marcos Mata shall have acknowledged the same before
a notary public;.
"5. Directing Claro L. Laureta to surrender to the Register of Deeds for the City and Province of
Davao the Owner’s Duplicate of Original Certificate of Title No. 3019 and the latter to cancel the
same;.
"6. Ordering the Register of Deeds for the City and Province of Davao to cancel Transfer
Certificate of Title No. T-140 in the name of Fermin Caram Jr.;
"7. Directing the Register of Deeds for the City and Province of Davao to issue a title in favor of
Claro L. Laureta, Filipino, resident of Quezon City, upon presentation of the deed executed by
Marcos Mata in his favor, Exhibit A, duly acknowledged by him and approved by the Secretary of
Agriculture and Natural Resources, and.
"8. Dismissing the counterclaim and cross claim of Marcos Mata and Codidi Mata, the
counterclaim of Caram, Jr., the answer in intervention, counterclaim and cross-claim of the
Mansacas.

"The Court makes no pronouncement as to costs.
"SO ORDERED."cralaw virtua1aw library
The defendants appealed from the judgment to the Court of Appeals. 10 The appeal was
docketed as CA-G.R. NO. 35721-R.
The Court of Appeals promulgated its decision on January 29, 1968 affirming the judgment of
the trial court.cralawnad
In his brief, the petitioner assigns the following errors. 11
"I
"THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT IRESPE AND
APORTADERA WERE ATTORNEYS-IN-FACT OF PETITIONER CARAM FOR THE PURPOSE
OF BUYING THE PROPERTY IN QUESTION.
"II
"THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE EVIDENCE
ADDUCED IN THE TRIAL COURT CONSTITUTE LEGAL EVIDENCE OF FRAUD ON THE
PART OF IRESPE AND APORTADERA ATTRIBUTABLE TO PETITIONER.
"III
"THE RESPONDENT COURT OF APPEALS COMMITTED GRAVE ERROR OF LAW IN
HOLDING THAT KNOWLEDGE OF IRESPE AND APORTADERA OF A PRIOR
UNREGISTERED SALE OF A TITLED PROPERTY ATTRIBUTABLE TO PETITIONER AND
EQUIVALENT IN LAW OF REGISTRATION OF SAID SALE.
"IV
"THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT AN ACTION
FOR RECONVEYANCE ON THE GROUND OF FRAUD PRESCRIBES WITHIN FOUR (4)
YEARS."cralaw virtua1aw library
The petitioner assails the finding of the trial court that the second sale of the property was made
through his representatives, Pedro Irespe and Atty. Abelardo Aportadera. He argues that Pedro
Irespe was acting merely as broker or intermediary with the specific task and duty to pay Marcos
Mata the sum of P1,000.00 for the latter’s property and to see to it that the requisite deed of sale
covering the purchase was properly executed by Marcos Mata; that the identity of the property to
be bought and the price of the purchase had already been agreed upon by the parties; and that
the other alleged representative, Atty. Aportadera, merely acted as a notary public in the
execution of the deed of sale.
The contention of the petitioner has no merit. The facts of record show that Mata, the vendor,
and Caram, the second vendee had never met. During the trial, Marcos Mata testified that he
knows Atty. Aportadera but did not know Caram. 12 Thus, the sale of the property could have
Page 10 of 40
only been through Caram’s representatives, Irespe and Aportadera. The petitioner, in his
answer, admitted that Atty. Aportadera acted as his notary public and attorney-in-fact at the
same time in the purchase of the property. 13
The petitioner contends that he cannot be considered to have acted in bad faith because there is
no direct proof showing that Irespe and Aportadera, his alleged agents, had knowledge of the
first sale to Laureta. This contention is also without merit.
The Court of Appeals, in affirming the decision of the trial court, said: 14
"The trial court, in holding that appellant Caram, Jr. was not a purchaser in good faith, at the time
he bought the same property from appellant Mata, on May 5, 1947, entirely discredited the
testimony of Aportadera. Thus it stated in its decision:chanrob1es virtual 1aw library
‘The testimony of Atty. Aportadera quoted elsewhere in this decision is hollow. There is every
reason to believe that Irespe and he had known of the sale of the property in question to Laureta
on the day Mata and Irespe, accompanied by Leoning Mansaca, went to the office of Atty.
Aportadera for the sale of the same property to Caram, Jr., represented by Irespe as attorney-in-
fact. Leoning Mansaca was with the two — Irespe and Mata — to engage the services of Atty.
Aportadera in the annulment of the sale of his land to Laureta. When Leoning Mansaca narrated
to Atty. Aportadera the circumstances under which his property had been sold to Laureta, he
must have included in the narration the sale of the land of Mata, for the two properties had been
sold on the same occasion and under the same circumstances. Even as early as immediately
after liberation, Irespe, who was the witness in most of the cases filed by Atty. Aportadera in his
capacity as Provincial Fiscal of Davao against Laureta, must have known on the purchases of
lands made by Laureta when he was regimental commander, one of which was the sale made
by Mata. It was not a mere coincidence that Irespe was made guardian ad litem of Leoning
Mansaca, at the suggestion of Atty. Aportadera and attorney-in-fact of Caram, Jr.
‘The Court cannot help being convinced that Irespe, attorney-in-fact of Caram, Jr., had
knowledge of the prior existing transaction, Exhibit A, between Mata and Laureta over the land,
subject matter of this litigation, when the deed, Exhibit F, was executed by Mata in favor of
Caram, Jr. And this knowledge has the effect of registration as to Caram, Jr.’ (R.A. pp. 123-124).
"We agree with His Honor’s conclusion on this particular point, on two grounds — the first, the
same concerns matters affecting the credibility of a witness of which the findings of the trial court
command great weight, and second, the same is borne out by the testimony of Atty. Aportadera
himself. (t.s.n. pp. 187-190, 213-215, Restauro)."cralaw virtua1aw library
Even if Irespe and Aportadera did not have actual knowledge of the first sale, still, their actions
have not satisfied the requirement of good faith. Bad faith is not based solely on the fact that a
vendee had knowledge of the defect or lack of title of his vendor. In the case of Leung Yee v.
F.L. Strong Machinery Co. and Williamson, this Court held: 15
"One who purchases real estate with knowledge of a defect or lack of title in his vendor can not
claim that he has acquired title thereto in good faith, as against the true owner of the land or of
an interest therein, and the same rule must be applied to one who has knowledge of facts which
should have put him upon such inquiry and investigation as might be necessary to acquaint him
with the defects in the title of his vendor."cralaw virtua1aw library
In the instant case, Irespe and Aportadera had knowledge of circumstances which ought to have
put them on inquiry. Both of them knew that Mata’s certificate of title together with other papers
pertaining to the land was taken by soldiers under the command of Col. Claro L. Laureta. 16
Added to this is the fact that at the time of the second sale Laureta was already in possession of
the land. Irespe and Aportadera should have investigated the nature of Laureta’s possession. If
they failed to exercise the ordinary care expected of a buyer of real estate they must suffer the
consequences. The rule of caveat emptor requires the purchaser to be aware of the supposed
title of the vendor and one who buys without checking the vendor’s title takes all the risks and
losses consequent to such failure. 17
The principle that a person dealing with the owner of the registered land is not bound to go
behind the certificate and inquire into transactions the existence of which is not there intimated
18 should not apply in this case. It was of common knowledge that at the time the soldiers of
Laureta took the documents from Mata, the civil government of Tagum was not yet established
and that there were no officials to ratify contracts of sale and make them registrable. Obviously,
Aportadera and Irespe knew that even if Mata previously had sold the disputed property such
sale could not have been registered.chanrobles virtual lawlibrary
There is no doubt then that Irespe and Aportadera, acting as agents of Caram, purchased the
property of Mata in bad faith. Applying the principle of agency, Caram, as principal, should also
be deemed to have acted in bad faith.
Article 1544 of the New Civil Code provides that:jgc:chanrobles.com.ph
"Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should
be movable property.
"Should it be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in the Registry of Property.
"Should there be no inscription, the ownership shall pertain to the person who in good faith was
first in the possession; and, in the absence thereof, to the person who presents the oldest title,
provided there is good faith. (1973)."
Since Caram was a registrant in bad faith, the situation is as if there was no registration at all. 19
The question to be determined now is, who was first in possession in good faith? A possessor in
good faith is one who is not aware that there exists in his title or mode of acquisition any flaw
which invalidates it. 20 Laureta was first in possession of the property. He is also a possessor in
good faith. It is true that Mata had alleged that the deed of sale in favor of Laureta was procured
by force. 21 Such defect, however, was cured when, after the lapse of four years from the time
the intimidation ceased, Marcos Mata lost both his rights to file an action for annulment or to set
up nullity of the contract as a defense in an action to enforce the same.
Anent the fourth error assigned, the petitioner contends that the second deed of sale, Exhibit "F"
is a voidable contract. Being a voidable contract, the action for annulment of the same on the
ground of fraud must be brought within four (4) years from the discovery of the fraud. In the case
at bar, Laureta is deemed to have discovered that the land in question has been sold to Caram
to his prejudice on December 9, 1947, when the Deed of Sale, Exhibit "F" was recorded and
entered in the Original Certificate of Title by the Register of Deeds and a new Certificate of Title
No. 140 was issued in the name of Caram. Therefore, when the present case was filed on June
29, 1959, plaintiff’s cause of action had long prescribed.
The petitioner’s conclusion that the second deed of sale, "Exhibit F", is a voidable contract is not
correct. In order that fraud can be a ground for the annulment of a contract, it must be employed
prior to or simultaneous to the consent or creation of the contract. The fraud or dolo causante
must be that which determines or is the essential cause of the contract. Dolo causante as a
ground for the annulment of contract is specifically described in Article 1338 of the New Civil
Code of the Philippines as "insidious words or machinations of one of the contracting parties"
Page 11 of 40
which induced the other to enter into a contract, and "without them, he would not have agreed
to."cralaw virtua1aw library
The second deed of sale in favor of Caram is not a voidable contract. No evidence whatsoever
was shown that through insidious words or machinations, the representatives of Caram, Irespe
and Aportadera had induced Mata to enter into the contract.
Since the second deed of sale is not a voidable contract, Article 1391, Civil Code of the
Philippines which provides that the action for annulment shall be brought within four (4) years
from the time of the discovery of fraud does not apply.
Moreover, Laureta has been in continuous possession of the land since he bought it in June
1945.
A more important reason why Laureta’s action could not have prescribed is that the second
contract of sale, having been registered in bad faith, is null and void. Article 1410 of the Civil
Code of the Philippines provides that any action or defense for the declaration of the inexistence
of a contract does not prescribe.
In a memorandum of Authorities 22 submitted to this Court on March 13, 1978, the petitioner
insists that the action of Laureta against Caram has prescribed because the second contract of
sale is not void under Article 1409 23 of the Civil Code of the Philippines which enumerates the
kinds of contracts which are considered void. Moreover, Article 1544 of the New Civil Code of
the Philippines does not declare void a second sale of immovable registered in bad faith.
The fact that the second contract is not considered void under Article 1409 and that Article 1544
does not declare void a deed of sale registered in bad faith does not mean that said contract is
not void. Article 1544 specifically provides who shall be the owner in case of a double sale of an
immovable property. To give full effect to this provision, the status of the two contracts must be
determined and clarified. One contract must be declared valid so that one vendee may exercise
all the rights of an owner, while the other contract must be declared void to cut off all rights
which may arise from said contract. Otherwise, Article 1544 will be meaningless.chanrobles
lawlibrary : rednad
The first sale in favor of Laureta prevails over the sale in favor of Caram.
WHEREFORE, the petition is hereby denied and the decision of the Court of Appeals sought to
be reviewed is affirmed, without pronouncement as to costs.
SO ORDERED.
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.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.chanrobles virtual law library
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.chanrobles virtual law library
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.chanrobles virtual law library
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles
virtual law library
xxx xxx xxxchanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.chanroblesvirtualawlibrary chanrobles virtual law library
Page 12 of 40
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.chanroblesvirtualawlibrary chanrobles
virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles
virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrarychanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles
virtual law library
Lim defaulted on his subsequent installment payments prompting JDA to request payments from
the surety. Pioneer paid a total sum of P298,626.12.chanroblesvirtualawlibrary chanrobles virtual
law library
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, chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.chanroblesvirtualawlibrary chanrobles virtual
law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
We first resolve G.R. No. 84197.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
Page 13 of 40
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).chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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).
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.chanroblesvirtualawlibrary chanrobles virtual law library
The records belie the petitioner's contention that the issue on the reinsurance money was never
raised by the parties.chanroblesvirtualawlibrary chanrobles virtual law library
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out
were:
xxx xxx xxxchanrobles virtual law library
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?chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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).chanroblesvirtualawlibrary chanrobles virtual law library
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.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber
attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has
Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing
no right to institute and maintain in its own name an action for the benefit of the reinsurers. It is
Corporation v. Court of Appeals (154 SCRA 650 [1987]):
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. 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
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in
aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision,
the name of the real party in interest.' This provision is mandatory. The real party in interest is
the real party in interest with regard to the portion of the indemnity paid is the insurer and not the
the party who would be benefitted or injured by the judgment or is the party entitled to the avails
insured. (Emphasis supplied).
of the suit.chanroblesvirtualawlibrary chanrobles virtual law library

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. Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp.
360-363).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of
the reinsurer.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. On the other hand, we find the trial court's findings on the matter replete with evidence to
Considering this admitted payment, the only issue that cropped up was the effect of payment substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court
made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the stated:
respondents had no interest in the reinsurance contract as this is strictly between the petitioner

Page 14 of 40
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective
after the execution of the chattel mortgage.chanroblesvirtualawlibrary chanrobles virtual law
library
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to
discharged these defendants from any liability as alleged indemnitors. The change of the
issue the bond provided that the same would be mortgaged to it, but this was not possible
maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru novations
because the planes were still in Japan and could not be mortgaged here in the Philippines. As
thus discharging the indemnitors.
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.chanroblesvirtualawlibrary chanrobles virtual law library 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
The following is averred under oath by Pioneer in the original complaint:
shall be due and payable 26th May 1967.

The various conflicting claims over the mortgaged properties have impaired and rendered
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim
insufficient the security under the chattel mortgage and there is thus no other sufficient security
and JDA, modifying the maturity dates of the obligations, as follows:
for the claim sought to be enforced by this action.

The principal hereof shall be paid in eight equal successive three month interval installments the
This is judicial admission and aside from the chattel mortgage there is no other security for the
first of which shall be due and payable 4 September 1965, the remainder of which ... shall be
claim sought to be enforced by this action, which necessarily means that the indemnity
due and payable on the 4th day ... of each succeeding months and the last of which shall be due
agreement had ceased to have any force and effect at the time this action was instituted. Sec 2,
and payable 4th June 1967.
Rule 129, Revised Rules of Court.chanroblesvirtualawlibrary chanrobles virtual law library

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.chanroblesvirtualawlibrary chanrobles
virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles
virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
These restructuring of the obligations with regard to their maturity dates, effected twice, were
done without the knowledge, much 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.chanroblesvirtualawlibrary chanrobles virtual law library

Page 15 of 40
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
Hence, it is our conclusion that the petition in G.R. No. 84197 is not
meritorious.chanroblesvirtualawlibrary chanrobles virtual law library
We now discuss the merits of G.R. No. 84157.chanroblesvirtualawlibrary chanrobles virtual law
library
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
Page 16 of 40
defendants Bormaheco and Maglana representing the latter's participation in the ownership of
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.chanroblesvirtualawlibrary chanrobles virtual law library
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:
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.chanroblesvirtualawlibrary chanrobles
virtual law library
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.chanroblesvirtualawlibrary chanrobles virtual law library
SO ORDERED.
EN BANC
[G.R. No. L-20993. September 28, 1968.]
RIZAL LIGHT & ICE CO., INC., Petitioner, v. THE MUNICIPALITY OF MORONG, RIZAL and
the PUBLIC SERVICE COMMISSION, Respondents.
[G.R. No. L-21221.]
RIZAL LIGHT & ICE CO., INC., Petitioner, v. THE PUBLIC SERVICE COMMISSION and
Page 17 of 40
MORONG ELECTRIC, INC., Respondents.
Atilano C. Bautista and Pompeyo F. Olivas for Respondents.
SYLLABUS
1. ADMINISTRATIVE LAW; PUBLIC SERVICE COMMISSION; PROCEDURE; OBJECTIONS.
— Objection to designation of a division chief, who is not a lawyer, to hear and receive evidence
in connection with a matter pending before the Public Service Commission, is a procedural, not
a jurisdictional point, and is waived by failure to interpose timely objection and the case had
been decided by the Commission.
2. ID.; ID.; DECISIONS; REVIEW; SCOPE OF INQUIRY. — In reviewing the decision of the
Public Service Commission, the Supreme Court is not required to examine the proof de novo
and determine for itself whether or not the preponderance of evidence really justifies the
decision, since its only function is to determine whether or not there is evidence before the
Commission upon which its decision might reasonably be based. This Court will not substitute its
discretion for that of the Commission on questions of fact and will not interfere in the latter’s
decision unless it clearly appears that there is no evidence to support it.
3. ID.; ID.; PROSECUTING AND INVESTIGATING FUNCTIONS; DISCRETION. — When
prosecuting and investigating duties are delegated by statute to an administrative body, as in the
case of the Public Service Commission, said body may take steps it believes appropriate for the
proper exercise of said duties, particularly in the manner of informing itself whether there is
probable violation of the law and/or its rules and regulations. It may initiate an investigation, file a
complaint, and then try the charge as preferred. So long as the respondent is given a day in
court, there can be no denial of due process.
4. ID.; ID.; REVOCATION OF CERTIFICATES; PROTECTION-OF-INVESTMENT RULE. — The
duty of the Commission to protect the investment of a public utility operator applies only to
operators of good standing — those who comply with the laws, rules and regulations — and not
to operators who are unconcerned with the public interest and whose investments have failed or
deteriorated because of their own fault. To apply that rule unqualifiedly is to encourage violation
or disregard of the terms and conditions of the certificate and the Commission’s directives and
regulations, and would close the door to other applicants who could establish, operate and
provide adequate, efficient and satisfactory service for the benefit and convenience of the
inhabitants.
5. ID.; ID.; ID.; VIOLATIONS OF CONDITIONS. — The action of the Public Service Commission
in revoking a certificate of public convenience and necessity to operate electric service, instead
of merely imposing a fine, was clearly justified where it appeared from the evidence that the
operator, despite ample time and opportunity given to it by the Commission, had failed to render
adequate, sufficient and satisfactory service and had violated the important conditions of its
certificate as well as the directives and the rules and regulations of the Commission.
6. ID.; ID.; ISSUANCE OF CERTIFICATES; REQUISITES. — Before a certificate to operate a
public service may be granted, three requisites must be complied with, namely: (1) the applicant
must be a citizen of the Philippines or of the United States, or a corporation or co-partnership,
association or joint-stock company constituted and organized under the laws of the Philippines,
60% at least of the stock or paid up capital of which belongs entirely to the citizens of the
Philippines or the United States; (2) the applicant must be financially capable of undertaking the
proposed service and meeting the responsibilities incident to its operation; and (3) the applicant
must prove that the operation of the public service proposed and the authorization to do
business will promote the public interest in a proper and suitable manner.
7. ID.; ID.; CONCLUSIVENESS OF FINDINGS OF FACT; FINANCIAL CAPACITY. — The
finding of the Public Service Commission that the respondent company is financially qualified to
install, maintain, and operate the proposed electric light, heat and power service, is essentially a
factual determination which the Supreme Court will not disturb unless patently unsupported by
evidence.
8. ID.; ID.; FRANCHISES; VALIDITY OF GRANT PRIOR TO INCORPORATION. — The fact
that a company had no corporate existence on the day the municipal electric franchise was
granted in its name does not render the franchise invalid where, as in the case at bar, the
acceptance of the franchise in accordance with the terms and conditions thereof, was made after
the issuance of a certificate of incorporation by the Securities and Exchange Commission.
DECISION
ZALDIVAR, J.:
These two cases, being interrelated, are decided together.
Case G.R. No. L - 20993 is a petition of the Rizal Light & Ice Co. Inc. to review and set aside the
orders of respondent Public Service Commission 1 , dated August 20, 1962 and February 15,
1963, in PSC Case No. 39715, cancelling and revoking the certificate of public convenience and
necessity and forfeiting the franchise of said petitioner. In the same petition, the petitioner
prayed for the issuance of a writ of preliminary injunction ex parte suspending the effectivity of
said orders and/or enjoining respondents Commission and/or Municipality of Morong, Rizal, from
enforcing in any way the cancellation and revocation of petitioner’s franchise and certificate of
public convenience during the pendency of this appeal. By resolution of March 12, 1963, this
Court denied the petition for injunction, for lack of merit.
Case G.R. No. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review and set
aside the decision of the Commission dated March 13, 1963 in PSC Case No. 62-5143 granting
a certificate of public convenience and necessity to respondent Morong Electric Co., Inc. 2 to
operate an electric light, heat and power service in the municipality of Morong, Rizal. In the
petition Rizal Light & Ice Co., Inc. also prayed for the issuance of a writ of preliminary injunction
ex parte suspending the effectivity of said decision. Per resolution of this Court, dated May 6,
1963, said petition for injunction was denied.
The facts, as they appear in the records of both cases, are as follows:chanrob1es virtual 1aw
library
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business address at Morong,
Rizal. On August 15, 1949, it was granted by the Commission a certificate of public convenience
and necessity for the installation, operation and maintenance of an electric light, heat and power
service in the municipality of Morong, Rizal.
In an order dated December 19, 1956, the Commission required the petitioner to appear before
it on February 18, 1957 to show cause why it should not be penalized for violation of the
conditions of its certificate of public convenience and the regulations of the Commission, and for
failure to comply with the directives to raise its service voltage and maintain them within the
limits prescribed in the Revised Order No. 1 of the Commission, and to acquire and install a
kilowatt meter to indicate the load in kilowatts at any particular time of the generating unit. 3
Page 18 of 40
For failure of the petitioner to appear at the hearing on February 18, 1957, the Commission
ordered the cancellation and revocation of petitioner’s certificate of public convenience and
necessity and the forfeiture of its franchise. Petitioner moved for reconsideration of said order on
the ground that its manager, Juan D. Francisco, was not aware of said hearing. Respondent
municipality opposed the motion, alleging that petitioner has not rendered efficient and
satisfactory service and has not complied with the requirements of the Commission for the
improvement of its service. The motion was set for hearing and Mr. Pedro S. Talavera, Chief,
Industrial Division of the Commission, was authorized to conduct the hearing for the reception of
the evidence of the parties. 4
Finding that the failure of the petitioner to appear at the hearing set for February 18, 1957 — the
sole basis of the revocation of petitioner’s certificate — was really due to the illness of its
manager, Juan D. Francisco, the Commission set aside its order of revocation. Respondent
municipality moved for reconsideration of this order of reinstatement of the certificate, but the
motion was denied.
In a petition dated June 25, 1958, filed in the same case, respondent municipality formally asked
the Commission to revoke petitioner’s certificate of public convenience and to forfeit its franchise
on the ground, among other things, that it failed to comply with the conditions of said certificate
and franchise. Said petition was set for hearing jointly with the order to show cause. The
hearings had been postponed several times.
Meanwhile, inspections had been made of petitioner’s electric plant and installations by the
engineers of the Commission, as follows: April 15, 1958 by Engineer Antonio M. Alli; September
18, 1959, July 12-13, 1960, and June 21-24, 1961, by Engineer Meliton S. Martinez. The
inspection on June 21-24, 1961 was made upon the request of the petitioner who manifested
during the hearing on December 15, 1960 that improvements have been made on its service
since the inspection on July 12-13, 1960, and that, on the basis of the inspection report to be
submitted, it would agree to the submission of the case for decision without further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to appear. Respondent
municipality was then allowed to present its documentary evidence, and thereafter the case was
submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that it had not
been furnished with a copy of the report of the June 21-24, 1961 inspection for it to reply as
previously agreed. In an order dated August 25, 1961, petitioner was granted a period of ten (10)
days within which to submit its written reply to said inspection report, on condition that should it
fail to do so within the said period the case would be considered submitted for decision.
Petitioner failed to file the reply. In consonance with the order of August 25, 1961, therefore, the
Commission proceeded to decide the case. On July 29, 1962 petitioner’s electric plant was
burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the inspection reports of
its aforenamed engineers, found that the petitioner had failed to comply with the directives
contained in its letters dated May 21, 1954 and September 4, 1954, and had violated the
conditions of its certificate of public convenience as well as the rules and regulations of the
Commission. The Commission concluded that the petitioner "cannot render the efficient,
adequate and satisfactory electric service required by its certificate and that it is against public
interest to allow it to continue its operation." Accordingly, it ordered the cancellation and
revocation of petitioner’s certificate of public convenience and the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision, alleging that
before its electric plant was burned on July 29, 1962, its service was greatly improved and that it
had still existing investment which the Commission should protect. But eight days before said
motion for reconsideration was filed, or on September 10, 1962, Morong Electric, having been
granted a municipal franchise on May 6, 1962 by respondent municipality to install, operate and
maintain an electric heat, light and power service in said municipality — approved by the
Provincial Board of Rizal on August 31, 1962 — filed with the Commission an application for a
certificate of public convenience and necessity for said service. Said application was entitled
"Morong Electric Co., Inc., Applicant", and docketed as Case No. 62-5143.
Petitioner opposed in writing the application of Morong Electric, alleging among other things, that
it is a holder of a certificate of public convenience to operate an electric light, heat and power
service in the same municipality of Morong, Rizal, and that the approval of said application
would not promote public convenience, but would only cause ruinous and wasteful competition.
Although the opposition is dated October 6, 1962, it was actually received by the Commission on
November 8, 1962, or twenty four days after the order of general default was issued in open
court when the application was first called for hearing on October 15, 1962. On November 12,
1962, however, the petitioner filed a motion to lift said order of default. But before said motion
could be resolved, petitioner filed another motion dated, January 4, 1963, this time asking for the
dismissal of the application upon the ground that applicant Morong Electric had no legal
personality when it filed its application on September 10, 1962, because its certificate of
incorporation was issued by the Securities and Exchange Commission only on October 17,
1962. This motion to dismiss was denied by the Commission in a formal order issued on January
17, 1963 on the premise that applicant Morong Electric was a de facto corporation.
Consequently, the case was heard on the merits and both parties presented their respective
evidence. On the basis of the evidence adduced, the Commission, in its decision dated March
13, 1963, found that there was an absence of electric service in the municipality of Morong and
that applicant Morong Electric, a Filipino-owned corporation duly organized and existing under
the laws of the Philippines, has the financial capacity to maintain said service. These
circumstances, considered together with the denial of the motion for reconsideration filed by
petitioner in Case No. 39715 on February 15, 1963, such that as far as the Commission was
concerned the certificate of the petitioner was already declared revoked and cancelled, the
Commission approved the application of Morong Electric and ordered the issuance in its favor of
the corresponding certificate of public convenience and necessity.
On March 8, 1963, petitioner filed with this Court a petition to review the decision in Case No.
39715 (now G.R. No. L-20993). Then on April 26, 1963, petitioner also filed a petition to review
the decision in Case No. 62-5143 (now G.R. No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner contends: (1) that
the Commission acted without or in excess of its jurisdiction when it delegated the hearing of the
case and the reception of evidence to Mr. Pedro S. Talavera who is not allowed by law to hear
the same; (2) that the cancellation of petitioner’s certificate of public convenience was
unwarranted because no sufficient evidence was adduced against the petitioner and that
petitioner was not able to present evidence in its defense; (3) that the Commission failed to give
protection to petitioner’s investment; and (4) that the Commission erred in imposing the extreme
penalty of revocation of the certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the Commission
erred in denying petitioner’s motion to dismiss and proceeding with the hearing of the application
of the Morong Electric; (2) that the Commission erred in granting Morong Electric a certificate of
public convenience and necessity since it is not financially capable to render the service; (3) that
the Commission erred when it made findings of facts that are not supported by the evidence
adduced by the parties at the trial; and (4) that the Commission erred when it did not give to
petitioner protection to its investment a reiteration of the third assignment of error in the other
case.
Page 19 of 40
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr. Pedro S. Talavera, who
conducted the hearings of the case below, is a division chief, he is not a lawyer. As such, under
Section 32 of Commonwealth Act No. 146, as amended, the Commission should not have
delegated to him the authority to conduct the hearings for the reception of evidence of the
parties.
We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of Section 32 of
Commonwealth Act No. 146, as amended, 6 the Commission can only authorize a division chief
to hear and investigate a case filed before it if he is a lawyer. However, the petitioner is raising
this question for the first time in this appeal. The record discloses that petitioner never made any
objection to the authority of Mr. Talavera to hear the case and to receive the evidence of the
parties. On the contrary, we find that petitioner had appeared and submitted evidence of the
hearings conducted by Mr. Talavera, particularly the hearings relative to the motion for
reconsideration of the order of February 18, 1957 cancelling and revoking its certificate. We also
find that, through counsel, petitioner had entered into agreements with Mr. Talavera, as hearing
officer, and the counsel for respondent municipality, regarding procedure in order to abbreviate
the proceedings. 7 It is only after the decision in the case turned out to be adverse to it that
petitioner questioned the proceedings held before Mr. Talavera.
This court in several cases has ruled that objection to the delegation of authority to hear a case
filed before the Commission and to receive the evidence in connection therewith is a procedural,
not a jurisdictional point, and is waived by failure to interpose timely the objection and the case
had been decided by the Commission. 8 Since petitioner has never raised any objection to the
authority of Mr. Talavera before the Commission, it should be deemed to have waived such
procedural defect, and consonant with the precedents on the matter, petitioner’s claim that the
Commission acted without or in excess of jurisdiction in so authorizing Mr. Talavera should be
dismissed. 9
2. Anent the second assigned error, the gist of petitioner’s contention is that the evidence —
consisting of inspection reports — upon which the Commission based its decision is insufficient
and untrustworthy in that (1) the authors of said reports had not been put to test by way of cross-
examination; (2) the reports constitute only one side of the picture as petitioner was not able to
present evidence in its defense; (3) judicial notice was not taken of the testimony of Mr. Harry B.
Bernardino, former mayor of respondent municipality, in PSC Case No. 62-5143 (the other case,
G.R. No. L-21221) to the effect that the petitioner had improved its service before its electric
power plant was burned on July 29, 1962 — which testimony contradicts the inspection reports;
and (4) the Commission acted both as prosecutor and judge — passing judgment over the very
same evidence presented by it as prosecutor — a situation "not conducive to the arrival at just
and equitable decisions."cralaw virtua1aw library
Settled is the rule that in reviewing the decision of the Public Service Commission this Court is
not required to examine the proof de novo and determine for itself whether or not the
preponderance of evidence really justifies the decision. The only function of this Court is to
determine whether or not there is evidence before the Commission upon which its decision
might reasonably be based. This Court will not substitute its discretion for that of the
Commission on questions of fact and will not interfere in the latter’s decision unless it clearly
appears that there is no evidence to support it. Inasmuch as the only function of this Court in
reviewing the decision of the Commission is to determine whether there is sufficient evidence
before the Commission upon which its decision can reasonably be based, as it is not required to
examine the proof de novo, the evidence that should be made the basis of this Court’s
determination should be only those presented in this case before the Commission. What then
was the evidence presented before the Commission and made the basis of its decision subject
of the present appeal? As stated earlier, the Commission based its decision on the inspection
reports submitted by its engineers who conducted the inspection of petitioner’s electric service
upon orders of the Commission. 10 Said inspection reports specify in detail the deficiencies
incurred, and violations committed, by the petitioner resulting in the inadequacy of its service.
We consider that said reports are sufficient to serve reasonably as bases of the decision in
question. It should be emphasized, in this connection that said reports, are not mere
documentary proofs presented for the consideration of the Commission, but are the results of
the Commission’s own observations and investigations which it can rightfully take into
consideration, 11 particularly in this case where the petitioner had not presented any evidence in
its defense, and speaking of petitioner’s failure to present evidence, as well as its failure to
cross-examine the authors of the inspection reports, petitioner should not complain because it
had waived not only its right to cross-examine but also its right to present evidence. Quoted
hereunder are the pertinent portions of the transcripts of the proceedings where the petitioner,
through counsel, manifested in clear language said waiver and its decision to abide by the last
inspection report of Engineer Martinez:chanrob1es virtual 1aw library
Proceedings of December 15, 1960
"COMMISSION:jgc:chanrobles.com.ph
"It appears at the last hearing of this case on September 23, 1960, that an engineer of this
Commission has been ordered to make an inspection of all electric services in the province of
Rizal and on that date the engineer of this Commission is still undertaking that inspection and it
appears that the said engineer had actually made that inspection on July 12 and 13, 1960. The
engineer has submitted his report on November 18, 1960 which is attached to the records of this
case.
"ATTY. LUQUE (Counsel for Petitioner):jgc:chanrobles.com.ph
". . . (W)e respectfully state that while the report is, as I see it attached to the records, clear and
very thorough, it was made sometime July of this year and I understand from the respondent
that there is some improvement since this report was made . . . we respectfully request that an
up-to-date inspection be made . . . . An inspector of this Commission can be sent to the plant
and considering that the engineer of this Commission, Engineer Meliton Martinez, is very
acquainted to the points involved we pray that his report will be used by us for the reason that he
is a technical man and he knows well as he has done a good job and I think our proposition
would expedite the matter. We sincerely believe that the inspection report will be the best
evidence to decide this matter.
x x x our records we are furnished with a copy of the report of July 17, 1961. We submit your honor.
"ATTY. LUQUE:jgc:chanrobles.com.ph
". . . . This is a very important matter and to show the good faith of respondent in this case we
will not even cross-examine the engineer when he makes a new report. We will agree to the
findings and, your honor please, considering as we have manifested before that Engineer
Martinez is an experienced engineer of this Commission and the points reported by Engineer
Martinez on the situation of the plant now will prevent the necessity of having a hearing, of us
bringing new evidence and complainant bringing new evidence. . . .
x x x
Page 20 of 40
"COMMISSION (to Atty. Luque):chanrob1es virtual 1aw library
Q "Does the Commission understand from the counsel for applicant that if the motion is granted
he will submit this order to show cause for decision without any further hearing and the decision
will be based on the report of the engineer of this Commission?
A "We respectfully reply in this manner that we be allowed or be given an opportunity just to read
the report and 99% we will agree that the report will be the basis of that decision. We just want
to find out the contents of the report, however, we request that we be furnished with a copy of
the report before the hearing so that we will just make a manifestation that we will agree.
"COMMISSION (to Atty. Luque):chanrob1es virtual 1aw library
Q "In order to prevent the delay of the disposition of this case the Commission will allow counsel
for the applicant to submit his written reply to the report that the engineer of this Commission.
Will he submit this case without further hearing upon the receipt of that written reply?
A "Yes, your honor."cralaw virtua1aw library
Proceedings of August 25, 1961
"ATTY. LUQUE (Counsel for petitioner)
"In order to avoid any delay in the consideration of this case we are respectfully move (sic) that
instead of our witnesses testifying under oath that we will submit a written reply under oath
together with the memorandum within fifteen (15) days and we will furnish a copy and upon our
submission of said written reply under oath and memorandum we consider this case submitted.
This suggestion is to abbreviate the necessity of presenting witnesses here which may prolong
the resolution of this case.
"ATTY. OLIVAS: (Counsel for respondent municipality)
"I object on the ground that there is no resolution by this Commission on the action to reopen the
case and second this case has been closed.
"ATTY. LUQUE:jgc:chanrobles.com.ph
"With regard to the testimony on the ground for opposition we respectfully submit to this
Commission our motion to submit a written reply together with a memorandum. Also as stated to
expedite the case and to avoid further hearing we will just submit our written reply. According to
x x x
"COMMISSION:jgc:chanrobles.com.ph
"To give applicant a chance to have a day in court the Commission grants the request of
applicant that it be given 10 days within which to submit a written reply on the report of the
engineer of the Commission who inspected the electric service, in the municipality of Morong,
Rizal, and after the submission of the said written reply within 10 days from today this case will
be considered submitted for decision."cralaw virtua1aw library
The above-quoted manifestations of counsel for the petitioner, specifically the statement
referring to the inspection report of Engineer Martinez as the "best evidence to decide this
matter," can serve as an argument against petitioner’s claim that the Commission should have
taken into consideration the testimony of Mr. Bernardino. But the primary reasons why the
Commission could not have taken judicial cognizance of said testimony are: first, it is not a
proper subject of judicial notice, as it is not a "known" fact — that is, well established and
authoritatively settled, without qualification and contention; 13 second, it was given in a
subsequent and distinct case after the petitioner’s motion for reconsideration was heard by the
Commission en banc and submitted for decision; 14 and third, it was not brought to the attention
of the Commission in this case through an appropriate pleading. 15
Regarding the contention of petitioner that the Commission had acted both as prosecutor and
judge, it should be considered that there are two matters that had to be decided in this case,
namely, the order to show cause dated December 19, 1956, and the petition or complaint filed
by respondent municipality dated June 25, 1958. Both matters were heard jointly, and the record
shows that respondent municipality had been allowed to present its evidence to substantiate its
complaint. It can not be said, therefore, that in this case the Commission had acted as
prosecutor and judge. But even assuming, for the sake of argument, that there was a
commingling of the prosecuting and investigating functions, this exercise of dual functions, is
authorized by Section 17(a) of Commonwealth Act No. 146, as amended, under which the
Commission has power "to investigate, upon its own initiative, or upon complaint in writing, any
matter concerning any public service as regards matters under its jurisdiction; to require any
public service to furnish safe, adequate, and proper service as the public interest may require
and warrant; to enforce compliance with any standard, rule, regulation, order or other
requirement of this Act or of the Commission, . . . ." Thus, in the case of Collector of Internal
Revenue v. Estate of F.P. Buan, L-11438, July 31, 1958, this Court held that the power of the
Commission to cancel and revoke a certificate of public convenience and necessity may be
exercised by it even without a formal charge filed by any interested party, with the only limitation
that the holder of the certificate should be given his day in court.
It may not be amiss to add that when prosecuting and investigating duties are delegated by
statute to an administrative body, as in the case of the Public Service Commission, said body
may take steps it believes appropriate for the proper exercise of said duties, particularly in the
manner of informing itself whether there is probable violation of the law and/or its rules and
regulations. It may initiate an investigation, file a complaint, and then try the charge as preferred.
So long as the respondent is given a day in court, there can be no denial of due process, and
objections to said procedure cannot be sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-investment rule"
enunciated by this Court in Batangas Transportation Co. v. Orlanes 16 in this
wise:jgc:chanrobles.com.ph
"The Government having taken over the control and supervision of all public utilities, so long as
an operator under a prior license complies with the terms and conditions of his license and
reasonable rules and regulations for its operation and meets the reasonable demands of the
public, it is the duty of the commission to protect rather than to destroy his investment by the
granting of the second license to another person for the same thing over the same route of
travel. The granting of such a license does not serve its convenience or promote the interests of
the public."cralaw virtua1aw library
The above-quoted rule, however, is not absolute, for nobody has exclusive right to secure a
franchise or a certificate of public convenience. 17 Where, as in the present case, it has been
shown by ample evidence that the petitioner, despite ample time and opportunity given to it by
the Commission, had failed to render adequate, sufficient and satisfactory service and had
violated the important conditions of its certificate as well as the directives and the rules and
regulations of the Commission, the rule cannot apply. To apply that rule unqualifiedly is to
encourage violation or disregard of the terms and conditions of the certificate and the
Page 21 of 40
Commission’s directives and regulations, and would close the door to other applicants who could
establish, operate and provide adequate, efficient and satisfactory service for the benefit and
convenience of the inhabitants. It should be emphasized that the paramount consideration
should always be the public interest and public convenience. The duty of the Commission to
protect the investment of a public utility operator refers only to operators of good standing -
those who comply with the laws, rules and regulations — and not to operators who are
unconcerned with the public interest and whose investments have failed or deteriorated because
of their own fault. 18
4. The last assignment of error assails the propriety of the penalty imposed by the Commission
on the petitioner — that is, the revocation of the certificate and the forfeiture of the franchise.
Petitioner contends that the imposition of a fine would have been sufficient, as had been done by
the Commission in cases of a similar nature.
It should be observed that Section 16 (n) of Commonwealth Act No. 146, as amended, confers
upon the Commission ample power and discretion to order the cancellation and revocation of
any certificate of public convenience issued to an operator who has violated, or has willfully and
contumaciously refused to comply with, any order, rule or regulation of the Commission or any
provision of law. What matters is that there is evidence to support the action of the Commission.
In the instant case, as shown by the evidence, the contumacious refusal of the petitioner since
1954 to comply with the directives, rules and regulations of the Commission, its violation of the
conditions of its certificate and its incapability to comply with its commitment as shown by its
inadequate service, were the circumstances that warranted the action of the Commission in not
merely imposing a fine but in revoking altogether petitioner’s certificate. To allow petitioner to
continue its operation would be to sacrifice public interest and convenience in favor of private
interest.
"A grant of a certificate of public convenience confers no property rights but is a mere license or
privilege, and such privilege is forfeited when the grantee fails to comply with his commitments
behind which lies the paramount interest of the public, for public necessity cannot be made to
wait, nor sacrificed for private convenience." (Collector of Internal Revenue v. Estate of F.P.
Buan, Et Al., L-11438 and Santiago Sambrano, Et Al., v. PSC, Et Al., L-11439 & L-11542-46,
July 31, 1958)
"(T)he Public Service Commission, . . . has the power to specify and define the terms and
conditions upon which the public utility shall be operated, and to make reasonable rules and
regulations for its operation and the compensation which the utility shall receive for its services
to the public, and for any failure to comply with such rules and regulations or the violation of any
of the terms and conditions for which the license was granted, the Commission has ample power
to enforce the provisions of the license or even to revoke it, for any failure or neglect to comply
with any of its terms and provisions." (Batangas Trans. Co. v. Orlanes, 52 Phil. 455,
460; Emphasis supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146, as amended,
which provides that a public utility operator violating or failing to comply with the terms and
conditions of any certificate, or any orders, decisions or regulations of the Commission, shall be
subject to a fine and that the Commission is authorized and empowered to impose such fine,
after due notice and hearing. It should be noted, however, that the last sentence of said section
states that the remedy provided therein "shall not be a bar to, or affect any other remedy
provided in this Act but shall be cumulative and additional to such remedy or remedies." In other
words, the imposition of a fine may only be one of the remedies which the Commission may
resort to, in its discretion. But that remedy is not exclusive of, or has preference over, the other
remedies. And this Court will not substitute its discretion for that of the Commission, as long as
there is evidence to support the exercise of that discretion by the Commission.
G.R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any certificate may be
granted, authorizing the operation of a public service, three requisites must be complied with,
namely: (1) the applicant must be a citizen of the Philippines or of the United States, or a
corporation or co-partnership, association or joint-stock company constituted and organized
under the laws of the Philippines, sixty per centum at least of the stock or paid-up capital of
which belongs entirely to citizens of the Philippines or of the United States; 19 (2) the applicant
must be financially capable of undertaking the proposed service and meeting the responsibilities
incident to its operation; 20 and (3) the applicant must prove that the operation of the public
service proposed and the authorization to do business will promote the public interest in a proper
and suitable manner. 21
As stated earlier, in the decision appealed from, the Commission found that Morong Electric is a
corporation duly organized and existing under the laws of the Philippines, the stockholders of
which are Filipino citizens, that it is financially capable of operating an electric light, heat and
power service, and that at the time the decision was rendered there was absence of electric
service in Morong, Rizal. While the petitioner does not dispute the need of an electric service in
Morong, Rizal, 22 it claims, in effect, that Morong Electric should not have been granted the
certificate of public convenience and necessity because (1) it did not have a corporate
personality at the time it was granted a franchise and when it applied for said certificate; (2) it is
not financially capable of undertaking an electric service, and (3) petitioner was rendering
efficient service before its electric plant was burned, and therefore, being a prior operator its
investment should be protected and no new party should be granted a franchise and certificate
of public convenience and necessity to operate an electric service in the same locality.
1. The bulk of petitioner’s arguments assailing the personality of Morong Electric dwells on the
proposition that since a franchise is a contract, 23 at least two competent parties are necessary
to the execution thereof, and parties are not competent except they are in being. Hence, it is
contended that until a corporation has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter
into any contract as a corporation. The certificate of incorporation of the Morong Electric was
issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical
personality and legal existence. Petitioner concludes that the franchise granted to Morong
Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of
the Commission’s consideration. On the other hand, Morong Electric argues, and to which
argument the Commission agrees, that it was a de facto corporation at the time the franchise
was granted and, as such, it was not incapacitated to enter into any contract or to apply for and
accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise
granted to it is valid and the approval or disapproval thereof can be properly determined by the
Commission.
Petitioner’s contention that Morong Electric did not yet have a legal personality on May 6, 1962
when a municipal franchise was granted to it is correct. The juridical personality and legal
existence of Morong Electric began only on October 17, 1962 when its certificate of
incorporation, was issued by the SEC. 24 Before that date, or pending the issuance of said
certificate of incorporation, the incorporators cannot be considered as de facto corporation. 25
But the fact that Morong Electric had no corporate existence on the day the franchise was
granted in its name does not render the franchise invalid, because later Morong Electric
obtained its certificate of incorporation and then accepted the franchise in accordance with the
terms and conditions thereof. This view is sustained by eminent American authorities. Thus.
McQuillin says:jgc:chanrobles.com.ph
"The fact that a company is not completely incorporated at the time the grant is made to it by a
municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But
Page 22 of 40
such grant cannot take effect until the corporation is organized. And in Illinois it has been
decided that the ordinance granting the franchise may be presented before the corporation
grantee is fully organized, where the organization is completed before the passage and
acceptance." (McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)
Fletcher says:jgc:chanrobles.com.ph
"While a franchise cannot take effect until the grantee corporation is organized, the franchise
may, nevertheless, be applied for before the company is fully organized.
"A grant of a street franchise is valid although the corporation is not created until afterwards."
(Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:jgc:chanrobles.com.ph
"(I)n the matter of the secondary franchise the authorities are numerous in support of the
proposition that an ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the introduction of the ordinance.
It is enough that organization is complete prior to the passage and acceptance of the ordinance.
The reason is that a privilege of this character is a mere license to the corporation until it accepts
the grant and complies with its terms and conditions." (Thompson on Corporations, Vol. 4, 3rd
Ed., Sec. 2929) 26
The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as
shown by its action in prosecuting the application filed with the Commission for the approval of
said franchise, not only perfected a contract between the respondent municipality and Morong
Electric but also cured the deficiency pointed out by the petitioner in the application of Morong
Electric. Thus, the Commission did not err in denying petitioner’s motion to dismiss said
application and in proceeding to hear the same. The efficacy of the franchise, however, arose
only upon its approval by the Commission on March 13, 1963. The reason is that —
"Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to grant
electric franchises, subject to the approval of the provincial board and the President. However,
under Section 16 (b) of Commonwealth Act No. 146, as amended, the Public Service
Commission is empowered’ to approve, subject to constitutional limitations any franchise or
privilege granted under the provisions of Act No. 667, as amended by Act 1022, by any political
subdivision of the Philippines when, in the judgment of the Commission, such franchise or
privilege will properly conserve the public interests, and the Commission shall in so approving
impose such conditions as to construction, equipment, maintenance, service, or operation as the
public interests and convenience may reasonably require, and to issue certificates of public
convenience and necessity when such is required or provided by any law or franchise.’ Thus, the
efficacy of a municipal electric franchise arises, therefore, only after the approval of the Public
Service Commission." (Almendras v. Ramos, 90 Phil. 231)
The conclusion herein reached regarding the validity of the franchise granted to Morong Electric
is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. v.
Teodoro Sandiko 27 upon which the petitioner leans heavily in support of its position. In said
case this Court held that a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or transact any business. It
should be pointed out, however, that this Court did not say in that case that the rule is absolute
or that under no circumstances may the acts of promoters of a corporation be ratified or
accepted by the corporation if and when subsequently organized. Of course, there are
exceptions. It will be noted that American courts generally hold that a contract made by the
promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation
when organized. 28

2. The validity of the franchise and the corporate personality of Morong Electric to accept the
same having been shown, the next question to be resolved is whether said company has the
financial qualification to operate an electric light, heat and power service. Petitioner challenges
the financial capability of Morong Electric, by pointing out the inconsistencies in the testimony of
Mr. Jose P. Ingal, president of said company, regarding its assets and the amount of its initial
investment for the electric plant. In this connection it should be stated that on the basis of the
evidence presented on the matter, the Commission has found the Morong Electric to be
"financially qualified to install, maintain and operate the proposed electric light, heat and power
service." This is essentially a factual determination which, in a number of cases, this Court has
said it will not disturb unless patently unsupported by evidence. An examination of the record of
this case readily shows that the testimony of Mr. Ingal and the documents he presented to
establish the financial capability of Morong Electric provide reasonable grounds for the above
finding of the Commission.
"It is now a very well-settled rule in this jurisdiction that the findings and conclusions of fact made
by the Public Service Commission, after weighing the evidence adduced by the parties in a
public service case, will not be disturbed by the Supreme Court unless those findings and
conclusions appear not to be reasonably supported by evidence." (La Mallorca and Pampanga
Bus Co. v. Mercado, L-19120, November 29, 1965)
"For purposes of appeal, what is decisive is that said testimonial evidence provides reasonable
support for the Public Service Commission’s findings of financial capacity on the part of
applicants, rendering such findings beyond our power to disturb." (Del Pilar Transit v. Silva, L-
21547, July 15, 1966)
It may be worthwhile to mention in this connection that per inspection report dated January 20,
1964 29 of Mr. Meliton Martinez of the Commission, who inspected the electric service of
Morong Electric on January 15-16, 1964, Morong Electric "is serving electric service to the entire
area covered by its approved plan and has constructed its line in accordance with the plans and
specifications approved by the Commission." By reason thereof, it was recommended that the
requests of Morong Electric (1) for the withdrawal of its deposit in the amount of P1,000.00 with
the Treasurer of the Philippines, and (2) for the approval of Resolution No. 160 of the Municipal
Council of Morong, Rizal, exempting the operator from making the additional P9,000.00 deposit
mentioned in its petition, dated September 16, 1963, be granted. This report removes any doubt
as to the financial capability of Morong Electric to operate and maintain an electric light, heat and
power service.
3. With the financial qualification of Morong Electric beyond doubt, the remaining question to be
resolved is whether, or not, the findings of fact of the Commission regarding petitioner’s service
are supported by evidence. It is the contention of the petitioner that the Commission made some
findings of fact prejudicial to its position but which do not find support from the evidence
presented in this case. Specifically, petitioner refers to the statements or findings that its service
had "turned from bad to worse", that it miserably failed to comply with the oft-repeated promises
to bring about the needed improvement, that its equipment is unserviceable, and that it has no
longer any plant site and, therefore, has discredited itself. Petitioner further states that such
statements are not only devoid of evidentiary support but contrary to the testimony of its witness,
Mr. Harry Bernardino, who testified that petitioner was rendering efficient and satisfactory
service before its electric plant was burned on July 29, 1962.
On the face of the decision appealed from, it is obvious that the Commission in describing the
kind of service petitioner was rendering before its certificate was ordered revoked and cancelled,
took judicial notice of the records of the previous case (PSC Case No. 39715) where the quality
of petitioner’s service had been squarely put in issue. It will be noted that the findings of the
Commission were made notwithstanding the fact that the aforementioned testimony of Mr.
Page 23 of 40
Bernardino had been emphasized and pointed out in petitioner’s Memorandum to the
Commission. 30 The implication is simple: that as between the testimony of Mr. Bernardino and
the inspection reports of the engineers of the Commission, which served as the basis of the
revocation order, the Commission gave credence to the latter. Naturally, whatever conclusion or
finding of fact that the Commission arrived at regarding the quality of petitioner’s service are not
borne out by the evidence presented in this case but by evidence in the previous case. 31 In this
connection, we repeat, the conclusion, arrived at by the Commission after weighing the
conflicting evidence in the two related cases, is a conclusion of fact which this Court will not
disturb.
"And it has been held time and again that where the Commission has reached a conclusion of
fact after weighing the conflicting evidence, that conclusion must be respected, and the Supreme
Court will not interfere unless it clearly appears that there is no evidence to support the decision
of the Commission." (La Mallorca and Pampanga Bus Co., v. Mercado, L-19120, November 29,
1965 citing Pangasinan Trans. Co., Inc. v. Dela Cruz, 95 Phil. 278)
For that matter, petitioner’s pretension that it has a prior right to the operation of an electric
service in Morong, Rizal, is not tenable; and its plea for protection of its investment, as in the
previous case, cannot be entertained.
WHEREFORE, the two decisions of the Public Service Commission, appealed from, should be,
as they are hereby affirmed, with costs in the two cases against petitioner Rizal Light & Ice Co.,
Inc. It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon Makalintal, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.
G.R. No. 218787, December 08, 2015
LEO Y. QUERUBIN, MARIA CORAZON M. AKOL, AND AUGUSTO C.
LAGMAN, Petitioners, v. COMMISSION ON ELECTIONS EN BANC, REPRESENTED BY
CHAIRPERSON J. ANDRES D. BAUTISTA, AND JOINT VENTURE OF SMARTMATIC-TIM
CORPORATION, TOTAL INFORMATION MANAGEMENT CORPORATION, SMARTMATIC
INTERNATIONAL HOLDING B.V. AND JARLTECH INTERNATIONAL CORPORATION,
REPRESENTED BY PARTNER WITH BIGGEST EQUITY SHARE, SMARTMATIC-TIM
CORPORATION, ITS GENERAL MANAGER ALASTAIR JOSEPH JAMES WELLS,
SMARTMATIC CHAIRMAN LORD MALLOCH-BROWN, SMARTMATIC-ASIA PACIFIC
PRESIDENT CESAR FLORES, AND ANY OR ALL PERSONS ACTING FOR AND ON
BEHALF OF THE JOINT VENTURE, Respondent.
DECISION
VELASCO JR., J.:
Nature of the Case
Before the Court is a petition for certiorari or prohibition under Rule 64 of the Rules of Court, with
prayer for injunctive relief, assailing the validity and seeking to restrain the implementation of the
Commission of Elections (COMELEC) en banc's June 29, 2015 Decision1 for allegedly being
repugnant to the provisions of Batas Pambansa Blg. 68 (BP 68), otherwise known as
the Corporation Code of the Philippines, and Republic Act No. 9184 (RA 9184) or
the Government Procurement Reform Act.
 The Facts
On October 27, 2014, the COMELEC en banc, through its Resolution No. 14-0715, released the
bidding documents for the "Two-Stage Competitive Bidding for the Lease of Election
Management System (EMS) and Precinct-Based Optical Mark Reader (OMR) or Optical Scan
(OP-SCAN) System."2 Specified in the published Invitation to Bid3 are the details for the lease
with option to purchase, through competitive public bidding, of twenty-three thousand (23,000)
new units of precinct-based OMRs or OP-SCAN Systems, with a total Approved Budget for
Contract of P2,503,518,000,4 to be used in the 2016 National and Local Elections.5 The
COMELEC Bids and Awards Committee (BAC) set the deadline for the submission by interested
parties of their eligibility requirements and initial technical proposal on December 4, 2014. 6
The joint venture of Smartmatic-TIM Corporation (SMTC), Smartmatic International Holding B.V.,
and Jarltech International Corporation (collectively referred to as "Smartmatic JV") responded to
the call and submitted bid for the project on the scheduled date. Indra Sistemas, S.A. (Indra) and
MIRU Systems Co. Ltd. likewise signified their interest in the project, but only Indra, aside from
Smartmatic JV, submitted its bid.7
During the opening of the bids, Smartmatic JV, in a sworn certification, informed the BAC tha't
one of its partner corporations, SMTC, has a pending application with the Securities and
Exchange Commission (SEC) to amend its Articles of Incorporation (AOI), attaching therein all
pending documents.8 The amendments adopted as early as November 12, 2014 were approved
by the SEC on December 10, 2014.9 On even date, Smartmatic JV and Indra participated in the
end-to-end testing of their initial technical proposals for the procurement project before the BAC.
Upon evaluation of the submittals, the BAC, through its Resolution No. 1 dated December 15,
2014, declared Smartmatic JV and Indra eligible to participate in the second stage of the bidding
process.10 The BAC then issued a Notice requiring them to submit their Final Revised Technical
Tenders and Price proposals on February 25, 2015, to which the eligible participants complied.
Finding that the joint venture satisfied the requirements in the published Invitation to Bid,
Smartmatic JV, on March 26, 2015, was declared to have tendered a complete and responsive
Overall Summary of the Financial Proposal.11 Meanwhile, Indra was disqualified for submitting a
non-responsive bid.12
Subsequently, for purposes of post-qualification evaluation, the BAC required Smartmatic JV to
submit additional documents and a prototype sample of its OMR. 13 The prototype was subjected
to testing to gauge its compliance with the requirements outlined in the project's Terms of
Reference (TOR).14
After the conduct of post-qualification, the BAC, through Resolution No. 9 dated May 5, 2015,
disqualified Smartmatic JV on two grounds, viz:15
1. Failure to submit valid AOI; and
2. The demo unit failed to meet the technical requirement that the system shall
be capable of writing all data/files, audit log, statistics and ballot images
simultaneously in at least two (2) data storages.
16
The ruling prompted Smartmatic JV to move for reconsideration. In denying the motion, the
BAC, through Resolution No. 1017 dated May 15, 2015, declared that Smartmatic JV complied
with the requirements of Sec. 23.1(b) of the Revised Implementing Rules and Regulations of RA
9184 (GPRA IRR), including the submission of a valid AOI, but was nevertheless disqualified as
it still failed to comply with the technical requirements of the project. 18
Page 24 of 40
Aggrieved, Smartmatic JV filed a Protest,19 seeking permission to conduct another technical
demonstration of its SAES 1800 plus OMR (OMR+), the OMR Smartmatic JV presented during
the public bidding before the COMELEC en banc.20 Accordingly, on June 19, 2015, Smartmatic
JV was allowed to prove compliance with the technical specifications for the second time, but
this time before the electoral tribunal's Technical Evaluation Committee (TEC).21 This was
followed, on June 23, 2015, by another technical demonstration before the Commission en
banc at the Advanced Science and Technology Institute (ASTI) at the University of the
Philippines, Diliman, Quezon City.22
Ruling of the COMELEC en banc
Though initially finding that the OMR+'s ability to simultaneously write data in two storage
devices could not conclusively be established,23 the TEC, upon the use of a Digital Storage
Oscilloscope (DSO) during the second demonstration,24 determined that the OMR+ complied
with the requirements specified in the TOR.25 Adopting the findings of the TEC as embodied in
its Final Report, the COMELEC en banc, on June 29, 2015, promulgated the assailed Decision
granting Smartmatic JV's protest. The dispositive portion of the Decision reads:26
WHEREFORE, the instant Protest is hereby GRANTED. Accordingly, the Commission hereby
declares the Joint Venture of Smartmatic-TIM Corporation, Total Information Management
Corporation, Smartmatic International Holding B.V., and Jarltech International Corporation, as
the bidder with the lowest calculated responsive bid in connection with the public bidding for the
lease with option to purchase of 23,000 new units of precinct-based Optical Mark Reader or
Optical Scan System for use in the May 9, 2016 national and local elections. Corollarily, the
scheduled opening of financial proposal and eligibility documents for the Second Round of
Bidding is hereby CANCELLED, with specific instruction for the Bids and Awards Committee
to RETURN to the prospective bidders their respective payments made for the purchase of
Bidding Documents pertaining to the Second Round of Bidding.
Let the Bids and Awards Committee implement this Decision.
SO ORDERED.
The seven-man commission was unanimous in holding that Smartmatic JV's OMR+ sufficiently
satisfied the technical requirements itemized in the TOR, reproducing in the assailed Decision,
verbatim and with approbation, the entirety of the TEC's Final Report, thusly: 27
This is to report on the result of the public test conducted on 23 June of the claim of Smartmatic
TIM (SMTT) that their proposed SAES 1800 (PCOS+) has the capability to write ballot images,
audit logs, and elections results on two separate storage (devices) simultaneously.
Technical discussion, demonstrations, and design reviews were conducted over two day period
before the actual demonstration to the Comelec En Banc. These reviews were conducted
between SMTT engineers and a team of embedded electronics design engineers from the
Advanced Science and Technology Institute of the Department of Science and Technology.
Though these reviews are important to validate the behavior and functionality of the PCOS+, the
best way to validate the claim of SMTT is to use a specialized test instrument connected to the
actual electrical inputs of both storage cards.
To visualize the electrical signals being sent to the memory cards, an Agilent DSO7054A Digital
Storage Oscilloscope (DSO) from ASTI connected to the same data input line on two SD card
adapters with a micro SD card inside. This was done to simulate an actual SC card and to make
the DSO probe connections accessible and secure without modifying anything in the PCOS+
hardware or software. x x x
During normal operation such as on Election day, when the PCOS+ is accepting ballots from
voters, the PCOS+ is designated to write data on both SD cards after the ballots has been
determined to be valid and the voter choices have been shown to the voter for verification.
The data being written on the storage devices consist mainly of the scanned ballots image of the
front and back of the ballot at 200 dots per inch in both the horizontal and vertical dimension with
each dot encoded into a 4 bit value corresponding to 16 shades of gray. The other data saved
on the storage device consists of the vote interpretation and updates to the audit log. Each time
that data is. written on the two storage device, the date is encrypted and a verification step is
done to check that identical data is written on both devices. The entire write process lasts a few
seconds for each ballot.
xxxx
The DSO display the time dimension on the horizontal axis and the electrical voltage in the
vertical axis, the display is generated left to right over time (earlier events are on the left). The
yellow line on top shows the electrical signal on the Data 2 pin of the main storage card and the
green line shows the electrical signal on the Data 2 pin of the backup storage card. The orange
dashed horizontal and vertical lines are used for measuring the differences in time and voltage.
The vertical dashed line on the left marks the start of the data being written on the main and
backup storage card and the vertical dashed line on the right marks the ends of the writing
operation for one ballot. The time difference in this case is about 2.616 seconds as shown near
the bottom left corner of the display.
The yellow and green vertical lines in between the two vertical dashed lines represent the digital
ones and zeros being written on both storage cards. The yellow and green traces are not exactly
identical because the main car also contains the operating system of the PCOS+ and additional
data operations are being performed on it. Because the time scale is the same on both probes,
we conclude that the PCOS+ is writing on both cards simultaneously during this time interval.
Notwithstanding Smartmatic JV's compliance with the technical requirements in the TOR,
Commissioner Luie Tito F. Guia (Guia) would nonetheless dissent in part, questioning the
sufficiency of the documents submitted by the Smartmatic JV.28 Taking their cue from
Commissioner Guia's dissent, petitioners now assail the June 29, 2015 Decision of the
COMELEC through the instant recourse.
The Issues
Petitioners framed the issues in the extant case in the following wise:29
A. Procedural Issues
I. WHETHER OR NOT THE PETITION IS THE PROPER REMEDIAL
VEHICLE TO ASSAIL THE SUBJECT DECISION OF THE COMELEC EN
BANC;
II. WHETHER OR NOT THE SUPREME COURT HAS THE RIGHT AND
DUTY TO ENTERTAIN THIS PETITION;
III. WHETHER OR NOT A JUSTICIABLE CASE OR CONTROVERSY EXISTS;
IV. WHETHER OR NOT THE CASE OR CONTROVERSY IS RIPE FOR
JUDICIAL ADJUDICATION;
Page 25 of 40
V. WHETHER OR NOT UNDER THE CIRCUMSTANCES, THE RULE ON
"HIERARCHY OF COURTS" MAY BE DISPENSED WITH;
VI. WHETHER OR NOT THE PETITIONERS POSSESS LOCUS STANDI;
B. Substantive Issues
VII. WHETHER OR NOT THE COMELEC EN BANC ACTED WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN GRANTING THE PROTEST AS WELL AS IN
DECLARING THE JOINT VENTURE OF SMARTMATIC-TIM
CORPORATION, TOTAL INFORMATION MANAGEMENT
CORPORATION, SMARTMATIC INTERNATIONAL HOLDING B.V. AND
JARLTECH INTERNATIONAL CORPORATION AS THE BIDDER WITH
THE LOWEST CALCULATED RESPONSIVE BID IN CONNECTION WITH
THE PUBLIC BIDDING FOR THE LEASE WITH OPTION TO PURCHASE
OF 23,000 NEW UNITS OF PRECINCT-BASED OPTICAL MARK READER
OR OPTICAL SCAN SYSTEM FOR USE IN THE MAY 9, 2016 NATIONAL
AND LOCAL ELECTIONS
VIII. WHETHER OR NOT A WRIT OF PRELIMINARY INJUNCTION OR
TEMPORARY RESTRAINING ORDER SHOULD ISSUE
In challenging the June 29, 2015 Decision, petitioners; filing as taxpayers, alleged that the
COMELEC en banc acted with grave abuse of discretion amounting to lack or excess of
jurisdiction in declaring Smartmatic JV as the bidder with the lowest calculated responsive
bid.30 According to petitioners, Smartmatic JV cannot be declared eligible, even more so as the
bidder with the lowest calculated responsive bid, because one of its proponents, SMTC, holding
46.5% of the shares of Smartmatic JV, no longer has a valid corporate purpose as required
under Sec. 14 of BP 68, which pertinently reads:
Section 14. Contents of the articles of incorporation. - All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any of
the official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special
law:chanRoblesvirtualLawlibrary
xxxx
2. The specific purpose or purposes for which the corporation is being incorporated.
Where a corporation has more than one stated purpose, the articles of incorporation shall state
which is the primary purpose and which is/are the secondary purpose or purposes: Provided,
That a nonstock corporation may not include a purpose which would change or contradict its
nature as such x x x.
As proof, petitioners cite the primary purpose of SMTC as stated in the company's AOI, which
was submitted to the COMELEC on December 4, 2014 as part of the joint venture's eligibility
documents. To quote SMTC's primary purpose therein:31
To do, perform and comply with all the obligations and responsibilities of, and accord legal
personality to, the joint venture of Total Information Management Corporation ("TIM") and
Smartmatic International Corporation ("Smartmatic") arising under the Request for Proposal and
the Notice of Award issued by the Commission on Elections ("COMELEC") for the automation
of the 2010 national and local elections ("Project"), including the leasing, selling, importing
and/or assembling of automated voting machines, computer software and other computer
services and/or otherwise deal in all kinds of services to be used, offered or provided to the
COMELEC for the preparations and the conduct of the Project including project
management services. (emphasis added)
In concurrence with Commissioner Guia's opinion, petitioners argue that the foregoing
paragraph readily evinces that SMTC was created solely for the automation of the 2010 National
and Local Elections, not for any other election.32 Having already served its purpose, SMTC no
longer has authority to engage in business, so petitioners claim. To allow SMTC then to have a
hand in the succeeding elections would be tolerating its performance of an ultra vires act.
Petitioners hasten to add that without a valid purpose, the company could not have submitted a
valid AOI, a procurement eligibility requirement under Sec. 23.1 (b) of the IRR of RA 9184. For
them, the SEC's subsequent approval, on December 10, 2014, of the amendments to SMTC's
AOI cannot cure the partner corporation's ineligibility because eligibility is determined at the time
of the opening of the bids, which, in this case, was conducted on December 4, 2014. 33
Finally, petitioners contend that SMTC misrepresented itself by leading the BAC to believe that it
may cany out the project despite its limited corporate purpose, and by claiming that it is a
Philippine corporation when it is, allegedly, 100% foreign-owned.34 They add that
misrepresentation is a ground for the procuring agency to consider a bidder ineligible and
disqualify it from obtaining an award or contract.35
In its Comment,36 public respondent COMELEC, through the Office of the Solicitor General
(OSG), refuted the arguments of petitioners on the main postulation that the sole issue raised
before the COMELEC en banc was limited to the technical aspect of the project.37 According to
the OSG, the sufficiency of the documents submitted was already decided by the BAC on May
15, 2015 when it partially granted Smartmatic JV's motion for reconsideration through BAC
Resolution No. 10. Anent the procedural issues, the OSG, in its bid to have the case dismissed
outright, questioned petitioners' locus standi and failure to observe the hierarchy of courts.38
Meanwhile, private respondents, in their Comment/Opposition,39 countered that the BAC has
thoroughly explained and laid down the factual and legal basis behind its finding on Smartmatic
JV's legal capacity to participate as bidder in the project procurement; that the issue on SMTC's
AOI has been rendered moot by the SEC's subsequent approval on December 10, 2014 of the
AOFs amendment broadening the companyjs primary purpose;40 that SMTC's primary purpose,
as amended, now reads:41
To sell, supply, lease, import, export, develop, assemble, repair and deal with automated voting
machines, canvassing equipment, computer software, computer equipment and all other goods
and supplies, and/or to provide, render and deal in all kinds of services, including project
management services for the conduct of elections, whether regular or special, in the
Philippine(s) and to provide Information and Communication Technology (ICT) goods and
services to private and government entities in the Philippines.
that the alleged defect in SMTC's AOI is of no moment since neither the law nor the bidding
documents require a bidder to submit its AOI;42 that even assuming for the sake of argument that
SMTC's primary purpose precludes it from further contracting for the automation of the Philippine
elections beyond 2010, its secondary purposes43 and Sec. 42 of BP 6844 authorize the company
to do so;45 and that the COMELEC, in fact, has already dealt with SMTC numerous times after
the 2010 elections.46
Private respondents would likewise debunk petitioners' allegation that SMTC misrepresented its
nationality. They argue that based on its General Information Sheet (GIS), SMTC is a Filipino
corporation, not a foreign one as petitioners alleged. Moreover, what is only required under RA
9184 is that the nationality of the joint venture be Filipino, and not necessarily that of its
Page 26 of 40
individual proponents.47 In any event, so private respondents claim, the COMELEC, under the
law, is not prohibited from acquiring election equipment from foreign sources, rendering SMTC
and even Smartmatic JV's nationality immaterial.48
Lastly, private respondents pray for the petition's outright dismissal, following petitioner Akol and
Lagman's alleged failure to comply with the rules on verifications, on the submission of
certifications against forum-shopping, and on the efficient use of paper.49
The Court's Ruling
The petition lacks merit.
Rule 64 is not applicable in assailing the COMELEC en banc's Decision granting
Smartmatic JV's protest
In arguing for the propriety of the remedial vehicle chosen, petitioners claim that under Rule 64,
Sec. 2 of the Rules of Court, "[a] judgment or final order or resolution of the Commission
on Elections x x x may be brought by the aggrieved party to the Supreme Court on
certiorari under Rule 65."50 They postulate that the June 29, 2015 Decision of the
COMELEC en banc declaring Smartmatic JV as the eligible bidder with the lowest calculated
responsive bid is a "judgment" within the contemplation of the rule, and is, therefore, a proper
subject of a Rule 64 petition.
The argument fails to persuade.
a. Rule 64 does not cover rulings of the COMELEC in the exercise of its administrative powers
The rule cited by petitioners is an application of the constitutional mandate requiring that, unless
otherwise provided by law, the rulings of the constitutional commissions shall be subject to
review only by the Supreme Court on certiorari. A reproduction of Article IX-A, Section 7 of the
1987 Constitution is in order:
Section 7. Each Commission shall decide by a majority vote of all its Members, any case or
matter brought before it within sixty days from the date of its submission for decision or
resolution. A case or matter is deemed submitted for decision or resolution upon the filing of the
last pleading, brief, or memorandum required by the rules of the Commission or by the
Commission itself. Unless otherwise provided by this Constitution or by law, any decision,
order, or ruling of each Commission may be brought to the Supreme Court
on certiorari by the aggrieved party within thirty days from receipt of a copy thereof. (emphasis
added)
Though the provision appears unambiguous and unequivocal, the Court has consistently held
that the phrase "decision, order, or ruling" of constitutional commissions, the COMELEC
included, that may be brought directly to the Supreme Court on certiorari is not all-
encompassing, and that it only relates to those rendered in the commissions' exercise
of adjudicatory or quasi-judicial powers.51 In the case of the COMELEC, this would limit the
provision's coverage to the decisions, orders, or rulings issued pursuant to its authority to be the
sole judge of generally all controversies and contests relating to the elections, returns, and
qualifications of elective offices.52
Consequently, Rule 64, which complemented the procedural requirement under Article IX-A,
Section 7, should likewise be read in the same sense—that of excluding from its coverage
decisions, rulings, and orders rendered by the COMELEC in the exercise of its administrative
functions. In such instances, a Rule 65 petition for certiorari is the proper remedy. As held
in Macabago v. COMELEC:53
[A] judgment or final order or resolution of the COMELEC may be brought by the aggrieved party
to this Court on certiorari under Rule 65, as amended, except as therein provided. We ruled
in Elpidio M. Salva, et al. vs. Hon. Roberto L. Makalintal, et al. (340 SCRA 506 (2000) that Rule
64 of the Rules applies only to judgments or final orders of the COMELEC in the exercise of its
quasi-judicial functions. The rule does not apply to interlocutory orders of the COMELEC in the
exercise of its quasi-judicial functions or to its administrative orders. In this case, the assailed
order of the COMELEC declaring private respondents petition to be one for annulment of the
elections or for a declaration of a failure of elections in the municipality and ordering the
production of the original copies of the VRRs for the technical examination is administrative in
nature. Rule 64, a procedural device for the review of final orders, resolutions or decision of the
COMELEC, does not foreclose recourse to this Court under Rule 65 from administrative orders
of said Commission issued in the exercise of its administrative function.
As applied herein, recall that the instant petition revolves around the issue on whether or not
Smartmatic JV is eligible to participate in the bidding process for the COMELEC's procurement
of 23,000 units of optical mark readers. The case does not stem from an election controversy
involving the election, qualification, or the returns of an elective office. Rather, it pertains to the
propriety of ihe polling commission's conduct of the procurement process, and its initial finding
that Smartmatic JV is eligible to participate therein. It springs from the COMELEC's compliance
with the Constitutional directive to enforce and administer all laws and regulations relative to the
conduct of an election.54 Specifically, it arose from the electoral commission's exercise of Sec.
12 of RA 8436, otherwise known as the Automated Elections Law, as amended by RA
9369,55 which authorized the COMELEC "to procure, in accordance with existing laws, by
purchase, lease, rent or other forms of acquisition, supplies, equipment, materials,
software, facilities, and other services, from local or foreign sources free from taxes and
import duties, subject to accounting and auditing rules and regulation."
The subject matter of Smartmatic JV's protest, therefore, does not qualify as one necessitating
the COMELEC's exercise of its adjudicatory or quasi-judicial powers that could properly be the
subject of a Rule 64 petition, but is, in fact, administrative in nature. Petitioners should then have
sought redress via a petition for the issuance of the extraordinary writ of certiorari under Rule 65
to assail the COMELEC en banc's June 29, 2015 Decision granting the protest. As a caveat,
however, the writ will only lie upon showing that the COMELEC acted capriciously or
whimsically, with grave abuse of discretion amounting to lack or excess of jurisdiction in issuing
the Decision, such as where the power is exercised in an arbitrary or despotic manner by reason
of passion or personal hostility. The abuse of discretion must be so patent and gross as to
amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act
at all in contemplation of law.56 Mere abuse of discretion will not suffice.
It goes without saying that petitioners' action, having been lodged through an improper petition,
is susceptible to outright dismissal. As the Court held in Pates v. COMELEC,57 a Rule 64 petition
cannot simply be equated to Rule 65 even if it expressly refers to the latter rule. 58 The clear
distinction between the instant, petition and Pates, however, is that in Pates, therein petitioner
failed to present an exceptional circumstance or any compelling reason that would have
warranted the liberal application of the Rules of Court. In stark contrast, herein petitioners, as will
later on be discussed, were able to establish a meritorious case for the relaxation of the rules,
relieving them from the rigid application of procedural requirements. We therefore treat the
instant recourse as one filed not merely in relation to, but under Rule 65.
This brings us now to the question on where the petition ought to have been filed.
b. Jurisdiction of the RTC over rulings of the head of the procuring entity relating to procurement
protests
Guilty of reiteration, the COMELEC en banc was not resolving an election controversy when it
resolved the protest, but was merely performing its function to procure the necessary election
Page 27 of 40
paraphernalia for the conduct of the 2016 National and Local Elections. This power finds
statutory basis in Sec. 12 of RA 8436,59 as amended, which reads:
SEC. 12. Procurement of Equipment and Materials. - To achieve the purpose of this Act, the
Commission is authorized to procure, in accordance with existing laws, by purchase,
lease, rent or other forms of acquisition, supplies, equipment, materials, software,
facilities, and other service, from local or foreign sources free from taxes and import duties,
subject to accounting and auditing rules and regulation. With respect to the May 10, 2010
election and succeeding electoral exercises, the system procured must have demonstrated
capability and been successfully used in a prior electoral exercise here or board. Participation in
the 2007 pilot exercise shall not be conclusive of the system's fitness.
In determining the amount of any bid from a technology, software or equipment supplier, the cost
to the government of its deployment and implementation shall be added to the bid price as
integral thereto. The value of any alternative use to which such technology, software or
equipment can be put for public use shall not be deducted from the original face value of the
said bid. (emphasis added)
In Pabillo v. COMELEC,60 the Court held that the "existing laws" adverted to in the provision is
none other than RA 9184. The law is designed to govern all cases of procurement of the national
government, its departments, bureaus, offices and agencies, including state universities and
colleges, government-owned and/or-controlled corporations, government financial institutions
and local government units.61 It mandates that as a general rule, all government procurement
must undergo competitive bidding62 and for purposes of conducting the bidding process, the
procuring entity convenes a BAC.
The BAC is tasked to oversee the entire procuring process, from advertisement of the project to
its eventual award.63 It is the first to rule on objections or complaints relating to the conduct of the
bidding process, subject to review by the head of the procuring entity via protest. As outlined in
RA 9184, the protest mechanism in procurement processes is as follows:
ARTICLE XVII
PROTEST MECHANISM
Section 55. Protests on Decisions of the BAC. - Decisions of the BAC in all stages of
procurement may be protested to the head of the procuring entity and shall be in writing.
Decisions of the BAC may be protested by filing, a verified position paper and paying a non-
refundable protest fee. The amount of the protest fee and the periods during which the protests
may be filed and resolved shall be specified in the IRR.
Section 56. Resolution of Protests. - The protest shall be resolved strictly on the basis of
records of the, BAC. Up to a certain amount to be specified in the IRR, the decisions of the Head
of the Procuring Entity shall be final.
Section 57. Non-interruption of the Bidding Process. - In no case shall any protest taken from
any decision treated in this Article stay or delay the bidding process. Protests must first be
resolved before any award is made.
Section 58. Resort to Regular Courts; Certiorari. - Court action may be resorted to only after the
protests contemplated in this Article shall have been completed. Cases that are filed in
violation of the process specified in this Article shall be dismissed for lack of jurisdiction.
The regional trial court shall have jurisdiction over final decision of the head of the
procuring entity. Court actions shall be governed by Rule 65 of the 1997 Rules of Civil
Procedure.
This provision is without prejudice to any law conferring on the Supreme court the sole
jurisdiction to issue temporary restraining orders and injunctions relating to Infrastructure
Projects of Government. (emphasis added)
Thus, under Sec. 58, the proper remedy to question the ruling of the head of the procuring entity
is through a Rule 65 petition for certiorari with the Regional Trial Court (RTC). The term
"procuring entity" is defined under the RA 9184 as "any branch, department, office, agency,
or instrumentality of the government, including state universities and colleges,
government-owned and/or -controlled corporations, government financial institutions,
and local government units procuring Goods, Consulting Services and Infrastructure
Projects."64 This statutory definition makes no distinction as to whether or not the procuring
entity is a constitutional commission under Article IX of the Constitution. It is broad enough to
include the COMELEC within the contemplation of the term. Hence, under the law, grievances
relating to the COMELEC rulings in protests over the conduct of its project procurement should
then be addressed to the RTC.
The mandatory recourse to the RTC in the appeal process applicable to COMELEC
procurement project is not a novel development introduced by RA 9184. Even prior to the advent
of the government procurement law, the requirement already finds jurisprudential support
in Filipinas Engineering and Machine Shop v. Ferrer,65 wherein the Court expounded this way:
[I]t has been consistently held that it is the Supreme Court, not the Court of First Instance, which
has exclusive jurisdiction to review on certiorari final decisions, orders or rulings of the
COMELEC relative to the conduct of elections and enforcement of election laws.
We are however, far from convince[d] that an order of the COMELEC awarding a contract to a
private party, as a result of its choice among various proposals submitted in response to its
invitation to bid comes within the purview of a "final order" which is exclusively and directly
appealable to this court on certiorari. What is contemplated by the term "final orders, rulings and
decisions" of the COMELEC reviewable by certiorari by the Supreme Court as provided by law
are those rendered in actions or proceedings before the COMELEC and taken cognizance of by
the said body in the exercise of its adjudicatory or quasi-judicial powers.
xxxx
[T]he order of the Commission granting the award to a bidder is not an order rendered in a legal
contrpversy before it wherein the parties filed their respective pleadings and presented evidence
after which the questioned order was issued; and that this order of the commission was issued
pursuant to its authority to enter into contracts in relation to election purposes. In short, the
COMELEC resolution awarding the contract in favor of Acme was not issued pursuant to
its quasi-judicial functions but merely as an incident of its inherent administrative
functions over the conduct of elections, and hence, the said resolution may not be
deemed as a "final order" reviewable by certiorari by the Supreme Court. Being non-judicial
in character, no contempt may be imposed by the COMELEC from said order, and no direct and
exclusive appeal by certiorari to this Tribunal lie from such order. Any question arising from
said order may be well taken in an ordinary civil action before the trial courts. (emphasis
added)
Additionally, even if the Court treats the protest proceeding as part of the procuring agency's
adjudicatory function, the Court notes that Sec. 58 of RA 9184 would nevertheless apply, and
the RTC would still have jurisdiction, pursuant to the proviso "unless otherwise provided by law"
as appearing in Article IX-A, Section 7 of the Constitution. In this case, the pertinent law provides
that insofar as rulings of the COMELEC in procurement protests are concerned, said rulings can
be challenged through a Rule 65 certiorari with the RTC.
c. The protest mechanism under RA 9184 can only be availed of by a losing bidder
Nevertheless, the application of Sec. 58 of RA 9184 has to be qualified. It cannot, in all
instances, be the proper remedy to question the rulings of the heads of procuring entities in
procurement protests. As in the prior case of Roque v. COMELEC,66 which similarly dealt with
COMELEC procurement of OMRs the Court held that only a losing bidder would be aggrieved
Page 28 of 40
by, and ergo would have the personality to challenge, the head of the procuring entity's ruling in
the protest. This is bolstered by the GPRA IRR, which fleshed out the provisions of RA 9184
thusly:
RULE XVII - PROTEST MECHANISM
Section 55. Protests on Decisions of the BAC
55.1. Decisions of the BAC at any stage of the procurement process may be questioned by filing
a request for reconsideration within the three (3) calendar days upon receipt of written notice or
upon verbal notification. The BAC shall decide on the request for reconsideration within seven
(7) calendar days from receipt thereof.
If a failed bidder signifies his intent to file a request for reconsideration, the BAC shall
keep the bid envelopes of the said failed bidder unopened and/or duly sealed until such time that
the request for reconsideration has been resolved.
55.2. In the event that the request for reconsideration is denied, decisions of the BAC may be
protested in writing to the Head of the Procuring Entity: Provided, however, That a prior request
for reconsideration should have been filed by the party concerned in accordance with the
preceding Section, and the same has been resolved.
55.3. The protest must be filed within seven (7) calendar days from receipt by the party
concerned of the resolution of the BAC denying its request for reconsideration. A protest may
be made by filing a verified position paper with the Head of the Procuring Entity concerned,
accompanied by the payment of a non-refundable protest fee. The non-refundable protest fee
shall be in an amount equivalent to no less than one percent (1%) of the ABC.
55.4. The verified position paper shall contain the following
information:chanRoblesvirtualLawlibrary
a) The name of bidder;
b) The office address of the bidder;
c) The name of project/contract;
d) The implementing office/agency or procuring entity;
e) A brief statement of facts;
f) The issue to be resolved; and
g) Such other matters and information pertinent and relevant to the proper resolution of the
protest.
The position paper is verified by an affidavit that the affiant has read and understood the
contents thereof and that the allegations therein are true and correct of his personal knowledge
or based on authentic records. An unverified position paper shall be considered unsigned,
produces no legal effect, and results to the outright dismissal of the protest.
xxxx
Section 58. Resort to Regular Courts; Certiorari
58.1. Court action may be resorted to only after the protests contemplated in this Rule
shall have been completed, i.e., resolved by the Head of the Procuring Entity with finality. The
regional trial court shall have jurisdiction over final decisions of the Head of the Procuring Entity.
Court actions shall be governed by Rule 65 of the 1997 Rules of Civil Procedure. (emphasis
added)
Evidently, the remedy of certiorari filed before the RTC under Sec. 58 of RA 9184 is intended as
a continuation of the motion for reconsideration filed before the BAC, and of the subsequent
protest filed with the head of the procuring entity. This is confirmed by the condition sine qua
non completion of the process under Rule XVII, Secs. 55-57 of the GPRA IRR before recourse
to the trial courts become available.
It is obvious under Sec. 55.1 of Rule XVII that only a failed bidder can turn the cogs of the
protest mechanism by first moving for reconsideration of the assailed BAC ruling. The party
concerned, the bidder adversely affected by the resolution of the motion, shall then have seven
(7) days to file a protest with the head of the procuring entity. The prerequisite that a protestant
should likewise be a bidder is emphasized by Sec. 55.4 which requires that the "name of the
bidder" and the "office address of the bidder" be indicated in its position paper.
Accordingly, only the bidder against whom the head of the procuring entity ruled, if it
would challenge the ruling any further, is required to resort to filing a petition for
certiorari before the trial courts under Sec. 58. Ego, there is neither rhyme nor reason for
petitioners herein, who are non-participants in the procurement project, to comply with the rules
on protest under RA 9184, part and parcel of which is the exclusivity of the jurisdiction of the
RTC under Sec. 58 thereof. Stated in the alternative, there is no legislative enactment requiring
petitioners to seek recourse first with the RTC to question the COMELEC en banc's June 29,
2015 Decision. Thus, if circumstances so warrant, direct resort to the Court will be allowed.
absolutely necessary or when serious and important reasons exist to justify an exception to the
policy.
Petitioners do not have the absolute and unrestrained freedom of choice of the court to which an
application for certiorari will be directed.74 Indeed, referral to the Supreme Court as the court of
last resort will simply be empty rhetoric if party-litigants are able to flout judicial hierarchy at will.
The Court reserves the direct invocation of its jurisdiction only when there are special and
important reasons clearly and especially set out in the petition that would justify the same. 75
In the leading case of The Diocese of Bacolod v. Comelec,76 the Court enumerated the specific
instances when direct resort to this Court is allowed, to wit:
(a) When there are genuine issues of constitutionality that must be addressed at the most
immediate time;
(b)When the issues involved are of transcendental importance;
(c) Cases of first impression;
(d) When the constitutional issues raised are best decided by this Court;
(e) When the time element presented in this case cannot be ignored;
(f) When the petition reviews the act of a constitutional organ;
(g) When there is no other plain, speedy, and adequate remedy in the ordinary course of law;

d. Hierarchy of courts and the exceptions to the doctrine (h) When public welfare and the advancement of public policy so dictates, or when demanded by
the broader interest of justice;
The expanded concept of judicial power under Article VIII, Section 1 of the
Constitution67 includes the duty of the judiciary not only "to settle actual controversies involving (i) When the orders complained of are patent nullities; and
rights which are legally demandable and enforceable" but also, as an instrument of checks and
balances, "to determine whether or not there has been a grave abuse of discretion amounting to (j) When appeal is considered as clearly an inappropriate remedy.
lack or excess of jurisdiction on the part of any branch or instrumentality of the
The Court finds the second and fifth, and sixth grounds applicable in the case at bar. Much has
Government."68 Under Rule 65 of the Rules of Court, the special civil actions for certiorari and
already been said of the "compelling significance and the transcending public importance" of the
prohibition are the available remedies for determining and correcting such grave abuses of
primordial issue underpinning petitions that assail election automation contracts: the success
discretion.
and the far-reaching grim implications of the failure—of the nationwide automation project.77 So it
is that the Court, in the growing number of cases concerning government procurement of
The power is wielded not by the Court alone, but concurrently with the Court of Appeals and the
election paraphernalia and services, has consistently exhibited leniency and dispensed of
Regional Trial Courts, as provided by law. With respect to the Court of Appeals, Section 9 (1) of
procedural requirements for petitioners to successfully lodge certiorari petitions.78 Technicalities
Batas Pambansa Blg. 129 (BP 129) gives the appellate court original jurisdiction to issue, among
should not stand in the way of resolving the substantive issues petitioners raised herein. On this
others, a writ of certiorari, whether or not in aid of its appellate jurisdiction. For the RTCs, the
same ground of transcendental importance, the Court may opt to treat the instant petition as one
power to issue a writ of certiorari, in the exercise of their original jurisdiction, is provided under
for certiorari under, not merely in relation to, Rule 65.
Section 21 of BP 129.69 Additionally, the Court has already held that the CTA, by constitutional
mandate, is likewise vested with jurisdiction to issue writs of certiorari. 70 So too has the
As regards the fifth ground, the time element, it is sufficient to state that with the 2016 polls
Sandiganbayan been vested with certiorari powers in aid of its appellate jurisdiction. 71
visible in the horizon, the post-haste resolution of this case becomes all the more imperative. It
would be the height of absurdity to require petitioners to undergo scrutiny through the lens of the
Notwithstanding the non-exclusivity of the original jurisdiction over applications for the issuance
RTC first, considering that the acquisition of 23,000 OMRs would, at the minimum, affect the
of writs of certiorari, however, the doctrine of hierarchy of courts dictates that recourse must first
clustering of precincts. Without the finalized list of clustered precincts, the polling place for the
be made to the lower-ranked court exercising concurrent jurisdiction with a higher court.72 The
registered voters could not yet be ascertained. Needless to state, this would impede the
rationale behind the principle is explained in Bañez, Jr. v. Conception73 in the following wise:
preparations for the conduct of the polls and its unmitigated effects could very well lead to mass
The Court must enjoin the observance of the policy on the hierarchy of courts, and now affirms
disenfranchisement of voters.
that the policy is not to be ignored without serious consequences. The strictness of the policy is
designed to shield the Court from having to deal with causes that are also well within the
Lastly, the sixth ground is indubitably applicable. The rulings of the COMELEC, as a
competence of the lower courts, and thus leave time to the Court to deal with the more
constitutional body, can immediately be reviewed by the Court on proper petition. As quoted
fundamental and more essential tasks that the Constitution has assigned to it. The Court may
in The Diocese of Bacolod v. COMELEC,79 citing Albano v. Arranz,80 "it is easy to realize the
act on petitions for the extraordinary writs of certiorari, prohibition and mandamus only when
Page 29 of 40
chaos that would ensue if the Court of First Instance of each and every province were [to]
arrogate itself the power to disregard, suspend, or contradict any order of the
Commission on Elections: that constitutional body would be speedily reduced to
impotence."
In sum, there exist ample compelling reasons to justify the direct resort to the Court as a
departure from the doctrine of hierarchy of courts not in relation to but under Rule 65 of the
Rules of Court on certiorari and prohibition, and to brush aside the procedural issues in this case
to focus on the substantive issues surrounding the procurement of the 23,000 additional OMRs
for the 2016 elections.
The submission of an AOI is not an eligibility criterion
It bears stressing on the outset that no issue has been brought forth questioning the technical
capability of Smartmatic JV's 0MR+. Instead, the pivotal point to be resolved herein is whether or
not the COMELEC acted with grave abuse of discretion in declaring Smartmatic JV eligible in
spite of the alleged nullity of, or defect in, SMTC's AOI.
Petitioner would first insist that the submission of an AOI is an eligibility requirement that
Smartmatic JV cannot be deemed to have complied with. In addressing this assertion, a
discussion of the qualification process is apropos.
a. The submission of an AOI was not a pre-qualification requirement
It is a basic tenet that except only in cases in which alternative methods of procurement are
allowed, all government procurement shall be done by competitive bidding. This is initiated by
the BAC, which publishes an Invitation to Bid for contracts under competitive bidding in order to
ensure the widest possible dissemination thereof.81
Answering the invitation, interested participants submit their bids using the forms specified in the
bidding documents in two (2) separate sealed bid envelopes submitted simultaneously. The first
contains the technical component of the bid, including the eligibility requirements under Section
23.1 of GPRA IRR, while the second contains the financial component of the bid.82
The BAC then sets out to determine the eligibility of the prospective bidders based on their
compliance with the eligibility requirements set forth in the Invitation to Bid and their submission
of the legal, technical and financial documents required under RA 9184 and the GPRA
IRR.83 The first screening is done via the pre-qualification stage as governed by Sec. 30.1 of RA
9184's IRR, which pertinently reads:
Section 30. Preliminary Examination of Bids
30.1. The BAC shall open the first bid envelopes of prospective bidders in public to determine
each bidder's compliance with the documents required to be submitted for eligibility and for the
technical requirements, as prescribed in this IRR. For this purpose, the BAC shall check the
submitted documents of each bidder against a checklist of required documents to
ascertain if they are all present, using a nondiscretionary "pass/fail" criterion, as stated in the
Instructions to Bidders. If a bidder submits the required document, it shall be rated "passed" for
that particular requirement. In this regard, bids that fail to include any requirement or are
incomplete or patently insufficient shall be considered as "failed". Otherwise, the BAC shall rate
the said first bid envelope as "passed." (emphasis added)
For the procurement of highly technical goods wherein the two-stage bidding process is
employed, such as the subject of procurement in this case, the same procedure for pre-
qualification outlined above is followed in the first stage, except that the technical specifications
are only in the form of performance criteria, and that the technical proposals will not yet include
price tenders.84
Page 30 of 40
Based on the rule, the BAC's function in determining the eligibility of a bidder during pre-
qualification is ministerial in the sense that it only needs to countercheck the completeness and
sufficiency of the documents submitted by a bidder against a checklist of requirements. It
cannot, therefore, declare a bidder ineligible for failure to submit a document which, in the first
place, is not even required in the bid documents.
Citing Sec. 23.1 (b) of the GPRA IRR, petitioners contend that an AOI is one of such mandatory
documentary requirements and that the failure of a bidder to furnish the BAG a valid one would
automatically render the bidder ineligible.
We are not convinced.
Sec. 23 of the adverted GPRA IRR reads:
Section 23. Eligibility Requirements for the Procurement of Goods and Infrastructure
Projects
23.1. For purposes of determining the eligibility of bidders using the criteria stated in Section
23.5 of this IRR, only the following documents shall be required by the BAC, using the forms
prescribed in the Bidding Documents:chanRoblesvirtualLawlibrary
a) Class "A" Documents
Legal Documents
i) Registration certificate from SEC, Department of Trade and Industry (DTI) for sole
proprietorship, or CDA for cooperatives, or any proof of such registration as stated in the
Bidding Documents.
ii) Mayor's permit issued by the city or municipality where the principal place of business of the
prospective bidder is located.
iii) Tax clearance per Executive Order 398, Series of 2005, as finally reviewed and approved by
the BIR.
Technical Documents
iv) Statement of the prospective bidder of all its ongoing government and private contracts,
including contracts awarded but not yet started, if any, whether similar or not similar in nature
and complexity to the contract to be bid; and Statement identifying the bidder's single largest
completed contract similar to the contract to be bid, except under conditions provided for in
Section 23.5.1.3 of this IRR, within the relevant period as provided in the Bidding Documents in
the case of goods. All of the above statements shall include all information required in the PBDs
prescribed by the GPPB.
v) In the case of procurement of infrastructure projects, a valid Philippine Contractors
Accreditation Board (PCAB) license and registration for the type and cost of the contract to be
bid.
Financial Documents
vi) The prospective bidder's audited financial statements, showing, among others, the
prospective bidder's total and current assets and liabilities, stamped "received" by the BIR or its
duly accredited and authorized institutions, for the preceding calendar year which should not be
earlier than two (2) years from the date of bid submission.
 (111.2) date of the contract;
vii) The prospective bidder's computation for its Net Financial Contracting Capacity (NFCC).

b) Class "B" Document

(111.3) kinds of Goods;
Valid joint venture agreement (JVA), in case the joint venture is already in existence. In
the absence of a JVA, duly notarized statements from all the potential joint venture
partners stating that they will enter into and abide by the provisions of the JVA in the
instance that the bid is successful shall be included in the bid. Failure to enter into, a joint (111.4) amount of contract and value of outstanding contracts;
venture in the event of a contract award shall be ground for the forfeiture of the bid
security. Each partner of the joint venture shall submit the legal eligibility documents. The
submission of technical and financial eligibility documents by any of the joint venture partners (111.5) date of delivery; and
constitutes compliance. (emphasis added)
Clearly, the quoted provisions, as couched, do not require the submission of an AOI in order for
a bidder to be declared eligible. The requirement that bears the most resemblance is the (111.6) end user's acceptance or official receipt(s) issued for the contract, if completed.
submission by each partner to the venture of a registration certificate issued by the Securities
and Exchange Commission, but compliance therewith was never disputed by the petitioners.
Moreover, it was never alleged that Smartmatic JV was remiss in submitting a copy of its joint
venture agreement pursuant to Sec. 23.1(b), which petitioners specifically invoked. (iv) Audited financial statements, stamped "received" by the Bureau of Internal Revenue
(BIR) or its duly accredited and authorized institutions, for the preceding calendar year,
It may be that the procuring entity has the option to additionally require the submission of the which should not be earlier than two (2) years from the bid submission;
bidders' respective AOIs in order to substantiate the latter's claim of due registration with the
government entities concerned. However, a perusal of the bidding documents would readily
reveal that the procuring entity, the COMELEC in this case, did not impose such a requirement.
As can be gleaned in the Instruction to Bidders,85 only the following documents were required for (v) NFCC computation or CLC in accordance with ITB Clause 5.5; and
purposes of determining a bidder's eligibility:
12. Documents Comprising the Bid: Eligibility and Technical Components
(vi) Tax clearance per Executive Order 398, Series of 2005, as finally reviewed and
12.1. Unless otherwise indicated in the BDS, the first envelope shall contain the following approved by the BIR. (Updated pursuant to GPPB Resolution No. 21-2013 dated July
eligibility and technical documents:chanRoblesvirtualLawlibrary 30, 2013)
(a) Eligibility Documents - Class "B" Document:

Class "A" Documents:

(vii) If applicable, the JVA in case the joint venture is already in existence, or duly notarized
(i) Registration certificate from the Securities and Exchange Commission (SEC), statements from all the potential joint venture partners stating that they will enter into
Department of Trade and Industry (DTI) for sole proprietorships, and Cooperative and abide by the provisions of the JVA in the instance that the bid is successful;
Development Authority (CDA) for cooperatives, or any proof of such registration as
stated in the BDS;
(viii) Social Security Clearance (SSS);

(ii) Mayor's permit issued by the city or municipality where the principal place of business of
the prospective bidder is located; (ix) Department of Labor and Employment Clearance (DOLE);

(iii) Statement of all its ongoing and completed government and private contracts within the
period stated in the BDS, including contracts awarded but not yet started, if any. The
statement shall include, for each contract, the following:
(x) Court Clearance (Regional Trial Court) (emphasis omitted)
The non-requirement of an AOI is further made evident by the Bid Data Sheet (BDS)86 which
provides a "complete list"87 of eligibility proposal documents to be submitted during the first
stage of the bidding process. As outlined in the BDS:88

(111.1) name of the contract; TAB CLASS "A" DOCUMENTS

I. LEGAL DOCUMENTS:

Page 31 of 40
(In case of a Joint Venture, each member of the JV shall submit the required Documents K. Certification from the Election Authority or Election Management Body that the system
mentioned in Tabs "A", "B", "C" and "I"). has demonstrated capability and has been successfully used in a prior electoral
exercise here or abroad.
A. Registration Certificate Form
L. Omnibus Sworn Statement using the prescribed form in Section VIII.
Securities and Exchange Commission from the Securities and Exchange Commission
(SEC) for Corporation or Partnership; or its equivalent documents in case of foreign Even the furnished Schedule of Requirements89 does not mandate the submission of an AOI:90
bidder. CORPORATION/
REQUIREMENTS JOINT VENTURE
SP/PARTNERSHIP
Department of Trade and Industry (DTI) for sole proprietorship; or its equivalent
documents in case of foreign bidder. PASSED FAILED PASSED FAILED
Cooperative Development Authority, for Cooperatives or its equivalent documents in xxx
case of foreign bidder.
ELIGIBILITY DOCUMENTS
B. Mayor's Permit issued by the city or municipality where the principal place of business
of the prospective bidder is located or its equivalent document in case of a foreign 1. LEGAL DOCUMENTS
corporation.
I. Class "A" Documents
C. Tax Clearance per Executive Order 398, Series of 2005, as finally reviewed and
approved by the BIR. a. Original/Certified true copy of Registration
Certificate from the Securities and Exchange
II. TECHNICAL DOCUMENTS Commission (SEC), Department of Trade
and Industry (DTI) for sole proprietorship, or
D. Statement of all ongoing and completed government and private contracts, within the Cooperative Development Authority (CDA)
last six (6) years from the date of submission and receipt of bids, including contracts for Cooperatives or any proof of such
awarded but not yet started, if any, using the prescribed form. Please refer to Section registration as stated in the BDS; (In case of
VIII. Bidding Forms. a JV, this requirement must be complied
with by all the JV partners)
Statement of at least one similar completed largest contract within six (6) years from
E. the date of the opening bids equivalent to at least 50% of the ABC, using the b. Original/Certified true copy of valid and
prescribed form. Please refer to Section VIII. Bidding Forms. current Mayor's/Business Permit/License
issued by the city or municipality where the
F. Bid security in the form, amount and validity in accordance with ITB Clause 18.
principal place of business of the
III. FINANCIAL DOCUMENTS prospective bidder is located; (In case of a
JV, this requirement must be complied with
G. Audited financial statements, stamped received by the Bureau of Internal Revenue by all the JV partners)
(BIR) or its duly accredited and authorized institutions, for the preceding calendar year,
which should not be earlier than two (2) years from bid submission; or equivalent c. Original/Certified true copy of valid Tax
documents in case of foreign bidder, provided that the same is in accordance with Clearance per Executive Order 398, Series
International Financial Reporting Standards. of 2005 (In case of a JV, this requirement
must be complied with by ail the JV
H. NFCC Computation in accordance with ITB clause 5. partners)

TAB CLASS "B" ELIGIBILITY REQUIREMENTS 2. TECHNICAL DOCUMENTS

I. Valid Joint Venture Agreement (JVA), in case the Joint d. Sworn Statement of all its on-going and
completed government and private contracts
Venture is already in existence at the time of the submission and opening of bids, OR within the last six (6) years prior to the
duly notarized statements from all potential joint venture partners stating that they will deadline for the submission and opening of
enter into and abide by the provisions of the JVA if the bid is successful; bids, including contracts awarded but not yet
started, if any. The statement shall include,
IV. OTHER DOCUMENTS for each of the contract, the following: x x x
J. Conformity with the Schedule of Requirements and Initial Technical Proposal e. Sworn Statement of the bidder's single
(approved TOR), as enumerated and specified in Sections VI and VII of the Bidding largest contract completed within six (6)
Documents, using the prescribed form. YEARS prior to the deadline for the

Page 32 of 40
 submission and opening of bids, with a
value of FIFTY (50%) per cent of the ABC. During post-qualification, the procuring entity verifies, validates, and ascertains all statements
made and documents submitted by the bidder with the lowest calculated or highest rated bid
f. The bid security (Payable to COMELEC) using a non-discretionary criteria as stated in the bidding documents.92 If, after post-qualification,
shall be ' in the following amount: x x x the Lowest Calculated Bid is determined to be post-qualified, it shall be considered the Lowest
Calculated Responsive Bid and the contract shall be awarded to the bidder.93
3. FINANCIAL DOCUMENTS
To recall, the BAC, on December 15, 2014, declared that only Smartmatic JV and Indra were
g. Audited Financial Statements (AFS), eligible to participate in the second stage of the bidding process. Of the two, only Smartmatic JV
stamped "received" by the Bureau of submitted a complete and responsive Overall Summary of the Financial Proposal and was thus
Internal Revenue (BIR) or its duly accredited subjected to post-qualification evaluation. Initially, the BAC post-disqualified Smartmatic JV for
and authorized institutions, for the preceding allegedly failing to submit a valid AOL It is this preliminary finding that petitioners want
calendar year x x x reinstated.
h. NFCC computation which shall be based We disagree.
only on the current assets and current
liabilities submitted to the BIR, through Even on post-qualification, the submission of an AOI was not included as an added requirement.
Electronic Filing and Payment System The Instruction to Bidders pertinently provides:94
(EFPS) 29. Post-Qualification
4. OTHERS
29.1. The Procuring Entity shall determine to its satisfaction whether the Bidder that is evaluated
i. Conformity with Section VI: Schedule of as having submitted the Lowest Calculated Bid (LCB) complies with and is responsive to all the
Requirements of the Bidding Documents requirements and conditions specified in ITB Clauses 5, 12 and 13.

j. Conformity with Section VII. Technical xxxx

Specifications of the Bidding Documents. If
proposal is the same with the initial technical 29.3. The determination shall be based upon an examination of the documentary evidence
requirements, just put "COMPLY" of the Bidder's qualifications submitted pursuant to ITB Clauses 12 and 13, as well as
other information as the Procuring Entity deems necessary and appropriate, using a non-
k. Certification from the Election Authority or discretionary "pass/fail" criterion. (emphasis added)
Election management Body that the system'
has demonstrated capability and has been Clauses 12 and 13 of the Instruction to Bidders pertain to the eligibility documents, technical
successfully used in a prior electoral documents, and the financial component of a participant's bid.95 Meanwhile, the Clause 5
exercise here or abroad. adverted to is an enumeration of persons or entities who may participate in the
bidding.96 Nowhere in these clauses does it appear that an AOI is a mandatory requirement even
l. OMNIBUS AFFIDAVIT in accordance with for post-qualification. Even the BAC's March 27, 2015 Notice addressed to Smartmatic JV
Section 25.2(a)(iv) of the IRR of RA 9184 supports this finding:97
and using the form prescribed in Section VIII x x x [F]or purposes of post-qualification proceedings, please submit copies of the following
of the Philippine bidding Documents. Shall documents to the Bid and Awards Committee (BAC), through the BAC Secretariat, as stated in
include: x x x Clause 29.2 (a) of Section III, Bid Data Sheet of the Bidding Documents, within three (3)
calendar days from receipt of this Notice:chanRoblesvirtualLawlibrary
Verily, based on Sec. 23.1 (b) of the GPRA IRR, the Instruction to Bidders, the BDS, and the
Checklist of Requirements, the non-submission of an AOI is not fatal to a bidder's eligibility to
contract the project at hand. Thus, it cannot be considered as a ground for declaring private a) Latest Income and Business Tax Returns. x x x
respondents ineligible to participate in the bidding process. To hold otherwise would mean
allowing the BAC to consider documents beyond the checklist of requirements, in contravention
of their non-discretionary duty under Sec. 30(l) of the GPRA IRR.
b) Certificate of PhilGEPS Registration.
b. Neither is the API a post-qualification requirement

After the preliminary examination stage, the BAC opens, examines, evaluates and ranks all bids c) ISO 9001:2008 Certification of the Optical Mark/reader or Optical Scan manufacturer for
and prepares the Abstract of Bids which contains, among others, the names of the bidders and OMR.
their corresponding calculated bid prices arranged from lowest to highest. The objective of the
bid evaluation is to identify the bid with the lowest calculated price or the Lowest Calculated Bid.
The Lowest Calculated Bid shall then be subject to post-qualification to determine its In addition, the following certifications must be submitted:chanRoblesvirtualLawlibrary
responsiveness to the eligibility and bid requirements.91

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a) That all system requirements for customization as stated in the Terms of Reference and
RA 9369 shall be fully complied with, subject to the application of applicable penalties
for non-compliance; and
b) That it shall not demand for additional payment from COMELEC to procure additional
OMR system requirements during Project Implementation for items that it may have
overlooked in its Bid Proposal.
The bidder is also required to submit the machines, including the software and hardware, back-
up power supply and other equipment and peripherals necessary for the conduct of the testing
during post-qualification, including the prototype sample of the ballot box based on what is
required in the Terms of Reference (TOR) for the OMR on April 6, 2015 as per instruction from
the Technical Working Group (TWG).
From the foregoing, the inescapable result is that mere failure to file an AOI cannot automatically
result in the bidder concerned being declared ineligible, contrary to petitioners' claim.
Smartmatic JV may validly undertake the project sought to be procured
a. SMTC still has the authority to conduct business even after the conduct of the 2010 national
and local elections
A thorough reading of petitioners' contention, however, would show that it is not only assailing
Smartmatic JV's ineligibility based on the alleged incompleteness of its documentary
requirements i.e. for non-submission of a valid AOI, but also because they considered the
subject of the procurement beyond the ambit of SMTCs corporate purpose. Petitioners postulate
that SMTC's authority to conduct business ceased upon fulfillment of its primary purpose stated
in its AOI-that of automating the 2010 National and Local Elections, and this allegedly rendered
SMTC's subsequent involvement in the subject procurement project an ultra vires act.
Petitioners' myopic interpretation of SMTC's purpose is incorrect.
While it is true that SMTC's AOI made specific mention of the automation of the 2010 National
and Local Elections as its primary purpose, it is erroneous to interpret this as meaning that the
corporation's authority to transact business will cease thereafter. Indeed, the contractual relation
between SMTC and the COMELEC has been the subject of prior controversies that haVe
reached the Court, and We have on these occasions held that even beyond the 2010 election
schedule, the parties remain to have subsisting rights and obligations relative to the products
and services supplied by SMTC to the COMELEC for the conduct of the 2010 polls.
For instance, the Court, in the landmark case of Capalla v. COMELEC (Capalla),98 upheld the
validity of the March 30, 2012 Deed of Sale by and between SMTC and COMELEC when the
latter exercised the option to purchase (OTP) clause embodied in their 2009 Automated Election
System Contract (AES Contract). Even though the original deadline for the option was only until
December 31, 2010, We ruled that the parties to the AES Contract, pursuant to Art. 19
thereof,99 can still validly extend the same by mutual agreement. The Court ratiocinated that Art.
19 of the AES Contract may still be invoked even after December 31, 2010, for the agreement
subsisted in view of the COMELEC's failure to return SMTC's performance security, a condition
for the contract's termination. As provided under Art. 2 of the AES Contract: 100
Article 2
EFFECTIVITY
2.1. This Contract shall take effect upon the fulfillment of all of the following
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conditions:chanRoblesvirtualLawlibrary
(a) Submission by the PROVIDER of the Performance Security;
(b) Signing of this Contract in seven (7) copies by the parties; and
(c) Receipt by the PROVIDER of the Notice to Proceed.
2.2. The Term of this Contract begins from the date of effectivity until the release of the
Performance Security,vithout prejudice to the surviving provisions of this Contract,
including the warranty provision as prescribed in Article 8.3 and the period of the option to
purchase. (Emphasis supplied)
Based on Our ruling in Capalla, the cessation of SMTC's business cannot be assumed just
because the May 10, 2010 polls have already concluded. For clearly, SMTC's purpose—the
"automation of the 2010 national and local elections"—is not limited to the conduct of the
election proper, but extends further to the fulfillment of SMTC's contractual obligations that
spring forth from the AES Contract during the lifetime of the agreement (i.e. until the release of
the performance security), and even thereafter insofar as the surviving provisions of the contract
are concerned. In other words, regardless of whether or not SMTC's performance security has
already been released, establishing even just one surviving provision of the AES Contract would
be sufficient to prove that SMTC has not yet completed its purpose under its AOI, toppling
petitioners' argument like a house of cards.
Unfortunately for petitioners, one such surviving provision has already been duly noted by the
Court in the recent case of Pabillo v. COMELEC (Pabillo).101 In Pabillo, the Court cited Art. 8.8 of
the AES Contract, which significantly reads:
8.8 If COMELEC opts to purchase the PCOS and Consolidation and Canvassing System (CCS),
the following warranty provisions indicated in the RFP shall form part of the purchase
contract:chanRoblesvirtualLawlibrary
1) For PCOS, SMARTMATIC shall warrant the availability of parts, labor and technical
support and maintenance to COMELEC for ten (10) years, if purchased (Item 18, Part V of
the RFP), beginning May 10, 2010. Any purchase of parts, labor and technical support and
maintenance not covered under Article 4.3 above shall be subject to the prevailing market prices
at the time and at such terms and conditions as may be agreed upon. (emphasis added)
Pertinently, We have interpreted the foregoing contractual provision in Pabillo in the following
wise:102
Smartmatic-TIM warrants that its parts, labor and technical support and maintenance will
be available to the COMELEC, if it so decides to purchase such parts, labor and technical
support and maintenance services, within the warranty period stated, i.e., ten (10) years for
the PCOS, reckoned from May 10, 2010, or until May 10, 2020. Article 8.8 skews from the
ordinary concept of warranty since it is a mere warranty on availability, which entails a
subsequent purchase contract, founded upon a new consideration, the costs of which (unlike in
the first warranty) are still to be paid. With Article 8.8 in place, the COMELEC is assured that it
would always have access to a capable parts/service provider in Smartmatic-TIM, during
the 10-year warranty period therefor, on account of the peculiar nature of the purchased
goods. (emphasis added)
Indubitably, the vinculum juris between COMELEC and SMTC remains solid and unsevered
despite the 2010 elections' inevitable conclusion. Several contractual provisions contained in the
2009 AES Contract, as observed in a review of our jurisprudence, continue to subsist and
remain enforceable up to this date. Pabillo, in effect, at least guaranteed that SMTC's purpose
under its AOI will not be fulfilled until May 10, 2020. Therefore, petitioners' theory—that SMTC
no longer has a valid purpose—is flawed. Otherwise, there would be no way of enforcing the
subsisting provisions of the contract and of holding SMTC to its warranties after the conduct of
the. May 10, 2010 elections.
Having resolved the continuity of SMTC's business, We now proceed to determine whether its
participation in the bidding process is an authorized or an ultra vires act.
b. The issue is mooted by the subsequent approval of the amendment to SMTC's AOI
Hence, any doubt on SMTC's authorization to continue its business has already been dispelled
by December 10, 2014. It matters not that the amendments to the AOI took effect only on that
day104 for as long as it preceded post-qualification.
c. SMTC's participation in the bidding is not an ultra vires act but one that is incidental to its
corporate purpose

Commissioner Guia, in his dissent, opines that a bidder should be authorized to participate in the In any event, there is merit in private respondents' argument that SMTC's participation in the
bidding as early as the time the pre-qualification was conducted, which in this case was held on bidding is not beyond its declared corporate purpose; that, in the first place, there was no
December 4, 2014. Thus, the December 10, 2014 approval of SMTC's amended AOI, to impediment in SMTC's AOI that could have prevented Smartmatic JV from participating in the
Commissioner Guia's mind, cannot cure the alleged vice attending SMTC's submission of its bid, project.
as a partner in Smartmatic JV, for a project that it was, at that time, unauthorized to undertake.
To elucidate, an ultra vires act is defined under BP 68 in the following wise:
The argument fails to persuade. Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
As earlier discussed, the function of the BAC, in making an initial assessment as to the eligibility incorporation and except such as are necessary or incidental to the exercise of the powers
of the bidders during pre-qualification, is ministerial and nondiscretionary. It merely so conferred. (emphasis added)
counterchecks the documents submitted by the bidder against the checklist of requirements
The language of the Code appears to confine the term ultra vires to an act outside or beyond
included in the bid documents disseminated by the procuring agency. It cannot consider
express, implied and incidental corporate powers. Nevertheless, the concept can also include
documents not listed in the checklist for purposes of ascertaining a bidder's eligibility during pre-
those acts that may ostensibly be within such powers but are, by general or special laws, either
qualification.
proscribed or declared illegal.105Ultra vires acts or acts which are clearly beyond the scope of
one's authority are null and void and cannot be given any effect.106
The only time the procuring agency can go beyond the checklist is during post-qualification
wherein it is allowed to check to its satisfaction the veracity of the information submitted to it by
In determining whether or not a coiporation may perform an act, one considers the logical and
the bidder. To recall, Sec. 29.3 of the Invitation to Bid provides that on post-qualification, the
necessary relation between the act assailed and the corporate purpose expressed by the law or
procuring entity may utilize any "other information as [it] may deem necessary and
in the charter, for if the act were one which is lawful in itself or not otherwise prohibited and done
appropriate" in order to test the accuracy of the information provided in the bidder's eligibility
for the purpose of serving corporate ends or reasonably contributes to the promotion of those
documents and bid proposal. In the end, notwithstanding the dispensability of the AOI insofar as
ends in a substantial and not merely in a remote and fanciful sense, it may be fairly considered
compliance with documentary requirements is concerned, the procuring entity may nevertheless
within corporate powers.107The test to be applied is whether the act in question is in direct
consider the same in ultimately determining a bidder's eligibility.
and immediate furtherance of the corporation's business, fairly incident to the express
powers and reasonably necessary to their exercise. If so, the corporation has the power to do it;
Stated in the alternative, the procuring entity, for purposes of post-qualification, cannot be
otherwise, not.108
faulted for, as it is not precluded from, considering information volunteered by the bidder with the
highest bid. Bearing in mind the non-discretionary function of the BAC during pre-qualification, it
In the case at bar, notwithstanding the specific mention of the 2010 National and Local Elections
is then understandable that it is only on post-qualification, when it is allowed to consider other
in SMTC's primary purpose, it is not, as earlier discussed, precluded from entering into contracts
documents, during which an extensive inquiry will be made to detect any defect in the bidder's
over succeeding ones. Here, SMTC cannot be deemed to be overstepping its limits by
capacity to contract. Hence, even though the submission of an AOI was not required for either
participating in the bidding for the 23,000 new optical mark readers for the 2016 polls since
pre or post-qualification purposes, the COMELEC and BAC, on post-qualification, may still
upgrading the machines that the company supplied the COMELEC for the automation of the
consider the same in determining whether or not the project is in line with the bidder's corporate
2010 elections and offering them for subsequent elections is but a logical consequence of
purpose, and, ultimately, in ascertaining the bidder's eligibility.
SMTC's course of business, and should, therefore, be considered included in, if not incidental to,
its corporate purpose. A restricted interpretation of its purpose would mean limiting SMTC's
In the case at bar, We take note that during the opening of the bids on December 4, 2014,
activity to that of waiting for the expiration of its warranties in 2020. How then can the company
Smartmatic JV already informed the BAC that SMTC was already in the process of amending its
be expected to subsist and sustain itself until then if it cannot engage in any other project, even
AOI. The contents of the AOI, at that time, were immaterial since the AOI is not an eligibility
in those similar to what the company already performed?
requirement that can be considered by the BAC on pre-qualification. By post-qualification,
however, the time the BAC can validly consider extraneous documents, SMTC's AOI has
In the final analysis, We see no defect in the AOI that needed to be cured before SMTC could
already been duly amended, and the amendments approved by the SEC on December 10,
have participated in the bidding as a partner in Smartmatic JV, the automation of the 2016
2014, for its updated primary purpose to read:103
National and Local Elections being a logical inclusion of SMTC's corporate purpose.
To sell, supply, lease, import, export, develop, assemble, repair and deal with automated voting
machines, canvassing equipment, computer software, computer equipment and all other goods
Smartmatic JV cannot be declared ineligible for SMTC's nationality
and supplies, and/or to provide, render and deal in all kinds of services, including project
management services for the conduct of elections, whether regular or special, in the
In a desperate last ditch effort to have Smartmatic JV declared ineligible to participate in the
Philippine(s) and to provide Information and Communication Technology (ICT) goods and
procurement project, petitioners question the nationality of SMTC. They direct the Court's
services to private and government entities in the Philippines.
attention to the 2013 Annual Report and Consolidated Financial Statements 109 of Smartmatic
Limited to prove that SMTC is 100% foreign owned. They then contend that SMTC is the biggest
Page 35 of 40
shareholder in the bidding joint venture at 46.5% share, making the joint venture less than 60% 226,000,000 common stocks116 at P1.00 par value, of which 100% is subscribed and
Filipino-owned and, hence, ineligible. paid.117 The GIS further provides information on the stcok holders as follows:118
NAME SHARES SUBSCRIBED
The argument is specious.
NATIONALITY
AND
Clause 5 of the Instruction to Bidders provides that the following may participate in the bidding AMOUNT PAID
CURRENT % OF
process:110 TYPE NUMBER AMOUNT
RESIDENTIAL OWNERSHIP
5.1. Unless otherwise provided in the BDS, the following persons shall be eligible to participate
ADDRESS
in the bidding:chanRoblesvirtualLawlibrary
1920 Business
xxxx Common 135,599,997 135,599,997.00 677,999,997.00
Inc.
(e) Unless otherwise provided in the BDS, persons/entities forming themselves into a JV, i.e., Filipino "A"
group of two (2) or more persons/entities that intend to be jointly and severally responsible or
liable for a peculiar contract: Provided, however, that Filipino ownership or interest of the King's Court 2,
joint venture concerned shall be at least sixty percent (60%). 2129 Don 60%
Chino
While petitioners are correct in asserting that Smartmatic JV ought to be at least 60% Filipino-
owned to qualify, they did not adduce sufficient evidence to prove that the joint venture did not Roces Ave.,
meet the requirement. Petitioners, having alleged non-compliance, have the correlative burden Makati, Metro TOTAL 135,599,997 135,599,997.00
of proving that Smartmatic JV did not meet the requirement, but aside from their bare allegation Manila
that SMTC is 100% foreign-owned, they did not offer any relevant evidence to substantiate their
claim. Even the 2013 financial statements submitted to Court fail to impress for they pertain to Smartmatic
the financial standing of Smartmatic Limited,111 which is a distinct and separate entity International, Common 90,399,998 90,399,998.00 451,999,998.00
from SMTC. It goes without saying that Smarmatic Limited's nationality is irrelevant herein for it Corp.
is not even a party to this case, and even to the joint venture.
Barbadian "B"
Aside from the sheer weakness of petitioners' claim, SMTC satisfactorily refuted the challenge to 40%
its nationality and established that it is, indeed, a Filipino corporation as defined under our laws. 4 Stafford
As provided in Republic Act No. 7042 (RA 7042), otherwise known as the Foreign Investments House,
Act, a Philippine corporation is defined in the following wise: Garisson St.,
Section 3. Definitions. - As used in this Act:chanRoblesvirtualLawlibrary
Michael,
TOTAL 90,399,998 90,399,998.00
Barbados
a) The term "Philippine national" shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation Juan C. Villa,
organized under the laws of the Philippines of which at least sixty percent (60%) of the Common 1 1.00 1.00
Jr.
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation Filipino
benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue
to the benefit of the Philippine nationals: Provided, That where a corporation and its non-Filipino No. 74, Jalan 0%
stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, Setiabakti,
at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent Damansara
(60%) of the members of the Board of Directors of both corporations must be citizens of the Heights, Kuala TOTAL 1 1.00
Philippines, in order that the corporations shall be considered a Philippine national. Lumpur

In Narra Nickel Mining and Development, Corp. v. Redmont Consolidated Mines, Corp.,112 the Jacinto R.
Common 1 1.00 1.00
Court held that the "control test" is the prevailing mode of determining whether or not a Perez, Jr.
corporation is Filipino. Under the "control test," shares belonging to corporations or partnerships
at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Filipino "A"
Philippine nationality.113 It is only when based on the attendant facts and circumstances of the
case, there is, in the mind of the Court, doubt in the 60-40 Filipino-equity ownership in the 1211 Consuelo
corporation, that it may apply the "grandfather rule."114 St., Singalong,

Manila TOTAL 1 1.00

Perusing SMTC's GIS115 proves useful in applying the control test. Upon examination, SMTC's
GIS reveals that it has an authorized capital stock of P226,000,000.00, compromised of

Page 36 of 40
 Alastair Joseph rule119 since the test is only employed when the 60% Filipino ownership in the corporation is in
Common 1 1.00 1.00 doubt.120 In this case, not even the slightest doubt is cast since the petition is severely wanting in
James Wells
facts and circumstances that raise legitimate challenges to SMTC's 60-40 Filipino ownership.
British "B" The petition rested solely on petitioners' vague assertions and baseless claims. On the other
hand, SMTC countered by furnishing the Court a copy of its GIS providing its shareholders' stock
1405 Spanish ownership details, and by submitting a copy of its AOI, which reserved all of SMTC's
Bay, Bonifacio 135,600,000 class A common shares to Filipinos121 in a bid to guarantee that when all of its
0%
shares are outstanding, foreign ownership will not exceed 40%.
Ridge,
1st Avenue, Anent the nationality of the other joint venture partners, the Court defers to the findings of the
Bonifacio TOTAL 1 1.00 COMELEC and the BAC, and finds sufficient their declaration that Smartmatic JV is, indeed,
eligible to participate in the bidding process, and is in fact the bidder with the lowest calculated
Global City, responsive bid.122 If petitioners would insist otherwise by reason of Smartmatic JV's nationality, it
Taguig becomes incumbent upon them to prove that the aggregate Filipino equity of the joint venture
partners—SMTC, Total Information Management Corporation, Smartmatic International Holding
Marian Ivy F.
Common 1 1.00 1.00 B.V., and Jarltech International Corporation—does not comply with the 60% Filipino equity
Reyes-Fajardo
requirement, following the oft-cited doctrine that he who alleges must prove.123 Regrettably, one
Filipino "A" fatal flaw in petitioners' posture is that they challenged the nationality of SMTC alone, which,
after utilizing the control test, turned out to be a Philippine corporation as defined under RA
71-B Tindalo 0% 7042. There was no iota of evidence presented or, at the very least, even a claim advanced that
St., the remaining partners are foreign-owned. There are, in fact, no other submissions whence - this
MonteVista, Court can inquire as to the nationalities of the other joint venture partners. Hence, there is no
other alternative for this Court other than to adopt the findings of the COMELEC and the BAC
Subdivision, upholding Smartmatic JV's eligibility to participate in the bidding process, subsumed in which is
Total 1 1.00
Marikina the joint venture and its individual partners' compliance with the nationality requirement.
Salvador P. WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED for lack of merit. The
Common 1 1.00 1.00
Aque June 29, 2015 Decision of the COMELEC en banc is hereby AFFIRMED. SO ORDERED.
Filipino "A"

2250 P. 0%
Burgos, Pasay
City SECOND DIVISION
Total 1 1.00
[G.R. NO. 124772 : August 14, 2007]
Applying the control test, 60% of SMTC's 226,000,000 shares, that is 135,600,000 shares, must
be Filipino-owned. From the above-table, it is clear that SMTC reached this threshold amount to
qualify as a Filipino-owned corporation. To demonstrate, the following are SMTC's Filipino PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT and MAGTANGGOL C.
investors: GUNIGUNDO, in his capacity as CHAIRMAN thereof, Petitioners, v. SANDIGANBAYAN and
OFFICECO HOLDINGS, N.V., Respondents.
NAME OF SHAREHOLDER TYPE OF SHARE NUMBER OF SHARES

1920 Business Inc. Common "A" 135,599,997 DECISION

Juan C. Villa, Jr. Common "B" 1

TINGA, J.:
Jacinto R. Perez, Jr. Common "A" 1

Marian Ivy F. Reyes-Fajardo Common "A" 1 Before this Court is a Petition for Certiorari and Prohibition with Prayer for Issuance of a
Temporary Restraining Order filed by the Presidential Commission on Good Government
Salvador P. Aque Common "A" 1 (PCGG) to restrain and enjoin respondent Sandiganbayan from further proceeding with Civil
Case No. 0164, and to declare null and void the Resolutions of the Sandiganbayan (Second
TOTAL 135,600,001 Division) dated 11 January 1996 and 29 March 1996, which denied PCGG's motion to dismiss
and motion for reconsideration, respectively, in Civil Case No. 0164.
Indeed, the application of the control test would yield the result that SMTC is a Filipino
corporation. There is then no truth to petitioners' claim that SMTC is 100% foreign-owned.
Consequently, it becomes unnecessary to confirm this finding through the grandfather The antecedent facts follow.
Page 37 of 40
On 7 April 1986, in connection with criminal proceedings initiated in the Philippines to locate, relitigation of the same claims or demands cannot be done without violating the doctrine of res
sequester and seek restitution of alleged ill-gotten wealth amassed by the Marcoses and other judicataor conclusiveness of judgment.16
accused from the Philippine Government,1 the Office of the Solicitor General (OSG) wrote the
Federal Office for Police Matters in Berne, Switzerland, requesting assistance for the latter office
Next, petitioners claim that Civil Case No. 0164 in effect seeks a judicial review of the legality or
to: (a) ascertain and provide the OSG with information as to where and in which cantons the ill-
illegality of the acts of the Swiss government since the Sandiganbayan would inevitably examine
gotten fortune of the Marcoses and other accused are located, the names of the depositors and
and review the freeze orders of Swiss officials in resolving the case. This would be in violation of
the banks and the amounts involved; and (b) take necessary precautionary measures, such as
the "act of state" doctrine which states that courts of one country will not sit in judgment on the
sequestration, to freeze the assets in order to preserve their existing value and prevent any
acts of the government of another in due deference to the independence of sovereignty of every
further transfer thereof (herein referred to as the IMAC request).2
sovereign state.17

On 29 May 1986, the Office of the District Attorney in Zurich, pursuant to the OSG's request,
Furthermore, if the Sandiganbayan allowed the complaint in Civil Case No. 0164 to prosper, this
issued an Order directing the Swiss Banks in Zurich to freeze the accounts of the accused in
would place the Philippine government in an uncompromising position as it would be constrained
PCGG I.S. No. 1 and in the "List of Companies and Foundations."3 In compliance with said
to take a position contrary to that contained in the IMAC request.
Order, Bankers Trust A.G. (BTAG) of Zurich froze the accounts of Officeco Holdings, N.V.
(Officeco).4
Petitioners allege that Officeco failed to exhaust the administrative remedies available under
Secs. 5 and 6 of the PCGG Rules and Regulations Implementing Executive Orders No. 1 and
Officeco appealed the Order of the District Attorney to the Attorney General of the Canton of
No. 2. This failure, according to petitioners, stripped Officeco of a cause of action thereby
Zurich. The Attorney General affirmed the Order of the District Attorney. 5 Officeco further
warranting the dismissal of the complaint before the Sandiganbayan.
appealed to the Swiss Federal Court which likewise dismissed the appeal on 31 May 1989. 6

Petitioners further contend that the complaint before the Sandiganbayan is actually one
Thereafter, in late 1992, Officeco made representations with the OSG and the PCGG for them to
for mandamus but the act sought by Officeco is discretionary in nature. Petitioners add that they
officially advise the Swiss Federal Office for Police Matters to unfreeze Officeco's assets. 7 The
did not commit grave abuse of discretion in denying Officeco's request to unfreeze its account
PCGG required Officeco to present countervailing evidence to support its request.
with BTAG since the denial was based on Officeco's failure to present countervailing evidence to
support its claim. The action for mandamus does not lie, petitioners conclude.
Instead of complying with the PCGG requirement for it to submit countervailing evidence, on 12
September 1994, Officeco filed the complaint8 which was docketed as Civil Case No. 0164 of the
In its comment,18 Officeco questions the competence of the PCGG lawyers to appear in the case
Sandiganbayan. The complaint prayed for the PCGG and the OSG to officially advise the Swiss
since they are not properly authorized by the OSG to represent the Philippine government
government to exclude from the freeze or sequestration order the account of Officeco with BTAG
and/or the PCGG in ill-gotten wealth cases such as the one in the case at bar. However, this
and to unconditionally release the said account to Officeco.
issue has been rendered moot by an agreement by and among the PCGG Chairman, the
Solicitor General, the Chief Presidential Legal Counsel, and the Secretary of Justice that the
The OSG filed a joint answer9 on 24 November 1994 in behalf of all the defendants in Civil Case PCGG lawyers would enter their appearance as counsel of PCGG or the Republic and shall
No. 0164.10 On 12 May 1995, the PCGG itself filed a motion to dismiss11 which was denied by directly attend to the various cases of the PCGG, by virtue of their deputization as active
the Sandiganbayan (Third Division) in its Resolution promulgated on 11 January counsel.19 Furthermore, the Memorandum in this case which was prepared by the OSG
1996.12 PCGG's motion for reconsideration was likewise denied in another Resolution dated 29 reiterated the arguments in support of the petition which was initially filed by PCGG.
March 1996.13 Hence, this petition.
Nevertheless, the petition is bereft of merit. We find that the Sandiganbayan did not act with
On 20 May 1996, the Sandiganbayan issued an order in Civil Case No. 0164 canceling the pre- grave abuse of discretion in denying petitioners' motion to dismiss.
trial scheduled on said date in deference to whatever action the Court may take on this petition. 14
Res judicata
The issues raised by the PCGG in its Memorandum 15 may be summarized as follows: whether
the Sandiganbayan erred in not dismissing Civil Case No. 0164 on the grounds of (1) res
means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by
judicata; (2) lack of jurisdiction on account of the "act of state doctrine"; (3) lack of cause of
judgment.20 The doctrine of res judicata provides that a final judgment on the merits rendered by
action for being premature for failure to exhaust administrative remedies; and (4) lack of cause
a court of competent jurisdiction is conclusive as to the rights of the parties and their privies and
of action for the reason that mandamus does not lie to compel performance of a discretionary
constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause
act, there being no showing of grave abuse of discretion on the part of petitioners.
of action.21

According to petitioners, the 31 May 1989 Decision of the Swiss Federal Court denying
For the preclusive effect of res judicata to be enforced, the following requisites must obtain: (1)
Officeco's appeal from the 29 May 1986 and 16 August 1988 freeze orders of the Zurich District
The former judgment or order must be final; (2) It must be a judgment or order on the merits, that
Attorney and the Attorney General of the Canton of Zurich, respectively, is conclusive upon
is, it was rendered after a consideration of the evidence or stipulations submitted by the parties
Officeco's claims or demands for the release of the subject deposit accounts with BTAG. Thus, a
at the trial of the case; (3) It must have been rendered by a court having jurisdiction over the
subject matter and the parties; and (4) There must be, between the first and second actions,
Page 38 of 40
identity of parties, of subject matter and of cause of action. This requisite is satisfied if the two
actions are substantially between the same parties.22
While the first three elements above are present in this case, we rule that the fourth element is
absent. Hence, res judicata does not apply to prevent the Sandiganbayan from proceeding with
Civil Case No. 0164.
Absolute identity of parties is not a condition sine qua non for res judicata to apply, a shared
identity of interest being sufficient to invoke the coverage of the principle.23 In this regard,
petitioners claim that while "the Philippine government was not an impleaded party respondent in
Switzerland," it is undisputed that "the interest of the Philippine government is identical to the
interest of the Swiss officials," harping on the fact that the Swiss officials issued the freeze order
on the basis of the IMAC request.24 However, we fail to see how petitioners can even claim an
interest identical to that of the courts of Switzerland. Petitioners' interest, as reflected in their
legal mandate, is to recover ill-gotten wealth, wherever the same may be located.25 The interest
of the Swiss court, on the other hand, is only to settle the issues raised before it, which include
the propriety of the legal assistance extended by the Swiss authorities to the Philippine
government.
Secondly, a subject matter is the item with respect to which the controversy has arisen, or
concerning which the wrong has been done, and it is ordinarily the right, the thing, or the
contract under dispute.26 In the case at bar, the subject matter in the Swiss Federal Court was
described in the 31 May 1989 decision itself as "ruling on temporary measures (freezing of
accounts) and of taking of evidence (gathering bank information)." 27 It was thus concerned with
determining (1) whether "there is a reason of exclusion as defined in Art. 2 lit. b and [Art.] 3 par.
1 IRSG28 or an applicable case of Art. 10 Par. 2 IRSG;" 29 (2) whether legal assistance should be
refused on the basis of Art. 2 lit. a IRSG;30 (3) whether Officeco should be regarded as a
disinterested party owing to the fact that its name was not included in the list accompanying the
IMAC request as well as in the order of the District Attorney of Zurich; and (4) whether the grant
of legal assistance is proper considering the actions of Gapud. 31 In short, the subject matter
before the Swiss courts was the propriety of the legal assistance extended to the Philippine
government. On the other hand, the issue in Civil Case No. 0164 is whether the PCGG may be
compelled to officially advise the Swiss government to exclude or drop from the freeze or
sequestration order the account of Officeco with BTAG and to release the said account to
Officeco. In short, the subject matter in Civil Case No. 0164 is the propriety of PCGG's stance
regarding Officeco's account with BTAG.
In arguing that there is identity of causes of action, petitioners claim that "the proofs required to
sustain a judgment for [Officeco] in Switzerland is no different from the proofs that it would offer
in the Philippines." We disagree.
A cause of action is an act or omission of one party in violation of the legal right of the
other.32 Causes of action are identical when there is an identity in the facts essential to the
maintenance of the two actions, or where the same evidence will sustain both actions. 33 The test
often used in determining whether causes of action are identical is to ascertain whether the
same facts or evidence would support and establish the former and present causes of
action.34 More significantly, there is identity of causes of action when the judgment sought will be
inconsistent with the prior judgment.35 In the case at bar, allowing Civil Case No. 0164 to
proceed to its logical conclusion will not result in any inconsistency with the 31 May 1989
decision of the Swiss Federal Court. Even if the Sandiganbayan finds for Officeco, the same will
not automatically result in the lifting of the questioned freeze orders. It will merely serve as a
basis for requiring the PCGG (through the OSG) to make the appropriate representations with
the Swiss government agencies concerned.
Page 39 of 40
Act of State Doctrine
The classic American statement of the act of state doctrine, which appears to have taken root in
England as early as 1674,36 and began to emerge in American jurisprudence in the late
eighteenth and early nineteenth centuries, is found in Underhill v. Hernandez,37 where Chief
Justice Fuller said for a unanimous Court:
Every sovereign state is bound to respect the independence of every other state, and the courts
of one country will not sit in judgment on the acts of the government of another, done within its
territory. Redress of grievances by reason of such acts must be obtained through the means
open to be availed of by sovereign powers as between themselves. 38
The act of state doctrine is one of the methods by which States prevent their national courts from
deciding disputes which relate to the internal affairs of another State, the other two being
immunity and non-justiciability.39 It is an avoidance technique that is directly related to a State's
obligation to respect the independence and equality of other States by not requiring them to
submit to adjudication in a national court or to settlement of their disputes without their
consent.40 It requires the forum court to exercise restraint in the adjudication of disputes relating
to legislative or other governmental acts which a foreign State has performed within its territorial
limits.41
It is petitioners' contention that the Sandiganbayan "could not grant or deny the prayers in
[Officeco's] complaint without first examining and scrutinizing the freeze order of the Swiss
officials in the light of the evidence, which however is in the possession of said officials" and that
it would therefore "sit in judgment on the acts of the government of another country."42 We
disagree.
The parameters of the use of the act of state doctrine were clarified in Banco Nacional de Cuba
v. Sabbatino.43 There, the U.S. Supreme Court held that international law does not require the
application of this doctrine nor does it forbid the application of the rule even if it is claimed that
the act of state in question violated international law. Moreover, due to the doctrine's peculiar
nation-to-nation character, in practice the usual method for an individual to seek relief is to
exhaust local remedies and then repair to the executive authorities of his own state to persuade
them to champion his claim in diplomacy or before an international tribunal. 44
Even assuming that international law requires the application of the act of state doctrine, it bears
stressing that the Sandiganbayan will not examine and review the freeze orders of the
concerned Swiss officials in Civil Case No. 0164. The Sandiganbayan will not require the Swiss
officials to submit to its adjudication nor will it settle a dispute involving said officials. In fact, as
prayed for in the complaint, the Sandiganbayan will only review and examine the propriety of
maintaining PCGG's position with respect to Officeco's accounts with BTAG for the purpose of
further determining the propriety of issuing a writ against the PCGG and the OSG. Everything
considered, the act of state doctrine finds no application in this case and petitioners' resort to it is
utterly mislaid.
Exhaustion of Administrative Remedies
Petitioners advert to Officeco's failure to exhaust the administrative remedies provided in Secs. 5
and 6 of the PCGG Rules and Regulations Implementing Executive Orders No. 1 and No.
2.45 However, a reading of said provisions shows that they refer only to sequestration orders,
freeze orders and hold orders issued by the PCGG in the Philippines. They cannot be made to
apply to the freeze orders involved in this case which were issued by the government of another
country.
It was thus error for petitioners to treat Officeco's request for the lifting of the freeze orders as a
request under Secs. 5 and 6 of its rules. First, the PCGG cannot even grant the remedy
embodied in the said rules, i.e., lifting of the freeze orders. Second, any argument towards a
conclusion that PCGG can grant the remedy of lifting the freeze order is totally inconsistent with
its earlier argument using the act of state doctrine. PCGG's cognizance of such a request and
treating it as a request under Secs. 5 and 6 of its rules would require a re-examination or review
of the decision of the Swiss court, a procedure that is prohibited by the act of state doctrine.
Complaint States a Cause of Action
While the stated issue is whether mandamus lies, the real crux of the matter is whether
Officeco's complaint before the Sandiganbayan states a cause of action. We uphold the
sufficiency of the complaint.
It may be recalled that Officeco had alleged that it had sent several letters to the PCGG and the
OSG for these bodies to advise the Swiss authorities to drop or exclude Officeco's account with
BTAG from the freeze or sequestration, but no formal response was received by petitioners on
these letters. Copies of at least four (4) of these letters were in fact attached as annexes to the
complaint.46
Section 5(a) of Republic Act No. 6713, or the Code of Conduct and Ethical Standards for Public
Officials and Employees, states:
Section 5. Duties of Public Officials and Employees. ― In the performance of their duties, all
public officials and employees are under obligation to:
(a) Act promptly on letters and requests. ― All public officials and employees shall, within
fifteen (15) working days from receipt thereof, respond to letters, telegrams or other means of
communications sent by the public. The reply must contain the action taken on the request.
[Emphasis supplied.]
exclude Officeco's account with BTAG in the list of ill-gotten wealth, to wit: (1) The freeze order
has been in effect for eleven (11) years, since 1986, without any judicial action instituted by the
PCGG and the OSG against Officeco; (2) The PCGG and the OSG have no document or proof
that the account of Officeco with BTAG belongs to the Marcoses nor their cronies. Information
on this matter was even requested by the OSG from the PCGG and the latter from Swiss
authorities who, up to the present, have not responded positively on the request; 48 and (3)
Requests49 by Officeco to the PCGG and OSG to make representations with the Swiss
authorities for the latter to release Officeco's account with the BTAG from the freeze order
remain unacted upon despite the mandate in Section 5(a) of Republic Act No. 6713.
The truth of the above allegations, which must be deemed hypothetically admitted for the
purpose of considering the motion to dismiss, may properly be determined only if Civil Case No.
0164 is allowed to proceed, such that if they are found to be supported by preponderance of
evidence, adverse findings may properly be made against PCGG and the corresponding reliefs
granted in favor of Officeco.
Furthermore, Officeco claims that on two separate occasions, upon request of counsel for
Security Bank and Trust Company (SBTC), the PCGG and the OSG formally advised the Swiss
authorities to release from the freeze orders two other securities accounts with BTAG. Because
of these representations, the release of the two accounts from the freeze order was effected.
Gapud also assisted in the establishment and administration of these accounts with
BTAG.50 According to Officeco, the continuous refusal of the PCGG and the OSG to act
favorably on its request while acting favorably on the above two requests of SBTC is a clear
violation of its right to equal protection under the 1987 Constitution.51
The guarantee of equal protection, according to Tolentino v. Board of Accountancy, et
al.,52 simply means "that no person or class of persons shall be deprived of the said protection of
the laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."53 Indeed, if it were true that the PCGG and the OSG facilitated the release of
two deposit accounts upon the request of SBTC and these accounts are similarly situated to
Officeco's frozen account with BTAG, the operation of the equal protection clause of the
Constitution dictates that Officeco's account should likewise be ordered released. Again, this
matter can properly be resolved if Civil Case No. 0164 is allowed to proceed.
WHEREFORE, premises considered, the instant petition is DISMISSED.

Since neither the PCGG nor the OSG replied to the requests of Officeco within fifteen (15) days No pronouncement as to costs. SO ORDERED.
as required by law, such inaction is equivalent to a denial of these requests. As such, no other
recourse was left except for judicial relief. The appreciation of the allegations in the complaint
from this standpoint allows us to see how the cause of action precisely materialized. Even if
these allegations were not cast in the framework of a mandamus action, they still would give rise
to a viable cause of action, subject to the proof of the allegations during trial.

A motion to dismiss on the ground of failure to state a cause of action in the complaint
hypothetically admits the truth of the facts alleged therein. The hypothetical admission extends
to the relevant and material facts well pleaded in the complaint and inferences fairly deducible
therefrom. Hence, if the allegations in the complaint furnish sufficient basis by which the
complaint can be maintained, the same should not be dismissed regardless of the defense that
may be assessed by the defendants.47

The following allegations culled from Officeco's complaint in the Sandiganbayan would, if
proven, entitle Officeco to the main reliefs sought in its complaint in view of petitioners' refusal to

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