FIRST DIVISION

[G.R. No. 150976. October 18, 2004.]

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO
S. FLORES, XERXES NAVARRO, MARIA ANTONIA
TEMPLO and MEDICAL CENTER PARAAQUE,
INC., petitioners, vs.
ANGELESBALINGHASAY,
RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO
FUNTILA, TERESITA GAYANILO, RUSTICO JIMENEZ,
ARACELI ** JO,
ESMERALDA MEDINA,
CECILIA
MONTALBAN, VIRGILIO OBLEPIAS, CARMENCITA
PARRENO, CESAR REYES, REYNALDO SAVET,
SERAPIO TACCAD, VICENTE VALDEZ, SALVACION
VILLAMORA,
and
HUMBERTO
VILLAREAL,respondents.

whereby the ONE THOUSAND SHARES issued to, and

subscribed by, the incorporating stockholders shall be
classified as Class A shares while the other ONE
THOUSAND unissued shares shall be considered as
Class B shares. Only holders of Class A shares can have
the right to vote and the right to be elected as directors or
as corporate officers. 2 (Emphasis supplied)
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was
amended, to read thus:
SEVENTH. That the authorized capital stock of the
corporation is FIVE MILLION (P5,000,000.00) PESOS,
divided as follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 P1,000.00

DECISION
"B" 4,000 P1,000.00
QUISUMBING, J :
p

For review on certiorari is the Partial Judgment 1 dated November 26, 2001 in
Civil Case No. 01-0140, of the Regional Trial Court (RTC) of Paraaque City,
Branch 258. The trial court declared the February 9, 2001, election of the
board of directors of the Medical Center Paraaque, Inc. (MCPI) valid. The
Partial Judgment dismissed petitioners' first cause of action, specifically, to
annul said election for depriving petitioners their voting rights and to be voted
on as members of the board.

Only holders of Class A shares have the right to vote and

the right to be elected as directors or as corporate
officers. 3 (Emphasis supplied)
The foregoing amendment was approved by the SEC on June 7, 1983. While
the amendment granted the right to vote and to be elected as directors or
corporate officers only to holders of Class "A" shares, holders of Class "B"
stocks were granted the same rights and privileges as holders of Class "A"
stocks with respect to the payment of dividends.
EITcaD

The facts, as culled from records, are as follows:

On September 9, 1992, Article VII was again amended to provide as follows:
Petitioners and the respondents are stockholders of MCPI, with the former
holding Class "B" shares and the latter owning Class "A" shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat,
Paraaque City. It was organized sometime in September 1977. At the time
of its incorporation, Act No. 1459, the old Corporation Law was still in force
and effect. Article VII of MCPI's original Articles of Incorporation, as approved
by the Securities and Exchange Commission (SEC) on October 26, 1977,
reads as follows:

SEVENTH: That the authorized capital stock of the

corporation is THIRTY TWO MILLION PESOS
(P32,000,000.00) divided as follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 P1,000.00
"B" 31,000 1,000.00

SEVENTH. That the authorized capital stock of the

corporation is TWO MILLION (P2,000,000.00) PESOS,
Philippine Currency, divided into TWO THOUSAND
(2,000) SHARES at a par value of P100 each share,

Except when otherwise provided by law, only holders of

Class "A" shares have the right to vote and the right to be

elected as directors or as corporate officers 4 (Stress and

emphasis supplied).
The SEC approved the foregoing amendment on September 22, 1993.
On February 9, 2001, the shareholders of MCPI held their annual
stockholders' meeting and election for directors. During the course of the
proceedings, respondent Rustico Jimenez, citing Article VII, as amended,
and notwithstanding MCPI's history, declared over the objections of herein
petitioners, that no Class "B" shareholder was qualified to run or be voted
upon as a director. In the past, MCPI had seen holders of Class "B" shares
voted for and serve as members of the corporate board and some Class "B"
share owners were in fact nominated for election as board members.
Nonetheless, Jimenez went on to announce that the candidates holding
Class "A" shares were the winners of all seats in the corporate board. The
petitioners protested, claiming that Article VII was null and void for depriving
them, as Class "B" shareholders, of their right to vote and to be voted upon,
in violation of the Corporation Code (Batas Pambansa Blg. 68), as amended.
On March 22, 2001, after their protest was given short shrift, herein
petitioners filed a Complaint for Injunction, Accounting and Damages,
docketed as Civil Case No. CV-01-0140 before the RTC of Paraaque City,
Branch 258. Said complaint was founded on two (2) principal causes of
action, namely:
a. Annulment of the declaration of directors of the MCPI
made during the February 9, 2001 Annual Stockholders'
Meeting, and for the conduct of an election whereat all
stockholders, irrespective of the classification of the shares
they hold, should be afforded their right to vote and be
voted for; and
b. Stockholders' derivative suit challenging the validity of a
contract entered into by the Board of Directors of MCPI for
the operation of the ultrasound unit. 5
Subsequently, the complaint was amended to implead MCPI as party-plaintiff
for purposes only of the second cause of action.
Before the trial court, the herein petitioners alleged that they were deprived of
their right to vote and to be voted on as directors at the annual stockholders'
meeting held on February 9, 2001, because respondents had erroneously
relied on Article VII of the Articles of Incorporation of MCPI, despite Article VII
being contrary to the Corporation Code, thus null and void. Additionally,
respondents were in estoppel, because in the past, petitioners were allowed
to vote and to be elected as members of the board. They further claimed that

the privilege granted to the Class "A" shareholders was more in the nature of
a right granted to founder's shares.
aHTcDA

In their Answer, the respondents averred that the provisions of Article VII
clearly and categorically state that only holders of Class "A" shares have the
exclusive right to vote and be elected as directors and officers of the
corporation. They denied that the exclusivity was intended only as a privilege
granted to founder's shares, as no such proviso is found in the Articles of
Incorporation. The respondents further claimed that the exclusivity of the
right granted to Class "A" holders cannot be defeated or impaired by any
subsequent legislative enactment, e.g. the New Corporation Code, as the
Articles of Incorporation is an intra-corporate contract between the
corporation and its members; between the corporation and its stockholders;
and among the stockholders. They submit that to allow Class "B"
shareholders to vote and be elected as directors would constitute a violation
of MCPI's franchise or charter as granted by the State.
At the pre-trial, the trial court ruled that a partial judgment could be rendered
on the first cause of action and required the parties to submit their respective
position papers or memoranda.
On November 26, 2001, the RTC rendered the Partial Judgment, the
dispositive portion of which reads:
WHEREFORE, viewed in the light of the foregoing, the
election held on February 9, 2001 is VALID as the holders
of CLASS "B" shares are not entitled to vote and be voted
for and this case based on the First Cause of Action is
DISMISSED.
SO ORDERED. 6
In finding for the respondents, the trial court ruled that corporations had the
power to classify their shares of stocks, such as "voting and non-voting"
shares, conformably with Section 6 7 of the Corporation Code of the
Philippines. It pointed out that Article VII of both the original and amended
Articles of Incorporation clearly provided that only Class "A" shareholders
could vote and be voted for to the exclusion of Class "B" shareholders, the
exception being in instances provided by law, such as those enumerated in
Section 6, paragraph 6 of the Corporation Code. The RTC found merit in the
respondents' theory that the Articles of Incorporation, which defines the rights
and limitations of all its shareholders, is a contract between MCPI and its
shareholders. It is thus the law between the parties and should be strictly
enforced as to them. It brushed aside the petitioners' claim that the Class "A"
shareholders were in estoppel, as the election of Class "B" shareholders to
the corporate board may be deemed as a mere act of benevolence on the

part of the officers. Finally, the court brushed aside the "founder's shares"
theory of the petitioners for lack of factual basis.

the Corporation Code could not retroactively apply to it without violating the
non-impairment clause 10 of the Constitution.

Hence, this petition submitting the sole legal issue of whether or not the
Court a quo, in rendering the Partial Judgment dated November 26, 2001,
has decided a question of substance in a way not in accord with law and
jurisprudence considering that:

We find merit in the petition.

1. Under the Corporation Code, the exclusive voting right

and right to be voted granted by the Articles of
Incorporation of the MCPI to Class A shareholders is null
and void, or already extinguished;
2. Hence, the declaration of directors made during the
February 9, 2001 Annual Stockholders' Meeting on the
basis of the purported exclusive voting rights is null and
void for having been done without the benefit of an
election and in violation of the rights of plaintiffs and Class
B shareholders; and
3. Perforce, another election should be conducted to elect
the directors of the MCPI, this time affording the holders of
Class B shares full voting right and the right to be voted. 8
The issue for our resolution is whether or not holders of Class "B" shares of
the MCPI may be deprived of the right to vote and be voted for as directors in
MCPI.
Before us, petitioners assert that Article VII of the Articles of Incorporation of
MCPI, which denied them voting rights, is null and void for being contrary to
Section 6 of the Corporation Code. They point out that Section 6 prohibits the
deprivation of voting rights except as to preferred and redeemable shares
only. Hence, under the present law on corporations, all shareholders,
regardless of classification, other than holders of preferred or redeemable
shares, are entitled to vote and to be elected as corporate directors or
officers. Since the Class "B" shareholders are not classified as holders of
either preferred or redeemable shares, then it necessarily follows that they
are entitled to vote and to be voted for as directors or officers.
CHEIcS

The respondents, in turn, maintain that the grant of exclusive voting rights to
Class "A" shares is clearly provided in the Articles of Incorporation and is in
accord with Section 5 9 of the Corporation Law (Act No. 1459), which was the
prevailing law when MCPI was incorporated in 1977. They likewise submit
that as the Articles of Incorporation of MCPI is in the nature of a contract
between the corporation and its shareholders and Section 6 of

When Article VII of the Articles of Incorporation of MCPI was amended in

1992, the phrase "except when otherwise provided by law" was inserted in
the provision governing the grant of voting powers to Class "A" shareholders.
This particular amendment is relevant for it speaks of a law providing for
exceptions to the exclusive grant of voting rights to Class "A" stockholders.
Which law was the amendment referring to? The determination of which law
to apply is necessary. There are two laws being cited and relied upon by the
parties in this case. In this instance, the law in force at the time of the 1992
amendment was the Corporation Code (B.P. Blg. 68), not the Corporation
Law (Act No. 1459), which had been repealed by then.
We find and so hold that the law referred to in the amendment to Article VII
refers to the Corporation Code and no other law. At the time of the
incorporation of MCPI in 1977, the right of a corporation to classify its shares
of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act
No. 1459, B.P. Blg. 68, retained the same grant of right of classification of
stock shares to corporations, but with a significant change. Under Section 6
of B.P. Blg. 68, the requirements and restrictions on voting rights were
explicitly provided for, such that "no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable" shares,
unless otherwise provided in this Code" and that "there shall always be a
class or series of shares which have complete voting rights." Section 6 of
the Corporation Code being deemed written into Article VII of the Articles of
Incorporation of MCPI, it necessarily follows that unless Class "B" shares of
MCPI stocks are clearly categorized to be "preferred" or "redeemable"
shares, the holders of said Class "B" shares may not be deprived of their
voting rights. Note that there is nothing in the Articles of Incorporation nor an
iota of evidence on record to show that Class "B" shares were categorized as
either "preferred" or "redeemable" shares. The only possible conclusion is
that Class "B" shares fall under neither category and thus, under the law, are
allowed to exercise voting rights.
One of the rights of a stockholder is the right to participate in the control and
management of the corporation that is exercised through his vote. The right
to vote is a right inherent in and incidental to the ownership of corporate
stock, and as such is a property right. The stockholder cannot be deprived of
the right to vote his stock nor may the right be essentially impaired, either by
the legislature or by the corporation, without his consent, through amending
the charter, or the by-laws. 11

Neither do we find merit in respondents' position that Section 6 of

the Corporation Code cannot apply to MCPI without running afoul of the nonimpairment clause of the Bill of Rights. Section 148 12 of theCorporation
Code expressly provides that it shall apply to corporations in existence at the
time of the effectivity of the Code. Hence, the non-impairment clause is
inapplicable in this instance. When Article VII of the Articles of Incorporation
of MCPI were amended in 1992, the board of directors and stockholders
must have been aware of Section 6 of the Corporation Code and intended
that Article VII be construed in harmony with the Code, which was then
already in force and effect. Since Section 6 of the Corporation
Code expressly prohibits the deprivation of voting rights, except as to
"preferred" and "redeemable" shares, then Article VII of the Articles of
Incorporation cannot be construed as granting exclusive voting rights to
Class "A" shareholders, to the prejudice of Class "B" shareholders, without
running afoul of the letter and spirit of the Corporation Code.
The respondents then take the tack that the phrase "except when otherwise
provided by law" found in the amended Articles is only a handwritten
insertion and could have been inserted by anybody and that no board
resolution was ever passed authorizing or approving said amendment.
EITcaD

Said contention is not for this Court to pass upon, involving as it does a
factual question, which is not proper in this petition. In an
appeal via certiorari, only questions of law may be reviewed. 13 Besides,
respondents did not adduce persuasive evidence, but only bare allegations,
to support their suspicion. The presumption that in the amendment process,
the ordinary course of business has been followed14 and that official duty has
been regularly performed 15 on the part of the SEC, applies in this case.
WHEREFORE, the petition is GRANTED. The Partial Judgment dated
November 26, 2001 of the Regional Trial Court of Paraaque City, Branch
258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No
pronouncement as to costs.
SO ORDERED.
Davide, Jr., C .J ., Ynares-Santiago and Carpio, JJ ., concur.
Azcuna, J ., is on leave.
(Castillo v. Balinghasay, G.R. No. 150976, [October 18, 2004], 483 PHIL
470-483)
|||

THIRD DIVISION
[G.R. No. 142936. April 17, 2002.]
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
DEVELOPMENT
CORPORATION, petitioners, vs. ANDRADA ELECTRIC
& ENGINEERING COMPANY, respondent.
Salvador Luy for petitioners.
Renecio Espiritu for private respondent.
SYNOPSIS
Respondent filed an action against petitioners for the unpaid
balance on electrical services it previously rendered to Pampanga Sugar
Mill (PASUMIL). Respondent alleged that petitioners became liable to
them when the former acquired the assets of, took over, and operated
PASUMIL.
The Court disagreed with respondent. The following precludes
the piercing of the corporate veil in the case at bar: Other than the fact
that petitioners acquired the assets of PASUMIL, there was no showing
that their control over it warrants the disregard of corporate personalities,
there was no evidence that their juridical personality was used to commit
fraud or to do a wrong, or that the separate corporate entity was
farcically used as a mere alter ego, business conduit or instrumentality of
another entity or person; respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL. Neither is there merger nor
consolidation with respect to PASUMIL and PNB.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; PETITION FOR
REVIEW; QUESTIONS OF FACT MAY NOT RE RAISED THEREIN;
EXCEPTION IS WHEN THERE IS MISAPPRECIATION OF EVIDENCE.
As a general rule, questions of fact may not be raised in a petition for review
under Rule 45 of the Rules of Court. To this rule, however, there are some
exceptions enumerated in Fuentes v. Court of Appeals. After a careful
scrutiny of the records and the pleadings submitted by the parties, we find
that the lower courts misappreciated the evidence presented. Overlooked by
the CA were certain relevant facts that would justify a conclusion different
from that reached in the assailed Decision.

2. COMMERCIAL
LAW;
PRIVATE
CORPORATIONS;
WHERE
CORPORATION
PURCHASED
THE
ASSETS
OF
ANOTHER
CORPORATION, THE FORMER WILL NOT BE LIABLE TO THE DEBTS OF
THE LATTER; EXCEPTIONS. As a rule, a corporation that purchases the
assets of another will not be liable for the debts of the selling corporation,
provided the former acted in good faith and paid adequate consideration for
such assets, except when any of the following circumstances is present: (1)
where the purchaser expressly or impliedly agrees to assume the debts, (2)
where the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely a continuation
of the selling corporation, and (4) where the transaction is fraudulently
entered into in order to escape liability for those debts.
SCHAT c

3. ID.; ID.; CORPORATION; ELUCIDATED. A corporation is an artificial

being created by operation of law. It possesses the right of succession and
such powers, attributes, and properties expressly authorized by law or
incident to its existence. It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to which it may
be related. This is basic.
4. ID.; ID.; DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION; WHEN PROPER. Equally well-settled is the principle that the
corporate mask may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a shield for fraud, illegality or
inequity committed against third persons. Hence, any application of the
doctrine of piercing the corporate veil should be done with caution. A court
should be mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result
from an erroneous application. This Court has pierced the corporate veil to
ward off a judgment credit, to avoid inclusion of corporate assets as part of
the estate of the decedent, to escape liability arising from a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to
shield unfair objectives or to cover up an otherwise blatant violation of the
prohibition against forum-shopping. Only in these and similar instances may
the veil be pierced and disregarded.
5. ID.; ID.; ID.; ELEMENTS; NOT PRESENT IN CASE AT BAR. The
question of whether a corporation is a mere alter ego is one of fact. Piercing
the veil of corporate fiction may be allowed only if the following elements
concur: (1) control not mere stock control, but complete domination not
only of finances, but of policy and business practice in respect to the

transaction attacked, must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; (2)
such control must have been used by the defendant to commit a fraud or a
wrong to perpetuate the violation of a statutory or other positive legal duty, or
a dishonest and an unjust act in contravention of plaintiff's legal right; and (3)
the said control and breach of duty must have proximately caused the injury
or unjust loss complained of. We believe that the absence of the foregoing
elements in the present case precludes the piercing of the corporate
veil. First, other than the fact that petitioners acquired the assets of
PASUMIL, there is no showing that their control over it warrants the
disregard of corporate personalities. Second, there is no evidence that their
juridical personality was used to commit a fraud or to do a wrong; or that the
separate corporate entity was farcically used as a mere alter ego, business
conduit or instrumentality of another entity or person. Third, respondent was
not defrauded or injured when petitioners acquired the assets of PASUMIL.
Being the party that asked for the piercing of the corporate veil, respondent
had the burden of presenting clear and convincing evidence to justify the
setting aside of the separate corporate personality rule. However, it utterly
failed to discharge this burden; it failed to establish by competent evidence
that petitioner's separate corporate veil had been used to conceal fraud,
illegality or inequity. The CA erred in affirming the trial court's lifting of the
corporate mask. The CA did not point to any fact evidencing bad faith on the
part of PNB and its transferee. The corporate fiction was not used to defeat
public convenience, justify a wrong, protect fraud or defend crime. None of
the foregoing exceptions was shown to exist in the present case. On the
contrary, the lifting of the corporate veil would result in manifest injustice.
This we cannot allow.
6. ID.; ID.; CONSOLIDATION OR MERGER OF CORPORATIONS;
REQUISITES; NOT PRESENT IN CASE AT BAR. A consolidation is the
union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby
one or more existing corporations are absorbed by another corporation that
survives and continues the combined business. The merger, however, does
not become effective upon the mere agreement of the constituent
corporations. Since a merger or consolidation involves fundamental changes
in the corporation, as well as in the rights of stockholders and creditors, there
must be an express provision of law authorizing them. For a valid merger or
consolidation, the approval by the Securities and Exchange Commission
(SEC) of the articles of merger or consolidation is required. These articles
must likewise be duly approved by a majority of the respective stockholders
of the constituent corporations. In the case at bar, we hold that there is no
merger or consolidation with respect to PASUMIL and PNB. The procedure
prescribed under Title IX of the Corporation Code was not followed.
AEIcSa

DECISION

PANGANIBAN, J :
p

Basic is the rule that a corporation has a legal personality distinct and
separate from the persons and entities owning it. The corporate veil may be
lifted only if it has been used to shield fraud, defend crime, justify a wrong,
defeat public convenience, insulate bad faith or perpetuate injustice. Thus,
the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which
had earlier been foreclosed and purchased at the resulting public auction by
the Development Bank of the Philippines (DBP), will not make PNB liable for
the PASUMIL's contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of
the Court of Appeals (CA) in CA-G.R. CV No. 57610. The decretal portion of
the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED."

The Facts
The factual antecedents of the case are summarized by the Court of Appeals
as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is
a partnership duly organized, existing, and operating under the
laws of the Philippines, with office and principal place of business
at Nos. 794-812 Del Monte [A]venue, Quezon City, while the
defendant [herein petitioner] Philippine National Bank (herein
referred to as PNB), is a semi-government corporation duly
organized, existing and operating under the laws of the
Philippines, with office and principal place of business at Escolta
Street, Sta. Cruz, Manila; whereas, the other defendant, the
National Sugar Development Corporation (NASUDECO in brief),
is also a semi-government corporation and the sugar arm of the
PNB, with office and principal place of business at the 2nd Floor,
Sampaguita Building, Cubao, Quezon City; and the defendant
Pampanga Sugar Mills (PASUMIL in short), is a corporation
organized, existing and operating under the 1975 laws of the
Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga; that the plaintiff is engaged
in the business of general construction for the repairs and/or
construction of different kinds of machineries and buildings; that
on August 26, 1975, the defendant PNB acquired the assets of
the defendant PASUMIL that were earlier foreclosed by the
Development Bank of the Philippines (DBP) under LOI No. 311;
that the defendant PNB organized the defendant NASUDECO in
September, 1975, to take ownership and possession of the

assets and ultimately to nationalize and consolidate its interest in

other PNB controlled sugar mills; that prior to October 29, 1971,
the defendant PASUMIL engaged the services of plaintiff for
electrical rewinding and repair, most of which were partially paid
by the defendant PASUMIL, leaving several unpaid accounts with
the plaintiff; that finally, on October 29, 1971, the plaintiff and the
defendant PASUMIL entered into a contract for the plaintiff to
perform the following, to wit

'(a) Construction of one (1) power house building;

'(b) Construction of three (3) reinforced concrete foundation for
three (3) units 350 KW diesel engine generating set[s];
'(c) Construction of three (3) reinforced concrete foundation for
the 5,000 KW and 1,250 KW turbo generator sets;
'(d) Complete overhauling and reconditioning tests sum for three
(3) 350 KW diesel engine generating set[s];
'(e) Installation of turbine and diesel generating sets including
transformer, switchboard, electrical wirings and pipe
provided those stated units are completely supplied with
their accessories;
'(f) Relocating of 2,400 V transmission line, demolition of all
existing concrete foundation and drainage canals,
excavation, and earth fillings all for the total amount of
P543,500.00 as evidenced by a contract, [a] xerox copy
of which is hereto attached as Annex 'A' and made an
integral part of this complaint;'
that aside from the work contract mentioned-above, the
defendant PASUMIL required the plaintiff to perform extra work,
and provide electrical equipment and spare parts, such as:

'(g) Supply of electrical equipment for machinery;

'(h) Supply of diesel engine parts and other related works
including fabrication of parts.'
that out of the total obligation of P777,263.80, the defendant
PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of June 27, 1973, amounting to P527,263.80, as
shown in the Certification of the chief accountant of the PNB, a
machine copy of which is appended as Annex 'C' of the
complaint; that out of said unpaid balance of P527,263.80, the
defendant PASUMIL made a partial payment to the plaintiff of
P14,000.00, in broken amounts, covering the period from
January 5, 1974 up to May 23, 1974, leaving an unpaid balance
of P513,263.80; that the defendant PASUMIL and the defendant
PNB, and now the defendant NASUDECO, failed and refused to
pay the plaintiff their just, valid and demandable obligation; that
the President of the NASUDECO is also the Vice-President of the
PNB, and this official holds office at the 10th Floor of the PNB,
Escolta, Manila, and plaintiff besought this official to pay the
outstanding obligation of the defendant PASUMIL, inasmuch as
the defendant PNB and NASUDECO now owned and possessed
the assets of the defendant PASUMIL, and these defendants all
benefited from the works, and the electrical, as well as the
engineering and repairs, performed by the plaintiff; that because
of the failure and refusal of the defendants to pay their just, valid,
and demandable obligations, plaintiff suffered actual damages in
the total amount of P513,263.80; and that in order to recover
these sums, the plaintiff was compelled to engage the
professional services of counsel, to whom the plaintiff agreed to
pay a sum equivalent to 25% of the amount of the obligation due
by way of attorney's fees. Accordingly, the plaintiff prayed that
judgment be rendered against the defendants PNB,
NASUDECO, and PASUMIL, jointly and severally to wit:
'(1) Sentencing the defendants to pay
the plaintiffs the sum of P513,263.80, with annual
interest of 14% from the time the obligation falls
due and demandable;

'(a) Supply of electrical devices;

'(b) Extra mechanical works;

'(2) Condemning the defendants to pay

attorney's fees amounting to 25% of the amount
claim;

'(c) Extra fabrication works;

'(d) Supply of materials and consumable items;
'(e) Electrical shop repair;
'(f) Supply of parts and related works for turbine generator;

'(3) Ordering the defendants to pay the

costs of the suit.'
"The defendants PNB and NASUDECO filed a joint motion to
dismiss the complaint chiefly on the ground that the complaint
failed to state sufficient allegations to establish a cause of action
against both defendants, inasmuch as there is lack or want of

privity of contract between the plaintiff and the two defendants,

the PNB and NASUDECO, said defendants citing Article 1311 of
the New Civil Code, and the case law ruling in Salonga v. Warner
Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v.
Court of Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order
of November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated the
grounds of its motion to dismiss, to wit:
'That the complaint does not state a sufficient cause of
action against the defendant NASUDECO because: (a)
NASUDECO is not . . . privy to the various electrical
construction jobs being sued upon by the plaintiff under
the present complaint; (b) the taking over by
NASUDECO of the assets of defendant PASUMIL was
solely for the purpose of reconditioning the sugar central
of defendant PASUMIL pursuant to martial law powers
of the President under the Constitution; (c) nothing in
the LOI No. 189-A (as well as in LOI No. 311)
authorized or commanded the PNB or its subsidiary
corporation, the NASUDECO, to assume the corporate
obligations of PASUMIL as that being involved in the
present case; and, (d) all that was mentioned by the
said letter of instruction insofar as the PASUMIL
liabilities [were] concerned [was] for the PNB, or its
subsidiary corporation the NASUDECO, to make a
study of, and submit [a] recommendation on the
problems concerning the same.'
"By way of counterclaim, the NASUDECO averred that by reason
of the filing by the plaintiff of the present suit, which it [labeled] as
unfounded or baseless, the defendant NASUDECO was
constrained to litigate and incur litigation expenses in the amount
of P50,000.00, which plaintiff should be sentenced to pay.
Accordingly, NASUDECO prayed that the complaint be
dismissed and on its counterclaim, that the plaintiff be
condemned to pay P50,000.00 in concept of attorney's fees as
well as exemplary damages.
"In its answer, the defendant PNB likewise reiterated the grounds
of its motion to dismiss, namely: (1) the complaint states no
cause of action against the defendant PNB; (2) that PNB is not a
party to the contract alleged in par. 6 of the complaint and that
the alleged services rendered by the plaintiff to the defendant
PASUMIL upon which plaintiff's suit is erected, was rendered
long before PNB took possession of the assets of the defendant
PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the

assets of the defendant PASUMIL under LOI 189-A was solely

for the purpose of reconditioning the sugar central so that
PASUMIL may resume its operations in time for the 1974-75
milling season, and that nothing in the said LOI No. 189-A, as
well as in LOI No. 311, authorized or directed PNB to assume the
corporate obligation/s of PASUMIL, let alone that for which the
present action is brought; (4) that PNB's management and
operation under LOI No. 311 did not refer to any asset of
PASUMIL which the PNB had to acquire and thereafter
[manage], but only to those which were foreclosed by the DBP
and were in turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the PNB and
the Development Bank of the Philippines (DBP) entered into a
'Redemption Agreement' whereby DBP sold, transferred and
conveyed in favor of the PNB, by way of redemption, all its (DBP)
rights and interest in and over the foreclosed real and/or personal
properties of PASUMIL, as shown in Annex 'C' which is made an
integral part of the answer; (6) that again, conformably with LOI
No. 311, PNB pursuant to a Deed of Assignment dated October
21, 1975, conveyed, transferred, and assigned for valuable
consideration, in favor of NASUDECO, a distinct and
independent corporation, all its (PNB) rights and interest in and
under the above 'Redemption Agreement.' This is shown in
Annex 'D' which is also made an integral part of the answer; [7]
that as a consequence of the said Deed of Assignment, PNB on
October 21, 1975 ceased to manage and operate the abovementioned assets of PASUMIL, which function was now actually
transferred to NASUDECO. In other words, so asserted PNB, the
complaint as to PNB, had become moot and academic because
of the execution of the said Deed of Assignment; [8] that
moreover, LOI No. 311 did not authorize or direct PNB to assume
the corporate obligations of PASUMIL, including the alleged
obligation upon which this present suit was brought; and [9] that,
at most, what was granted to PNB in this respect was the
authority to 'make a study of and submit recommendation on the
problems concerning the claims of PASUMIL creditors,' under
sub-par. 5LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily
constrained to litigate and to incur expenses in this case, hence it
is entitled to claim attorney's fees in the amount of at least
P50,000.00. Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be
sentenced to pay defendant PNB the sum of P50,000.00 as
attorney's fees, aside from exemplary damages in such amount
that the court may seem just and equitable in the premises.
"Summons by publication was made via the Philippines Daily
Express, a newspaper with editorial office at 371 Bonifacio Drive,
Port Area, Manila, against the defendant PASUMIL, which was

thereafter declared in default as shown in the August 7, 1981

Order issued by the Trial Court.

In their Memorandum, petitioners raise the following errors for the Court's
consideration:

"After due proceedings, the Trial Court rendered judgment, the

decretal portion of which reads:
'WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against the defendant Corporation,
Philippine National Bank (PNB) NATIONAL SUGAR
DEVELOPMENT CORPORATION (NASUDECO) and
PAMPANGA SUGAR MILLS (PASUMIL), ordering the
latter to pay jointly and severally the former the
following:
'1. The sum of P513,623.80 plus interest
thereon at the rate of 14% per
annum as claimed from September
25, 1980 until fully paid;
'2. The sum of P102,724.76 as attorney's
fees; and,

"I
The Court of Appeals gravely erred in law in holding the herein
petitioners liable for the unpaid corporate debts of PASUMIL, a
corporation whose corporate existence has not been legally
extinguished or terminated, simply because of petitioners['] takeover of the management and operation of PASUMIL pursuant to
the mandates of LOI No. 189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the
case at bench the ruling enunciated in Edward J. Nell Co. v.
Pacific Farms, 15 SCRA 415." 6

Succinctly put, the aforesaid errors boil down to the principal issue of
whether PNB is liable for the unpaid debts of PASUMIL to respondent.
This Court's Ruling

'3. Costs.

The Petition is meritorious.

'SO ORDERED.

Main Issue:

'Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S.
TENGCO

'Judge
'" 3

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets
of justice and equity for a corporation to take over and operate the business
of another corporation, while disavowing or repudiating any responsibility,
obligation or liability arising therefrom. 4
Hence, this Petition. 5
Issues

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review
under Rule 45 of the Rules of Court. 7 To this rule, however, there are some
exceptions enumerated in Fuentes v. Court of Appeals. 8 After a careful
scrutiny of the records and the pleadings submitted by the parties, we find
that the lower courts misappreciated the evidence presented. 9 Overlooked
by the CA were certain relevant facts that would justify a conclusion different
from that reached in the assailed Decision. 10
Petitioners posit that they should not be held liable for the corporate debts of
PASUMIL, because their takeover of the latter's foreclosed assets did not
make them assignees. On the other hand, respondent asserts that
petitioners and PASUMIL should be treated as one entity and, as such,
jointly and severally held liable for PASUMIL's unpaid obligation.
As a rule, a corporation that purchases the assets of another will not be liable
for the debts of the selling corporation, provided the former acted in good
faith and paid adequate consideration for such assets, except when any of
the following circumstances is present: (1) where the purchaser expressly or

impliedly agrees to assume the debts, (2) where the transaction amounts to a
consolidation or merger of the corporations, (3) where the purchasing
corporation is merely a continuation of the selling corporation, and (4) where
the transaction is fraudulently entered into in order to escape liability for
those debts. 11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses
the right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. 12 It has a personality separate
and distinct from the persons composing it, as well as from any other legal
entity to which it may be related. 13 This is basic.
Equally well-settled is the principle that the corporate mask may be removed
or the corporate veil pierced when the corporation is just an alter ego of a
person or of another corporation. 14 For reasons of public policy and in the
interest of justice, the corporate veil will justifiably be impaled 15 only when it
becomes a shield for fraud, illegality or inequity committed against third
persons. 16
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution. 17 A court should be mindful of the milieu where it is to be
applied. 18 It must be certain that the corporate fiction was misused to such
an extent that injustice, fraud, or crime was committed against another, in
disregard of its rights. 19 The wrongdoing must be clearly and convincingly
established; it cannot be presumed. 20 Otherwise, an injustice that was never
unintended may result from an erroneous application. 21
This Court has pierced the corporate veil to ward off a judgment credit, 22 to
avoid inclusion of corporate assets as part of the estate of the decedent, 23 to
escape liability arising from a debt, 24 or to perpetuate fraud and/or confuse
legitimate issues 25 either to promote or to shield unfair objectives 26 or to
cover up an otherwise blatant violation of the prohibition against forumshopping. 27 Only in these and similar instances may the veil be pierced and
disregarded. 28
The question of whether a corporation is a mere alter ego is one of
fact. 29 Piercing the veil of corporate fiction may be allowed only if the
following elements concur: (1) control not mere stock control, but
complete domination not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been such that the
corporate entity as to this transaction had at the time no separate mind, will
or existence of its own; (2) such control must have been used by the

defendant to commit a fraud or a wrong to perpetuate the violation of a

statutory or other positive legal duty, or a dishonest and an unjust act in
contravention of plaintiff's legal right; and (3) the said control and breach of
duty must have proximately caused the injury or unjust loss complained of. 30
We believe that the absence of the foregoing elements in the present case
precludes the piercing of the corporate veil. First, other than the fact that
petitioners acquired the assets of PASUMIL, there is no showing that their
control
over
it
warrants
the
disregard
of
corporate
personalities. 31 Second, there is no evidence that their juridical personality
was used to commit a fraud or to do a wrong; or that the separate corporate
entity was farcically used as a mere alter ego, business conduit or
instrumentality of another entity or person. 32 Third, respondent was not
defrauded or injured when petitioners acquired the assets of PASUMIL. 33
Being the party that asked for the piercing of the corporate veil, respondent
had the burden of presenting clear and convincing evidence to justify the
setting aside of the separate corporate personality rule. 34 However, it utterly
failed to discharge this burden; 35 it failed to establish by competent evidence
that petitioner's separate corporate veil had been used to conceal fraud,
illegality or inequity. 36
While we agree with respondent's claim that the assets of the National Sugar
Development Corporation (NASUDECO) can be easily traced to
PASUMIL, 37 we are not convinced that the transfer of the latter's assets to
petitioners was fraudulently entered into in order to escape liability for its debt
to respondent. 38
A careful review of the records reveals that DBP foreclosed the mortgage
executed by PASUMIL and acquired the assets as the highest bidder at the
public auction conducted. 39 The bank was justified in foreclosing the
mortgage, because the PASUMIL account had incurred arrearages of more
than 20 percent of the total outstanding obligation. 40 Thus, DBP had not only
a right, but also a duty under the law to foreclose the subject properties. 41
Pursuant to LOI No. 189-A 42 as amended by LOI No. 311, 43 PNB acquired
PASUMIL's assets that DBP had foreclosed and purchased in the normal
course. Petitioner bank was likewise tasked to manage temporarily the
operation of such assets either by itself or through a subsidiary corporation. 44
PNB, as the second mortgagee, redeemed from DBP the foreclosed
PASUMIL assets pursuant to Section 6 of Act No. 3135. 45 These assets
were later conveyed to PNB for a consideration, the terms of which were
embodied in the Redemption Agreement 46 PNB, as successor-in-interest,
stepped into the shoes of DBP as PASUMIL's creditor. 47 By way of a Deed of

Assignment, 48 PNB then transferred to NASUDECO all its rights under the
Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals, 49 we had the
occasion to resolve a similar issue. We ruled that PNB, DBP and their
transferees were not liable for Marinduque Mining's unpaid obligations to
Remington Industrial Sales Corporation (Remington) after the two banks had
foreclosed the assets of Marinduque Mining. We likewise held that
Remington failed to discharge its burden of proving bad faith on the part of
Marinduque Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial court's lifting of the
corporate mask. 50 The CA did not point to any fact evidencing bad faith on
the part of PNB and its transferee. 51 The corporate fiction was not used to
defeat public convenience, justify a wrong, protect fraud or defend
crime. 52 None of the foregoing exceptions was shown to exist in the present
case. 53 On the contrary, the lifting of the corporate veil would result in
manifest injustice. This we cannot allow.

In the case at bar, we hold that there is no merger or consolidation with

respect to PASUMIL and PNB. The procedure prescribed under Title IX of
the Corporation Code 59 was not followed.
In fact, PASUMIL's corporate existence, as correctly found by the CA, had
not been legally extinguished or terminated. 60 Further, prior to PNB's
acquisition of the foreclosed assets, PASUMIL had previously made partial
payments to respondent for the former's obligation in the amount of
P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to
respondent and, from January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of
PASUMIL to respondent. 61 LOI No. 11 explicitly provides that PNB shall
study and submit recommendations on the claims of PASUMIL's
creditors. 62 Clearly, the corporate separateness between PASUMIL and PNB
remains, despite respondent's insistence to the contrary. 63
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision
SET ASIDE. No pronouncement as to costs.
DHTCaI

No Merger or
SO ORDERED.
Consolidation
Vitug, Sandoval-Gutierrez and Carpio, JJ., concur.
Respondent further claims that petitioners should be held liable for the
unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which
expressly authorized PASUMIL and PNB to merge or consolidate. On the
other hand, petitioners contend that their takeover of the operations of
PASUMIL did not involve any corporate merger or consolidation, because the
latter had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new
entity called the consolidated corporation. A merger, on the other hand, is a
union whereby one or more existing corporations are absorbed by another
corporation that survives and continues the combined business. 54
The merger, however, does not become effective upon the mere agreement
of the constituent corporations. 55 Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law
authorizing them. 56 For a valid merger or consolidation, the approval by the
Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required. 57 These articles must likewise be duly approved by
a majority of the respective stockholders of the constituent corporations. 58

Melo, J., Abroad, is on official leave.

(Philippine National Bank v. Andrada Electric & Engineering Co., G.R. No.
142936, [April 17, 2002], 430 PHIL 882-903)
|||

SECOND DIVISION
[G.R. No. 163981. August 12, 2005.]
CONSTRUCTION & DEVELOPMENT CORPORATION
OF THE PHILIPPINES (now PHILIPPINE NATIONAL
CONSTRUCTION
CORPORATION), petitioner, vs.
RODOLFO M. CUENCA and MALAYAN INSURANCE
CO., INC., respondents.
Office of the Government Corporate Counsel for petitioner.
Alfredo E. Aasco for R.M. Cuenca.
Francisco J. Farolan for Malayan Insurance Co., Inc.
SYLLABUS
1.REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS; THIRD-PARTY
COMPLAINT; NATURE. At the outset, we note that the petitioner became
a party to this case only when respondent Cuenca, as defendant, filed a
third-party complaint against it on the allegation that it had assumed his
liability. In Firestone Tire and Rubber Company of the Philippines v.
Tempongko, we emphasized the nature of a third-party complaint,
particularly its independence from the main case: The third-party complaint
is, therefore, a procedural device whereby a "third party" who is neither a
party nor privy to the act or deed complained of by the plaintiff, may be
brought into the case with leave of court, by the defendant, who acts as thirdparty plaintiff to enforce against such third-party defendant a right for
contribution, indemnity, subrogation or any other relief, in respect of the
plaintiff's claim. The third-party complaint is actually independent of and
separate and distinct from the plaintiff's complaint. Were it not for this
provision of the Rules of Court, it would have to be filed independently and
separately from the original complaint by the defendant against the thirdparty. But the Rules permit defendant to bring in a third-party defendant or so
to speak, to litigate his separate cause of action in respect of plaintiff's claim
against a third party in the original and principal case with the object of
avoiding circuitry of action and unnecessary proliferation of lawsuits and of
disposing expeditiously in one litigation the entire subject matter arising from
one particular set of facts. . . . When leave to file the third-party complaint is
properly granted, the Court renders in effect two judgments in the same
case, one on the plaintiff's complaint and the other on the third-party
complaint. When he finds favorably on both complaints, as in this case, he
renders judgment on the principal complaint in favor of plaintiff against
defendant and renders another judgment on the third-party complaint in favor
of defendant as third-party plaintiff, ordering the third-party defendant to

reimburse the defendant whatever amount said defendant is ordered to pay

plaintiff in the case. Failure of any of said parties in such a case to appeal the
judgment as against him makes such judgment final and executory. . . .
2.ID.; ID.; ID.; ID.; ID.; THE DECISION IN THE MAIN CASE BECOMES
FINAL WHERE ONLY THE THIRD-PARTY DEFENDANT FILES AN
APPEAL. It follows then that the plaintiff in the main action may not be
regarded as a party to the third-party complaint; nor may the third-party
defendant be regarded as a party to the main action. As for the defendant, he
is party to both the main action and the third-party complaint but in different
capacities in the main action, he is the defendant; in the third-party
complaint, he is the plaintiff. In the present case, the petitioner PNCC which
was the third-party defendant appealed before this Court from the decision of
the CA. Case law is that if only the third-party defendant files an appeal, the
decision in the main case becomes final. Therefore, the CA's decision in the
main action, holding UITC liable to MICI and dismissing the case as against
the Cuencas, became final and executory when none of the said parties filed
an appeal with this Court.
3.ID.; ID.; ID.; ID.; WHERE A THIRD PARTY DEFENDANT IS BEING SUED
FOR CONTRIBUTION, INDEMNITY OR SUBROGATION, IT IS
IMPERATIVE THAT THE DEFENDANT BE FIRST ADJUDGED LIABLE TO
THE PLAINTIFF BEFORE THE THIRD-PARTY DEFENDANT MAY BE
HELD LIABLE TO THE PLAINTIFF. Neither can the petitioner be made
liable under the indemnity agreement on the ground that it had assumed the
personal liability of respondent Cuenca. To reiterate, the decision of the CA
dismissing the case against respondent Cuenca has already become final
and executory. The Court has, likewise, pointed out that
respondent Cuenca impleaded the petitioner as a remedy over, and not as
one directly liable to MICI. Since the petitioner's liability is grounded on that
of respondent Cuenca's, it is imperative that the latter be first adjudged liable
to MICI before the petitioner may be held liable. Indeed, the Court ruled in
Samala v. Victor, thus: . . . It is not indispensable in the premises that the
defendant be first adjudged liable to the plaintiff before the third-party
defendant may be held liable to the plaintiff, as precisely, the theory of
defendant is that it is the third party defendant, and not he, who is directly
liable to plaintiff. The situation contemplated by appellants would properly
pertain to situation (a) above wherein the third party defendant is being sued
for contribution, indemnity or subrogation, or simply stated, for a defendant's
"remedy over."
4.COMMERCIAL LAW; CORPORATIONS; VEIL OF CORPORATE
FICTION, WHEN MAY BE DISREGARDED; MERE OWNERSHIP BY A
SINGLE STOCKHOLDER OR BY ANOTHER CORPORATION OF ALL OR
NEARLY ALL OF THE CAPITAL STOCK OF A CORPORATION IS NOT OF
ITSELF SUFFICIENT GROUND FOR DISREGARDING THE SEPARATE

CORPORATE PERSONALITY. We do not agree with the CA ruling that

the petitioner is liable under the indemnity agreement. On this point, the CA
ratiocinated that the petitioner is liable, considering that it is the majority
stockholder of UITC and the materials from Goodyear were purchased by
UITC for and in its behalf. This is clearly erroneous. The petitioner cannot be
made directly liable to MICI under the indemnity agreement on the ground
that it is UITC's majority stockholder. It bears stressing that the petitioner was
not a party defendant in the main action. MICI did not assert any claim
against the petitioner, nor was the petitioner impleaded in the third-party
complaint on the ground of its direct liability to MICI. In the latter case, it
would be as if the third-party defendant was itself directly impleaded by the
plaintiff as a defendant. In the present case, petitioner PNCC was brought
into the action by respondent Cuenca simply for a "remedy over." No cause
of action was asserted by MICI against it. The petitioner's liability could only
be based on its alleged assumption of respondent Cuenca's liability under
the indemnity agreement. In any case, petitioner PNCC, as majority
stockholder, may not be held liable for UITC's obligation. A corporation, upon
coming into existence, is invested by law with a personality separate and
distinct from those persons composing it as well as from any other legal
entity to which it may be related. The veil of corporate fiction may only be
disregarded in cases where the corporate vehicle is being used to defeat
public convenience, justify a wrong, protect fraud, or defend a crime. Mere
ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality. To disregard the separate
juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established.
DECISION
CALLEJO, SR., J :
p

Before this Court is a petition for review on certiorari of the Decision 1 of the
Court of Appeals (CA) in CA-G.R. CV No. 44660 and its Resolution denying
a motion for reconsideration thereof.

To protect MICI's interests, UITC, Edilberto Cuenca, and Rodolfo Cuenca,

herein respondent, executed an Indemnity Agreement 4 in favor of MICI.
Edilberto was then the President, while Rodolfo was a member of the Board
of Directors of UITC. Edilberto signed the indemnity agreement in his official
and personal capacity, while Rodolfo signed in his personal capacity only. In
the said agreement, UITC, Edilberto and Rodolfo bound themselves jointly
and severally to indemnify MICI of any payment it would make under the
surety bond.
On February 18, 1983, Goodyear sent a letter 5 to MICI informing it of UITC's
default on its obligation. In the said letter, Goodyear requested MICI to pay
P600,000.00 under the surety bond. MICI sent several demand letters to
UITC, Edilberto and Rodolfo, requiring them to immediately settle
Goodyear's claim. 6 UITC, Edilberto and Rodolfo failed to settle the account
with Goodyear. Thus, on April 25, 1983, MICI paid Goodyear P600,000.00. 7
On May 3, 1983, MICI sent a demand letter to UITC, Edilberto and Rodolfo
for reimbursement of the payment it made to Goodyear, plus legal
interest. 8 UITC replied that Construction & Development Corporation of the
Philippines (CDCP), now Philippine National Construction Corporation
(PNCC), had initiated a complete review of UITC's financial plans to enable it
to pay its creditors, like MICI. 9 UITC was a subsidiary of petitioner
PNCC, 10 with the latter owning around 78% of the former's shares of
stock. 11 UITC requested MICI to delay the filing of any suit against it, to give
it time to work out an acceptable repayment plan. 12 MICI agreed and gave
UITC until May 20, 1983 to come up with an offer. 13
However, UITC, Edilberto and Rodolfo still failed to pay MICI. On July 1,
1983, MICI filed a Complaint 14 for sum of money against UITC, Edilberto and
Rodolfo, praying for indemnity of the amount it paid to Goodyear, plus
interest per annum compounded quarterly from April 25, 1983 until fully paid,
and 20% of the amount involved as attorney's fees and costs of the suit.
On July 23, 1983, UITC wrote MICI proposing the following:
a.Immediate payment of P150,000.00.

The Backdrop
Ultra International Trading Corporation (UITC) applied for a surety bond from
Malayan Insurance Co., Inc. (MICI), to guarantee its credits, indebtedness,
obligations and liabilities of any kind to Goodyear Tire and Rubber Company
of the Philippines (Goodyear). MICI approved the application and issued
MICO Bond No. 65734 2 for an amount not exceeding P600,000.00. The
surety bond was valid for 12 months, and was renewed several times, the
last time being on May 15, 1983. 3

b.Balance payable P50,000.00 per month until the obligation is

fully liquidated.
c.Interest and penalty charges are to be waived.

15

In the meantime, Rodolfo filed motion for leave to file a third-party complaint
which the trial court granted. 16 The third-party complaint 17 against CDCP
alleged that it had assumed Rodolfo's liability under the indemnity agreement
as indicated in a board resolution. In support of this allegation, he presented
in evidence a certification of Antonio Roque, Assistant Corporate Secretary

of CDCP, attesting to the correctness of an excerpt from the minutes of the

Board of Directors' meeting of January 10, 1978, which reads:
GUARANTEE MADE BY CDCP REPRESENTATIVES IN
OTHER
CORPORATIONS

In fairness to the CDCP Board Members and/or Officers who

represent the Corporation in other affiliated corporations and who
are made to sign jointly and severally guarantees for and in
support of said affiliated corporations, the Board under Res. No.
BD-59-77/78 made of record CDCP's assumption of all said
guarantees and the liabilities and responsibilities arising
therefrom. In the same vein, any guaranty fee that may be
payable to said representatives shall accrue to CDCP. 18

On August 26, 1983, UITC remitted to MICI P150,000.00 as partial payment

of its obligation. 19 Nonetheless, the parties failed to reach an amicable
settlement of their respective claims.
caADIC

On January 6, 1994, the Regional Trial Court (RTC) of Manila, Branch 51,
rendered a decision holding UITC and PNCC, jointly and solidarily liable to
MICI under the indemnity agreement. The trial court ruled that UITC was
bound by the indemnity agreement entered into by its two officers, even
though there was no board resolution specifically authorizing them to do so
because it had, in effect, ratified the acts of the said officers. Moreover, UITC
has acknowledged its obligation to MICI in the letters it sent to the latter, and
when it had remitted P150,000.00 as partial payment. It also held PNCC
solidarily liable with UITC on the basis of the board resolution attesting to the
fact that PNCC had assumed all liabilities arising from the guarantees made
by its officers in other affiliated corporations. 20 The trial court dismissed the
complaint as against the Cuencas. The dispositive portion of the RTC
decision reads:
WHEREFORE, in view of all the foregoing, judgment is hereby
rendered in favor of plaintiff Malayan Insurance Co., Inc. and
against defendant ULTRA and Third-Party defendant PNCC,
ordering the latter to pay jointly and solidarily the former the
following:
a)The sum of P600,000.00 but considering that
defendant ULTRA had already advanced the
amount of P150,000.00 to plaintiff, their liability
has then reduced to the sum of P450,000.00
with legal interest from the date of the filing of
the complaint until fully paid;

b)The sum equivalent to 20% of all the amounts due

and demandable as and for attorney's fees;
and
c)The costs of suit.
The complaint against defendants Edilberto Cuenca and
Rodolfo Cuenca and their counter-claims are hereby dismissed
for lack of merit.
SO ORDERED. 21

UITC and PNCC appealed the decision to the CA, but MICI did not. On
October 28, 2003, the CA affirmed in toto the appealed decision. 22 The
appellate court held that UITC had impliedly authorized Edilberto and
Rodolfo to procure the surety bond and the indemnity agreement; hence,
UITC was liable. Moreover, UITC was estopped from questioning Edilberto
and Rodolfo's authority to enter into the indemnity agreement in its behalf,
considering that it had already partially paid P150,000.00 to MICI. The
appellate court added that Edilberto and Rodolfo, having signed the
indemnity agreement also in their personal capacity, would ordinarily be
personally liable under the said agreement; but because MICI failed to
appeal the decision, it had effectively waived its right to hold them liable on
its claim. 23
The CA further affirmed the trial court's finding that PNCC was liable under
the indemnity agreement. The appellate court noted that UITC was a
subsidiary company of PNCC because the latter holds almost 78% of UITC's
stocks. As such, UITC would purchase materials from suppliers such as
Goodyear, in behalf of PNCC. Finally, the CA held that the award of
attorney's fees was justified, considering that payment of attorney's fees is
specifically stated in the indemnity agreement.
On June 3, 2004, the CA denied PNCC's motion for reconsideration for lack
of merit. 24 Hence, this petition for review, where the petitioner assigns the
following errors:
I.
THE COURT OF APPEALS GRAVELY ERRED IN FINDING
PETITIONER PNCC, JOINTLY AND SEVERALLY, LIABLE
WITH ULTRA FOR THE INDEMNIFICATION AMOUNT
REIMBURSABLE TO RESPONDENT MALAYAN AND IN
EXEMPTING RESPONDENT RODOLFO CUENCA FROM ANY
LIABILITY THEREFOR.
II.

THE COURT OF APPEALS GRAVELY ERRED IN FINDING

PETITIONER PNCC, JOINTLY AND SEVERALLY, LIABLE
WITH ULTRA FOR THE PAYMENT OF ATTORNEY'S FEES
AND COSTS OF SUIT. 25

The sole issue in this petition is whether or not the petitioner is jointly and
solidarily liable with UITC, a subsidiary corporation, to respondent MICI
under the indemnity agreement for reimbursement, attorney's fees and costs.
The petitioner maintains that it cannot be held liable under the indemnity
agreement primarily because it was not a party to it. Likewise, it cannot
answer for UITC's liability under the indemnity agreement merely because it
is the majority stockholder of UITC. It maintains that it has a personality
separate and distinct from that of UITC; hence, it cannot be held liable for the
latter's obligations. The mere fact that the materials purchased from
Goodyear were delivered to it does not warrant the piercing of the corporate
veil so as to treat the two corporations as one entity, absent sufficient and
clear showing that it was purposely used as a shield to defraud creditors. 26
Further, the petitioner asserts that respondent Cuenca's claim that it has
assumed his personal liability under the indemnity agreement is unfounded.
It assails the reliability of Exhibit 5, the certification attesting to the existence
of the board resolution, wherein the petitioner allegedly assumed the
personal guarantee of respondent Cuenca. The petitioner avers that the
certification is a mere excerpt of the alleged board resolution. It points out
that even the CA did not rely on this certification when it held that the
Cuencas should be liable, but were absolved of their liabilities because MICI
had waived the cause of action against them. 27 Assuming that it has
assumed the liability of respondent Cuenca, such liability is now extinguished
after MICI waived its claim against the said respondent. 28

Finally, the petitioner asserts that there is no basis for the payment of
attorney's fees and costs of suit. It was not a party to the indemnity
agreement and the case does not fall under the instances enumerated
under Article 2208 of the Civil Code when attorney's fees are proper. 29
For his part, respondent Cuenca reiterates that he is not liable because the
petitioner has already assumed his personal liability under the indemnity
agreement, as evidenced by a certification issued by the Assistant Corporate
Secretary attesting that CDCP Board Resolution No. BD-59-77/78 exists. He
points out that the petitioner has already admitted the due execution and
authenticity of the certification; hence, it cannot now impugn the existence of
the board resolution referred to therein.

Respondent Cuenca further argues that PNCC should be liable because it

was the one which benefited from the transaction, having received the
materials purchased from Goodyear; he did not derive any benefit from it. He
emphasizes that the petitioner's liability arose out of its voluntary assumption
of the liabilities of the guarantors under the indemnity agreement, and not
from the fact that it is the majority stockholder of UITC. Finally, he asserts
that the CA's decision holding UITC and the petitioner solidarily liable for the
payment of attorney's fees had factual and legal basis. 30
On the other hand, respondent MICI avers that the petition is fatally defective
for failure to implead as co-respondent, UITC, an indispensable party to the
case. It, likewise, asserts that the petition raises no new issues of law, and
that the CA and the trial court have amply ruled upon the issues raised in the
petition. Further, MICI contends that, since the petitioner has assumed the
liability of the UITC officers, it cannot now invoke the doctrine of separate
personality. 31
The petition is impressed with merit.

CTacSE

At the outset, we note that the petitioner became a party to this case only
when respondent Cuenca, as defendant, filed a third-party complaint against
it on the allegation that it had assumed his liability.Section 11, Rule 6 of the
Rules of Court defines a third-party complaint as follows:
SEC. 11.Third (fourth, etc.)-party complaint. A third (fourth,
etc.)-party complaint is a claim that a defending party may, with
leave of court, file against a person not a party to the action,
called the third (fourth, etc.)-party defendant, for contribution,
indemnity, subrogation or any other relief, in respect of his
opponent's claim.

In Firestone Tire and Rubber Company of the Philippines v.

Tempongko, 32 we emphasized the nature of a third-party complaint,
particularly its independence from the main case:
The third-party complaint is, therefore, a procedural device
whereby a "third party" who is neither a party nor privy to the act
or deed complained of by the plaintiff, may be brought into the
case with leave of court, by the defendant, who acts as thirdparty plaintiff to enforce against such third-party defendant a right
for contribution, indemnity, subrogation or any other relief, in
respect of the plaintiff's claim. The third-party complaint is
actually independent of and separate and distinct from the
plaintiff's complaint. Were it not for this provision of the Rules of
Court, it would have to be filed independently and separately
from the original complaint by the defendant against the thirdparty. But the Rules permit defendant to bring in a third-party
defendant or so to speak, to litigate his separate cause of action

in respect of plaintiff's claim against a third party in the original

and principal case with the object of avoiding circuitry of action
and unnecessary proliferation of lawsuits and of disposing
expeditiously in one litigation the entire subject matter arising
from one particular set of facts. . . . When leave to file the thirdparty complaint is properly granted, the Court renders in effect
two judgments in the same case, one on the plaintiff's complaint
and the other on the third-party complaint. When he finds
favorably on both complaints, as in this case, he renders
judgment on the principal complaint in favor of plaintiff against
defendant and renders another judgment on the third-party
complaint in favor of defendant as third-party plaintiff, ordering
the third-party defendant to reimburse the defendant whatever
amount said defendant is ordered to pay plaintiff in the
case. Failure of any of said parties in such a case to appeal the
judgment as against him makes such judgment final and
executory. . . . 33

It follows then that the plaintiff in the main action may not be regarded as a
party to the third-party complaint; 34 nor may the third-party defendant be
regarded as a party to the main action. As for the defendant, he is party to
both the main action and the third-party complaint but in different capacities
in the main action, he is the defendant; in the third-party complaint, he is
the plaintiff.
In the present case, the petitioner PNCC which was the third-party defendant
appealed before this Court from the decision of the CA. Case law is that if
only the third-party defendant files an appeal, the decision in the main case
becomes final. 35 Therefore, the CA's decision in the main action, holding
UITC liable to MICI and dismissing the case as against the Cuencas,
became final and executory when none of the said parties filed an appeal
with this Court.

its alleged assumption of respondent Cuenca's liability under the indemnity

agreement.
In any case, petitioner PNCC, as majority stockholder, may not be held liable
for UITC's obligation. A corporation, upon coming into existence, is invested
by law with a personality separate and distinct from those persons
composing it as well as from any other legal entity to which it may be
related. 38 The veil of corporate fiction may only be disregarded in cases
where the corporate vehicle is being used to defeat public convenience,
justify a wrong, protect fraud, or defend a crime. 39 Mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 40 To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly
established.41
Neither can the petitioner be made liable under the indemnity agreement on
the ground that it had assumed the personal liability of respondent Cuenca.
To reiterate, the decision of the CA dismissing the case against
respondent Cuenca has already become final and executory. The Court has,
likewise, pointed out that respondent Cuenca impleaded the petitioner as a
remedy over, and not as one directly liable to MICI. Since the petitioner's
liability is grounded on that of respondent Cuenca's, it is imperative that the
latter be first adjudged liable to MICI before the petitioner may be held liable.
Indeed, the Court ruled in Samala v. Victor, 42 thus:
. . . It is not indispensable in the premises that the defendant be
first adjudged liable to the plaintiff before the third-party
defendant may be held liable to the plaintiff, as precisely, the
theory of defendant is that it is the third party defendant, and not
he, who is directly liable to plaintiff. The situation contemplated
by appellants would properly pertain to situation (a) above
wherein the third party defendant is being sued for contribution,
indemnity or subrogation, or simply stated, for a defendant's
"remedy over". 43

We do not agree with the CA ruling that the petitioner is liable under the
indemnity agreement. On this point, the CA ratiocinated that the petitioner is
liable, considering that it is the majority stockholder of UITC and the
materials from Goodyear were purchased by UITC for and in its behalf.
This is clearly erroneous. The petitioner cannot be made directly liable to
MICI under the indemnity agreement on the ground that it is UITC's majority
stockholder. It bears stressing that the petitioner was not a party defendant in
the main action. MICI did not assert any claim against the petitioner, nor was
the petitioner impleaded in the third-party complaint on the ground of its
direct liability to MICI. In the latter case, it would be as if the third-party
defendant was itself directly impleaded by the plaintiff as a defendant. 36 In
the present case, petitioner PNCC was brought into the action by
respondent Cuencasimply for a "remedy over." 37 No cause of action was
asserted by MICI against it. The petitioner's liability could only be based on

WHEREFORE, premises considered, the petition is GRANTED. The decision

of the Court of Appeals is MODIFIED in that petitioner PNCC is absolved
from any liability under the indemnity agreement. The third-party complaint
against the petitioner is DISMISSED for lack of merit.
SO ORDERED.
Puno, Austria-Martinez, Tinga and Chico-Nazario, JJ., concur.
(Construction & Development Corp. of the Phil. v. Cuenca, G.R. No.
163981, [August 12, 2005], 504 PHIL 259-272)
|||

THIRD DIVISION
[G.R. No. 144880. November 17, 2004.]
PASCUAL AND SANTOS, INC., petitioner, vs. THE
MEMBERS
OF
THE TRAMO WAKAS NEIGHBORHOOD ASSOCIATION
, INC. represented by DOMINGA MAGNO, respondents.
DECISION
CARPIO MORALES, J :
p

At bar is a petition for review on certiorari assailing the May 17, 2000 and
August 8, 2000 Resolutions 1 of the Court of Appeals (CA) in CA-G.R. No.
57274 which respectively, dismissed the appeal instituted by petitioner
Pascual and Santos, Inc. (petitioner) and denied its motion for
reconsideration.
The Members of Tramo Wakas Neighborhood Association, represented by
Dominga Magno (respondents), lodged before the Presidential Action Center
a petition dated January 12, 1994 praying that ownership over three (3)
parcels of land situated in Barangay San Dionisio, Paraaque, Metro Manila,
identified as Lot Nos. 4087, 4088 and 5003, Psu-118886, Cad. 229 with an
aggregate area of 35,195 square meters be awarded to them. In their
petition, respondents alleged that petitioner claims ownership of the subject
lots which they have openly, peacefully and continuously occupied since
1957.
The petition was referred to the Land Management Bureau (LMB) where it
was docketed as LMB Case No. 2-96, for investigation and hearing.
By Decision 2 of February 21, 1996, Director Abelardo G. Palad, Jr. of the
LMB found for respondents. The dispositive portion of the decision reads,
quoted verbatim:
WHEREFORE, it is ordered that the claim of Pascual and
Santos, Inc., over Lot 4087, Lot 4088 and Lot 5003, situated at
Brgy. San Dionisio, Paraaque, Metro Manila be, as hereby it is,
dismissed.
The
individual
members
of TRAMO WAKAS NEIGHBORHOOD ASSOCIATION,
now
represented by Dominga Magno, if qualified may file appropriate
public land applications over the land they actually possessed
and occupied. An individual survey shall be conducted on the
land at their own expense and after approval of the said survey
the same shall be given due course.
DTEAHI

SO ORDERED. 3

Its Motion for Reconsideration having been denied by Order of June 26,
1996, petitioner lodged an appeal before the Office of the Department of
Environment and Natural Resources (DENR) Secretary, docketed as DENR
Case No. 7816.
By Decision 4 of November 25, 1997, then DENR Secretary Victor O. Ramos
dismissed the appeal for lack of merit and affirmed in toto the decision of the
Director of the LMB. Petitioner's Motion for Reconsideration of the decision
having been denied by Order 5 of May 18, 1998, it filed an appeal before the
Office of the President (OP), docketed as O.P. Case No. 98-F-8459, which
was likewise dismissed for lack of merit by Decision 6 of January 20, 2000.
The November 25, 1997 DENR decision was affirmed in toto.
Petitioner received a copy of the OP's dismissal of its appeal on February 1,
2000, 7 following which or on February 16, 2000, it filed a "Petition for
Time" 8 before the CA for an additional period of fifteen days or until March 2,
2000 within which to file its petition for review.
By Resolution 9 of February 21, 2000, the CA granted petitioner's Petition for
Time, giving it a non-extendible period of fifteen days from February 16, 2000
or until March 2, 2000 within which to file the petition.
Petitioner subsequently filed its Petition for Review 10 dated March 2, 2000
with the CA, praying that judgment be rendered (1) reversing and setting
aside the January 20, 2000 OP Decision and the November 25, 1997 DENR
Decision and May 18, 1998 Order, and (2) declaring the subject lots as no
longer forming part of the public domain and have been validly acquired by
petitioner; or in the alternative, (1) allowing it to present additional evidence
in support of its claim to the subject lots, (2) reversing and setting aside the
aforementioned Decisions and Order of the OP and the DENR, and (3)
declaring the subject lots as no longer forming part of the public domain and
have been validly acquired by petitioner. 11
By Resolution of May 17, 2000, the CA dismissed the appeal due to infirm
Verification and Certification of non-forum shopping and belated filing.
HAC aSc

For one, the Verification and Certification of non-forum shopping

was signed merely by Estela Lombos and Anita Pascual who
allege that they are the duly authorized representatives of
petitioner corporation, without showing any proof whatsoever of
such authority.
For another, and importantly, the petition for review was filed a
day after the period petitioner corporation expressly sought. As
indicated in its "Petition for Time," petitioner corporation asked for

an additional fifteen (15) days, or until March 2, 2000, within

which to file its petition, which was granted by the Court per
Resolution dated February 21, 2000. However, despite the
foregoing, petitioner corporation filed the same only on MARCH
3, 2000 as indicated by the date stamped on the envelope which
contains the petition for review. 12 (Citations omitted; emphasis
supplied)

On June 14, 2000, petitioner filed a Motion for Reconsideration 13 of the CA

May 17, 2000 Resolution, arguing that there was no showing that the
persons acting on its behalf were not authorized to do so and that its petition
was filed within the additional 15-day period granted by the CA. Attached to
the Motion was a Secretary's Certificate 14 dated June 14, 2000 showing that
petitioner's Board of Directors approved a Resolution on February 11, 2000
appointing Estela Lombos and Anita Pascual, incumbent directors of the
corporation, as its duly authorized representatives who may sign all papers,
execute all documents, and do such other acts as may be necessary to
prosecute the petition for review that it would file with the CA assailing the
decision rendered in OP Case No. 98-G-8459. 15
By Resolution of August 23, 2000, the CA denied petitioner's Motion for
Reconsideration for lack of merit.
. . . It must be stressed that any person who claims authority to
sign, in behalf of another, the Certificate of Non-Forum Shopping,
as required by the rules, must show sufficient proof thereof. Bare
allegations are not proof, and the representation of one who acts
in behalf of another cannot, by itself, serve as proof of his
authority to act as agent or of the extent of his authority as agent.
Thus, absent such clear proof, the Court cannot accept at face
value, such authority to sign in behalf of the corporation.
xxx xxx xxx
Another perusal of the registry return receipts attached to the
petition for review (Nos. 182, 183 and 184) shows that copies of
the Manifestation and Petition for Review were served to private
respondent's (sic) counsel, the Office of the President, and the
Department of Environment and Natural Resources, on March 2,
2000. However, it does not indicate therein when the petition for
review was filed with the Court. The registry return receipts (No.
185, 186, 187 and 188) being referred to by petitioner shows (sic)
the date March 2, 2000 only on that numbered 188, and does
(sic) not show the dates on those numbered 185187. In fact,
said receipts do not even indicate which pertain to the copy filed
with the Court.

3, 2000, without any proof whatsoever of such error. The date

stamped on the envelope which contained the Manifestation and
Petition for Review clearly shows that the same was filed on
March 3, 2000, and petitioner having failed to rebut the
presumption of regularity in the performance of official functions,
the same must prevail. 16 (Citations omitted; emphasis in the
original; italics supplied)

Petitioner thus filed on September 27, 2000 before this Court a "Petition For
Time" to file its petition for review.
On October 30, 2000, petitioner
on Certiorari raising the following issues:

filed

Petition

for

Review

I
WHETHER OR NOT THE PERSONS WHO EXECUTED THE
VERIFICATION AND CERTIFICATION OF NON-FORUM
SHOPPING ATTACHED TO PSI'S MANIFESTATION/PETITION
FOR REVIEW FILED WITH THE COURT OF APPEALS WERE
AUTHORIZED TO DO SO.
II
WHETHER OR NOT PSI'S MANIFESTATION/PETITION FOR
REVIEW WAS FILED WITHIN THE REGLEMENTARY
PERIOD. 17

By Resolution 18 of December 6, 2000, this Court denied the Petition for

Review in view of petitioner's failure to submit a valid affidavit of service
pursuant to Section 13 of Rule 13 and Sections 3 and 5 of Rule 45 in relation
to Section 5 (d) of Rule 56 of the Rules of Court and attach to the petition a
duplicate original or certified true copy of the assailed CA resolutions
pursuant to Sections 4 (d) and 5 of Rule 45 in relation to Section 5 (d) of Rule
56 of the Rules of Court.
EH SCcT

Petitioner filed a Motion for Reconsideration, 19 averring that it had already

attached certified true copies of the assailed resolutions of the CA in its
"Petition for Time" filed before this Court on September 27, 2000, and while it
was the affidavit before the CA which was inadvertently attached to its
petition before this Court, the messengerial staff of petitioner's counsel did in
fact serve copies of is the petition on counsel for respondents, the DENR, the
OP and the court a quo as evidenced by registry receipts and return
cards 20 which it attached to its Motion for Reconsideration.

IDaCcS

Moreover, the Court cannot sustain petitioner's supposition that a

post office employee might have stamped the wrong date, March

By Resolution 21 of March 7, 2001, this Court, finding petitioner's explanation

satisfactory, granted the Motion for Reconsideration and reinstated the
petition, now the subject of this Decision.

The petition is impressed with merit.

Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of the Rules of
Court mandates that a petition for review shall contain a sworn certification
against forum shopping in which the petitioner shall attest that he has not
commenced any other action involving the same issues in this Court, the
Court of Appeals or different divisions thereof, or any other tribunal or
agency; if there is such other action or proceeding, he must state the status
of the same; and if he should thereafter learn that a similar action or
proceeding has been filed or is pending before this Court, the Court of
Appeals, or different divisions thereof, or any other tribunal or agency, he
undertakes to promptly inform the aforesaid courts and other tribunal or
agency thereof within five days therefrom.

For failure to comply with this mandate, Section 7 of Rule 43 provides:

SEC. 7. Effect of failure to comply with requirements. The
failure of the petitioner to comply with any of the foregoing
requirements regarding the payment of the docket and other
lawful fees, the deposit for costs, proof of service of the petition,
and the contents of and the documents which should accompany
the petition shall be sufficient ground for the dismissal thereof.

The requirement that the petitioner should sign the certificate of non-forum
shopping applies even to corporations, considering that the mandatory
directives of the Rules of Court make no distinction between natural and
juridical persons. 22
In the case at bar, the CA dismissed the petition before it on the ground that
Lombos and Pascual, the signatories to the verification and certification on
non-forum shopping, failed to show proof that they were authorized by
petitioner's board of directors to file such a petition.
Except for the powers which are expressly conferred on it by the Corporation
Code and those that are implied by or are incidental to its existence, a
corporation has no powers. It exercises its powers through its board of
directors and/or its duly authorized officers and agents. 23 Thus, its power to
sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers. 24Physical acts, like the signing of documents,
can be performed only by natural persons duly authorized for the purpose by
corporate by-laws or by a specific act of the board of directors. 25
It is undisputed that when the petition for certiorari was filed with the CA,
there was no proof attached thereto that Lombos and Pascual were
authorized to sign the verification and non-forum shopping certification.
Subsequent to the CA's dismissal of the petition, however, petitioner filed a

motion for reconsideration to which it attached a certificate issued by its

board secretary stating that on February 11, 2000 or prior to the filing of the
petition, Lombos and Pascual had been authorized by petitioner's board of
directors to file the petition before the CA.
This Court has ruled that the subsequent submission of proof of authority to
act on behalf of a petitioner corporation justifies the relaxation of the Rules
for the purpose of allowing its petition to be given due course. 26
Thus, in Shipside Incorporated v. Court of Appeals, 27 this Court held:
. . . Moreover, in Loyola, Roadway and Uy, the Court
excused non-compliance with the requirement as to the
certificate of non-forum shopping. With more reason should we
allow the instant petition since petitioner herein did submit a
certification on non-forum shopping, failing only to show proof
that the signatory was authorized to do so. That petitioner
subsequently submitted a secretary's certificate attesting that
Balbin was authorized to file an action on behalf of petitioner
likewise mitigates this oversight.
It must also be kept in mind that while the requirement of the
certificate of non-forum shopping is mandatory, nonetheless the
requirements must not be interpreted too literally and thus defeat
the objective of preventing the undesirable practice of forum
shopping. 28

As for the timeliness of the filing of its petition for review before the CA,
petitioner maintains in the affirmative.
caAIC E

Sections 3 and 12 of Rule 13 of the Rules of Court provide:

SEC. 3. Manner of filing. The filing of pleadings, appearances,
motions, notices, orders, judgments and all other papers shall be
made by presenting the original copies thereof, plainly indicated
as such, personally to the clerk of court or by sending them by
registered mail. In the first case, the clerk of court shall endorse
on the pleading the date and hour of filing. In the second case,
the date of the mailing of motions, pleadings, or any other papers
or payments or deposits, as shown by the post office stamp on
the envelope or the registry receipt, shall be considered as the
date of their filing, payment, or deposit in court. The envelope
shall be attached to the record of the case.
SEC. 12. Proof of filing. The filing of a pleading or paper shall
be proved by its existence in the record of the case. If it is not in
the record, but is claimed to have been filed personally, the filing
shall be proved by the written or stamped acknowledgment of its
filing by the clerk of court on a copy of the same; if filed by

registered mail, by the registry receipt and by the affidavit of the

person who did the mailing, containing a full statement of the
date and place of depositing the mail in the post office in a sealed
envelope addressed to the court, with postage fully prepaid, and
with instructions to the postmaster to return the mail to the
sender after ten (10) days if not delivered.

Registry Receipt Nos. 185-188 covering the envelopes bearing the copies of
the petition which were sent to the CA indicate that such copies were filed by
registered mail at the Domestic Airport Post Office (DAPO) on March 2,
2000. 29
The Affidavit of Service 30 filed by the person who did the mailing of the
petition in behalf of petitioner states that such petition was filed by registered
mail by depositing seven copies thereof in four separate sealed envelopes
and mailing the same to the Clerk of Court of the CA through the DAPO on
March 2 2000. The affidavit likewise states that on even date, the petition
was served on counsel for respondents, the DENR and the OP by depositing
copies of the same in sealed envelopes and mailing them to said parties'
respective addresses through the DAPO.
And in the Certification 31 dated October 26, 2000 issued by Postmaster
Cesar A. Felicitas of the DAPO, he states that the registered mail matter
covered by Registry Receipt Nos. 185188 addressed to the Clerk of Court
of the CA was posted at their office for mailing on March 2 2000, but that it
was "dispatched to the CMEC on March 3, 2000 for proper disposition." This
could very well explain why the latter date was stamped on the envelope
received by the CA containing the petition.
At all events, strict adherence to rules of procedure must give way to
considerations of equity and substantial justice where, as in this case, there
is evidence showing that the appeal was filed on time. 32
WHEREFORE, the petition is GRANTED. The Resolutions dated May 17,
2000 and August 23, 2000 of the Court of Appeals are SET ASIDE. The
case, CA-G.R. SP No. 57274, is REMANDED to the appellate court which is
hereby directed to give due course to the appeal of petitioner.
No costs.
SO ORDERED.
Panganiban, Sandoval-Gutierrez and Garcia, JJ ., concur.
Corona, J ., is on leave.

(Pascual and Santos Inc. v. Members of Tramo Wakas Neighborhood Assn.

Inc., G.R. No. 144880, [November 17, 2004], 485 PHIL 113-124)
|||

EN BANC
[G.R. No. 155027. February 28, 2006.]
THE VETERANS FEDERATION OF THE PHILIPPINES
represented by Esmeraldo R. Acorda, petitioner, vs.
Hon. ANGELO T. REYES in his capacity as Secretary
of National Defense; and Hon. EDGARDO E. BATENGA
in his capacity as Undersecretary for Civil Relations
and Administration of the Department of National
Defense, respondents.

Dear Col. De Ocampo:

Please be informed that during the preparation of my briefing
before the Cabinet and the President last March 9, 2002, we
came across some legal bases which tended to show that there
is
an
organizational
and
management
relationship
between Veterans Federation of the Philippines and the
Philippine Veterans Bank which for many years have been
inadvertently overlooked.
CDHcaS

I refer to Republic Act 2640 creating the body corporate known as the VFP
and Republic Act 3518 creating the Phil. Vets [sic] Bank.

DECISION

1. RA 2640 dated 18 June 60 Section 1 . . . "hereby created a

body corporate, under the control and supervision of the
Secretary of National Defense."

This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997
Rules of Civil Procedure, with a prayer to declare as void Department
Circular No. 04 of the Department of National Defense (DND), dated 10 June
2002.

2. RA 2640 Section 12 . . . "On or before the last day of the

month following the end of each fiscal year,
the Federation shall make and transmit to the President
of the Philippines or to the Secretary of National
Defense, a report of its proceedings for the past year,
including a full, complete and itemized report of receipts
and expenditures of whatever kind."

CHICO-NAZARIO, J :
p

Petitioner in this case is the Veterans Federation of the Philippines (VFP), a

corporate body organized under Republic Act No. 2640, dated 18 June 1960,
as amended, and duly registered with the Securities and Exchange
Commission. Respondent Angelo T. Reyes was the Secretary of National
Defense (DND Secretary) who issued the assailed Department Circular No.
04, dated 10 June 2002. Respondent Edgardo E. Batenga was the DND
Undersecretary for Civil Relations and Administration who was tasked by the
respondent DND Secretary to conduct an extensive management audit of the
records of petitioner.
The factual and procedural antecedents of this case are as follows:
Petitioner VFP was created under Rep. Act No. 2640, 1 a statute approved on
18 June 1960.
On 15 April 2002, petitioner's incumbent president received a letter dated 13
April 2002 which reads:
Col. Emmanuel V. De Ocampo (Ret.)
President
Veterans Federation of the Philippines
Makati, Metro Manila

3. Republic Act 3518 dated 18 June 1963 (An Act Creating the
Philippine Veterans Bank, and for Other Purposes)
provides in Section 6 that . . . "the affairs and business
of the Philippine VeteransBank shall be directed and its
property managed, controlled and preserved, unless
otherwise provided in this Act, by a Board of Directors
consisting of eleven (11) members to be composed of
three ex
officio members
to
wit:
the
Philippine Veterans Administrator, the President of the
Veteran's Federation of the Philippines and the
Secretary of National Defense . . . .
It is therefore in the context of clarification and rectification of
what should have been done by the DND (Department of
National Defense) for and about the VFP and PVB that I am
requesting appropriate information and report about these two
corporate bodies.
Therefore it may become necessary that a conference with your
staffs in these two bodies be set.
Thank you and anticipating your action on this request.
Very truly yours,

(SGD) ANGELO T.
REYES
[DND] Secretary

On 10 June 2002, respondent DND Secretary issued the assailed DND

Department Circular No. 04 entitled, "Further Implementing the Provisions of
Sections 1 2 and 2 3 of Republic Act No. 2640," the full text of which appears
as follows:
Department of National Defense
Department Circular No. 04
Subject: Further Implementing the Provisions of Sections 1 &
2 of Republic Act No. 2640
Authority: Republic Act No. 2640
Executive Order No. 292 dated July 25, 1987
Section 1
These rules shall govern and apply to the management and
operations of the Veterans Federation of the Philippines (VFP)
within the context provided by EO 292 s-1987.
Section 2 DEFINITION OF TERMS for the purpose of these
rules, the terms, phrases or words used herein shall, unless the
context indicates otherwise, mean or be understood as follows:
Supervision and Control it shall include authority to act
directly whenever a specific function is entrusted by law or
regulation to a subordinate; direct the performance of a duty;
restrain the commission of acts; approve, reverse or modify acts
and decisions of subordinate officials or units; determine priorities
in the execution of plans and programs; and prescribe standards,
guidelines, plans and programs.
cSHATC

Power of Control power to alter, modify, nullify or set aside

what a subordinate officer had done in the performance of his
duties and to substitute the judgment of the former to that of the
latter.
Supervision means overseeing or the power of an officer to
see to it that their subordinate officers perform their duties; it
does not allow the superior to annul the acts of the subordinate.
Administrative Process embraces matter concerning the
procedure in the disposition of both routine and contested

matters, and the matter in which determinations are made,

enforced or reviewed.
Government Agency as defined under PD 1445, a
government agency or agency of government or "agency" refers
to any department, bureau or office of the national government,
or any of its branches or instrumentalities, of any political
subdivision, as well as any government owned or controlled
corporation, including its subsidiaries, or other self-governing
board or commission of the government.
Government Owned and Controlled Corporation (GOCC)
refer to any agency organized as a stock or non-stock
corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the
government directly or through its instrumentalities wholly or,
where applicable as in the case of stock corporations, to the
extent of at least 50% of its capital stock.
Fund sum of money or other resources set aside for the
purpose of carrying out specific activities or attaining certain
objectives in accordance with special regulations, restrictions or
limitations and constitutes an independent, fiscal and accounting
entity.
Government Fund includes public monies of every sort and
other resources pertaining to any agency of the government.
Veteran any person who rendered military service in the land,
sea or air forces of the Philippines during the revolution against
Spain, the Philippine American War, World War II, including
Filipino citizens who served in Allied Forces in the Philippine
territory and foreign nationals who served in Philippine forces; the
Korean campaign, the Vietnam campaign, the Anti-dissidence
campaign, or other wars or military campaigns; or who rendered
military service in the Armed Forces of the Philippines and has
been honorably discharged or separated after at least six (6)
years total cumulative active service or sooner separated due to
the death or disability arising from a wound or injury received or
sickness or disease incurred in line of duty while in the active
service.
Section 3 Relationship Between the DND and the VFP
3.1 Sec 1 of RA 3140 provides ". . . the following persons (heads
of various veterans associations and organizations in the
Philippines) and their associates and successors are hereby
created a body corporate, under the control and supervision of
the Secretary of National Defense, under the name, style and title
of "Veterans Federation of the Philippines . . ."

The Secretary of National Defense shall be charged with the duty

of supervising the veterans and allied program under the
jurisdiction of the Department. It shall also have the responsibility
of overseeing and ensuring the judicious and effective
implementation of veterans assistance, benefits, and utilization of
VFP assets.
3.2 To effectively supervise and control the corporate affairs of
the Federation and to safeguard the interests and welfare of
the veterans who are also wards of the State entrusted under the
protection of the DND, the Secretary may personally or through a
designated representative, require the submission of reports,
documents and other papers regarding any or all of
theFederation's business transactions particularly those relating
to the VFP functions under Section 2 of RA 2640.
ISTHED

The Secretary or his representative may attend conferences of

the supreme council of the VFP and such other activities he may
deem relevant.
3.3 The Secretary shall from time to time issue guidelines,
directives and other orders governing vital government activities
including, but not limited to, the conduct of elections; the
acquisition, management and dispositions of properties, the
accounting of funds, financial interests, stocks and bonds,
corporate investments, etc. and such other transactions which
may affect the interests of the veterans.
3.4 Financial transactions of the Federation shall follow the
provisions of the government auditing code (PD 1445) i.e.
government funds shall be spent or used for public purposes;
trust funds shall be available and may be spent only for the
specific purpose for which the trust was created or the funds
received; fiscal responsibility shall, to the greatest extent, be
shared by all those exercising authority over the financial affairs,
transactions, and operations of the federation; disbursements or
dispositions of government funds or property shall invariably bear
the approval of the proper officials.

All such records and minutes shall be open to directors, trustees,

stockholders, and other members for inspection and copies of
which may be requested.
As a body corporate, it shall submit the following: annual report;
proceedings of council meetings; report of operations together
with financial statement of its assets and liabilities and fund
balance per year; statement of revenues and expenses per year;
statement of cash flows per year as certified by the accountant;
and other documents/reports as may be necessary or required by
the SND.
Section 5 Submission of Annual and Periodic Report
As mandated under appropriate laws, the following reports shall
be submitted to the SND, to wit:
a. Annual Report to be submitted not later than every January 31
of the following year. Said report shall consist of the
following:
1. Financial Report of the Federation, signed by the
Treasurer General and Auditor General;
2. Roster of Members of the Supreme Council;
3. Roster of Members of the Executive Board and
National Officers; and
4. Current listing of officers and management of VFP.
b. Report on the proceedings of each Supreme Council Meeting
to be submitted not later than one month after the
meeting;
c. Report of the VFP President as may be required by SND or as
may be found necessary by the President of
the Federation;

Section 4 Records of the FEDERATION

As a corporate body and in accordance with appropriate laws, it
shall keep and carefully preserve records of all business
transactions, minutes of meetings of stockholders/members of
the board of directors reflecting all details about such activity.

d. Resolutions passed by the Executive Board and the Supreme

Council for confirmation to be submitted not later than
one month after the approval of the resolution;
e. After Operation/Activity Reports to be submitted not later than
one month after such operation or activity;
Section 6 Penal Sanctions

As an attached agency to a regular department of the

government, the VFP and all its instrumentalities, officials and
personnel shall be subject to the penal provisions of such laws,
rules and regulations applicable to the attached agencies of the
government.
aEDCSI

In a letter dated 6 August 2002 addressed to the President of petitioner,

respondent DND Secretary reiterated his instructions in his earlier letter of 13
April 2002.
Thereafter, petitioner's President received a letter dated 23 August 2002
from respondent Undersecretary, informing him that Department Order No.
129 dated 23 August 2002 directed "the conduct of a Management Audit of
the Veterans Federation of the Philippines." 4 The letter went on to state that
respondent DND Secretary "believes that the mandate given by said law can
be meaningfully exercised if this department can better appreciate the
functions, responsibilities and situation on the ground and this can be done
by undertaking a thorough study of the organization." 5
Respondent Undersecretary also requested both for a briefing and for
documents on personnel, ongoing projects and petitioner's financial
condition. The letter ended by stating that, after the briefing, the support staff
of the Audit Committee would begin their work to meet the one-month target
within which to submit a report.
A letter dated 28 August 2003 informed petitioner's President that the
Management Audit Group headed by the Undersecretary would be paying
petitioner a visit on 30 August 2002 for an update on VFP's different affiliates
and the financial statement of the Federation.
Subsequently, the Secretary General of the VFP sent an undated letter to
respondent DND Secretary, with notice to respondent Undersecretary for
Civil Relations and Administration, complaining about the alleged broadness
of the scope of the management audit and requesting the suspension thereof
until such time that specific areas of the audit shall have been agreed upon.
The request was, however, denied by the Undersecretary in a letter dated 4
September 2002 on the ground that a specific timeframe had been set for the
activity.
Petitioner thus filed this Petition for Certiorari with Prohibition under Rule 65
of the 1997 Rules of Civil Procedure, praying for the following reliefs:
1. For this Court to issue a temporary restraining order and a writ
of preliminary prohibitory and mandatory injunction to
enjoin respondent Secretary and all those acting under
his discretion and authority from: (a) implementing DND

Department Circular No. 04; and (b) continuing with the

ongoing management audit of petitioner's books of
account;
2. After hearing the issues on notice
a. Declare DND Department Circular No. 04 as null and
void for being ultra vires;
b. Convert the writ of prohibition, preliminary prohibitory
and mandatory injunction into a permanent
one. 6

GIVING DUE COURSE TO THE PETITION

Petitioner asserts that, although cases which question the constitutionality or
validity of administrative issuances are ordinarily filed with the lower courts,
the urgency and substantive importance of the question on hand and the
public interest attendant to the subject matter of the petition justify its being
filed with this Court directly as an original action. 7
It is settled that the Regional Trial Court and the Court of Appeals also
exercise original jurisdiction over petitions for certiorari and prohibition. As we
have held in numerous occasions, however, such concurrence of original
jurisdiction does not mean that the party seeking extraordinary writs has the
absolute freedom to file his petition in the court of his choice. 8 Thus,
in Commissioner of Internal Revenue v. Leal, 9 we held that:
Such concurrence of original jurisdiction among the Regional
Trial Court, the Court of Appeals and this Court, however, does
not mean that the party seeking any of the extraordinary writs
has the absolute freedom to file his petition in the court of his
choice. The hierarchy of courts in our judicial system determines
the appropriate forum for these petitions. Thus, petitions for the
issuance of the said writs against the first level (inferior) courts
must be filed with the Regional Trial Court and those against the
latter, with the Court of Appeals. A direct invocation of this
Court's original jurisdiction to issue these writs should be allowed
only where there are special and important reasons therefor,
specifically and sufficiently set forth in the petition. This is the
established policy to prevent inordinate demands upon the
Court's time and attention, which are better devoted to matters
within its exclusive jurisdiction, and to prevent further overcrowding of the Court's docket. Thus, it was proper for petitioner
to institute the special civil action for certiorari with the Court of
Appeals assailing the RTC order denying his motion to dismiss
based on lack of jurisdiction.

The petition itself, in this case, does not specifically and sufficiently set forth
the special and important reasons why the Court should give due course to
this petition in the first instance, hereby failing to fulfill the conditions set forth
in Commissioner of Internal Revenue v. Leal. 10 While we reiterate the
policies set forth in Leal and allied cases and continue to abhor the
propensity of a number of litigants to disregard the principle of hierarchy of
courts in our judicial system, we, however, resolve to take judicial notice of
the fact that the persons who stand to lose in a possible protracted litigation
in this case are war veterans, many of whom have precious little time left to
enjoy the benefits that can be conferred by petitioner corporation. This
bickering for the power over petitioner corporation, an entity created to
represent and defend the interests of Filipino veterans, should be resolved as
soon as possible in order for it to once and for all direct its resources to its
rightful beneficiaries all over the country. All these said, we hereby resolve to
give due course to this petition.
ISSUES
Petitioner mainly alleges that the rules and guidelines laid down in the
assailed Department Circular No. 04 expanded the scope of "control and
supervision" beyond what has been laid down in Rep. Act No.
2640. 11 Petitioner further submits the following issues to this Court:
1. Was the challenged department circular passed in the valid
exercise of the respondent Secretary's "control and supervision"?
2. Could the challenged department circular validly lay standards
classifying the VFP, an essentially civilian organization, within the
ambit of statutes only applying to government entities?
3. Does the department circular, which grants respondent direct
management control on the VFP, unduly encroach on the
prerogatives of VFP's governing body?

At the heart of all these issues and all of petitioner's prayers and assertions
in this case is petitioner's claim that it is a private non-government
corporation.
C aSH Ac

CENTRAL
IS THE VFP A PRIVATE CORPORATION?

This Court has defined the power of control as "the power of an officer to
alter or modify or nullify or set aside what a subordinate has done in the
performance of his duties and to substitute the judgment of the former to that
of the latter." 13 The power of supervision, on the other hand, means
"overseeing, or the power or authority of an officer to see that subordinate
officers perform their duties. If the latter fail or neglect to fulfill them, the
former may take such action or step as prescribed by law to make them
perform their duties." 14 These definitions are synonymous with the definitions
in the assailed Department Circular No. 04, while the other provisions of the
assailed department circular are mere consequences of control and
supervision as defined.
Thus, in order for petitioner's premise to be able to support its conclusion,
petitioners should be deemed to imply either of the following: (1) that it is
unconstitutional/impermissible for the law (Rep. Act No. 2640) to grant
control and/or supervision to the Secretary of National Defense over a private
organization, or (2) that the control and/or supervision that can be granted to
the Secretary of National Defense over a private organization is limited, and
is not as strong as they are defined above.

The following provision of the 1935 Constitution, the organic act controlling at
the time of the creation of the VFP in 1960, is relevant:
Section 7. The Congress shall not, except by general law,
provide for the formation, organization, or regulation of private
corporations, unless such corporations are owned and controlled
by the Government or any subdivision or instrumentality
thereof. 15

On the other hand, its counterparts in the 1973 and 1987

constitutions are the following:
Section 4. The National Assembly shall not, except by general
law, provide for the formation, organization, or regulation of
private corporations, unless such corporations are owned or
controlled by the government or any subdivision or
instrumentality thereof. 16

ISSUE:

Petitioner claims that it is not a public nor a governmental entity but a private
organization, and advances this claim to prove that the issuance of DND
Department Circular No. 04 is an invalid exercise of respondent Secretary's
control and supervision. 12

Sec. 16. The Congress shall not, except by general law, provide
for the formation, organization, or regulation of private
corporations. Government-owned and controlled corporations
may be created or established by special charters in the interest
of the common good and subject to the test of economic
viability. 17

From the foregoing, it is crystal clear that our constitutions explicitly prohibit
the regulation by special laws of private corporations, with the exception of

government-owned or controlled corporations (GOCCs). Hence, it would be

impermissible for the law to grant control of the VFP to a public official if it
were neither a public corporation, an unincorporated governmental entity, nor
a GOCC. 18 Said constitutional provisions can even be read to prohibit the
creation itself of the VFP if it were neither of the three mentioned above, but
we cannot go into that in this case since there is no challenge to the creation
of the VFP in the petition as to permit this Court from considering its nullity.

c. The VFP is governed, not by the Civil Service Law,

the Articles of War nor the GSIS Law, but by
the Labor Code and the SSS Law;
d. The VFP has its own Constitution and By-Laws and is
governed by a Supreme Council who are
elected from and by the members themselves;

DaCT cA

Petitioner vigorously argues that the VFP is a private non-government

organization, pressing on the following contentions:
1. The VFP does not possess the elements which would qualify it
as a public office, particularly the possession/delegation of a
portion of sovereign power of government to be exercised for the
benefit of the public;
2. VFP funds are not public funds because
a) No budgetary appropriations or government funds
have been released to the VFP directly or
indirectly from the Department of Budget and
Management (DBM);
b) VFP funds come from membership dues;
c) The lease rentals raised from the use of government
lands reserved for the VFP are private in
character and do not belong to the
government. Said rentals are fruits of VFP's
labor and efforts in managing and
administering the lands for VFP purposes and
objectives. A close analogy would be any
Filipino citizen settling on government land and
who tills the land for his livelihood and
sustenance. The fruits of his labor belong to
him and not to the owner of the land. Such
fruits are not public funds.
3. Although the juridical personality of the VFP emanates from a
statutory charter, the VFP retains its essential character as a
private, civilian federation of veterans voluntarily formed by
theveterans themselves to attain a unity of effort, purpose and
objectives, e.g.
a. The members of the VFP are individual members and
retirees from the public and military service;
b. Membership in the VFP is voluntary, not compulsory;

4. The Administrative Code of 1987 does not provide that the

VFP is an attached agency, nor does it provide that it is an entity
under the control and supervision of the DND in the context of
the provisions of said code.
5. The DBM declared that the VFP is a non-government
organization and issued a certificate that the VFP has not been a
direct recipient of any funds released by the DBM.

These arguments of petitioner notwithstanding, we are constrained to rule

that petitioner is in fact a public corporation. Before responding to petitioner's
allegations one by one, here are the more evident reasons why the VFP is a
public corporation:
(1) Rep. Act No. 2640 is entitled "An Act to Create a Public
Corporation to
be
Known
as
the Veterans Federation of the Philippines, Defining its
Powers, and for Other Purposes."
(2) Any action or decision of the Federation or of the Supreme
Council shall be subject to the approval of the Secretary
of Defense. 19
(3) The VFP is required to submit annual reports of its
proceedings for the past year, including a full, complete
and itemized report of receipts and expenditures of
whatever kind, to the President of the Philippines or to
the Secretary of National Defense. 20
(4) Under Executive Order No. 37 dated 2 December 1992, the
VFP was listed as among the government-owned and
controlled corporations that will not be privatized.
(5) In Ang Bagong Bayani OFW Labor Party v.
COMELEC, 21 this Court held in a minute resolution that
the "VFP [Veterans Federation Party] is an adjunct of
the government, as it is merely an incarnation of
the Veterans Federation of the Philippines.

And now to answer petitioner's reasons for insisting that it is a private

corporation:

1. Petitioner claims that the VFP does not possess the elements which would
qualify it as a public office, particularly the possession/delegation of a portion
of sovereign power of government to be exercised for the benefit of the
public;
In Laurel v. Desierto, 22 we adopted the definition of Mechem of a public
office, that it is "the right, authority and duty, created and conferred by law,
by which, for a given period, either fixed by law or enduring at the pleasure of
the creating power, an individual is invested with some portion of the
sovereign functions of the government, to be exercised by him for the benefit
of the public."
ScH AIT

In the same case, we went on to adopt Mechem's view that the delegation to
the individual of some of the sovereign functions of government is "[t]he most
important characteristic" in determining whether a position is a public office
or not. 23 Such portion of the sovereignty of the country, either legislative,
executive or judicial, must attach to the office for the time being, to be
exercised for the public benefit. Unless the powers conferred are of this
nature, the individual is not a public officer. The most important characteristic
which distinguishes an office from an employment or contract is that the
creation and conferring of an office involves a delegation to the individual of
some of the sovereign functions of government, to be exercised by him for
the benefit of the public; that some portion of the sovereignty of the
country, either legislative, executive or judicial, attaches, for the time being,
to be exercised for the public benefit. Unless the powers conferred are of this
nature, the individual is not a public officer. 24 The issue, therefore, is whether
the VFA's officers have been delegated some portion of the sovereignty of
the country, to be exercised for the public benefit.
In several cases, we have dealt with the issue of whether certain specific
activities can be classified as sovereign functions. These cases, which deal
with activities not immediately apparent to be sovereign functions, upheld the
public sovereign nature of operations needed either to promote social
justice 25 or to stimulate patriotic sentiments and love of country. 26
As regards the promotion of social justice as a sovereign function, we held
in Agricultural Credit and Cooperative Financing Administration (ACCFA) v.
Confederation of Unions in Government Corporations and Offices
(CUGCO), 27 that the compelling urgency with which the Constitution speaks
of social justice does not leave any doubt that land reform is not an optional
but a compulsory function of sovereignty. The same reason was used in our
declaration that socialized housing is likewise a sovereign function. 28 Highly
significant here is the observation of former Chief Justice Querube
Makalintal:

The growing complexities of modern society, however, have

rendered this traditional classification of the functions of
government [into constituent and ministrant functions] quite
unrealistic, not to say obsolete. The areas which used to be left
to private enterprise and initiative and which the government
was called upon to enter optionally, and only "because it was
better equipped to administer for the public welfare than is any
private individual or group of individuals," continue to lose their
well-defined boundaries and to be absorbed within activities
that the government must undertake in its sovereign
capacity if it is to meet the increasing social challenges of the
times. Here[,] as almost everywhere else[,] the tendency is
undoubtedly towards a greater socialization of economic forces.
Here, of course, this development was envisioned, indeed
adopted as a national policy, by the Constitution itself in its
declaration of principle concerning the promotion of social
justice. 29 (Emphasis supplied.)

It was, on the other hand, the fact that the National Centennial Celebrations
was calculated to arouse and stimulate patriotic sentiments and love of
country that it was considered as a sovereign function inLaurel v.
Desierto. 30 In Laurel, the Court then took its cue from a similar case in the
United States involving a Fourth of July fireworks display. The holding of the
Centennial Celebrations was held to be an executive function, as it was
intended to enforce Article XIV of the Constitution which provides for the
conservation, promotion and popularization of the nation's historical and
cultural heritage and resources, and artistic relations.
In the case at bar, the functions of petitioner corporation enshrined in Section
4 of Rep. Act No. 2640 31 should most certainly fall within the category of
sovereign functions. The protection of the interests of war veterans is not
only meant to promote social justice, but is also intended to reward
patriotism. All of the functions in Section 4 concern the well-being of
war veterans, our countrymen who risked their lives and lost their limbs in
fighting for and defending our nation. It would be injustice of catastrophic
proportions to say that it is beyond sovereignty's power to reward the people
who defended her.

Like the holding of the National Centennial Celebrations, the functions of the
VFP are executive functions, designed to implement not just the provisions of
Rep. Act No. 2640, but also, and more importantly, the Constitutional
mandate for the State to provide immediate and adequate care, benefits and
other forms of assistance to war veterans and veterans of military
campaigns, their surviving spouses and orphans. 32
2. Petitioner claims that VFP funds are not public funds.

Petitioner claims that its funds are not public funds because no budgetary
appropriations or government funds have been released to the VFP directly
or indirectly from the DBM, and because VFP funds come from membership
dues and lease rentals earned from administering government lands
reserved for the VFP.
aEIcHA

The fact that no budgetary appropriations have been released to the VFP
does not prove that it is a private corporation. The DBM indeed did not see it
fit to propose budgetary appropriations to the VFP, having itself believed that
the VFP is a private corporation. 33 If the DBM, however, is mistaken as to its
conclusion regarding the nature of VFP's incorporation, its previous
assertions will not prevent future budgetary appropriations to the VFP. The
erroneous application of the law by public officers does not bar a subsequent
correct application of the law. 34
Nevertheless, funds in the hands of the VFP from whatever source are public
funds, and can be used only for public purposes. This is mandated by the
following provisions of Rep. Act No. 2640:
(1) Section 2 provides that the VFP can only "invest its funds for
the exclusive benefit of the Veterans of the Philippines;"
(2) Section 2 likewise provides that "(a)ny action or decision of
the Federation or of the Supreme Council shall be
subject to the approval of the Secretary of National
Defense." Hence, all activities of the VFP to which the
Supreme Council can apply its funds are subject to the
approval of the Secretary of National Defense;
(3) Section 4 provides that "the Federation shall exist solely for
the purposes of a benevolent character, and not for the
pecuniary benefit of its members;"
(4) Section 6 provides that all funds of the VFP in excess of
operating expenses are "reserved for disbursement, as
the Supreme Council may authorize, for the purposes
stated in Section two of this Act;"
(5) Section 10 provides that "(a)ny donation or contribution which
from time to time may be made to the Federation by the
Government of the Philippines or any of its subdivisions,
branches, offices, agencies or instrumentalities shall be
expended by the Supreme Council only for the purposes
mentioned in this Act."; and finally,
(6) Section 12 requires the submission of annual reports of VFP
proceedings for the past year, including a full, complete
and itemized report of receipts and expenditures of

whatever kind, to the President of the Philippines or to

the Secretary of National Defense.

It is important to note here that the membership dues collected from the
individual members of VFP's affiliate organizations do not become public
funds while they are still funds of the affiliate organizations. A close reading
of Section 1 35 of Rep. Act No. 2640 reveals that what has been created as a
body corporate is not the individual membership of the affiliate organizations,
but merely the aggregation of the heads of the affiliate organizations. Thus,
only the money remitted by the affiliate organizations to the VFP partake in
the public nature of the VFP funds.
In Republic v. COCOFED, 36 we held that the Coconut Levy Funds are public
funds because, inter alia, (1) they were meant to be for the benefit of the
coconut industry, one of the major industries supporting the national
economy, and its farmers; and (2) the very laws governing coconut levies
recognize their public character. The same is true with regard to the VFP
funds. No less public is the use for the VFP funds, as such use is limited to
the purposes of the VFP which we have ruled to be sovereign functions.
Likewise, the law governing VFP funds (Rep. Act No. 2640) recognizes the
public character of the funds as shown in the enumerated provisions above.
We also observed in the same COCOFED case that "(e)ven if the money is
allocated for a special purpose and raised by special means, it is still public
in character." 37 In the case at bar, some of the funds were raised by even
more special means, as the contributions from affiliate organizations of the
VFP can hardly be regarded as enforced contributions as to be considered
taxes. They are more in the nature of donations which have always been
recognized as a source of public funding. Affiliate organizations of the VFP
cannot complain of their contributions becoming public funds upon the
receipt by the VFP, since they are presumed aware of the provisions of
Rep. Act No. 2640 which not only specifies the exclusive purposes for which
VFP funds can be used, but also provides for the regulation of such funds by
the national government through the Secretary of National Defense. There is
nothing wrong, whether legally or morally, from raising revenues through
non-traditional methods. As remarked by Justice Florentino Feliciano in his
concurring opinion in Kilosbayan, Incorporated v. Guingona, Jr. 38 where he
explained that the funds raised by the On-line Lottery System were also
public in nature, thus:
. . . [T]he more successful the government is in raising revenues
by non-traditional methods such as PAGCOR operations and
privatization measures, the lesser will be the pressure upon the
traditional sources of public revenues, i.e., the pocket books of
individual taxpayers and importers.

Petitioner additionally harps on the inapplicability of the case of Laurel v.

Desierto 39 which was cited by respondents. Petitioner claims that among the
reasons National Centennial Commission Chair Salvador Laurel was
considered a public officer was the fact that his compensation was derived
from public funds. Having ruled that VFP funds from whatever source are
public funds, we can safely conclude that the Supreme Council's
compensation, taken as they are from VFP funds under the term "operating
expenses" in Section 6 of Rep. Act No. 2640, are derived from public funds.
The particular nomenclature of the compensation taken from VFP funds is
not even of relevance here. As we said in Laurel concerning compensation
as an element of public office:
Under particular circumstances, "compensation" has been held to
include allowance for personal expenses, commissions,
expenses, fees, an honorarium, mileage or traveling expenses,
payments for services, restitution or a balancing of accounts,
salary, and wages. 40

3. Petitioner argues that it is a civilian federation where membership is

voluntary.
Petitioner claims that the Secretary of National Defense "historically did not
indulge in the direct or 'micromanagement' of the VFP precisely because it is
essentially a civilian organization where membership is voluntary." 41 This
reliance of petitioner on what has "historically" been done is erroneous, since
laws are not repealed by disuse, custom, or practice to the
contrary. 42 Furthermore, as earlier stated, the erroneous application of the
law by public officers does not bar a subsequent correct application of the
law. 43
Neither is the civilian nature of VFP relevant in this case.
The Constitution does not contain any prohibition, express or implied, against
the grant of control and/or supervision to the Secretary of National Defense
over a civilian organization. The Office of the Secretary of National Defense
is itself a civilian office, its occupant being an alter ego of the civilian
Commander-in-Chief. This set-up is the manifestation of the constitutional
principle that civilian authority is, at all times, supreme over the
military. 44 There being no such constitutional prohibition, the creation of a
civilian public organization by Rep. Act No. 2640 is not rendered invalid by its
being placed under the control and supervision of the Secretary of National
Defense.
Petitioner's stand that the VFP is a private corporation because membership
thereto is voluntary is likewise erroneous. As stated above, the membership
of the VFP is not the individual membership of the affiliate organizations, but
merely the aggregation of the heads of such affiliate organizations. These

heads forming the VFP then elect the Supreme Council and the other
officers, 45 of this public corporation.
cTIESa

4. Petitioner claims that the Administrative Code of 1987 does not provide
that the VFP is an attached agency, and nor does it provide that it is an entity
under the control and supervision of the DND in the context of the provisions
of said code.
The Administrative Code, by giving definitions of the various entities covered
by it, acknowledges that its enumeration is not exclusive. The Administrative
Code could not be said to have repealed nor enormously modified Rep. Act
No. 2640 by implication, as such repeal or enormous modification by
implication is not favored in statutory construction. 46
5. Petitioner offers as evidence the DBM opinion that the VFP is a nongovernment organization in its certification that the VFP "has not been a
direct recipient of any funds released by the DBM."
Respondents claim that the supposed declaration of the DBM that petitioner
is a non-government organization is not persuasive, since DBM is not a
quasi-judicial agency. They aver that what we have said of the Bureau of
Local Government Finance (BLGF) in Philippine Long Distance Telephone
Company (PLDT) v. City of Davao 47 can be applied to DBM:
In any case, it is contended, the ruling of the Bureau of Local
Government Finance (BLGF) that petitioner's exemption from
local taxes has been restored is a contemporaneous construction
of Section 23 [of R.A. No. 7925] and, as such, is entitled to great
weight.

The ruling of the BLGF has been considered in this case. But
unlike the Court of Tax Appeals, which is a special court created
for the purpose of reviewing tax cases, the BLGF was created
merely to provide consultative services and technical assistance
to local governments and the general public on local taxation and
other related matters. Thus, the rule that the "Court will not set
aside conclusions rendered by the CTA, which is, by the very
nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or
improvident exercise of authority" cannot apply in the case of the
BLGF.

On this score, though, we disagree with respondents and hold that the
DBM's appraisal is considered persuasive. Respondents misread
the PLDT case in asserting that only quasi-judicial agencies' determination

can be considered persuasive. What the PLDT case points out is that, for an
administrative agency's opinion to be persuasive, the administrative agency
involved (whether it has quasi-judicial powers or not) must be an expert in
the field they are giving their opinion on.

representing veterans organizations, and substitutes government discretion

and decisions to that of the veterans' own determination." 51 Petitioner says
that the circular's provisions practically render the Supreme Council inutile,
despite its being the statutory governing body of the VFP. 52

The DBM is indeed an expert on determining what the various government

agencies and corporations are. This determination is necessary for the DBM
to fulfill its mandate:

As previously mentioned, this Court has defined the power of control as "the
power of an officer to alter or modify or nullify or set aside what a subordinate
has done in the performance of his duties and to substitute the judgment of
the former to that of the latter." 53 The power of supervision, on the other
hand, means "overseeing, or the power or authority of an officer to see that
subordinate officers perform their duties." 54 Under the Administrative Code of
1987: 55

Sec. 2. Mandate. The Department shall be responsible for the

formulation and implementation of the National Budget with the
goal of attaining our national socio-economic plans and
objectives.
The Department shall be responsible for the efficient and sound
utilization of government funds and revenues to effectively
achieve our country's development objectives. 48

The persuasiveness of the DBM opinion has, however, been overcome by all
the previous explanations we have laid so far. It has also been eclipsed by
another similarly persuasive opinion, that of the Department of National
Defense embodied in Department Circular No. 04. The DND is clearly more
of an expert with respect to the determination of the entities under it, and its
Administrative Rules and Regulations are entitled to great respect and have
in their favor the presumption of legality. 49
The DBM opinion furthermore suffers from its lack of explanation and
justification in the "certification of non-receipt" where said opinion was given.
The DBM has not furnished, in said certification or elsewhere, an explanation
for its opinion that VFP is a non-government organization.
H ScCEa

THE FATE OF DEPARTMENT CIRCULAR NO. 04

Our ruling that petitioner is a public corporation is determinative of whether or
not we should grant petitioner's prayer to declare Department Circular No. 04
void.
Petitioner assails Department Circular No. 04 on the ground that it expanded
the scope of control and supervision beyond what has been laid down in
Rep. Act No. 2640. Petitioner alleges that "(t)he equation of the meaning of
'control' and 'supervision' of the Administrative Code of 1987 as the same
'control and supervision' under Rep. Act No. 2640, takes out the context of
the original legislative intent from the peculiar surrounding circumstances and
conditions that brought about the creation of the VFP." 50 Petitioner claims
that the VFP "was intended as a self-governing autonomous body with a
Supreme Council as governing authority," and that the assailed circular "preempts
VFP's
original
self-governance
and
autonomy
(in)

Supervision and control shall include the authority to act directly

whenever a specific function is entrusted by law or regulation to a
subordinate; direct the performance of duty; restrain the
commission of acts; review, approve, reverse or modify acts and
decisions of subordinate officials or units; determine priorities in
the execution of plans and programs; and prescribe standards,
guidelines, plans and programs. . . .

The definition of the power of control and supervision under Section 2 of the
assailed Department Circular are synonymous with the foregoing definitions.
Consequently, and considering that petitioner is a public corporation, the
provisions of the assailed Department Circular No. 04 did not supplant nor
modify the provisions of Republic Act No. 2640, thus not violating the settled
rule that "all such (administrative) issuances must not override, but must
remain consistent and in harmony with the law they seek to apply or
implement. Administrative rules and regulations are intended to carry out,
neither to supplant nor to modify, the law." 56
Section 3.2 of the assailed department circular, which authorizes
the Secretary of National Defense to ". . . personally or through a
designated representative, require the submission of reports, documents
and other papers regarding any or all of the Federation's business
functions, . . . ."
as well as Section 3.3 which allows the Secretary of DND to
. . . [F]rom time to time issue guidelines, directives and other
orders governing vital government activities including, but not
limited to, the conduct of elections, the acquisition, management
and dispositions of properties, the accounting of funds, financial
interests, stocks and bonds, corporate investments, etc. and
such other transactions which may affect the interests of
the veterans.

are merely consequences of both the power of control and supervision

granted by Rep. Act No. 2640. The power to alter or modify or nullify or
set aside what a subordinate has done in the performance of his duties,
or to see to it that subordinate officers perform their duties in accordance
with law, necessarily requires the ability of the superior officer to monitor,
as closely as it desires, the acts of the subordinate.

that can be performed as consequences of such control and supervision, but

without specifying the particular actions that shall be rendered to control and
supervise the VFP. Section 6, in the same vein, merely state what the
drafters of the circular perceived to be consequences of being an attached
agency to a regular department of the government, enumerating sanctions
and remedies provided by law that may be availed of whenever desired.

The same is true with respect to Sections 4 and 5 of the assailed Department
Circular No. 04, which requires the preservation of the records of
the Federation and the submission to the Secretary of National Defense of
annual and periodic reports.

Petitioner then objects to the implementation of Sec. 3.4 of the assailed

Department Circular, which provides that

CHDTEA

3.4 Financial transactions of the Federation shall follow the

provisions of the government auditing code (PD 1445) i.e.
government funds shall be spent or used for public purposes;
trust funds shall be available and may be spent only for the
specific purpose for which the trust was created or the funds
received; fiscal responsibility shall, to the greatest extent, be
shared by all those exercising authority over the financial affairs,
transactions, and operations of the federation; disbursements or
dispositions of government funds or property shall invariably bear
the approval of the proper officials.

Petitioner likewise claims that the assailed DND Department Circular No. 04
was never published, and hence void. 57 Respondents deny such nonpublication. 58
We have put forth both the rule and the exception on the publication of
administrative rules and regulations in the case of Taada v. Tuvera: 59
. . . Administrative rules and regulations must also be published if
their purpose is to enforce or implement existing law pursuant
also to a valid delegation.
Interpretative regulations and those merely internal in nature, that
is, regulating only the personnel of the administrative agency and
not the public, need not be published. Neither is publication
required of the so-called letters of instructions issued by
administrative superiors concerning the rules on guidelines to be
followed by their subordinates in the performance of their duties.

Even assuming that the assailed circular was not published, its validity is not
affected by such non-publication for the reason that its provisions fall under
two of the exceptions enumerated in Taada.
Department Circular No. 04 is an internal regulation. As we have ruled, they
are meant to regulate a public corporation under the control of DND, and not
the public in general. As likewise discussed above, what has been created as
a body corporate by Rep. Act No. 2640 is not the individual membership of
the affiliate organizations of the VFP, but merely the aggregation of the
heads of the affiliate organizations. Consequently, the individual members of
the affiliate organizations, who are not public officers, are beyond the
regulation of the circular.
Sections 2, 3 and 6 of the assailed circular are additionally merely
interpretative in nature. They add nothing to the law. They do not affect the
substantial rights of any person, whether party to the case at bar or not. In
Sections 2 and 3, control and supervision are defined, mentioning actions

Since we have also previously determined that VFP funds are public funds,
there is likewise no reason to declare this provision invalid. Section 3.4 is
correct in requiring the VFP funds to be used for public purposes, but only
insofar the term "public purposes" is construed to mean "public purposes
enumerated in Rep. Act No. 2640."

Having in their possession public funds, the officers of the VFP, especially its
fiscal officers, must indeed share in the fiscal responsibility to the greatest
extent.
aIHC SA

As to petitioner's allegation that VFP was intended as a self-governing

autonomous body with a Supreme Council as governing authority, we find
that the provisions of Rep. Act No. 2640 concerning the control and
supervision of the Secretary of National Defense clearly withholds from the
VFP complete autonomy. To say, however, that such provisions render the
VFP inutile is an exaggeration. An office is not rendered inutile by the fact
that it is placed under the control of a higher office. These subordinate
offices, such as the executive offices under the control of the President,
exercise discretion at the first instance. While their acts can be altered or
even set aside by the superior, these acts are effective and are deemed the
acts of the superior until they are modified. Surely, we cannot say that the
offices of all the Department Secretaries are worthless positions.

In sum, the assailed DND Department Circular No. 04 does not supplant nor
modify and is, on the contrary, perfectly in consonance with Rep. Act No.
2640. Petitioner VFP is a public corporation. As such, it can be placed under
the control and supervision of the Secretary of National Defense, who
consequently has the power to conduct an extensive management audit of
petitioner corporation.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit. The
validity of the Department of National Defense Department Circular No. 04 is
AFFIRMED.
SO ORDERED.
Panganiban, C.J., Puno, Ynares-Santiago, Sandoval-Gutierrez, Carpio,
Austria-Martinez, Corona, Carpio Morales, Callejo, Sr., Azcuna,
Tinga and Garcia, JJ., concur.
Quisumbing, J., took no part, former USND.
(Veterans Federation of the Phil. v. Reyes, G.R. No. 155027, [February 28,
2006], 518 PHIL 668-706)
|||

EN BANC

The Ruling of the Commission on Audit

[G.R. No. 147402. January 14, 2004.]

The COA ruled that this Court has already settled COA's audit jurisdiction over local
water
districts
in Davao
City
Water
District
v.
Civil
Service Commission and Commission on Audit, 3 as follows:

ENGR. RANULFO C. FELICIANO, in his capacity

as General Manager of the Leyte Metropolitan
Water
District
(LMWD),
Tacloban
City, petitioner, vs. COMMISSION ON AUDIT,
Chairman CELSO D. GANGAN, Commissioners
RAUL C. FLORES and EMMANUEL M. DALMAN,
and Regional Director of COA Region
VIII, respondents.
DECISION

The above-quoted provision [referring to Section 3(b) PD 198] definitely

sets to naught petitioner's contention that they are private corporations. It
is clear therefrom that the power to appoint the members who will
comprise the members of the Board of Directors belong to the local
executives of the local subdivision unit where such districts are located.
In contrast, the members of the Board of Directors or the trustees of a
private corporation are elected from among members or stockholders
thereof. It would not be amiss at this point to emphasize that a private
corporation is created for the private purpose, benefit, aim and end of its
members or stockholders. Necessarily, said members or stockholders
should be given a free hand to choose who will compose the governing
body of their corporation. But this is not the case here and this clearly
indicates that petitioners are not private corporations.

CARPIO, J :
p

The Case
This is a petition for certiorari 1 to annul the Commission on Audit's ("COA")
Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying
the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Feliciano's
request for COA to cease all audit services, and to stop charging auditing fees, to
Leyte Metropolitan Water District ("LMWD"). The COA also denied petitioner's
request for COA to refund all auditing fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of
LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999
requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a
reply dated 12 October 1999 informing COA's Regional Director that the water district
could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and
20 of Presidential Decree 198 ("PD 198"), 2 as well as Section 18 of Republic Act No.
6758 ("RA 6758"). The Regional Director referred petitioner's reply to the COA
Chairman on 18 October 1999.

The COA also denied petitioner's request for COA to stop charging auditing fees
as well as petitioner's request for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack
or excess of jurisdiction by auditing LMWD and requiring it to pay auditing fees.
Petitioner raises the following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198,
as amended, is a government-owned or controlled
corporation subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COA's
certified public accountants from auditing local water
districts; and
TDCaSE

3. Whether Section 18 of RA 6758 prohibits the COA from

charging
government-owned
and
controlled
corporations auditing fees.

On 19 October 1999, petitioner wrote COA through the Regional Director asking for
refund of all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangan's Resolution
dated 3 January 2000 denying his requests. Petitioner filed a motion for
reconsideration on 31 March 2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were
resolutions of the Visayas Association of Water Districts (VAWD) and the Philippine
Association of Water Districts (PAWD) supporting the petition.

The Ruling of the Court

The petition lacks merit.
The Constitution and existing laws 4 mandate COA to audit all government agencies,
including government-owned and controlled corporations ("GOCCs") with original
charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D of
the Constitution provides for COA's audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power,

authority and duty to examine, audit, and settle all accounts pertaining to
the revenue and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations with original charters,
and on a post-audit basis: (a) constitutional bodies, commissions and
offices that have been granted fiscal autonomy under this Constitution;
(b) autonomous state colleges and universities; (c) other governmentowned or controlled corporations and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the audited
agencies is inadequate, the Commission may adopt such measures,
including temporary or special pre-audit, as are necessary and
appropriate to correct the deficiencies. It shall keep the general accounts
of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto.
(Emphasis supplied)

The COA's audit jurisdiction extends not only to government "agencies or

instrumentalities," but also to "government-owned and controlled corporations
with original charters" as well as "other government-owned or controlled
corporations" without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a reexamination of a
doctrine backed by a long line of cases culminating in Davao City Water District v.
Civil
Service Commission 5 and
just
recently
reiterated
in De
Jesus
v. Commission on Audit. 6 Petitioner maintains that LWDs are not government-owned
and controlled corporations with original charters. Petitioner even argues that LWDs
are private corporations. Petitioner asks the Court to consider certain interpretations
of the applicable laws, which would give a "new perspective to the issue of the true
character of water districts." 7
Petitioner theorizes that what PD 198 created was the Local Waters Utilities
Administration ("LWUA") and not the LWDs. Petitioner claims that LWDs are created
"pursuant to" and not created directly by PD 198. Thus, petitioner concludes that PD
198 is not an "original charter" that would place LWDs within the audit jurisdiction of
COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates
that PD 198 does not create LWDs since it does not expressly direct the creation of
such entities, but only provides for their formation on an optional or voluntary
basis. 8 Petitioner adds that the operative act that creates an LWD is the approval of
the Sanggunian Resolution as specified in PD 198.
Petitioner's contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law.
The Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to government-owned or

controlled corporations created by special charters. Section 16, Article XII of

the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and
subject to the test of economic viability.

The Constitution emphatically prohibits the creation of private corporations

except by a general law applicable to all citizens. 9 The purpose of this
constitutional provision is to ban private corporations created by special charters,
which historically gave certain individuals, families or groups special privileges
denied to other citizens. 10
In short, Congress cannot enact a law creating a private corporation with a special
charter. Such legislation would be unconstitutional. Private corporations may exist
only under a general law. If the corporation is private, it must necessarily exist under
a general law. Stated differently, only corporations created under a general law can
qualify as private corporations. Under existing laws, that general law is
the Corporation Code, 11 except that the Cooperative Code governs the incorporation
of cooperatives. 12
The Constitution authorizes Congress to create government-owned or controlled
corporations through special charters. Since private corporations cannot have special
charters, it follows that Congress can create corporations with special charters only if
such corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under
the Corporation Code. LWDs are not registered with the Securities and
Exchange Commission. Section 14 of theCorporation Code states that "[A]ll
corporations organized under this code shall file with the Securities and
Exchange Commission articles of incorporation . . .." LWDs have no articles of
incorporation, no incorporators and no stockholders or members. There are no
stockholders or members to elect the board directors of LWDs as in the case of all
corporations registered with the Securities and ExchangeCommission. The local
mayor or the provincial governor appoints the directors of LWDs for a fixed term of
office. This Court has ruled that LWDs are not created under the Corporation Code,
thus:

From the foregoing pronouncement, it is clear that what has been

excluded from the coverage of the CSC are those corporations created
pursuant to the Corporation Code. Significantly, petitioners are not
created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its
provision. 13 (Emphasis supplied)

LWDs exist by virtue of PD 198, which constitutes their special charter. Since under
the Constitution only government-owned or controlled corporations may have special
charters, LWDs can validly exist only if they are government-owned or controlled. To

claim that LWDs are private corporations with a special charter is to admit that their
existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from
the Corporation Code, LWDs derive their legal existence and power from PD
198. Sections 6 and 25 of PD 198 14 provide:
TAacCE

Section 6. Formation of District. This Act is the source of authorization

and power to form and maintain a district. For purposes of this Act, a
district shall be considered as a quasi-public corporation performing
public service and supplying public wants. As such, a district shall
exercise the powers, rights and privileges given to private corporations
under existing laws, in addition to the powers granted in, and subject to
such restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of
the city, municipality, or province, or region thereof, served by said
system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or
municipality, such boundary may include all lands within the city or
municipality. A district may include one or more municipalities, cities or
provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or
sewerage facilities managed, operated by or under the control of such
city, municipality or province to such district upon the filing of resolution
forming the district.
(d) A statement identifying the purpose for which the district is formed,
which shall include those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of
expiration of term of office for each.
(f) A statement that the district may only be dissolved on the grounds and
under the conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set
forth in Section 36 of this Title.

of carrying out the objectives of this Act, a district is hereby granted the
power of eminent domain, the exercise thereof shall, however, be subject
to review by the Administration. (Emphasis supplied)

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly

confers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs "shall
exercise the powers, rights and privileges given to private corporations under existing
laws." Without PD 198, LWDs would have no corporate powers. Thus, PD
198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is
that LWDs are government-owned and controlled corporations with a special charter.
The phrase "government-owned and controlled corporations with original charters"
means GOCCs created under special laws and not under the general incorporation
law. There is no difference between the term "original charters" and "special
charters." The Court clarified this in National Service Corporation v. NLRC 15 by citing
the deliberations in the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas).
The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO.
Mr. Presiding Officer, I am amending my original proposed amendment
to now read as follows: "including government-owned or
controlled corporations WITH ORIGINAL CHARTERS." The
purpose of this amendment is to indicate that government
corporations such as the GSIS and SSS, which have original
charters, fall within the ambit of the civil service. However,
corporations which are subsidiaries of these chartered
agencies such as the Philippine Airlines, Manila Hotel and
Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas).
What does the Committee say?
MR. FOZ.

Nothing in the resolution of formation shall state or infer that the local
legislative body has the power to dissolve, alter or affect the district
beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination
thereof, desire to form a single district, a similar resolution shall be
adopted in each city, municipality and province.

Just one question, Mr. Presiding Officer. By the term "original charters,"
what exactly do we mean?
MR. ROMULO.
We mean that they were created by law, by an act of Congress, or by
special law.

xxx xxx xxx

Sec. 25. Authorization. The district may exercise all the powers which
are expressly granted by this Title or which are necessarily implied from
or incidental to the powers and purposes herein stated. For the purpose

MR. FOZ.
And not under the general corporation law.

SECTION 447. Powers, Duties, Functions and Compensation. (a) The

sangguniang bayan, as the legislative body of the municipality, shall
enact ordinances, approve resolutions and appropriate funds for the
general welfare of the municipality and its inhabitants pursuant to Section
16 of this Code and in the proper exercise of the corporate powers of the
municipality as provided for under Section 22 of this Code, and shall:

MR. ROMULO.
That is correct. Mr. Presiding Officer.
MR. FOZ.
With that understanding and clarification, the Committee accepts the
amendment.
MR. NATIVIDAD.
Mr. Presiding Officer, so those created by the general corporation law
are out.
MR. ROMULO.
That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission, 16 the Court reiterated
the meaning of the phrase "government-owned and controlled corporations with
original charters" in this wise:
By "government-owned or controlled corporation with original charter,"
We mean government owned or controlled corporation created by a
special law and not under the Corporation Code of the Philippines. Thus,
in the case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170
SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v.
National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively from
the deliberations of the 1986 Constitutional Commission in
respect of the intent and meaning of the new phrase 'with
original charter,' in effect held that government-owned and
controlled corporations with original charter refer to
corporations chartered by special law as distinguished from
corporations organized under our general incorporation
statute the Corporation Code. In NASECO, the company
involved had been organized under the general incorporation
statute and was a subsidiary of the National Investment
Development Corporation (NIDC) which in turn was a
subsidiary of the Philippine National Bank, a bank chartered by
a special statute. Thus, government-owned or controlled
corporations like NASECO are effectively, excluded from the
scope of the Civil Service." (Emphasis supplied)
CAaSED

Petitioner's contention that the Sangguniang Bayan resolution creates the LWDs
assumes that the Sangguniang Bayan has the power to create corporations. This is a
patently baseless assumption. The Local Government Code 17 does not vest in the
Sangguniang Bayan the power to create corporations. 18 What the Local Government
Code empowers the Sangguniang Bayan to do is to provide for the establishment of a
waterworks system "subject to existing laws." Thus, Section 447(5)(vii) of the Local
Government Code provides:

xxx xxx xxx

(vii) Subject to existing laws, provide for the establishment,
operation, maintenance, and repair of an efficient waterworks
system to supply water for the inhabitants; regulate the
construction, maintenance, repair and use of hydrants, pumps,
cisterns and reservoirs; protect the purity and quantity of the
water supply of the municipality and, for this purpose, extend
the coverage of appropriate ordinances over all territory within
the drainage area of said water supply and within one hundred
(100) meters of the reservoir, conduit, canal, aqueduct,
pumping station, or watershed used in connection with the
water service; and regulate the consumption, use or wastage of
water;
. . . (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system only in accordance with
the provisions of PD 198. The Sangguniang Bayan has no power to create a
corporate entity that will operate its waterworks system. However, the Sangguniang
Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a
water district. Besides, even assuming for the sake of argument that the Sangguniang
Bayan has the power to create corporations, the LWDs would remain governmentowned or controlled corporations subject to COA's audit jurisdiction. The resolution of
the Sangguniang Bayan would constitute an LWD's special charter, making the LWD
a government-owned and controlled corporation with an original charter. In any event,
the Court has already ruled in Baguio Water District v. Trajano 19 that the Sangguniang
Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for
the final creation of a district, this Court is of the opinion that said
resolution cannot be considered as its charter, the same being intended
only to implement the provisions of said decree.

Petitioner further contends that a law must create directly and explicitly a GOCC in
order that it may have an original charter. In short, petitioner argues that one special
law cannot serve as enabling law for several GOCCs but only for one GOCC. Section
16, Article XII of the Constitution mandates that "Congress shall not, except by
general law," 20 provide for the creation of private corporations. Thus,
theConstitution prohibits one special law to create one private corporation, requiring
instead a "general law" to create private corporations. In contrast, the same Section
16 states that "Government-owned or controlled corporations may be created or
established by special charters." Thus, the Constitution permits Congress to create a
GOCC with a special charter. There is, however, no prohibition on Congress to create
several GOCCs of the same class under one special enabling charter.

The rationale behind the prohibition on private corporations having special charters
does not apply to GOCCs. There is no danger of creating special privileges to certain
individuals, families or groups if there is one special law creating each GOCC.
Certainly, such danger will not exist whether one special law creates one GOCC, or
one special enabling law creates several GOCCs. Thus, Congress may create
GOCCs either by special charters specific to each GOCC, or by one special enabling
charter applicable to a class of GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD
198 21 declares that LWDs "shall be considered quasi-public" in nature. Petitioner's
rationale is that only private corporations may be deemed "quasi-public" and not
public corporations. Put differently, petitioner rationalizes that a public corporation
cannot be deemed "quasi-public" because such corporation is already public.
Petitioner concludes that the term "quasi-public" can only apply to private
corporations. Petitioner's argument is inconsequential.
Petitioner
forgets
that
the
constitutional
criterion on the
exercise
of
COA's audit jurisdiction depends on the government's ownership or control of a
corporation. The nature of the corporation, whether it is private, quasi-public, or public
is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned and
controlled corporations with original charters," as well as "government-owned or
controlled corporations" without original charters. GOCCs with original charters are
subject to COA pre-audit, while GOCCs without original charters are subject to COA
post-audit. GOCCs without original charters refer to corporations created under
the Corporation Code but are owned or controlled by the government. The nature or
purpose of the corporation is not material in determining COA's audit jurisdiction.
Neither is the manner of creation of a corporation, whether under a general or special
law.
The determining factor of COA's audit jurisdiction is government ownership or
control of the corporation. In Philippine Veterans Bank Employees Union-NUBE v.
Philippine Veterans Bank, 22 the Court even ruled that the criterion of ownership and
control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IXB, Section 2(1) that "the Civil Service embraces all branches,
subdivisions, instrumentalities, and agencies of the Government,
including government-owned or controlled corporations with original
charters." As the Bank is not owned or controlled by the Government
although it does have an original charter in the form of R.A. No. 3518, 23 it
clearly does not fall under the Civil Service and should be regarded as an
ordinary commercial corporation. Section 28 of the said law so provides.
The consequence is that the relations of the Bank with its employees
should be governed by the labor laws, under which in fact they have
already been paid some of their claims. (Emphasis supplied)

Certainly, the government owns and controls LWDs. The government organizes
LWDs in accordance with a specific law, PD 198. There is no private party involved
as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the
national or local government owns and controls all their assets. The government

controls LWDs because under PD 198 the municipal or city mayor, or the provincial
governor, appoints all the board directors of an LWD for a fixed term of six
years. 24 The board directors of LWDs are not co-owners of the LWDs. LWDs have no
private stockholders or members. The board directors and other personnel of LWDs
are government employees subject to civil service laws 25 and anti-graft laws. 26
acCT SE

While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an
LWD, it only means that the appointees to the board of directors of LWDs shall come
from the private sector. Once such private sector representatives assume office as
directors, they become public officials governed by the civil service law and anti-graft
laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of
the Constitution declaring that the civil service includes "government-owned or
controlled corporations with original charters."
If LWDs are neither GOCCs with original charters nor GOCCs without original
charters, then they would fall under the term "agencies or instrumentalities" of the
government and thus still subject to COA'saudit jurisdiction. However, the stark and
undeniable fact is that the government owns LWDs. Section 45 27 of PD
198 recognizes government ownership of LWDs when Section 45 states that the
board of directors may dissolve an LWD only on the condition that "another public
entity has acquired the assets of the district and has assumed all obligations and
liabilities attached thereto." The implication is clear that an LWD is a public and not a
private entity.
Petitioner does not allege that some entity other than the government owns or
controls LWDs. Instead, petitioner advances the theory that the "Water District's
owner is the District itself." 28 Assuming for the sake of argument that an LWD is "selfowned," 29 as petitioner describes an LWD, the government in any event controls all
LWDs. First, government officials appoint all LWD directors to a fixed term of
office. Second, any per diem of LWD directors in excess of P50 is subject to the
approval of the Local Water Utilities Administration, and directors can receive no
other compensation for their services to the LWD. 30 Third, the Local Water Utilities
Administration can require LWDs to merge or consolidate their facilities or
operations. 31 This element of government control subjects LWDs to
COA's auditjurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities
through the transfer of ownership of water facilities from local government units to
their respective water districts as mandated by PD 198. Petitioner is grasping at
straws. Privatization involves the transfer of government assets to a private entity.
Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD
198 is no other than the LWD itself. 32 The transfer of assets mandated by PD 198 is a
transfer of the water systems facilities "managed, operated by or under the control of
such city, municipality or province to such (water) district." 33 In short, the transfer is
from one government entity to another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and
controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. 34 Section
20 of PD 198 provides:

Sec. 20. System of Business Administration. The Board shall, as soon

as practicable, prescribe and define by resolution a system of business
administration and accounting for the district, which shall be patterned
upon and conform to the standards established by the
Administration. Auditing shall be performed by a certified public
accountant not in the government service. The Administration may,
however, conduct annual audits of the fiscal operations of the district to
be performed by an auditor retained by the Administration. Expenses
incurred in connection therewith shall be borne equally by the water
district concerned and the Administration. 35 (Emphasis supplied)

Petitioner argues that PD 198 expressly prohibits COA auditors, or any

government auditor for that matter, from auditing LWDs. Petitioner asserts that
this is the import of the second sentence of Section 20 of PD 198 when it states
that "[A]uditing shall be performed by a certified public accountant not in the
government service." 36
PD 198 cannot prevail over the Constitution. No amount of clever legislation can
exclude GOCCs like LWDs from COA's audit jurisdiction. Section 3, Article IX-C of
the Constitution outlaws any scheme or devise to escape COA's audit jurisdiction,
thus:
Sec. 3. No law shall be passed exempting any entity of the Government
or its subsidiary in any guise whatever, or any investment of public funds,
from the jurisdiction of the Commission onAudit. (Emphasis supplied)

The
framers
of
the Constitution added
Section
3,
Article
IX-D
of
the Constitution precisely to annul provisions of Presidential Decrees, like that of
Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange
in the deliberations of the Constitutional Commission elucidates this intent of the
framers:
MR. OPLE:

different corporations underneath it were exempted from the

coverage of the Commission on Audit.
Another

example is the United Coconut Planters Bank.

The Commission on Audit has determined that the coconut levy
is a form of taxation; and that, therefore, these funds attributed
to the shares of 1,400,000 coconut farmers are, in effect, public
funds. And that was, I think, the basis of the PCGG in
undertaking that last major sequestration of up to 94 percent of
all the shares in the United Coconut Planters Bank. The charter
of the UCPB, through a presidential decree, exempted it from
the jurisdiction of the Commission on Audit, it being a private
organization.

So these are the fetuses of future abuse that we are slaying right here
with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE
PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT
OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS' OF PUBLIC FUNDS, FROM THE
JURISDICTION OF THE COMMISSION ON AUDIT.
THE PRESIDENT:
May we know the position of the Committee on the proposed
amendment of Commissioner Ople?
MR. JAMIR:
If the honorable Commissioner will change the number of the section to
4, we will accept the amendment.
IAcTaC

I propose to add a new section on line 9, page, 2 of the amended

committee report which reads: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE
JURISDICTION OF THE COMMISSION ON AUDIT.

MR. OPLE:

May I explain my reasons on record.

Madam President, point of inquiry on the new amendment.

We know that a number of entities of the government took advantage of

the absence of a legislature in the past to obtain presidential
decrees exempting themselves from the jurisdiction of
the Commission on Audit, one notable example of which is the
Philippine National Oil Company which is really an empty shell.
It is a holding corporation by itself, and strictly on its own
account. Its funds were not very impressive in quantity but
underneath that shell there were billions of pesos in a
multiplicity of companies. The PNOC the empty shell
under a presidential decree was covered by the jurisdiction of
the Commission on Audit, but the billions of pesos invested in

THE PRESIDENT:

Gladly, Madam President. Thank you.

MR. DE CASTRO:

Commissioner de Castro is recognized.

MR. DE CASTRO:
Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c) governmentowned or controlled corporations and their subsidiaries"? So

that if these government-owned and controlled corporations

and their subsidiaries are subjected to the audit of the COA,
any law exempting certain government corporations or
subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is
unnecessary.
MR. MONSOD:
Madam President, since this has been accepted, we would like to reply
to the point raised by Commissioner de Castro.
THE PRESIDENT:

additional compensation to said officials and employees. (Emphasis

supplied)

Claiming that Section 18 is "absolute and leaves no doubt," 39 petitioner asks

COA to discontinue its practice of charging auditing fees to LWDs since such
practice allegedly violates the law.
Petitioner's claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of
compensation from any government entity except "compensation paid directly by
COA out of its appropriations and contributions." Thus, RA 6758 itself recognizes an
exception to the statutory ban on COA personnel receiving compensation from
GOCCs. In Tejada v. Domingo, 40 the Court declared:

Commissioner Monsod will please proceed.

MR. MONSOD:
I think the Commissioner is trying to avoid the situation that happened in
the past, because the same provision was in the
1973 Constitution and yet somehow a law or a decree was
passed where certain institutions were exempted from audit.
We are just reaffirming, emphasizing, the role of
the Commission on Audit so that this problem will never arise in
the future. 37

There is an irreconcilable conflict between the second sentence of Section 20 of PD

198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IXD of the Constitution vesting in COA the power to audit all GOCCs. We rule that the
second sentence of Section 20 of PD 198 is unconstitutional since it violates Sections
2(1) and 3, Article IX-D of the Constitution.
On the Legality of COA's Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate
the prohibition in Section 18 of RA 6758, 38 which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel
and of other Agencies. In order to preserve the independence and
integrity of the Commission on Audit (COA), its officials and employees
are prohibited from receiving salaries, honoraria, bonuses, allowances or
other emoluments from any government entity, local government unit,
government-owned or controlled corporations, and government financial
institutions, except those compensation paid directly by COA out of its
appropriations and contributions.
Government entities, including government-owned or controlled
corporations including financial institutions and local government units
are hereby prohibited from assessing or billing other government entities,
including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials
and employees as part of their regular functions for purposes of paying

There can be no question that Section 18 of Republic Act No. 6758 is

designed to strengthen further the policy . . . to preserve the
independence and integrity of the COA, by explicitly PROHIBITING: (1)
COA officials and employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local
government unit, GOCCs and government financial institutions, except
such compensation paid directly by the COA out of its appropriations and
contributions, and (2) government entities, including GOCCs, government
financial institutions and local government units from assessing or billing
other government entities, GOCCs, government financial institutions or
local government units for services rendered by the latter's officials and
employees as part of their regular functions for purposes of paying
additional compensation to said officials and employees.
xxx xxx xxx
The first aspect of the strategy is directed to the COA itself, while the
second aspect is addressed directly against the GOCCs and government
financial institutions. Under the first, COA personnel assigned to auditing
units of GOCCs or government financial institutions can receive only such
salaries, allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the
cost of audit services earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners. The COA is further
barred from assessing or billing GOCCs and government financial
institutions for services rendered by its personnel as part of their
regular audit functions for purposes of paying additional compensation to
such personnel. . . . . (Emphasis supplied)

In Tejada, the Court explained the meaning of the word "contributions" in Section 18
of RA 6758, which allows COA to charge GOCCs the cost of its audit services:
. . . the contributions from the GOCCs are limited to the cost
of audit services which are based on the actual cost of the audit function
in the corporation concerned plus a reasonable rate to cover overhead
expenses. The actual audit cost shall include personnel services,
maintenance and other operating expenses, depreciation on capital and
equipment and out-of-pocket expenses. In respect to the allowances and
fringe benefits granted by the GOCCs to the COA personnel assigned to

the former's auditing units, the same shall be directly defrayed by COA
from its own appropriations . . .. 41

COA may charge GOCCs "actual audit cost" but GOCCs must pay the same
directly to COA and not to COA auditors. Petitioner has not alleged that COA
charges LWDs auditing fees in excess of COA's "actual audit cost." Neither has
petitioner alleged that the auditing fees are paid by LWDs directly to individual
COA auditors. Thus, petitioner's contention must fail.
AEIcTD

WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and
the Decision dated 30 January 2001 denying petitioner's Motion for Reconsideration
are AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is
declared VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of
the Constitution. No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, SandovalGutierrez, Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr., Azcuna and Tinga,
JJ., concur.
(Feliciano v. Commission on Audit, G.R. No. 147402, [January 14, 2004], 464 PHIL
439-470)
|||

EN BANC
[G.R. Nos. 84132-33. December 10, 1990.]
NATIONAL DEVELOPMENT COMPANY AND NEW
AGRIX,
INC., petitioners, vs. PHILIPPINE VETERANS BANK,
THE EX-OFFICIO SHERIFF and GODOFREDO
QUILING, in his capacity as Deputy Sheriff of Calamba,
Laguna, respondents.
Vicente Pascual, Jr. and Lope E.
Feble for Philippine Veterans Bank.
DECISION
CRUZ, J :
p

This case involves the constitutionality of a presidential decree which, like all
other issuances of President Marcos during his regime, was at that time
regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts
are being tested by the touchstone of the fundamental law that even then
was supposed to limit presidential action.

extrajudicially foreclose the mortgage, prompting the petitioners to file a

second case with the same court to stop the foreclosure. The two cases were
consolidated.
After the submission by the parties of their respective pleadings, the trial
court rendered the impugned decision. Judge Francisco Ma. Guerrero
annulled not only the challenged provision, viz., Sec. 4 (1), but the entire
Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of
legislative power was a violation of the principle of separation of powers; (2)
the law impaired the obligation of contracts; and (3) the decree violated the
equal protection clause. The motion for reconsideration of this decision
having been denied, the present petition was filed.
cdrep

The petition was originally assigned to the Third Division of this Court but
because of the constitutional questions involved it was transferred to the
Court en banc. On August 30, 1988, the Court granted the petitioner's prayer
for a temporary restraining order and instructed the respondents to cease
and desist from conducting a public auction sale of the lands in question.
After the Solicitor General and the private respondent had filed their
comments and the petitioners their reply, the Court gave due course to the
petition and ordered the parties to file simultaneous memoranda. Upon
compliance by the parties, the case was deemed submitted.

cdrep

The particular enactment in question is Pres. Decree No. 1717, which

ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company. The law
outlined the procedure for filing claims against the Agrix companies and
created a Claims Committee to process these claims. Especially relevant to
this case, and noted at the outset, is Sec. 4(1) thereof providing that "all
mortgages and other liens presently attaching to any of the assets of the
dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private
respondent Philippine Veterans Bank a real estate mortgage dated July 7,
1978, over three (3) parcels of land situated in Los Baos, Laguna. During
the existence of the mortgage, AGRIX went bankrupt. It was for the
expressed purpose of salvaging this and the other Agrix companies that the
aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims
Committee for the payment of its loan credit. In the meantime, the New Agrix,
Inc. and the National Development Company, petitioners herein, invoking
Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of
Calamba, Laguna, for the cancellation of the mortgage lien in favor of the
private respondent. For its part, the private respondent took steps to

The petitioners contend that the private respondent is now estopped from
contesting the validity of the decree. In support of this contention, it cites the
recent case of Mendoza v. Agrix Marketing, Inc., 1where the constitutionality
of Pres. Decree No. 1717 was also raised but not resolved. The Court, after
noting that the petitioners had already filed their claims with the AGRIX
Claims Committee created by the decree, had simply dismissed the petition
on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also
invoked the provisions of Pres. Decree No. 1717 by filing a claim with the
AGRIX Claims Committee. Failing to get results, it sought to foreclose the
real estate mortgage executed by AGRIX in its favor, which had been
extinguished by the decree. It was only when the petitioners challenged the
foreclosure on the basis of Sec. 4 (1) of the decree, that the private
respondent attacked the validity of the provision. At that stage, however,
consistent with Mendoza, the private respondent was already estopped from
questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX
Claims Committee pursuant to this decree. It must be noted, however, that
this was done in 1980, when President Marcos was the absolute ruler of this

country and his decrees were the absolute law. Any judicial challenge to
them would have been futile, not to say foolhardy. The private respondent,
no less than the rest of the nation, was aware of that reality and knew it had
no choice under the circumstances but to conform.
cdll

It is true that there were a few venturesome souls who dared to question the
dictator's decisions before the courts of justice then. The record will show,
however, that not a single act or issuance of President Marcos was ever
declared unconstitutional, not even by the highest court, as long as he was in
power. To rule now that the private respondent is estopped for having abided
with the decree instead of boldly assailing it is to close our eyes to a cynical
fact of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after
filing their claims with the AGRIX Claims Committee, received in settlement
thereof shares of stock valued at P40,000.00 without protest or reservation.
The herein private respondent has not been paid a single centavo on its
claim, which was kept pending for more than seven years for alleged lack of
supporting papers. Significantly, the validity of that claim was not questioned
by the petitioner when it sought to restrain the extrajudicial foreclosure of the
mortgage by the private respondent. The petitioner limited itself to the
argument that the private respondent was estopped from questioning the
decree because of its earlier compliance with its provisions.
Independently of these observations, there is the consideration that an
affront to the Constitution cannot be allowed to continue existing simply
because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted
above, extinguishing all mortgages and other liens attaching to the assets of
AGRIX. It also notes, with equal concern, the restriction in Subsection (ii)
thereof that all "unsecured obligations shall not bear interest" and in
Subsection (iii) that "all accrued interests, penalties or charges as of date
hereof pertaining to the obligations, whether secured or unsecured, shall not
be recognized."
These provisions must be read with the Bill of Rights, where it is clearly
provided in Section 1 that "no person shall be deprived of life, liberty or
property without due course of law nor shall any person be denied the equal
protection of the law" and in Section 10 that "no law impairing the obligation
of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all
rights, are subject to regulation under the police power for the promotion of
the common welfare. The contention is that this inherent power of the state

may be exercised at any time for this purpose so long as the taking of the
property right, even if based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The police
power is not a panacea for all constitutional maladies. Neither does its mere
invocation conjure an instant and automatic justification for every act of the
government depriving a person of his life, liberty or property.
A legislative act based on the police power requires the concurrence of a
lawful subject and a lawful method. In more familiar words, a) the interests of
the public generally, as distinguished from those of a particular class, should
justify the interference of the state; and b) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the
interests of the public are not sufficiently involved to warrant the interference
of the government with the private contracts of AGRIX. The decree speaks
vaguely of the "public, particularly the small investors," who would be
prejudiced if the corporation were not to be assisted. However, the record
does not state how many there are of such investors, and who they are, and
why they are being preferred to the private respondent and other creditors of
AGRIX with vested property rights.
Cdpr

The public interest supposedly involved is not identified or explained. It has

not been shown that by the creation of the New Agrix, Inc. and the extinction
of the property rights of the creditors of AGRIX, the interests of the public as
a whole, as distinguished from those of a particular class, would be promoted
or protected. The indispensable link to the welfare of the greater number has
not been established. On the contrary, it would appear that the decree was
issued only to favor a special group of investors who, for reasons not given,
have been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the
means employed to rehabilitate AGRIX fall far short of the requirement that
they shall not be unduly oppressive. The oppressiveness is patent on the
face of the decree. The right to property in all mortgages, liens, interests,
penalties and charges owing to the creditors of AGRIX is arbitrarily
destroyed. No consideration is paid for the extinction of the mortgage rights.
The accrued interests and other charges are simply rejected by the decree.
The right to property is dissolved by legislative fiat without regard to the
private interest violated and, worse, in favor of another private interest.

A mortgage lien is a property right derived from contract and so comes under
the protection of the Bill of Rights. So do interests on loans, as well as
penalties and charges, which are also vested rights once they accrue.
Private property cannot simply be taken by law from one person and given to
another without compensation and any known public purpose. This is plain
arbitrariness and is not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as well. In
extinguishing the mortgage and other liens, the decree lumps the secured
creditors with the unsecured creditors and places them on the same level in
the prosecution of their respective claims. In this respect, all of them are
considered unsecured creditors. The only concession given to the secured
creditors is that their loans are allowed to earn interest from the date of the
decree, but that still does not justify the cancellation of the interests earned
before that date. Such interests, whether due to the secured or the
unsecured creditors, are all extinguished by the decree. Even assuming such
cancellation to be valid, we still cannot see why all kinds of creditors,
regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated
must be treated alike, both in the privileges conferred and the obligations
imposed. Conversely, all persons or things differently situated should be
treated differently. In the case at bar, persons differently situated
are similarly treated, in disregard of the principle that there should be equality
only among equals.
llcd

One may also well wonder why AGRIX was singled out for government help,
among other corporations where the stockholders or investors were also
swindled. It is not clear why other companies entitled to similar concern were
not similarly treated. And surely, the stockholders of the private respondent,
whose mortgage lien had been cancelled and legitimate claims to accrued
interests rejected, were no less deserving of protection, which they did not
get. The decree operated, to use the words of a celebrated case, 3 "with an
evil eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree
notwithstanding the provision of Article XIV, Section 4 of the
1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general
law, provide for the formation, organization, or regulation of
private corporations, unless such corporations are owned or
controlled by the Government or any subdivision or
instrumentality thereof. 4

The new corporation is neither owned nor controlled by the government. The
National Development Corporation was merely required to extend a loan of

not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof,
NDC would undertake the management of the corporation, but with the
obligation of making periodic reports to the Agrix board of directors. After
payment of the loan, the said board can then appoint its own management.
The stocks of the new corporation are to be issued to the old investors and
stockholders of AGRIX upon proof of their claims against the abolished
corporation. They shall then be the owners of the new corporation. New
Agrix, Inc. is entirely private and so should have been organized under the
Corporation Law in accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract
between AGRIX and the private respondent without justification. While it is
true that the police power is superior to the impairment clause, the principle
will apply only where the contract is so related to the public welfare that it will
be considered congenitally susceptible to change by the legislature in the
interest of the greater number. 5Most present-day contracts are of that
nature. But as already observed, the contracts of loan and mortgage
executed by AGRIX are purely private transactions and have not been shown
to be affected with public interest. There was therefore no warrant to amend
their provisions and deprive the private respondent of its vested property
rights.
It is worth noting that only recently in the case of the Development Bank of
the Philippines v. NLRC, 6 we sustained the preference in payment of a
mortgage creditor as against the argument that the claims of laborers should
take precedence over all other claims, including those of the government. In
arriving at this ruling, the Court recognized the mortgage lien as a property
right protected by the due process and contract clauses notwithstanding the
argument that the amendment in Section 110 of the Labor Code was a
proper exercise of the police power.
prcd

The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of
the police power, not being in conformity with the traditional requirements of
a lawful subject and a lawful method. The extinction of the mortgage and
other liens and of the interest and other charges pertaining to the legitimate
creditors of AGRIX constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to the category of
unsecured creditors in violation of the equal protection clause. Moreover, the
new corporation, being neither owned nor controlled by the Government,
should have been created only by general and not special law. And insofar
as the decree also interferes with purely private agreements without any
demonstrated connection with the public interest, there is likewise an
impairment of the obligation of the contract.

With the above pronouncements, we feel there is no more need to rule on

the authority of President Marcos to promulgate Pres. Decree No. 1717
under Amendment No. 6 of the 1973 Constitution. Even if he had such
authority, the decree must fall just the same because of its violation of the Bill
of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is
declared UNCONSTITUTIONAL. The temporary restraining order dated
August 30, 1988, is LIFTED. Costs against the petitioners.
llcd

SO ORDERED.
Fernan, C.J., Narvasa, Gutierrez, Jr., Paras, Gancayco Padilla, Bidin,
Sarmiento, Grio-Aquino, Medialdea and Regalado, JJ., concur.
Melencio-Herrera, J., In the result. In Dumlao v. COMELEC, 95 SCRA 392
(1980), a portion of the second paragraph of section 4 of Batas Pambansa
Blg. 52 was declared null and void for being unconstitutional.
Feliciano, J., is on leave.
(National Development Co. v. Philippine Veterans Bank, G.R. Nos. 8413233, [December 10, 1990], 270 PHIL 349-360)
|||

FIRST DIVISION
[G.R. No. 15574. September 17, 1919.]
SMITH, BELL &
COMPANY
(LTD.), petitioner, vs.
JOAQUIN NATIVIDAD, Collector of Customs of the
port of Cebu, respondent.
Ross & Lawrence for petitioner.
Attorney-General Paredes for respondent.
SYLLABUS
1.CONSTITUTIONAL LAW; PHILIPPINE BILL OF RIGHTS;
CONSTRUCTION. The guaranties extended by the Congress of the
United States to the Philippine Islands have been used in the same
sense as like provisions found in the United States Constitution.
2.ID.; ID.; FOURTEENTH AMENDMENT TO THE UNITED
STATES CONSTITUTION; DUE PROCESS OF LAW AND EQUAL
PROTECTION OF THE LAWS; ALIENS. The guaranties of the
Fourteenth Amendment and so of the first paragraph of the Philippine Bill
of Rights are universal in their application to all persons within the
territorial jurisdiction, without regard to any differences of race, color, or
nationality.
3.ID.; ID.; ID.; ID.; ID. The word "person" found in the
Fourteenth Amendment and in the first sentence of the first paragraph of
the Philippine Bill of Rights includes aliens.
4.ID.; ID.; ID.; ID.; ID. Private corporations are "persons"
within the scope of the guaranties in so far as their property is
concerned.
5.ID.; ID.; ID.; ID.; ID. Statutes which have attempted
arbitrarily to forbid aliens to engage in any kind of business to earn their
living have been held unconstitutional, while other statutes denying
certain rights to aliens have been held constitutional
6.ID.; ID.; ID.; ID.; ID.; POLICE POWER. Neither the
Fourteenth Amendment to the United States Constitution, broad and
comprehensive as it is, nor any other amendment, "was designed to
interfere with the power of the State, sometimes termed its police power,'
to prescribe regulations to promote the health, peace, morals, education
and good order of the people, and to legislate so as to increase the

industries of the State, develop its resources and add to its wealth and
prosperity. From the very necessities of society, legislation of a special
character, having these objects in view, must often be had in certain
districts." (Barbier vs. Connolly [1884], 113 U. S., 27; New Orleans Gas
Co. vs. Louisiana Light Co. [1885], 115 U. S., 650.)
7.ID.; ID.; ID.; ID.; ID.; ID. None of the provisions of the
Philippine Organic Law could have had the effect of denying to the
Government of the Philippine Islands, acting through its Legislature, the
right to exercise that most essential, insistent, and illimitable of powers,
the sovereign police power, in the promotion of the general welfare and
the public interest.
8.ID., ID.; ID.; ID.; ID.; ID. The public domain or the common
property or resources of the people of the State may be so regulated or
distributed as to limit the use to its citizens.
9.ID.; ID.; ID.; ID.; ID.; ID. The limitation of employment in the
construction of public works by, or for, a state or a municipality to citizens
of the United States or of a State is permitted.
10.ID.; ID.; ID.; ID.; ID.; ID. Our local experience and our
peculiar local conditions, often of controlling effect, have caused the
executive branch of the Government of the Philippine Islands, always
later with the sanction of the judicial branch, to take a firm stand with
reference to the presence of undesirable foreigners. The Government
has thus assumed to act for the all sufficient and primitive reasons of the
benefit and protection of its own citizens and of the self-preservation and
integrity of its dominion.
11.ID.; ID.; ID.; ID.; ID.; ID. Common carriers which, in the
Philippines as in the United States and other countries, are affected with
a public interest, can only be permitted to use the public waters, deemed
a part of the national domain and open to public use, as a privilege, and
under such conditions as to the Legislature may seem wise.
12.ID.; CONSTRUCTION; PUBLIC POLICY. The judiciary,
alive to the dictates of the national welfare, can properly incline the
'scales of their decisions in favor of that solution which will most
effectively promote the public policy.
13.ID.; ID., PRESUMPTION. All the presumption is in favor of
the constitutionality of the law, and without good and strong reasons a
court should not attempt to nullify the action of the Legislature.

14.ID.; ID.; ID. That is the true construction which will best
carry legislative intention into effect.
15.ID.; COMMERCE; UNITED STATES COASTWISE TRADE.
The power to regulate commerce, expressly delegated to the
Congress by the Constitution, includes the power to nationalize ships
built and owned in the United States by registries and enrollments and
the recording of the muniments of title of American vessels.
16.ID.; ID.; ID. Under the Acts of Congress of December 31,
1792, and February 18, 1793 (1 Stat. at L., 287, 305) in case of
alienation to a foreigner, all the privileges .of an American bottom
were ipso facto forfeited. No vessel in which a foreigner was directly or
indirectly interested could lawfully be registered as a vessel of the United
States.
17.ID.; ID.; ID. The Act of Congress of May 28, 1895 (29 Stat.
at L., 188) extended the privileges of registry from vessels wholly owned
by a citizen or citizens of the United States to corporations created under
the laws of any of the states thereof. This law made it possible for a
domestic corporation to obtain the registry or enrollment of its vessels
even though some stock of the corporation was owned by aliens.
18.ID.; ID.; PHILIPPINE COASTWISE TRADE; ACT No. 2761,
VALIDITY. The history of the different laws which have concerned the
Philippine coastwise trade is set out in the opinion. The last Act on the
subject, No. 2761, has returned to the restrictive idea of the original
Customs Administrative Act which in turn was merely a reflection of the
statutory language of the first American Congress.
19.ID.; ID.; ID.; ID. Without any subterfuge, the apparent
purpose of the Philippine Legislature is seen to be to enact an anti-alien
shipping act. The ultimate purpose of the Legislature is to encourage
Philippine ship-building.
20.ID.; ID.; ID.; ID. The Philippine Legislature made up
entirely of Filipinos, representing the mandate of the Filipino people and
the guardian of their rights, acting under practically autonomous powers,
and imbued with a strong sense of Philippinism, has desired for these
Islands safety from foreign interlopers, the use of the common property
exclusively by its citizens and the citizens of the United States, and
protection for the common good of the people.
21.ID.; ID.; ID.; ID. Act No. 2761 of the Philippine Legislature,
limiting certificates of the Philippine registry to vessels of domestic
ownership vested in some one or more of the following classes of

persons: (a) citizens or native inhabitants of the Philippine Islands; (b)

citizens of the United States residing in the Philippine Islands; (c) any
corporation or company composed wholly of citizens of the Philippine
Islands or of the United States or both, is authorized by the Act of
Congress of April 29, 1908, with its specific delegation of authority to the
Government of the Philippine Islands to regulate the transportation of
merchandise and passengers between ports or places therein, and by
the grant by the Act of Congress of August 29, 1916, of general
legislative power to the Philippine Legislature.
22.ID.; ID, ID.; ID. While the plaintiff, a corporation having
alien stockholders, is entitled to the protection afforded by the due
process of law and equal protection of the laws clause of the Philippine
Bill of Rights, yet Act No. 2761, in denying to corporations such as the
plaintiff the right to register vessels in the Philippine coastwise trade,
does not belong to that vicious species of class legislation which must
always be condemned, but falls within authorized exceptions, notably,
within the purview of the police power.
23.ID.; ID.; ID.; ID. Act No. 2761 does not violate the
provisions of paragraph 1 of section 3 of the Act of Congress of August
29, 1916, providing "that no law shall be enacted in said Islands which
shall deprive any person of life, liberty, or property without due process
of law, or deny to any person therein the equal protection of the laws."
24.ID.; ID.; ID.; ID. Act No. 2761 is held to be valid and
constitutional.
DECISION
MALCOLM, J :
p

A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.),

against Joaquin Natividad, Collector of Customs of the port of Cebu,
Philippine Islands, to compel him to issue a certificate of Philippine
registry to the petitioner for its motor vessel Bato. The Attorney-General,
acting as counsel for respondent, demurs to the petition on the general
ground that it does not state facts sufficient to constitute a cause of
action. While the facts are thus admitted, and while, moreover, the
pertinent provisions of law are clear and understandable, and
interpretative American jurisprudence is found in abundance, yet the
issue submitted is not lightly to be resolved. The question, flatly
presented, is, whether Act No. 2761 of the Philippine Legislature is valid
or, more directly stated, whether the Government of the Philippine
Islands, through its Legislature, can deny the registry of vessels in its
coastwise trade to corporations having alien stockholders.

FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing
under the laws of the Philippine Islands. A majority of its stockholders are
British subjects. It is the owner of a motor vessel known as the Bato built
for it in the Philippine Islands in 1916, of more than fifteen tons gross.
The Bato was brought to Cebu in the present year for the purpose of
transporting plaintiff's merchandise between ports in the Islands.
Application was made at Cebu, the home port of the vessel, to the
Collector of Customs for a certificate of Philippine registry. The Collector
refused to issue the certificate, giving as his reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens either of the United
States or of the Philippine Islands. The instant action is the result.

LAW.
The Act of Congress of April 29, 1908, repealing the Shipping
Act of April 30, 1906, but reenacting a portion of section 3 of this Law,
and still in force, provides in its section 1:
"That until Congress shall have authorized the registry
as vessels of the United States of vessels owned in the
Philippine Islands, the Government of the Philippine Islands is
hereby authorized to adopt, from time to time, and enforce
regulations governing the transportation of merchandise and
passengers between ports or places in the Philippine
Archipelago." (35 Stat. at L., 70; Section 3912, U. S. Comp. Stat.
[1916]; 7 Pub. Laws, 364.)

The Act of Congress of August 29, 1916, commonly known as

the Jones Law, still in force, provides in sections 3, (first paragraph, first
sentence), 6, 7, 8, 10, and 31, as follows:
"Sec. 3.That no law shall be enacted in said Islands
which shall deprive any person of life, liberty, or property without
due process of law, or deny to any person therein the equal
protection of the laws." . . .
"SEC. 6.That the laws now in force in the Philippines
shall continue in force and effect, except as altered, amended, or
modified herein, until altered, amended, or repealed by the
legislative authority herein provided or by Act of Congress of the
United States.
"SEC. 7.That the legislative authority herein provided
shall have power, when not inconsistent with this Act, by due

enactment to amend, alter, modify, or repeal any law, civil or

criminal, continued in force by this Act as it may from time to time
see fit.
"This power shall specifically extend with the limitation
herein provided as to the tariff to all laws relating to revenue and
taxation in effect in the Philippines.
"SEC. 8.That general legislative power, except as
otherwise herein provided, is hereby granted to the Philippine
Legislature, authorized by this Act."
"SEC. 10.That while this Act provides that the Philippine
government shall have the authority to enact a tariff law the trade
relations between the islands and the United States shall
continue to be governed exclusively by laws of the Congress of
the United States: Provided, That tariff acts or acts amendatory
to the tariff of the Philippine Islands shall not become law until
they shall receive the approval of the President of the United
States, nor shall any act of the Philippine Legislature affecting
immigration or the currency or coinage laws of the Philippines
become a law until it has been approved by the President of the
United States: Provided further, That the President shall approve
or disapprove any act mentioned in the foregoing proviso within
six months from and after its enactment and submission for his
approval, and if not disapproved within such time it shall become
a law the same as if it had been specifically approved."
"SEC. 31.That all laws or parts of laws applicable to the
Philippines not in conflict with any of the provisions of this Act are
hereby continued in force and effect." (39 Stat at L., 546.)

On February 23, 1918, the Philippine Legislature enacted Act

No. 2761. The first section of this law amended section 1172 of the
Administrative Code to read as follows:
"SEC. 1172.Certificate of Philippine register. Upon
registration of a vessel of domestic ownership, and of more than
fifteen tons gross, a certificate of Philippine register shall be
issued for it. If the vessel is of domestic ownership and of fifteen
tons gross or less, the taking of the certificate of Philippine
register shall be optional with the owner.
" 'Domestic ownership,' as used in this section, means
ownership vested in some one or more of the following classes of
persons: (a) Citizens or native inhabitants of the Philippine
Islands; (b) citizens of the United States residing in the Philippine
Islands; (c) any corporation or company composed wholly of
citizens of the Philippine Islands or of the United States or of
both, created under the laws of the United States, or of any State

thereof, or of the Philippine Islands, provides some duly

authorized officer thereof, or the managing agent or master of the
vessel resides in the Philippine Islands.
"Any vessel of more than fifteen gross tons which on
February eighth, nineteen hundred and eighteen, had a
certificate of Philippine register under existing law, shall likewise
be deemed a vessel of domestic ownership so long as there shall
not be any change in the ownership thereof nor any transfer of
stock of the companies or corporations owning such vessel to
persons not included under the last preceding paragraph."

Sections 2 and 3 of Act No. 2761 amended sections 1176 and

1202 of the Administrative Code to read as follows:
"SEC. 1176.Investigation into character of vessel. No
application for a certificate of Philippine register shall be
approved until the collector of customs is satisfied from an
inspection of the vessel that it is engaged or destined to be
engaged in legitimate trade and that it is of domestic ownership
as such ownership is defined in section eleven hundred and
seventy-two of this Code.
"The collector of customs may at any time inspect a
vessel or examine its owner, master, crew, or passengers in
order to ascertain whether the vessel is engaged in legitimate
trade and is entitled to have or retain the certificate of Philippine
register."
"SEC. 1202.Limiting number of foreign officers and
engineers on board vessels. No Philippine vessel operating in
the coastwise trade or on the high seas shall be permitted to
have on board more than one master or one mate and one
engineer who are not citizens of the United States or of the
Philippine Islands, even if they hold licenses under section one
thousand one hundred and ninety-nine hereof. No other person
who is not a citizen of the United States or of the Philippine
Islands shall be an officer or a member of the crew of such
vessel. Any such vessel which fails to comply with the terms of
this section shall be required to pay an additional tonnage tax of
fifty centavos per net ton per month during the continuance of
said failure."

ISSUES.
Predicated on these facts and provisions of law, the issues as
above stated recur, namely, whether Act No. 2761 of the Philippine
Legislature is valid in whole or in part whether the Government of the
Philippine Islands, through its Legislature, can deny the registry of vessel
in its coast- wise trade to corporations having alien stockholders.

OPINION.
1.Considered from a positive standpoint, there can exist no
measure of doubt as to the power of the Philippine Legislature to enact
Act No. 2761. The Act of Congress of April 29, 1908, with its specific
delegation of authority to the Government of the Philippine Islands to
regulate the transportation of merchandise and passengers between
ports or places therein, the liberal construction given to the provisions of
the Philippine Bill, the Act of Congress of July 1, 1902, by the courts, and
the grant by the Act of Congress of August 29, 1916, of general
legislative power to the Philippine Legislature, are certainly
superabundant authority for such a law. While the Act of the local
legislature may in a way be inconsistent with the Act of Congress
regulating the coasting trade of the Continental United States, yet the
general rule that only such laws of the United States have force in the
Philippines as are expressly extended thereto, and the abnegation of
power by Congress in favor of the Philippine Islands would leave no
starting point for convincing argument. As a matter of fact, counsel for
petitioner does not assail legislative action from this direction. (See U. S.
vs. Bull [1910], 15 Phil., 7; Sinnot vs. Davenport [1859] 22 How., 227.)
2.It is from the negative, prohibitory standpoint that counsel
argues against the constitutionality of Act No. 2761. The first paragraph
of the Philippine Bill of Rights of the Philippine Bill, repeated again in the
first paragraph of the Philippine Bill of Rights as set forth in the Jones
Law, provides "That no law shall be enacted in said Islands which shall
deprive any person of life, liberty, or property without due process of law,
or deny to any person therein the equal protection of the laws." Counsel
says that Act No. 2761 denies to Smith, Bell & Co., Ltd., the equal
protection of the laws because it, in effect, prohibits the corporation from
owning vessels, and because classification of corporations based on the
citizenship of one or more of their stockholders is capricious, and that Act
No. 2761 deprives the corporation of its property without due process of
law because by the passage of the law the company was automatically
deprived of every beneficial attribute of ownership in theBato and left
with the naked title to a boat it could not use.
The guaranties extended by the Congress of the United States to
the Philippine Islands have been used in the same sense as like
provisions found in the United States Constitution. While the "due
process of law and equal protection of the laws" clause of the Philippine
Bill of Rights is couched in slightly different words than the corresponding
clause of the Fourteenth Amendment to the United States Constitution,
the first should be interpreted and given the same force and effect as the
latter. (Kepner vs. U. S. [1904], 195 U. S., 100; Serra vs. Mortiga [1907],
204 U. S., 470, U. S. vs. Bull [1910], 15 Phil., 7.) The meaning of the

Fourteenth Amendment has been announced in classic decisions of the

United States Supreme Court. Even at the expense of restating what is
so well known, these basic principles must again be set down in order to
serve as the basis of this decision.
The guaranties of the Fourteenth Amendment and so of the first
paragraph of the Philippine Bill of Rights, are universal in their
application to all persons within the territorial jurisdiction, without regard
to any differences of race, color, or nationality. The word "person"
includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356; Truax vs.
Raich [1915], 239 U. S., 33.) Private corporations, likewise, are "persons"
within the scope of the guaranties in so far as their property is
concerned. (Santa Clara County vs. Southern Pac. R. R. Co. [1886], 118
U. S., 394; Pembina Mining Co. vs. Pennsylvania [1888], 125 U. S., 181;
Covington &; L. Turnpike Road Co. vs. Sandford [1896], 164 U. S., 578.)
Classification with the end in view of providing diversity of treatment may
be made among corporations, but must be based upon some reasonable
ground and not be a mere arbitrary selection. (Gulf, Colorado & Santa Fe
Railway Co. vs. Ellis [1897], 165 U. S., 150.) Examples of laws held
unconstitutional because of unlawful discrimination against aliens could
be cited. Generally, these decisions relate to statutes which had
attempted arbitrarily to forbid aliens to engage in ordinary kinds of
business to earn their living. (State vs. Montgomery [1900], 94 Maine,
192, peddling but see Commonwealth vs. Hana [1907], 195 Mass.,
262; Templar vs. Board of Examiners of Barbers [1902], 131 Mich., 254,
barbers; Yick Wo vs. Hopkins [1886], 118 U. S 356, discrimination
against Chinese ; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott
[1880], 1 Fed., 481; Fraser vs McConway & Torley Co. [1897], 82 Fed.,
257, Juniata Limestone Co. vs. Fagley [1898], 187 Penn., 193, all
relating to the employment of aliens by private corporations.)

A literal application of general principles to the facts before us

would, of course, cause the inevitable deduction that Act No. 2761 is
unconstitutional by reason of its denial to a corporation, some of whose
members are foreigners, of the equal protection of the laws. Like all
beneficent propositions, deeper research discloses provisos. Examples
of a denial of rights to aliens notwithstanding the provisions of the
Fourteenth Amendment could be cited. (Tragesser vs. Gray [1890], 73
Md., 250, licenses to sell spirituous liquors denied to persons not citizens
of the United States; Commonwealth vs. Hana [1907], 19.~ Mass., 262,
excluding aliens from the right to peddle; Patsone vs. Commonwealth of
Pennsylvania [1914], 232 U. S., 138, prohibiting the killing of any wild
bird or animal by any unnaturalized foreign-born resident; Ex parte Gilleti
[1915], 70 Fla., 442, discriminating in favor of citizens with reference to

the taking for private use of the common property in fish and oysters
found in the public waters of the State; Heim vs. McCall [1915], 239 U.
S., 175, and Crane vs. New York [1915], 239 U. S., 195, limiting
employment on public works by, or for, the State or a municipality to
citizens of the United States.)
One of the exceptions to the general rule, most persistent and far
reaching in influence is, that neither the Fourteenth Amendment to the
United States Constitution, broad and comprehensive as it is, nor any
other amendment, "was designed to interfere with the power of the State,
sometimes termed its 'police power,' to prescribe regulations to promote
the health, peace, morals, education, and good order of the people, and
to legislate so as to increase the industries of the State, develop its
resources and add to its wealth and prosperity- From the very
necessities of society, legislation of a special character, having these
objects in view, must often be had in certain districts." (Barbier vs.
Connolly [1884], 113 U. S., 27; New Orleans Gas Co. vs. Louisiana Light
Co. [1885], 115 U. S., 650.) This is the same police power which the
United States Supreme Court says "extends to so dealing with the
conditions which exist in the state as to bring out of them the greatest
welfare of its people." (Bacon vs. Walker [1907], 204 U-. S., 311.) For
quite similar reasons, none of the provisions of the Philippine Organic
Law could have had the effect of denying to the Government of the
Philippine Islands, acting through its Legislature, the right to exercise that
most essential, insistent, and illimitable of powers, the sovereign police
power, in the promotion of the general welfare and the public interest. (U.
S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs. Raferty [1915],
32 Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.l
Another notable exception permits of the regulation or distribution of the
public domain or the common property or resources of the people of the
State, so that the use may be limited to its citizens. (Ex Parte Gilleti
[1915], 70 Fla., 442; McCready vs. Virginia [1876], 94 U. S., 391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S., 138.) Still
another exception permits of the limitation of employment in the
construction of public works by, or for, the State or a municipality to
citizens of the United States or of the State. (Atkin vs. Kansas [1903],
191 U. S., 207; Heim vs. McCall [1915], 239 U.' S., 175; Crane vs. New
York [1915], 239 U. S., 195.) Even as to classification, it is admitted that
a State may classify with reference to the evil to be prevented; the
question is a practical one, dependent upon experience. (Patsone vs.
Commonwealth of Pennsylvania [1914], 232 U. S., 138.)
To justify that portion of Act No. 2761 which permits corporations
or companies to obtain a certificate of Philippine registry only on
condition that they be composed wholly of citizens of the Philippine
Islands or of the United States or both, as not infringing Philippine

Organic Law, it must be done under some one of the exceptions here
mentioned. This must be done, moreover, having particularly in mind
what is so often of controlling effect in this jurisdiction our local
experience and our peculiar local conditions.
To recall a few facts in geography, within the confines of
Philippine jurisdictional limits are found more than three thousand
islands. Literally, and absolutely, steamship lines are, for an Insular
territory thus situated, the arteries of commerce. If one be severed, the
life-blood of the nation is lost. If on the other hand these arteries are
protected, then the security of the country and the promotion of the
general welfare is sustained. Time and again, with such conditions
confronting it, has the executive branch of the Government of the
Philippine Islands, always later with the sanction of the judicial branch,
taken a firm stand with reference to the presence of undesirable
foreigners. The Government has thus assumed to act for the all-sufficient
and primitive reason of the benefit and protection of its own citizens and
of the self-preservation and integrity of its dominion. (In re Patterson
[1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16
Phil., 534; 228 U. S., ;549; In re McCulloch Dick [1918], 38 Phil., 41. )
Boats owned by foreigners, particularly by such solid and reputable firms
as the instant claimant, might indeed traverse the waters of the
Philippines for ages without doing any particular harm. Again, some evilminded foreigner might very easily take advantage of such lavish
hospitality to chart Philippine waters, to obtain valuable information for
unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino
or American commerce. Moreover, under the Spanish portion of
Philippine law, the waters within the domestic jurisdiction are deemed
part of the national domain, open to public use. (Book II, Tit. IV, Ch. I,
Civil Code; Spanish Law of Waters of August 3, 1866. arts. 1. 2. 3.)
Common carriers which in the Philippines as in the United States and
other countries are, as Lord Hale said, "affected with a public interest,"
can only be permitted to use these public waters as a privilege and under
such conditions as to the representatives of the people may seem wise.
(See De Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.
S., 138), a case hereinbefore mentioned, Justice Holmes delivering the
opinion of the United States Supreme Court said:
"This statute makes it unlawful for any unnaturalized
foreign-born resident to kill any wild bird or animal except in
defense of person or property, and 'to that end' makes it unlawful
for such foreign-born person to own or be possessed of a
shotgun or rifle; with a penalty of $25 and a forfeiture of the gun
or guns. The plaintiff in error was found guilty and was sentenced
to pay the above mentioned fine. The judgment was affirmed on

successive appeals. (231 Pa., 46; 79 Atl., 928.) He brings the

case to this court on the ground that the statute is contrary to the
14th Amendment and also is in contravention of the treaty
between the United States and Italy, to which latter country the
plaintiff in error belongs.
"Under the 14th Amendment the objection is twofold;
unjustifiably depriving the alien of property, and discrimination
against such aliens as a class. But the former really depends
upon the latter, since it hardly can be disputed that if the lawful
object, the protection of wild life (Geer vs. Connecticut, 161 U. S.,
519; 40 L. ed., 793; 16 Sup. Ct. Rep., 600), warrants the
discrimination, the means adopted for making it effective also
might be adopted. . . .
"The discrimination undoubtedly presents a more
difficult question. But we start with the general consideration that
a state may classify with reference to the evil to be prevented,
and that if the class discriminated against is or reasonably might
be considered to define those from whom the evil mainly is to be
feared, it properly may be picked out. A lack of abstract
symmetry does not matter. The question is a practical one,
dependent upon experience. . . .
"The question therefore narrows itself to whether this
court can say that the legislature of Pennsylvania was not
warranted in assuming as its premise for the law that resident
unnaturalized aliens were the peculiar source of the evil that it
desired to prevent. (Barrett vs. Indiana, 229 U. S., 26, 29; 57 L.
ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)
"Obviously the question, so stated, is one of local
experience, on which this court ought to be very slow to declare
that the state legislature was wrong in its facti. (Adams vs.
Milwaukee, 228 U. S., 572, 583; 57 L. ed., 971, 977; 33 Sup. Ct.
Rep., 610.) If we might trust popular speech in some states it was
right; but it is enough that this court has no such knowledge of
local conditions as to be able to say that it was manifestly wrong.
...
"Judgment affirmed."

We are inclined to the view that while Smith, Bell & Co Ltd., a
corporation having alien stockholders, is entitled to the protection
afforded by the-due process of law and equal protection of the laws
clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of the
Philippine Legislature, in denying to corporations such as Smith, Bell &
Co. Ltd., the right to register vessels in the Philippines coastwise trade,
does not belong to that vicious species of class legislation which must
always be condemned, but does fall within authorized exceptions,

notably, within the purview of the police power, and so does not offend
against the constitutional provision.
This opinion might well be brought to a close at this point. It
occurs to us, however, that the legislative history of the United States
and the Philippine Islands, and, probably, the legislative history of other
countries, if we were to take the time to search it out, might disclose
similar attempts at restriction on the right to enter the coastwise trade,
and might thus furnish valuable aid by which to ascertain and, if possible,
effectuate legislative intention.

3.The power to regulate commerce, expressly delegated to the

Congress by the Constitution, includes the power to nationalize ships
built and owned in the United States by registries and enrollments, and
the recording of the muniments of title of American vessels. The
Congress "may encourage or it may entirely prohibit such commerce,
and it may regulate in any way it may see fit between these two
extremes." (U. S. vs. Craig [1886], 28 Fed., 795; Gibbons vs. Ogden
[1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How., 283.)
Acting within the purview of such power, the first Congress of the
United States had not been long convened before it enacted on
September 1, 1789, "An Act for Registering and Clearing Vessels,
Regulating the Coasting Trade, and for other purposes." Section 1 of this
law provided that for any ship or vessel to obtain the benefits of
American registry, it must belong wholly to a citizen or citizens of the
United States "and no other." (1 Stat. at L., 55.) That Act was shortly
after repealed, but the same idea was carried into the Acts of Congress
of December 31, 1792 and February 18, 179.3. (1 Stat. at L., 287, 305.)
Section 4 of the Act of 1792 provided that in order to obtain the registry
of any vessel, an oath shall be taken and subscribed by the owner, or by
one of the owners thereof, before the officer authorized to make such
registry, declaring, "that there is no subject or citizen of any foreign
prince or state, directly or indirectly, by way of trust, confidence, or
otherwise, interested in such vessel, or in the profits or issues thereof."
Section 32 of the Act of 1793 even went so far as to say "that if any
licensed ship or vessel shall be transferred to any person who is not at
the time of such transfer a citizen of and resident within the United
States, . . . every such vessel with her tackle, apparel, and furniture, and
the cargo found on board her, shall be forfeited." In case of alienation to
a foreigner, Chief Justice Marshall said that all the privileges of an
American bottom were ipso facto forfeited. (U. S. vs. Willings and Francis
[1807], 4 Cranch, 48.) Even as late as 1873, the Attorney-General of the
United States was of the opinion that under the provisions of the Act of

December 31, 1792 no vessel in which a foreigner is directly or indirectly

interested can lawfully be registered as a vessel of the United States. (14
Op. Atty.-Gen. [U. S.], 340.)
These laws continued in force without contest, although possibly
the Act of March 3, 1825, may have affected them until amended by the
Act of May 28, 1896 (29 Stat. at L., 188) which extended the privileges of
registry from vessels wholly owned by a citizen or citizens of the United
States to corporations created under the laws of any of the states
thereof. The law, as amended, made possible the deduction that a
vessel belonging to a domestic corporation was entitled to registry or
enrollment even though some stock of the company be owned by aliens.
The right of ownership of stock in a corporation was thereafter distinct
from the right to hold the property by the corporation. (Humphreys vs.
McKissock [1890], 140 U. S., 304; Queen vs. Arnaud [1846], 9 Q. B.,
806; 29 Op. Atty.-Gen. [U. S.], 188.)
On American occupation of the Philippines, the new government
found a substantive law in operation in the Islands with a civil law history
which it wisely continued in force. Article fifteen of the Spanish Code of
Commerce permitted any foreigner to engage in Philippine trade if he
had legal capacity to do so under the laws of his nation. When the
Philippine Commission came to enact the Customs Administrative Act
(No. 355) in 1902, it returned to the old American policy of limiting the
protection and flag of the United States to vessels owned by citizens of
the United States or by native inhabitants of the Philippine Islands. (Sec.
117.) Two years later, the same body reverted to the existing
Congressional law by permitting certificates to be issued to a citizen of
the United States or to a corporation or company created under the laws
of the United States or of any state thereof or of the Philippine Islands.
(Act No. 1235, sec. 3. ) The two administrative codes repeated the same
provision with the necessary amplification of inclusion of citizens or
native inhabitants of the Philippine Islands (Adm. Code of 1916, sec.
1345; Adm. Code of 1917, sec. 1172). And now Act No. 2761 has
returned to the restrictive idea of the original Customs Administrative Act
which in turn was merely a reflection of the statutory language of the first
American Congress.
Provisions such as those in Act No. 2761, which deny to
foreigners the right to a certificate of Philippine registry, are thus found
not to be as radical as a first reading would make them appear.
Without any subterfuge, the apparent purpose of the Philippine
Legislature is seen to be to enact an anti-alien shipping act. The ultimate
purpose of the Legislature is to encourage Philippine ship-building. This,
without doubt, has, likewise, been the intention of the United States

Congress in passing navigation or tariff laws on different occasions. The

object of such a law, the United States Supreme Court once said, was to
encourage American trade, navigation, and ship-building by giving
American ship-owners exclusive privileges. ( Old Dominion Steamship
Co. vs. Virginia [1905], 198 U. S., 299; Kent's Commentaries, Vol. 3, p.
139.)

Surely, the members of the judiciary are not expected to live

apart from active life, in monastic seclusion amidst dusty tomes and
ancient records, but, as keen spectators of passing events and alive to
the dictates of the general the national welfare, can incline the
scales of their decisions in favor of that solution which will most
effectively promote the public policy. All the presumption is in favor of the
constitutionality of the law and without good and strong reasons, courts
should not attempt to nullify the action of the Legislature. "In construing a
statute enacted by the Philippine Commission (Legislature), we deem it
our duty not to give it a construction which would be repugnant to an Act
of Congress, if the language of the statute is fairly susceptible of another
construction not in conflict with the higher law." (In re Guaria [1913], 24
Phil., 36; U. S. vs. Ten Yu [1912], 24 Phil., 1.) That is the true
construction which will best carry legislative intention into effect.

In the concurring opinion of Justice Johnson in Gibbons vs.

Ogden ([1824], 9 Wheat., 1) is found the following:
"Licensing acts, in fact, in legislation, are universally
restraining acts; as, for example, acts licensing gaming houses,
retailers of spirituous liquors, etc. The act, in this instance, is
distinctly of that character, and forms part of an extensive
system, the object of which is to encourage American shipping,
and place them on an equal footing with the shipping of other
nations. Almost every commercial nation reserves to its own
subjects a monopoly of its coasting trade; and a countervailing
privilege in favor of American shipping is contemplated, in the
whole legislation of the United States on this subject. It is not to
give the vessel an American character, that the license is
granted; that effect has been correctly attributed to the act of her
enrollment. But it is to confer on her American privileges. a contra
distinguished from foreign; and to preserve the Government from
fraud by foreigners, in surreptitiously intruding themselves into
the American commercial marine, as well as frauds upon the
revenue in the trade coastwise that this whole system is
projected."

The United States Congress in assuming its grave responsibility

of legislating wisely for a new country did so imbued with a spirit of
Americanism. Domestic navigation and trade, it decreed, could only be
carried on by citizens of the United States. If the representatives of the
American people acted in this patriotic manner to advance the national
policy, and if their action was accepted without protest in the courts, who
can say that they did not enact such beneficial laws under the allpervading police power, with the prime motive of safeguarding the
country and of promoting its prosperity? Quite similarly, the Philippine
Legislature made up entirely of Filipinos, representing the mandate of the
Filipino people and the guardian of their rights, acting under practically
autonomous powers, and imbued with a strong sense of Philippinism,
has desired for these Islands safety from foreign interlopers, the use of
the common property exclusively by its citizens and the citizens of the
United States, and protection for the common good of the people. Who
can say, therefore, especially can a court, that with all the facts and
circumstances affecting the Filipino people before it, the Philippine
Legislature has erred in the enactment of Act No. 2761?

With full consciousness of the importance of the question, we

nevertheless are clearly of the opinion that the limitation of domestic
ownership for purposes of obtaining a certificate of Philippine registry in
the coastwise trade to citizens of the Philippine Islands, and to citizens of
the United States, does not violate the provisions of paragraph 1 of
section 3 of the Act of Congress of August 29, 1916. No treaty right is
relied upon. Act No. 2761 of the Philippine Legislature is held valid and
constitutional.
The petition for a writ of mandamus is denied, with costs against
the petitioner. So ordered.
Arellano, C. J., Torres, Johnson, Araullo, Street,
Avancea and Moir, JJ., concur.

(Smith, Bell & Co. (Ltd.) v. Natividad, G.R. No. 15574, [September 17,
1919], 40 PHIL 136-155)
|||

EN BANC
[G.R. No. L-19550. June 19, 1967.]
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J.
BROOKS and KARL BECK, petitioners, vs. HON. JOSE
W. DIOKNO, in his capacity as SECRETARY OF
JUSTICE, JOSE LUKBAN, in his capacity as Acting
Director of the National Bureau of Investigation;
SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN
I. PLANA and MANUEL VILLAREAL, JR. and ASST.
FISCAL MANASES G. REYES, JUDGE AMADO ROAN,
Municipal Court of Manila, JUDGE ROMAN CANSINO,
Municipal Court of Manila, JUDGE HERMOGENES
CALUAG, Court of First Instance of Rizal-Quezon City
Branch, and JUDGE DAMIAN JIMENEZ, Municipal
Court of Quezon City, respondents.
Paredes, Poblador, Cruz & Nazareno and Meer, Meer & Meer and Juan
T . David for petitioners.
Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de
Castro, Assistant Solicitor General Frine C . Zaballero, Solicitor Camilo
D. Quiason and Solicitor C . Padua for respondents.
SYLLABUS
1. CONSTITUTIONAL LAW; SEARCH AND SEIZURE; WHO MAY
CONTEST LEGALITY THEREOF CASE AT BAR. It is well settled that the
legality of a seizure can be contested only by the party whose rights have
been impaired thereby (Lewis vs. U.S., 6 F. 2d. 22) and that the objection to
an unlawful search and seizure is purely personal and cannot be availed of
by third parties (In. re Dooley, 48 F. 2d. 121: Rouda vs. U.S., 10 F. 2d. 916;
Lusco vs. U.S., 287 F. 69; Ganci vs. U.S., 287 F, 60; Moriz vs. U.S., 26 F.
2d. 444). Consequently, petitioner in the case at bar may not validly object to
the use in evidence against them of the document, papers, and things seized
from the offices and premises of the corporation adverted to, since the right
to object to the admission of said papers in evidence belongs exclusively to
the corporations, to whom the seized effects belong, and may not be invoked
by the corporate officers in proceedings against them in their individual
capacity U.S., vs. Gaas, 17 F. 2d. 997; People vs. Rubio, 57 Phil., 384).
2. ID.; ID.; REQUISITES FOR ISSUANCE OF SEARCH WARRANT. Two
points must be stressed in connection with this constitutional mandate,
namely: (1) that no warrant issue but upon probable cause, to be determined
by the judge in the manner set forth in said provision; and (2) that the warrant

shall particularly describe the things to be seized. None of these

requirements has been complied with in the contested warrants. Indeed, the
same were issued upon applications stating that the natural and juridical
persons therein named had committed a "violation of Central Bank Laws,
Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code." In other words, no specific offense had been alleged in said
applications. The averments thereof with respect to the offense committed
were abstract. As a consequence, it was impossible for the judges who
issued the warrants to have found the existence of probable cause, for the
same presupposes the introduction of competent proof that the party against
whom it is sought has performed particular acts, or committed specific
omissions, violating a given provision of our criminal laws. As a matter of
fact, the applications involved in the case at bar do not allege any specific
acts performed by herein petitioners. It would be a legal heresy, of the
highest order, to convict anybody of a "violation of Central Bank Laws, Tariff
and Customs Laws, Internal Revenue (Code) and Revised Penal Code",
as alleged in aforementioned applications without reference to any
determine provision of said laws or coders.
3. ID.; ID.; ID.; GENERAL WARRANTS ARE OUTLAWED BY THE
CONSTITUTION. To uphold the validity of the warrants in question, would
be to wipe out completely one of the most fundamental rights guaranteed in
our Constitution, for it would place the sanctity of the domicile and the privacy
of communication and correspondence at the mercy of the victims, caprice or
passion of peace officers. This is precisely the evil sought to be remedied by
the constitutional provision Sec. 1, par. 3 Art. III, Const.) to outlaw the socalled general warrants. It is not difficult to imagine what would happen, in
times of keen political strife, when the party in power feels that the minority is
likely to wrest it, even though by legal means. Such is the seriousness of the
irregularities committed in connection with the disputed search warrants, that
this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of
Court, by providing in its counterpart, under the Revised Rules of Court (Sec.
3, Rule 126) that "a search warrant shall not issue but upon probable cause
in connection with one specific offense." Not satisfied with this qualification,
the Court added thereto paragraph, directing that "no search warrant shall
issue for more than one specific offense."
4. ID.; ID.; ID.; ID.; CASE AT BAR. The grave violation of the Constitution
made in the application for the contested search warrants was compounded
by the description therein made of the effects to be searched for and seized,
to wit: "Books of accounts, Financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and
other documents and/or papers, showing all business transactions including
disbursement receipts, balance sheets and related profit and loss
statements." Thus, the warrants authorized the search for and seizure of
records pertaining to all business transactions petitioners herein, regardless

of whether the transaction were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the explicit command of our
Bill of Rights that the things to be seized be particularly described as
well as tending to defeat its major objective: the elimination
of general warrants.
5. ID.; ID.; ID.; NON-EXCLUSIONARY RULE CONTRAVENES THE
CONSTITUTIONAL PROHIBITIONS AGAINST UNREASONABLE SEARCH
AND SEIZURES. Indeed, the non-exclusionary rule is contrary, not only to
the letter, but also to the spirit of the constitutional injunction against
unreasonable searches and seizures. To be sure, if the applicant for a
search warrant has competent evidence to establish probable cause of the
commission of a given crime by the party against whom the warrant is
intended, then there is no reason why the applicant should not comply with
the requirements of the fundamental law. Upon the other hand, if he has no
such competent evidence, then it is not possible for the Judge to find that
there is probable cause and only possible for the Judge to find that there is
probable cause and hence, no justification for the issuance of the warrant.
The only possible explanation (not justification) for its issuance is the
necessity of fishing evidence of the commission of crime. But when this
fishing expedition is indicative of the absence of evidence to establish a
probable cause.
6. ID.; ID.; ID.; ID.; PROSECUTION OF THOSE WHO SECURE ILLEGAL
SEARCH WARRANT OR MAKE UNREASONABLE SEARCH OR SEIZURE
IS NO EXCUSE. The theory that the criminal prosecution of those who
secure an illegal search warrant and/or make unreasonable searches or
seizures would suffice to protect the constitutional guarantee under
consideration, overlooks the fact that violations thereof are, in general,
committed by agents of the party in power, for certainly, those belonging to
the minority could not possibly abuse a power they do not have. Regardless
of the handicap under which the minority usually but understandably finds
itself in prosecuting agents of the majority, one must not lose sight of the fact
that the psychological and moral effect of the possibility of securing their
conviction, is watered down by the pardoning power of the party for whose
benefit the illegality had been committed.
7. ID.; ID.; ID.; MONCADO DOCTRINE ABANDONED. The doctrine
adopted in the Moncado case must be, as it is hereby, abandoned; the
warrants for the search of 3 residences of petitioners, as specified in the
Resolution of June 29, 1962, are null and void; the searches and seizures
therein made are illegal.
DECISION

CONCEPCION, C .J :
p

Upon application of the officers of the government named on the margin 1

hereinafter referred to as Respondent-Prosecutors several judges 2
hereinafter referred to as Respondent-Judges issued, on different
dates, 3 a total of 42 search warrants against petitioners herein 4 and/or the
corporations of which they were officers, 5 directed to any peace officer, to
search the persons above-named and/or the premises of their offices,
warehouses and/or residences, and to seize and take possession of the
following personal property to wit:
"Books of accounts, financial records, vouchers, correspondence,
receipts, ledgers, journals, portfolios, credit journals, typewriters,
and other documents and/or papers showing all business
transactions including disbursements receipts, balance sheets
and profit and loss statements and Bobbins (cigarette wrappers)."

as "the subject of the offense; stolen or embezzled and proceeds or fruits

of the offense," or "used or intended to be used as the means of
committing the offense," which is described in the applications adverted
to above as "violation of Central Bank Laws, Tariff and Customs Laws,
Internal Revenue (Code) and the Revised Penal Code."
Alleging that the aforementioned search warrants are null and void, as
contravening the Constitution and the Rules of Court because, inter alia:
(1) they do not describe with particularity the documents, books and things to
be seized; (2) cash money, not mentioned in the warrants, were actually
seized; (3) the warrants were issued to fish evidence against the
aforementioned petitioners in deportation cases filed against them; (4) the
searches and seizures were made in an illegal manner; and (5) the
documents, papers and cash money seized were not delivered to the courts
that issued the warrants, to be disposed of in accordance with law on
March 20, 1962, said petitioners filed with the Supreme Court this original
action for certiorari, prohibition, mandamus and injunction, and prayed that,
pending final disposition of the present case, a writ of preliminary injunction
be issued restraining Respondent-Prosecutors, their agents and or
representatives from using the effects seized as aforementioned, or any
copies thereof, in the deportation cases already adverted to, and that, in due
course, thereafter, decision be rendered quashing the contested search
warrants and declaring the same null and void, and commanding the
respondents, their agents or representatives to return to petitioners herein, in
accordance with Section 3, Rule 67, of the Rules of Court, the documents,
papers, things and cash moneys seized or confiscated under the search
warrants in question.

In their answer, respondents-prosecutors alleged 6 (1) that the contested

search warrants are valid and have been issued in accordance with law; (2)
that the defects of said warrants, if any, were cured by petitioners' consent;
and (3) that, in any event, the effects seized are admissible in evidence
against herein petitioners, regardless of the alleged illegality of the
aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed
for in the petition. However, by resolution dated June 29, 1962, the writ was
partially lifted or dissolved, insofar as the papers, documents and things
seized from the offices of the corporations above mentioned are concerned;
but, the injunction was maintained as regards the papers, documents and
things found and seized in the residences of petitioners herein. 7
Thus, the documents, papers, and things seized under the alleged authority
of the warrants in question may be split into (2) major groups, namely: (a)
those found and seized in the offices of the aforementioned corporations and
(b) those found seized in the residences of petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of
action to assail the legality of the contested warrants and of the seizures
made in pursuance thereof, for the simple reason that said corporations have
their respective personalities, separate and distinct from the personality of
herein petitioners, regardless of the amount of shares of stock or of the
interest of each of them in said corporations, and whatever the offices they
hold therein may be. 8 Indeed, it is well settled that the legality of a seizure
can be contested only by the party whose rights have been impaired
thereby, 9 and that the objection to an unlawful search and seizure is
purely personal and cannot be availed of by third parties. 10 Consequently,
petitioners herein may not validly object to the use in evidence against them
of the documents, papers and things seized from the offices and premises of
the corporations adverted to above, since the right to object to the admission
of said papers in evidence belongsexclusively to the corporations, to whom
the seized effects belong, and may not be invoked by the corporate officers
in proceedings against them in their individual capacity. 11 Indeed, it has been
held:
". . . that the Government's action in gaining possession of
papers belonging to the corporation did not relate to nor did it
affect the personal defendants. If these papers were unlawfully
seized and thereby the constitutional rights of or any one were
invaded, they were the rights of the corporation and not the rights
of the other defendants. Next, it is clear that a question of the
lawfulness of a seizure can be raised only by one whose rights
have been invaded. Certainly, such a seizure, if unlawful, could
not affect the constitutional rights of defendants whose property
had not been seized or the privacy of whose homes had not been

disturbed; nor could they claim for themselves the benefits of the
Fourth Amendment, when its violation, if any, was with reference
to the rights of another. Remus vs. United States (C.C.A.) 291 F.
501, 511. It follows, therefore, that the question of the
admissibility of the evidence based on an alleged unlawful search
and seizure does not extend to the personal defendants but
embraces only the corporation whose property was taken . . ." (A.
Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d, 786,
789, Emphasis supplied.)

With respect to the documents, papers and things seized in the residences of
petitioners herein, the aforementioned resolution of June 29, 1962, denied
the lifting of the writ of preliminary injunction previously issued by this
Court, 12 thereby, in effect, restraining herein Respondent-Prosecutors from
using them in evidence against petitioners herein.
In connection with said documents, papers and things, two (2) important
questions need be settled, namely: (1) whether the search warrants in
question, and the searches and seizures made under the authority thereof,
are valid or not; and (2) if the answer to the preceding question is in the
negative, whether said documents, papers and things may be used in
evidence against petitioners herein.
Petitioners maintain that the aforementioned search warrants are in the
nature of general warrants and that, accordingly, the seizures effected upon
the authority thereof are null and void. In this connection, the
Constitution 13 provides:
"The right of the people to be secure in their persons, houses,
papers, and effects against unreasonable searches and seizures
shall not be violated, and no warrants shall issue but upon
probable cause, to be determined by the judge after examination
under oath or affirmation of the complainant and the witnesses
he may produce, and particularly describing the place to be
searched, and the persons or things to be seized."

Two points must be stressed in connection with this constitutional mandate,

namely: (1) that no warrant shall issue but upon probable cause, to be
determined by the judge in the manner set forth in said provision; and (2) that
the warrant shall particularly describe the things to be seized.
None of these requirements has been complied with in the contested
warrants. Indeed, the same were issued upon applications stating that the
natural and juridical persons therein named had committed a "violation of
Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and
Revised Penal Code." In other words, no specific offense had been alleged
in said applications. The averments thereof with respect to the offense
committed were abstract. As a consequence, it was impossible for the judges

who issued the warrants to have found the existence of probable cause, for
the same presupposes the introduction of competent proof that the party
against whom it is sought has performed particular acts, or
committed specific omissions, violating a given provision of our criminal laws.
As a matter of fact, the applications involved in this case do not allege any
specific acts performed by herein petitioners. It would be a legal heresy, of
the highest order, to convict anybody of a "violation of Central Bank Laws,
Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code," as alleged in the aforementioned applications without reference
to any determinate provision of said laws or codes.
To uphold the validity of the warrants in question would be to wipe out
completely one of the most fundamental rights guaranteed in our
Constitution, for it would place the sanctity of the domicile and the privacy of
communication and correspondence at the mercy of the whims, caprice or
passion of peace officers. This is precisely the evil sought to be remedied by
the constitutional provision above quoted to outlaw the so-called general
warrants. It is not difficult to imagine what would happen, in times of keen
political strife, when the party in power feels that the minority is likely to wrest
it, even though by legal means.
Such is the seriousness of the irregularities committed in connection with the
disputed search warrants, that this Court deemed it fit to amend Section 3 of
Rule 122 of the former Rules of Court 14 by providing in its counterpart, under
the Revised Rules of Court 15 that "a search warrant shall not issue upon
probable cause in connection with one specific offense." Not satisfied with
this qualification, the Court added thereto a paragraph, directing that "no
search warrant shall issue for more than one specific offense."
The grave violation of the Constitution made in the application for the
contested search warrants was compounded by the description therein made
of the effects to be searched for and seized, to wit:
"Books of accounts, financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit journals,
typewriters, and other documents and/or papers showing all
business transactions including disbursement receipts, balance
sheets and related profit and loss statements."

Thus, the warrants authorized the search for and seizure of records
pertaining to all business transactions of petitioners herein, regardless of
whether the transactions were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the explicit command of our
Bill of Rights that the things to be seized be particularly described as
well as tending to defeat its major objective: the elimination
of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), RespondentProsecutors maintain that, even if the searches and seizures under
consideration were unconstitutional, the documents, papers and things thus
seized are admissible in evidence against petitioners herein. Upon mature
deliberation, however, we are unanimously of the opinion that the position
taken in the Moncado case must be abandoned. Said position was in line
with the American common law rule, that the criminal should not be allowed
to go free merely "because the constable has blundered," 16 upon the theory
that the constitutional prohibition against unreasonable searches and
seizures is protected by means other than the exclusion of evidence
unlawfully obtained, 17 such as the common-law action for damages against
the searching officer, against the party who procured the issuance of the
search warrant and against those assisting in the execution of an illegal
search, their criminal punishment, resistance, without liability to an unlawful
seizure, and such other legal remedies as may be provided by other laws.
However, most common law jurisdictions have already given up this
approach and eventually adopted the exclusionary rule, realizing that this is
the only practical means of enforcing the constitutional injunction against
unreasonable searches and seizures. In the language of Judge Learned
Hand:

"As we understand it, the reason for the exclusion of evidence

competent as such, which has been unlawfully acquired, is that
exclusion is the only practical way of enforcing the constitutional
privilege. In earlier times the action of trespass against the
offending official may have been protection enough; but that is
true no longer. Only in case the prosecution which itself controls
the seizing officials, knows that it cannot profit by their wrong, will
that wrong be repressed". 18

In fact, over thirty (30) years before, the Federal Supreme Court had already
declared:
"If letters and private documents can thus be seized and held and
used in evidence against a citizen accused of an offense, the
protection of the 4th Amendment, declaring his rights to be
secure against such searches and seizures, is of no value, and,
so far as those thus placed are concerned, might as well be
stricken from the Constitution. The efforts of the courts and their
officials to bring the guilty to punishment, praiseworthy as they
are, are not to be aided by the sacrifice of those great principles
established by years of endeavor and suffering which have
resulted in their embodiment in the fundamental law of the
land." 19

This view was, not only reiterated, but, also, broadened in subsequent
decisions of the same Federal Court. 20 After reviewing previous decisions
thereon, said Court held, in Mapp vs. Ohio (supra.):
". . . Today we once again examine the Wolf's constitutional
documentation of the right of privacy free from unreasonable
state intrusion, and, after its dozen years on our books, are led
by it to close the only courtroom door remaining open to evidence
secured by official lawlessness in flagrant abuse of that basic
right, reserved to all persons as a specific guarantee against that
very same unlawful conduct. We held that all evidence obtained
by searches and seizures in violation of the Constitution is, by
that same authority, inadmissible in a State court.
"Since the Fourth Amendment's right of privacy has been
declared enforceable against the States through the Due Process
Clause of the Fourteenth, it is enforceable against them by the
same sanction of exclusion as it used against the Federal
Government. Were it otherwise, then just as without the Weeks
rule the assurance against unreasonable federal searches and
seizures would be 'a form of words', valueless and undeserving
of mention in a perpetual charter of inestimable human liberties,
so too, 'without that rule the freedom from state invasions of
privacy would be so ephemeral and so neatly severed from its
conceptual nexus with the freedom from all brutish means of
coercing evidence as not to permit this Court's high regard as a
freedom implicit in the concept of ordered liberty.' At the time that
the Court held in Wolf that the Amendment was applicable to the
States through the Due Process Clause, the cases of this Court
as we have seen, had steadfastly held that as to federal officers
the Fourth Amendment included the exclusion of the evidence
seized in violation of its provisions. Even Wolf 'stoutly adhered' to
that proposition. The right to privacy, when conceded operatively
enforceable against the States, was not susceptible of
destruction by avulsion of the sanction upon which its protection
and enjoyment had always been deemed dependent under the
Boyd, Weeks and Silverthorne Cases. Therefore, in extending
the substantive protections of due process to all constitutionally
unreasonable searches state or federal it was logically and
constitutionally necessary that the exclusion doctrine an
essential part of the right to privacy be also insisted upon as
an essential ingredient of the right newly recognized by the Wolf
Case. In short, the admission of the new constitutional right by
Wolf could not consistently tolerate denial of its most important
constitutional privilege, namely, the exclusion of the evidence
which an accused had been forced to give by reason of the
unlawful seizure. To hold otherwise is to grant the right but in
reality to withhold its privilege and enjoinment. Only last year the
Court itself recognized that the purpose of the exclusionary rule
'is to deter to compel respect for the constitutional guaranty in

the only effectively available way by removing the incentive to

disregard it.' . . .
"The ignoble shortcut to conviction left open to the State tends to
destroy the entire system of constitutional restraints on which the
liberties of the people rest. Having once recognized that the right
to privacy embodied in the Fourth Amendment is enforceable
against the States, and that the right to be secure against rude
invasions of privacy by state officers is, therefore constitutional in
origin, we can no longer permit that right to remain an empty
promise. Because it is enforceable in the same manner and to
like effect as other basic rights secured by the Due Process
Clause, we can no longer permit it to be revocable at the whim of
any police officer who, in the name of law enforceable itself,
chooses to suspend its enjoinment. Our decision, founded on
reason and truth, gives to the individual no more than that which
the Constitution guarantees him, to the police officer no less than
that to which honest law enforcement is entitled, and, to the
courts, that judicial integrity so necessary in the true
administration of justice." (Emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but, also,
to spirit of the constitutional injunction against unreasonable searches and
seizures. To be sure, if the applicant for a search warrant has competent
evidence to establish probable cause of the commission of a given crime by
the party against whom the warrant is intended, then there is no reason why
the applicant should not comply with the requirements of the fundamental
law. Upon the other hand, if he has no such competent evidence, then it
is not possible for the judge to find that there is probable cause, and, hence,
no justification for the issuance of the warrant. The only possible explanation
(not justification) for its issuance is the necessity of fishing evidence of the
commission of a crime. But, then, this fishing expedition is indicative of the
absence of evidence to establish a probable cause.
Moreover, the theory that the criminal prosecution of those who secure an
illegal search warrant and/or make unreasonable searches or seizures would
suffice to protect the constitutional guarantee under consideration, overlooks
the fact that violations thereof are, in general, committed by agents of the
party in power, for, certainly, those belonging to the minority could not
possibly abuse a power they do not have. Regardless of the handicap under
which the minority usually but, understandably finds itself in
prosecuting agents of the majority, one must not lose sight of the fact that the
psychological and moral effect of the possibility 21 of securing their conviction,
is watered down by the pardoning, power of the party for whose benefit the
illegality had been committed.
In their Motion for Reconsideration and Amendment of the Resolution of this
Court dated June 29, 1962, petitioners allege that Room Nos. 81 and 91 of

Carmen Apartments, House No. 2008, Dewey Boulevard, House No. 1436,
Colorado Street, and Room No. 304 of the Army-Navy Club, should be
included among the premises considered in said Resolution as residences of
herein petitioners, Harry S.Stonehill, Robert P. Brook, John J. Brooks and
Karl Beck, respectively, and that, furthermore, the records, papers and other
effects seized in the offices of the corporations above referred to include
personal belongings of said petitioners and other effects under their
exclusive possession and control, for the exclusion of which they have a
standing under the latest rulings of the federal courts of the United States. 22
We note, however, that petitioners' theory, regarding their alleged
possession of and control over the aforementioned records, papers and
effects, and the alleged "personal" nature thereof, has been advanced, not in
their petition or amended petition herein, but in the Motion for
Reconsideration and Amendment of the Resolution of June 29, 1962. In
other words, said theory would appear to be a readjustment of that followed
in said petitions, to suit the approach intimated in the Resolution sought to be
reconsidered and amended. Then, too, some of the affidavits or copies of
alleged affidavits attached to said motion for reconsideration, or submitted in
support thereof, contain either inconsistent allegations, or allegations
inconsistent with the theory now advanced by petitioners herein.
Upon the other hand, we are not satisfied that the allegations of said petitions
and motion for reconsideration, and the contents of the aforementioned
affidavits and other papers submitted in support of said motion, have
sufficiently established the facts or conditions contemplated in the cases
relied upon by the petitioners, to warrant application of the views therein
expressed, should we agree thereto. At any rate, we do not deem it
necessary to express our opinion thereon, it being best to leave the matter
open for determination in appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the Moncado case must be,
as it is hereby, abandoned; that the warrants for the search of three (3)
residences of herein petitioners, as specified in the Resolution of June 29,
1962 are null and void; that the searches and seizures therein made are
illegal; that the writ of preliminary injunction heretofore issued, in connection
with the documents, papers and other effects thus seized in said residences
of herein petitioners is hereby made permanent, that the writs prayed for are
granted, insofar as the documents, papers and other effects so seized in the
aforementioned residences are concerned; that the aforementioned motion
for Reconsideration and Amendment should be, as it is hereby, denied; and
that the petition herein is dismissed and the writs prayed for denied, as
regards the documents, papers and other effects seized in the twenty-nine
(29) places, offices and other premises enumerated in the same Resolution,
without special pronouncement as to costs.

It is so ordered.
Reyes, J .B.L., Dizon, Makalintal, Bengzon, J .P., Zaldivar and Sanchez,
JJ ., concur.

Separate Opinions
CASTRO, J ., concurring and dissenting:
From my analysis of the opinion written by Chief Justice Roberto Concepcion
and from the import of the deliberations of the Court on this case, I gather the
following distinct conclusions:
1. All the search warrants served by the National Bureau of Investigation in
this case are general warrants and are therefore prescribed by, and in
violation of, Paragraph 3 of Section 1 of Article III (Bill of Rights) of the
Constitution;
2. All the searches and seizures conducted under the authority of the said
search warrants were consequently illegal;
3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1,
should be, and is declared, abandoned;
4. The search warrants served at the three residences of the petitioners
are expressly declared null and void; the searches and seizures therein
made are expressly declared illegal; and the writ of preliminary injunction
heretofore issued against the use of the documents, papers and effects
seized in the residences is made permanent; and
5. Reasoning that the petitioners have not in their pleadings satisfactorily
demonstrated that they have legal standing to move for the suppression of
the documents, papers and effects seized in the places other than the three
residences adverted to above, the opinion written by the Chief
Justice refrains from expressly declaring as null and void the search warrants
served at such other places and as illegal the searches and seizures made
therein, and leaves "the matter open for determination in appropriate cases
in the future."
It is precisely the position taken by the Chief Justice summarized in the
immediately preceding paragraph (numbered 5) with which I am not in
accord.

I do not share his reluctance or unwillingness to expressly declare, at this

time, the nullity of the search warrants served at places other than the three
residences, and the illegality of the searches and seizures conducted under
the authority thereof. In my view even the exacerbating passions and
prejudices inordinately generated by the environmental political and moral
developments of this case should not deter this Court from forthrightly laying
down the law - not only for this case but as well for future cases and future
generations. All the search warrants, without exception, in this case are
admittedly general, blanket and roving warrants and are therefore admittedly
and indisputably outlawed by the Constitution; and the searches and
seizures made were therefore unlawful. That the petitioners, let us assume in
gratia argumenti, have no legal standing to ask for the suppression of the
papers, things and effects seized from places other than their residences, to
my mind, cannot in any manner affect, alter or otherwise modify the intrinsic
illegality of the search warrants and the intrinsic illegality of the searches and
seizures made thereunder. Whether or not the petitioners possess legal
standing, the said warrants are void and remain void, and the searches and
seizures were illegal and remain illegal. No inference can be drawn from the
words of the Constitution that "legal standing" or the lack of it is a
determinant of the nullity or validity of a search warrant or of the lawfulness
or illegality of a search or seizure.
On the question of legal standing, I am of the conviction that, upon the
pleadings submitted to this Court, the petitioners have the requisite legal
standing to move for the suppression and return of the documents, papers
and effects that were seized from places other than their family residences.
Our constitutional provision on searches and seizures was derived
almost verbatim from the Fourth Amendment to the United States
Constitution. In the many years of judicial construction and interpretation of
the said constitutional provision, our courts have invariably regarded as
doctrinal the pronouncements made on the Fourth Amendment by federal
courts, especially the Federal Supreme Court and the Federal Circuit Courts
of Appeals.
The U.S. doctrines and pertinent cases on standing to move for the
suppression or return of documents, papers and effects which are the fruits
of an unlawful search and seizure, may be summarized as follows: (a)
ownership of documents, papers and effects gives "standing"; (b) ownership
and/or control or possession actual or constructive of premises
searched gives "standing"; and (c) the "aggrieved person" doctrine where the
search warrant and the sworn application for search warrant are "primarily"
directed solely and exclusively against the "aggrieved person", gives
"standing."

An examination of the search warrants in this case will readily show that,
excepting three, all were directed against the petitioners personally. In some
of them, the petitioners were named personally, followed by the designation,
"the President and/or General Manager" of the particular corporation. The
three warrants excepted named three corporate defendants. But the
"office/house/warehouse/premises" mentioned in the said three warrants
were also the same "office/house/warehouse/premises" declared to be
owned by or under the control of the petitioners in all the other search
warrants directed against the petitioners and/or "the President and/or
General Manager" of the particular corporation. (see pages 5-24 of
Petitioners' Reply of April 2, 1962). The searches and seizures were to be
made, and were actually made, in the "office/house warehouse/premises"
owned by or under the control of the petitioners.
Ownership of matters seized gives "standing."
Ownership of the properties seized alone entitles the petitioners to bring a
motion to return and suppress, and gives them standing as persons
aggrieved by an unlawful search and seizure regardless of their location at
the time of seizure. Jones vs. United States, 362 U.S. 257, 261 (1960)
(narcotics stored in the apartment of a friend of the defendant); Henzel vs.
United States, 296 F 2d. 650, 652-53 (5th Cir. 1961) (personal and corporate
papers of corporation of which the defendant was president); United States
vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment not
belonging to the defendant); Pielow vs. United States, 8F. 2d 492, 493 (9th
Cir. 1925) (books seized from the defendant's sister but belonging to the
defendant); Cf. Villano vs. United States, 310 F. 2d 680, 683 (10th Cir. 1962)
(papers seized in desk neither owned by nor in exclusive possession of the
defendant).
In a very recent case (decided by the U.S. Supreme Court on December 12,
1966), it was held that under the constitutional provision against unlawful
searches and seizures, a person places himself or his property within a
constitutionally protected area, be it his home or his office, his hotel room or
his automobile:
"Where the argument falls is in its misapprehension of the
fundamental nature and scope of Fourth Amendment protection.
What the Fourth Amendment protects is the security a man relies
upon when he places himself or his property within a
constitutionally protected area, be it his homes, or his office, his
hotel room or his automobile. There he is protected from
unwarranted governmental intrusion. And when he puts
something in his filing cabinet, in his desk drawer, or in his
pocket, he has the right to know it will be secure from an
unreasonable search or an unreasonable seizure. So it was that
the Fourth Amendment could not tolerate the warrantless search

of the hotel room in Jeffers, the purloining of the petitioner's

private papers in Gouled, or the surreptitious electronic
surveillance in Silverman. Countless other cases which have
come to this Court over the years have involved a myriad of
differing factual contexts in which the protections of the Fourth
Amendment have been appropriately invoked. No doubt the
future will bring countless others. By nothing we say here or do
we either foresee or foreclose factual situations to which the
Fourth Amendment may be applicable." Hoffa vs. U.S. 87 S. Ct.
408 (December 12, 1966) See also U.S. vs. Jeffers, 342 U.S. 48,
72 S. Ct. 93 (November 13, 1951). (Emphasis supplied).

Control of premises searches gives "standing."

Independent of ownership or other personal interest in the records and
documents seized, the petitioners have standing to move for return and
suppression by virtue of their proprietary or leasehold interest in many of the
premises searched. These proprietary and leasehold interests have been
sufficiently set forth in their motion for reconsideration and need not be
recounted here, except to emphasize that the petitioners paid rent, directly or
indirectly, for practically all the premises searched (Room 91, 84 Carmen
Apts.; Room 304, Army & Navy Club; Premises 2008, Dewey Boulevard;
1436 Colorado Street); maintained personal offices within the corporate
offices (IBMS, USTC); had made improvements or furnished such offices; or
had paid for the filing cabinets in which the papers were stored (Room 204,
Army & Navy Club); and individually, or through their respective spouses,
owned the controlling stock of the corporations involved. The petitioners'
proprietary interest in most, if not all, of the premises searched therefore
independently gives them standing to move for the return and suppression of
the books, papers and effects seized therefrom.
In Jones vs. United States, supra, the U.S. Supreme Court delineated the
nature and extent of the interest in the searched premises necessary to
maintain a motion to suppress. After reviewing what it considered to be the
unduly technical standards of the then prevailing circuit court decisions, the
Supreme Court said (362 U.S. 266):
"We do not lightly depart from this course of decisions by the
lower courts. We are persuaded, however, that it is unnecessary
and ill-advised to import into the law surrounding the
constitutional right to be free from unreasonable searches and
seizures subtle distinctions, developed and refined by the
common law in evolving the body of private property law, which,
more than almost any other branch of law, has been shaped by
distinctions whose validity is largely historical. Even in the area
from which they derive, due consideration has led to the
discarding of those distinctions in the homeland of the common
law. See Occupiers' Liability Act, 1957, 5 and 6 Eliz. 2, c. 31,
carrying out Law Reform Committee, Third Report, Cmd. 9305.

Distinctions such as those between 'lessee,' 'licensee,' 'invitee,'

and 'guest,' often only of gossamer strength, ought not be
determinative in fashioning procedures ultimately referable to
constitutional safeguards." See also Chapman vs. United
States,354 U.S. 610, 616-17 (1961).

It has never been held that a person with requisite interest in the premises
searched must own the property seized in order to have standing in a motion
to return and suppress. In Alioto vs. United States,216 F. Supp. 48 (1963), a
bookkeeper for several corporations from whose apartment the corporate
records were seized successfully moved for their return. In United States vs.
Antonelli Fireworks Co., 53 F. Supp. 870, 873 (W. D. N. Y. 1943), the
corporation's president successfully moved for the return and suppression as
to him of both personal and corporate documents seized from his home
during the course of an illegal search:
"The lawful possession by Antonelli of documents and
property, either his own or the corporation's, was entitled to
protection against unreasonable search and seizure. Under the
circumstances in the case at bar, the search and seizure were
unreasonable and unlawful. The motion for the return of seized
articles and the suppression of the evidence so obtained should
be granted." (emphasis supplied)

Time was when only a person who had property interest in either the place
searched or the articles seized had the necessary standing to invoke the
protection of the exclusionary rule. But in MacDonald vs. United States, 336
U.S. 461 (1948), Justice Robert Jackson, joined by Justice Felix Frankfurter,
advanced the view that "even a guest may expect the shelter of the rooftree
he is under against criminal intrusion". This view finally became the official
view of the U.S. Supreme Court and was articulated in United States vs.
Jeffers, 342 U.S. 48 (1951). Nine years later, in 1960, in Jones vs. United
States, 362 U.S. 257, 267, the U.S. Supreme Court went a step further.
Jones was a mere guest in the apartment unlawfully searched, but the Court
nonetheless declared that the exclusionary rule protected him as well. The
concept of "person aggrieved by an unlawful search and seizure" was
enlarged to include "anyone legitimately on premises where the search
occurs."
Shortly after the U.S. Supreme Court's Jones decision, the U.S. Court of
Appeals for the Fifth Circuit held that the defendant organizer, sole
stockholder and president of a corporation had standing in a mail fraud
prosecution against him to demand the return and suppression of corporate
property. Henzel vs. United States, 296 F. 2d. 650, 652 (5th Cir.
1961), supra. The court concluded that the defendant had standing on two
independent grounds: First he had a sufficient interest in

the property seized, and second he had an adequate interest in

the premises searched (just in the case at bar). A postal inspector had
unlawfully searched the corporation's premises and had seized most of the
corporation's books and records. Looking to Jones, the court observed:
"Jones clearly tells us, therefore, what is not required to qualify
one as a 'person aggrieved by an unlawful search and seizure.' It
tells us that appellant should not have been precluded from
objecting to the Postal Inspector's search and seizure of the
corporation's books and records, merely because the appellant
did not show ownership or possession of the books and records
or a substantial possessory interest in the invaded premises . .
." Henzel vs. United States, 296 F. 2d at 651.

Henzel was soon followed by Villano vs. United States, 310 F. 2d 680, 683,
(10th Cir. 1962). In Villano, police officers seized two notebooks from a desk
in the defendant's place of employment; the defendant did not claim
ownership of either; he asserted that several employees (including himself)
used the notebooks. The Court held that the employee had a protected
interest and that there also was an invasion of privacy.
Both Henzel and Villano considered also the fact that the search and seizure
were "directed at" the moving defendant. Henzel vs. United States, 296 F. 2d
at 682; Villano vs. United States, 310 F. 2d at 683.
In a case in which an attorney closed his law office, placed his files in storage
and went to Puerto Rico, the Court of Appeals for the Eighth Circuit
recognized his standing to move to quash as unreasonable search and
seizure under the Fourth Amendment of the U.S. Constitution a grand jury
subpoena duces tecum directed to the custodian of his files. The
Government contended that the petitioner had no standing because the
books and papers were physically in the possession of the custodian, and
because the subpoena was directed against the custodian. The court
rejected the contention, holding that.
"Schwimmer legally had such possession, control and
unrelinquished personal rights in the books and papers as not to
enable the question of unreasonable search and seizure to be
escaped through the mere procedural device of compelling a
third-party naked possessor to produce and deliver
them." Schwimmer vs. United. States, 232 F. 2d 855, 861 (8th
Cir. 1956).

Aggrieved person doctrine where the search warrant is primarily directed

against said person gives "standing."
The latest United States decision squarely in point is United States vs.
Birrell, 242 F. Supp. 191 (1965, U.S.D.C., S.D.N.Y. ). The defendant had
stored with an attorney certain files and papers, which attorney, by the name

of Dunn, was not, at the time of the seizing of the records, Birrell's
attorney. * Dunn, in turn, had stored most of the records at his home in the
country and on a farm which, according to Dunn's affidavit, was under his
(Dunn's) "control and management". The papers turned out to be private,
personal and business papers together with corporate books and records of
certain unnamed corporations in which Birrell did not even claim ownership.
(All of these type records were seized in the case at bar). Nevertheless, the
search in Birrell was held invalid by the court which held that even though
Birrell did not own the premises where the records were stored, he had
"standing" to move for the return of all the papers and properties seized. The
court, relying on Jones vs. U.S., supra; U.S. vs. Antonelli Fireworks Co., 53
F. Supp. 870, Aff'd 155 F. 2d 631; Henzel vs. U.S., supra; and Schwimmer
vs. U.S., supra, pointed out that.
"It is overwhelmingly established that the searches here in
question were directed solely and exclusively against Birrell. The
only person suggested in the papers as having violated the law
was Birrell. The first "search warrant described the records as
having been used in committing a violation of Title 18, United
States Code, Section 1341, by the use of the mails by one Lowell
M. Birrell, . . .' The second search warrant was captioned: 'United
States of America vs. Lowell M. Birrell. (p. 198)
"Possession (actual or constructive), no less than ownership,
gives standing to move to suppress. Such was the rule even
before Jones." (p. 199)
"If, as thus indicated, Birrell had at least constructive possession
of the records stored with Dunn, it matters not whether he had
any interest in the premises searched." See also Jeffers vs.
United States. 88 U.S. Appl. D.C. 58, 187 F. 2d 498 (1950),
affirmed 342 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459 (1951).

The ruling in the Birrell case was reaffirmed on motion for reargument; the
United States did not appeal from this decision. The factual situation
in Birrell is strikingly similar to the case of the present petitioners; as
in Birrell, many personal and corporate papers were seized from premises
not petitioners' family residences; as in Birrell, the searches were
"PRIMARILY DIRECTED SOLELY AND EXCLUSIVELY" against the
petitioners. Still both types of documents were suppressed in Birrell because
of the illegal search. In the case at bar, the petitioners' connection with the
premises raided is much closer than in Birrell.
Thus, the petitioners have full standing to move for the quashing of all the
warrants regardless of whether these were directed against residences in the
narrow sense of the word, as long as the documents were personal papers of
the petitioners or (to the extent that they were corporate papers) were held
by them in a personal capacity or under their personal control.

Prescinding from the foregoing, this Court, at all events, should order the
return to the petitioners all personal and private papers and effects seized,
no matter where these were seized, whether from their residences or
corporate offices or any other place or places. The uncontradicted sworn
statements of the petitioners in their various pleadings submitted to this Court
indisputably show that amongst the things seized from the corporate offices
and other places were personal and private papers and effects belonging to
the petitioners.
If there should be any categorization of the documents, papers and things
which were the objects of the unlawful searches and seizures, I submit that
the grouping should be: (a) personal or private papers of the petitioners
wherever they were unlawfully seized, be it their family residences, offices,
warehouses and/or premises owned and/or controlled and/or possessed
(actually or constructively) by them as shown in all the search warrants and
in the sworn applications filed in securing the void search warrants, and (b)
purely corporate papers
belonging
to
corporations.
Under
such
categorization or grouping, the determination of which unlawfully seized
papers, documents and things are personal/private of the petitioners
or purely corporate papers will have to be left to the lower courts which
issued the void search warrants in ultimately effecting the suppression and/or
return of the said documents.
And as unequivocally indicated by the authorities above cited, the petitioners
likewise have clear legal standing to move for the suppression of purely
corporate papers as "President and/or General Manager" of the corporations
involved as specifically mentioned in the void search warrants.
Finally, I must articulate my persuasion that although the cases cited in my
disquisition were criminal prosecutions, the great clauses of the constitutional
proscription on illegal searches and seizures do not withhold the mantle of
their protection from cases not criminal in origin or nature.
|||

(Stonehill v. Diokno, G.R. No. L-19550, [June 19, 1967])

EN BANC
[G.R. No. L-19550. June 29, 1962.]
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J.
BROOKS and KARL BECK, petitioners, vs. HON. JOSE
W. DIOKNO, in his capacity as Secretary of Justice;
JOSE LUKBAN, in his capacity as Acting Director,
National Bureau of Investigation; Special Prosecutors
PEDRO D. CENZON, EFREN I. PLANA and MANUEL

VILLAREAL, JR. and ASST. FISCAL MANASES G.

REYES, ET AL., respondents.
Paredes, Poblador, Cruz & Nazareno for petitioners.
Jose W. Diokno for and in his own behalf as respondent.
Solicitor General for the other respondents.
SYLLABUS
1. PROVISIONAL REMEDY; PRELIMINARY INJUNCTION; USE OF
PAPERS SEIZED PENDING DECISION LIFTED IN PART; CASE OF BAR.
The writ of preliminary injunction issued by this Court against the use of
the papers, documents and things from the petitioners lifted as to those
seized in factories and offices of the petitioners. The preliminary injunction
shall continue as to those papers, documents and things found in the
residences of petitioners.
RESOLUTION
LABRADOR, J :
p

Without prejudice to explaining the reasons for this order in the decision to be
rendered in the case, the writ of preliminary injunction issued by Us in this
case against the use of the papers, documents and this from the following
premises: (1) The Office of the U.S. Tobacco Corporation at the Ledesma
Building, Arzobispo St., Manila; (2) 932 Gonzales, Ermita, Manila; (3) Office
at Atlanta St., bounded by Chicago, 15th and 14th Streets, Port Area, Manila;
(4) 527 Rosario St., Manila; (5) Atlas Cement Corporation and/or Atlas
Development Corporation at Magsaysay Bldg., San Luis, Ermita, Manila; (6)
205 13th St., Port Area, Manila; (7) No. 224 San Vicente St., Manila; (8)
Warehouse No. 2 at Chicago and 23rd Streets, Manila; (9) Warehouse at
23rd St., between Muelle de San Francisco and Boston, Port Area, Manila;
(10) Investment Incorporated, 24th St. and Boston; (11) IBMC, Magsaysay
Bldg., San Luis, Manila; (12) General Agricultural Corporation, Magsaysay
Bldg. San Luis, Manila; (13) American Asiatic Oil Corporation, Magsaysay
Bldg., San Luis, Manila; (14) Room 91, Carmen Apartments, Dewey
Boulevard, Manila; (15) Warehouse Railroad St., between 17 and 12 Streets,
Port Area, Manila; (16) Room 304, Army and Navy Club, Manila, South Blvd.,
Manila; (17) Warehouse Annex Bldg., 18th Street, Port Area, Manila; (18)
Room 81, Carmen Apartments, Dewey Boulevard, Manila; (19) Holiday Hills,
Inc., Trinity Bldg. San Luis, Manila; (20) No. 2008 Dewey Boulevard; (21)
Premises of 24th Street and Boston, Port Area, Manila; (22) Republic Glass
Corporation, Trinity Bldg., San Luis, Manila; (23) IBMC, 2nd Floor, Trinity
Bldg., San Luis, Manila; (24) IBMC, 2nd Floor, Gochangco Bldg., 610 San

Luis, Manila; (25) United Housing Corporation, Trinity Bldg., San Luis St.,
Manila; (26) Republic Real Estate Corporation, Trinity Bldg., San Luis,
Manila; (27) 1436 Colorado St., Malate, Manila; (28) Philippine Tobacco
Flue-Curing, Magsaysay Bldg., San Luis, Manila; and (29) 14 Baldwin St.,
Sta. Cruz, Manila, in the hearing of Deportation Cases Nos. R-953 and R955 against petitioners, before the Deportation Board, is hereby lifted. The
preliminary injunction shall continue as to the papers, documents and things
found in the other premises, namely, in those of the residences of petitioners,
as follows: (1) 13 Narra Road, Forbes Park, Makati, Rizal; (2) 15 Narra Road,
Forbes Park, Makati, Rizal; and (3) 8 Urdaneta Avenue, Urdaneta Village,
Makati, Rizal.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Barrera, Dizon,
Regala and Makalintal, JJ., concur.
Paredes and Reyes, J.B.L., JJ., took no part.
(Stonehill v. Diokno, G.R. No. L-19550 (Resolution), [June 29, 1962], 126
PHIL 738-766)
|||

EN BANC

1. Bataan Shipyard and Engineering Co., Inc.

(Engineering Island Shipyard and Mariveles Shipyard)

[G.R. No. 75885. May 27, 1987.]

2. Baseco Quarry

BATAAN SHIPYARD &

ENGINEERING
CO.,
INC.
(BASECO), petitioner, vs. PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER
MARY
CONCEPCION
BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R.
DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT.
JORGE B. SIACUNCO, et al., respondents.

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

7. New Trident Management

Vicente G. Sison for intervenor A.T. Abesamis.

8. Bay Transport

DECISION

9. And all affiliate companies of Alfredo "Bejo"

Romualdez.

NARVASA, J :
p

You are hereby ordered:

Challenged in this special civil action of certiorari and Exhibition by a private

corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by President Corazon C.
Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the
sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on
Good Government and/or its Commissioners and agents, affecting said
corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation,
initiated all its misery, was issued on April 14, 1986 by Commissioner Mary
Concepcion Bautista. It was addressed to three of the agents of the
Commission, hereafter simply referred to as PCGG. It reads as follows:
"RE : SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on
Good Government, by authority of the President of the
Philippines, you are hereby directed to sequester the following
companies:

1. To implement this sequestration order with a minimum

disruption of these companies' business activities.
2. To ensure the continuity of these companies as going
concerns, the care and maintenance of these assets until such
time that the Office of the President through the Commission on
Good Government should decide otherwise.
3. To report
periodically.

to

the

Commission

on

Good

Government

Further, you are authorized to request for Military/Security

Support from the Military/Police authorities, and such other acts
essential to the achievement of this sequestration order." 1

b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting
for the PCGG, addressed a letter dated April 18, 1986 to the President and
other officers of petitioner firm, reiterating an earlier request for the
production of certain documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws
2.3. Minutes of the
Meeting from 1973 to 1986

Annual

Stockholders

2.4. Minutes of the Regular and Special

Meetings of the Board of Directors from 1973 to 1986
2.5. Minutes of the
Meetings from 1973 to 1986
2.6. Existing
suppliers/contractors/others.

Executive

Committee

contracts

with

3. Yearly list of stockholders with their corresponding

share/stockholdings from 1973 to 1986 duly certified by the
Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit &
Loss and others from 1973 to December 31, 1985.
5. Monthly Financial Statements for the current year up to March
31, 1986.
6. Consolidated Cash Position Reports from January to April 15,
1986.
7. Inventory listings of assets updated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts
Payable.
9. Complete list of depository banks for all funds with the
authorized signatories for withdrawals thereof.
10. Schedule of company investments and placements.

The letter closed with the warning that if the documents were not submitted
within five days, the officers would be cited for "contempt in pursuance with
Presidential Executive Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply

as BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala,
a member of the task force assigned to carry out the basic sequestration
order. He sent a letter to BASECO's Vice-President for Finance, 3 terminating
the contract for security services within the Engineer Island compound
between BASECO and "Anchor and FAIRWAYS" and "other civilian security
agencies," CAPCOM military personnel having already been assigned to the
area.
cdphil

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed
to "Truck Owners and Contractors," particularly a "Mr. Buddy Ondivilla,
National Marine Corporation," advising of the amendment in part of their
contracts with BASECO in the sense that the stipulated charges for use of
the BASECO road network were made payable "upon entry and not anymore
subject to monthly billing as was originally agreed upon." 4
d. Aborted Contract for Improvement of Wharf
at Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract
in behalf of BASECO with Deltamarine Integrated Port Services, Inc., in
virtue of which the latter undertook to introduce improvements costing
approximately P210,000.00 on the BASECO wharf at Engineer Island,
allegedly then in poor condition, avowedly to "optimize its utilization and in
return maximize the revenue which would flow into the government coffers,"
in consideration of Deltamarine's being granted "priority in using the
improved portion of the wharf ahead of anybody" and exemption "from the
payment of any charges for the use of wharf including the area where it may
install its bagging equipments" "until the improvement remains in a condition
suitable for port operations." 5 It seems however that this contract was never
consummated. Capt. Jorge B. Siacunco, "Head-(PCGG) BASECO
Management Team," advised Deltamarine by letter dated July 30, 1986 that
"the new management is not in a position to honor the said contract" and
thus "whatever improvements . . . (may be introduced) shall be deemed
unauthorized . . . and shall be at . . . (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock
Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a
PCGG agent, Mayor Melba O. Buenaventura, "to plan and implement
progress towards maximizing the continuous operation of the BASECO
Sesiman Rock Quarry . . . by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another

party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an

agreement to this effect having been executed by them on September 17,
1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986,
Mayor Buenaventura was also "authorized to clean and beautify the
Company's compound," and in this connection, to dispose of or sell "metal
scraps" and other materials, equipment and machineries no longer usable,
subject to specified guidelines and safeguards including audit and
verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the
provisional takeover by the PCGG of BASECO, "the Philippine Dockyard
Corporation and all their affiliated companies." 9 Diaz invoked the provisions
of Section 3 (c) of Executive Order No. 1, empowering the Commission
". . . To provisionally takeover in the public interest or to prevent
its disposal or dissipation, business enterprises and properties
taken over by the government of the Marcos Administration or by
entities or persons close to former President Marcos, until the
transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities."

A management team was designated to implement the order, headed by

Capt. Siacunco, and was given the following powers:
"1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as
necessary;
3. Enters into contracts related to management and operation of
the companies;

6. Holds itself fully accountable to the Presidential Commission

on Good Government on all aspects related to this take-over
order."

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco sent letters to Hilario M. Ruiz, Manuel S.
Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I,
advising of the termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and
agents which, to repeat, petitioner BASECO would have this Court nullify.
More particularly, BASECO prays that this Court
1) declare unconstitutional and void Executive Orders
Numbered 1 and 2;
2) annul the sequestration order dated April 14, 1986, and all
other orders subsequently issued and acts done on the basis thereof,
inclusive of the takeover order of July 14, 1986 and the termination of
the services of the BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the
Sequestration and Takeover Orders
While BASECO concedes that "sequestration, without resorting to judicial
action, might be made within the context of Executive orders Nos.
1 and 2 before March 25, 1986 when the Freedom Constitutionwas
promulgated, under the principle that the law promulgated by the ruler under
a revolutionary regime is the law of the land, it ceased to be acceptable when
the same ruler opted to promulgate the Freedom Constitution on March 25,
1986 wherein under Section 1 of the same, Article IV (Bill of Rights) of the
1973 Constitution was adopted providing, among others, that 'No person
shall be deprived of life, liberty and property without due process of law.'
(Const., Art. IV, Sec. 1)." 12

4. Ensures that the assets of the companies are not dissipated

and used effectively and efficiently; revenues are duly accounted
for; and disburses funds only as may be necessary;
5. Does actions including among others, seeking of military
support as may be necessary, that will ensure compliance to this
order;

It declares that its objection to the constitutionality of the Executive Orders

"as well as the Sequestration Order . . . and Takeover Order . . . issued
purportedly under the authority of said Executive Orders, rests on four
fundamental considerations: First, no notice and hearing was accorded . . .
(it) before its properties and business were taken over; Second, the PCGG is
not a court, but a purely investigative agency and therefore not competent to

act as prosecutor and judge in the same cause; Third, there is nothing in the
issuances which envisions any proceeding, process or remedy by which
petitioner may expeditiously challenge the validity of the takeover after the
same has been effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional presumption of innocence and
general rules and procedures, they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986,
which it has apparently already complied with, was issued without court
authority and infringed its constitutional right against self-incrimination, and
unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and
Management
BASECO further contends that the PCGG had unduly interfered with its right
of dominion and management of its business affairs by
1) terminating its contract for security services with Fairways &
Anchor, without the consent and against the will of the contracting
parties; and amending the mode of payment of entry fees stipulated in
its Lease Contract with National Stevedoring & Lighterage Corporation,
these acts being in violation of the non-impairment clause of
the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an
"anomalous contract" with Deltamarine Integrated Port Services, Inc.,
giving the latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to
manage and operate its rock quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal
scrap, equipment, machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard
Corporation, and all their affiliated companies;
6) terminating the services of BASECO executives: President
Hilario M. Ruiz; EVP Manuel S. Mendoza; GM Moises M. Valdez;
Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta
I; 19
7) planning to elect its own Board of Directors; 20

8) "allowing willingly or unwillingly its personnel to take, steal,

carry away from petitioner's premises at Mariveles . . . rolls of cable
wires, worth P600,000.00 on May 11, 1986;" 21
9) allowing "indiscriminate diggings" at Engineer Island to
retrieve gold bars supposed to have been buried therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze
and Takeover Orders
Many misconceptions and much doubt about the matter of sequestration,
takeover and freeze orders have been engendered by misapprehension, or
incomplete comprehension if not indeed downright ignorance of the law
governing these remedies. It is needful that these misconceptions and
doubts be dispelled so that uninformed and useless debates about them may
be avoided, and arguments tainted by sophistry or intellectual dishonesty be
quickly exposed and discarded. Towards this end, this opinion will essay an
exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.
LLpr

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit
command of the Provisional Constitution, ordained by Proclamation No.
3, 23 that the President in the exercise of legislative power which she was
authorized to continue to wield "(u)ntil a legislature is elected and convened
under a new Constitution" "shall give priority to measures to achieve the
mandate of the people," among others to (r)ecover ill-gotten properties
amassed by the leaders and supporters of the previous regime and protect
the interest of the people through orders of sequestration or freezing of
assets or accounts." 24
b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten
wealth," and postulates that "vast resources of the government have been
amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad." 25 Upon these
premises, the Presidential Commission on Good Government was
created, 26 "charged with the task of assisting the President in regard to . . .
(certain specified) matters," among which was precisely
". . . The recovery of all ill-gotten wealth accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives,
subordinates and close associates, whether located in the

Philippines or abroad, including the takeover or sequestration of

all business enterprises and entities owned or controlled by them,
during his administration, directly or through nominees, by taking
undue advantage of their public office and/or using their powers,
authority, influence, connections or relationship." 27

In relation to the takeover or sequestration that it was authorized to

undertake in the fulfillment of its mission, the PCGG was granted "power and
authority" to do the following particular acts, to wit:
1. "To sequester or place or cause to be placed under its control or
possession any building or office wherein any ill-gotten wealth or properties
may be found, and any records pertaining thereto, in order to prevent their
destruction, concealment or disappearance which would frustrate or hamper
the investigation or otherwise prevent the Commission from accomplishing its
task."
"2. "To provisionally take over in the public interest or to prevent the disposal
or dissipation, business enterprises and properties taken over by the
government of the Marcos Administration or by entities or persons close to
former President Marcos, until the transactions leading to such acquisition by
the latter can be disposed of by the appropriate authorities.
"3. "To enjoin or restrain any actual or threatened commission of acts by any
person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual the efforts of the Commission to carry out its task
under this order." 28
So that it might ascertain the facts germane to its objectives, it was granted
power to conduct investigations; require submission of evidence
by subpoenae ad testificandum and duces tecum; administer oaths; punish
for contempt. 29 It was given power also to promulgate such rules and
regulations as may be necessary to carry out the purposes of . . . (its
creation.)." 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed by the leaders and
supporters of the previous regime." It declares that:
1) ". . . the Government of the Philippines is in possession of
evidence showing that there are assets and properties purportedly
pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda
Romualdez Marcos, their close relatives, subordinates, business
associates, dummies, agents or nominees which had been or were
acquired by them directly or indirectly, through or as a result of the

improper or illegal use of funds or properties owned by the government

of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their
office, authority, influence, connections or relationship, resulting in their
unjust enrichment and causing grave damage and prejudice to the
Filipino people and the Republic of the Philippines;" and
2) ". . . said assets and properties are in the form of bank
accounts, deposits, trust accounts, shares of stocks, buildings,
shopping centers, condominiums, mansions, residences, estates, and
other kinds of real and personal properties in the Philippines and in
various countries of the world." 31
Upon these premises, the President
1) froze "all assets and properties in the Philippines in which
former President Marcos and/or his wife, Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates,
dummies, agents, or nominees have any interest or participation;"
2) prohibited former President Ferdinand Marcos and/or his
wife . . ., their close relatives, subordinates, business associates,
dummies, agents, or nominees from transferring, conveying,
encumbering, concealing or dissipating said assets or properties in the
Philippines and abroad, pending the outcome of appropriate
proceedings in the Philippines to determine whether any such assets
or properties were acquired by them through or as a result of improper
or illegal use of or the conversion of funds belonging to the
Government of the Philippines or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue
advantage of their official position, authority, relationship, connection or
influence to unjustly enrich themselves at the expense and to the grave
damage and prejudice of the Filipino people and the Republic of the
Philippines;"
3) prohibited "any person from transferring, conveying,
encumbering or otherwise depleting or concealing such assets and
properties or from assisting or taking part in their transfer,
encumbrance, concealment or dissipation under pain of such penalties
as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets
or properties, whether located in the Philippines or abroad, in their
names as nominees, agents or trustees, to make full disclosure of the
same to the Commission on Good Government within thirty (30) days
from publication of * (the) Executive Order, . . ." 32

grave damage and prejudice to the Filipino people and the Republic of the
Philippines"; 39
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the
PCGG is empowered, "with the assistance of the Office of the Solicitor
General and other government agencies, . . . to file and prosecute all cases
investigated by it . . . as may be warranted by its findings." 34 All such cases,
whether civil or criminal, are to be filed "with the Sandiganbayan, which shall
have exclusive and original jurisdiction thereof." 35 Executive Order
No. 14 also pertinently provides that "(c)ivil suits for restitution, reparation of
damages, or indemnification for consequential damages, forfeiture
proceedings provided for under Republic Act No. 1379, or any other civil
actions under the Civil Code or other existing laws, in connection with . . .
(said Executive Orders Numbered 1 and 2) may be filed separately from and
proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of
procedure and evidence shall not be strictly applied to . . . (said) civil
cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these
being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and
supporters of the previous regime"; 37
a) more particularly, that "(i)ll-gotten wealth (was) accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives, subordinates
and close associates, . . . located in the Philippines or abroad, . . . (and)
business enterprises and entities (came to be) owned or controlled by them,
during . . . (the Marcos) administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers,
authority, influence, connections or relationship;" 38
b) otherwise stated, that "there are assets and properties purportedly
pertaining to former President Ferdinand E. Marcos, and/or his wife Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates, business
associates, dummies, agents or nominees which had been or were acquired
by them directly or indirectly, through or as a result of the improper or illegal
use of funds or properties owned by the Government of the Philippines or
any of its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of their office, authority, influence,
connections or relationship, resulting in their unjust enrichment and causing

c) that "said assets and properties are in the form of bank accounts,
deposits, trust accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real and
personal properties in the Philippines and in various countries of the
world;" 40 and
2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to
former President Marcos." 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the
Government's plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the
above described factual premises of the Executive Orders and Proclamation
No. 3 to be true, to be amassed demonstrable by competent evidence, the
recovery from Marcos, his family and his minions of the assets and
properties involved, is not only a right but a duty on the part of Government.
llcd

But however plain and valid that right and duty may be, still a balance must
be sought with the equally compelling necessity that a proper respect be
accorded and adequate protection assured, the fundamental rights of private
property and free enterprise which are deemed pillars of a free society such
as ours, and to which all members of that society may without exception lay
claim.
". . . Democracy, as a way of life enshrined in the Constitution,
embraces as its necessary components freedom of conscience,
freedom of expression, and freedom in the pursuit of
happiness.Along with these freedoms are included economic
freedom and freedom of enterprise within reasonable bounds and
under proper control. . . . Evincing much concern for the
protection of property, the Constitution distinctly recognizes the
preferred position which real estate has occupied in law for
ages. Property is bound up with every aspect of social life in a
democracy as democracy is conceived in the Constitution.
The Constitution realizes the indispensable role which property,
owned in reasonable quantities and used legitimately, plays in
the stimulation to economic effort and the formation and growth
of a solid social middle class that is said to be the bulwark of
democracy and the backbone of every progressive and happy
country." 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be
assumed. They will have to be duly established by adequate proof in each
case, in a proper judicial proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged and consummated; although
there are some who maintain that the fact that an immense fortune, and
"vast resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad," and they have resorted to all sorts of clever schemes
and manipulations to disguise and hide their illicit acquisitions is within the
realm of judicial notice, being of so extensive notoriety as to dispense with
proof thereof Be this as it may, the requirement of evidentiary substantiation
has been expressly acknowledged, and the procedure to be followed
explicitly laid down, in Executive Order No. 14.
prLL

b. Need of Provisional Measures to Collect and Conserve

Assets Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the
recovery of such "ill-gotten wealth" as the evidence at hand may reveal, there
is an obvious and imperative need for preliminary, provisional measures to
prevent the concealment, disappearance, destruction, dissipation, or loss of
the assets and properties subject of the suits, or to restrain or foil acts that
may render moot and academic, or effectively hamper, delay, or negate
efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies.
These are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed
instances of "ill-gotten wealth." The remedy of "provisional takeover" is
peculiar to cases where "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by entities or
persons close to former President Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester
property claimed to be "ill-gotten" means to place or cause to be placed
under its possession or control said property, or any building or office
wherein any such property and any records pertaining thereto may be found,
including "business enterprises and entities," for the purpose of preventing
the destruction, concealment or dissipation of, and otherwise conserving and

preserving, the same until it can be determined, through appropriate

judicial proceedings, whether the property was in truth "ill-gotten," i.e.,
acquired through or as a result of improper or illegal use of or the conversion
of funds belonging to the Government or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of official position, authority, relationship, connection or
influence, resulting in unjust enrichment of the ostensible owner and grave
damage and prejudice to the State. 44 And this, too, is the sense in which the
term is commonly understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property
alleged to constitute "ill-gotten wealth" "from transferring, conveying,
encumbering or otherwise depleting or concealing such property, or from
assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." 46 In other words, it commands the possessor to hold the
property and conserve it subject to the orders and disposition of the authority
decreeing such freezing. In this sense, it is akin to a garnishment by which
the possessor or ostensible owner of property is enjoined not to deliver,
transfer, or otherwise dispose of any effects or credits in his possession or
control, and thus becomes in a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges
the apparent distinction between "ill-gotten" "business enterprises and
entities" (going concerns, businesses in actual operation), generally, as to
which the remedy of sequestration applies, it being necessarily inferred that
the remedy entails no interference, or the least possible interference with the
actual management and operations thereof; and "business enterprises which
were taken over by the government of the Marcos Administration or by
entities or persons close to him," in particular, as to which a "provisional
takeover" is authorized, "in the public interest or to prevent disposal or
dissipation of the enterprises." 48 Such a "provisional takeover" imports
something more than sequestration or freezing, more than the placing of the
business under physical possession and control, albeit without or with the
least possible interference with the management and carrying on of the
business itself. In a "provisional takeover," what is taken into custody is not
only the physical assets of the business enterprise or entity, but the business
operation as well. It is in fine the assumption of control not only over things,
but over operations or on-going activities. But, to repeat, such a "provisional
takeover" is allowed only as regards "business enterprises . . . taken over by
the government of the Marcos Administration or by entities or persons close
to former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional,
contingent character of the remedies just described. Indeed the law plainly
qualifies the remedy of takeover by the adjective, "provisional." These
remedies may be resorted to only for a particular exigency: to prevent in the
public interest the disappearance or dissipation of property or business, and
conserve it pending adjudgment in appropriate proceedings of the primary
issue of whether or not the acquisition of title or other right thereto by the
apparent owner was attended by some vitiating anomaly. None of the
remedies is meant to deprive the owner or possessor of his title or any right
to the property sequestered, frozen or taken over and vest it in the
sequestering agency, the Government or other person. This can be done
only for the causes and by the processes laid down by law.
LexLib

That this is the sense in which the power to sequester, freeze or provisionally
take over is to be understood and exercised, the language of the executive
orders in question leaves no doubt. Executive Order No. 1 declares that the
sequestration of property the acquisition of which is suspect shall last "until
the transactions leading to such acquisition . . . can be disposed of by the
appropriate authorities."49 Executive Order No. 2 declares that the assets or
properties therein mentioned shall remain frozen " pending the outcome of
appropriate proceedings in the Philippines to determine whether any such
assets or properties were acquired" by illegal means. Executive Order
No. 14 makes clear that judicial proceedings are essential for the resolution
of the basic issue of whether or not particular assets are "ill-gotten," and
resultant recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The
Constitutional Command

"SEC. 26. The authority to issue sequestration or freeze orders

under Proclamation No. 3 dated March 25, 1986 in relation to the
recovery of ill-gotten wealth shall remain operative for not more
than eighteen months after the ratification of this Constitution.
However, in the national interest, as certified by the President,
the Congress may extend said period.
"A sequestration or freeze order shall be issued only upon
showing of a prima facie case. The order and the list of the
sequestered or frozen properties shall forthwith be registered
with the proper court. For orders issued before the ratification of
this Constitution, the corresponding judicial action or proceeding
shall be filed within six months from its ratification. For those
issued after such ratification, the judicial action or proceeding
shall be commenced within six months from the issuance thereof.
"The sequestration or freeze order is deemed automatically lifted
if no judicial action or proceeding is commenced as herein
provided." 52

f. Kinship to Attachment, Receivership

As thus described, sequestration, freezing and provisional takeover are akin
to the provisional remedy of preliminary attachment, or receivership. 53 By
attachment, a sheriff seizes property of a defendant in a civil suit so that it
may stand as security for the satisfaction of any judgment that may be
obtained, and not disposed of, or dissipated, or lost intentionally or otherwise,
pending the action. 54 By receivership, property, real or personal, which is
subject of litigation, is placed in the possession and control of a receiver
appointed by the Court, who shall conserve it pending final determination of
the title or right of possession over it. 55 All these remedies sequestration,
freezing, provisional, takeover, attachment and receivership are
provisional, temporary, designed for particular exigencies, attended by no
character of permanency or finality, and always subject to the control of the
issuing court or agency.
LLjur

There is thus no cause for the apprehension voiced by BASECO 50 that

sequestration, freezing or provisional takeover is designed to be an end in
itself, that it is the device through which persons may be deprived of their
property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this is not
so is quite explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about
the duration of these provisional remedies. Section 26 of its Transitory
Provisions 51 lays down the relevant rule in plain terms, apart from extending
ratification or confirmation (although not really necessary) to the institution by
presidential fiat of the remedy of sequestration and freeze orders:

g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are
not issued by a court is of no moment. The Solicitor General draws attention
to the writ of distraint and levy which since 1936 the Commissioner of
Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a
rigid insistence on sequestration as a purely judicial remedy . . . (as it feels)
that the law should not be ossified to a point that makes it insensitive to
change." What it insists on, what it pronounces to be its "unyielding position,
is that any change in procedure, or the institution of a new one, should
conform to due process and the other prescriptions of the Bill of Rights of

the Constitution." 57 It is, to be sure, a proposition on which there can be no

disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as
delivery of personal property in replevin suits, sequestration and provisional
takeover writs may issue ex parte. 58 And as in preliminary attachment,
receivership, and delivery of personality, no objection of any significance may
be raised to the ex parte issuance of an order of sequestration, freezing or
takeover, given its fundamental character of temporariness or conditionality;
and taking account specially of the constitutionally expressed "mandate of
the people to recover ill-gotten properties amassed by the leaders and
supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected
possessors of "ill-gotten wealth" and thereby cause that disappearance or
loss of property precisely sought to be prevented, and the fact, just as selfevident, that "any transfer, disposition, concealment or disappearance of said
assets and properties would frustrate, obstruct or hamper the efforts of the
Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and
receivership, there exist a prima facie factual foundation, at least, for the
sequestration, freeze or takeover order, and adequate and fair opportunity to
contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and
regulations promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements
of fairness and due process." 62 Executive Order No. 2 declares that with
respect to claims on allegedly "ill-gotten" assets and properties, "it is the
position of the new democratic government that President Marcos . . . (and
other parties affected) be afforded fair opportunity to contest these claims
before appropriate Philippine authorities." 63 Section 7 of the Commission's
Rules and Regulations provides that sequestration or freeze (and takeover)
orders issue upon the authority of at least two commissioners, based on
theaffirmation or complaint of an interested party, or motu proprio when the
Commission has reasonable grounds to believe that the issuance thereof is
warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of
the 1987 Constitution, which requires that a "sequestration or freeze order
shall be issued only upon showing of a prima facie case." 65

b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the
procedure by which a party may seek to set aside a writ of sequestration or
freeze order, viz:
"SECTION 5. Who may contend. The person against whom a
writ of sequestration or freeze or hold order is directed may
request the lifting thereof in writing, either personally or through
counsel within five (5) days from receipt of the writ or order, or in
the case of a hold order, from date of knowledge thereof.
"SECTION 6. Procedure for review of writ or order. After due
hearing or motu proprio for good cause shown, the Commission
may lift the writ or order unconditionally or subject to such
conditions as it may deem necessary, taking into consideration
the evidence and the circumstance of the case. The resolution of
the Commission may be appealed by the party concerned to the
Office of the President of the Philippines within fifteen (15) days
from receipt thereof."

Parenthetically, even if the requirement for a prima facie showing of "illgotten wealth" were not expressly imposed by some rule or regulation as a
condition to warrant the sequestration or freezing of property contemplated in
the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are
devoid of rational basis in fact or law, or are whimsical and capricious, are
condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as
to the validity and propriety of sequestration, freeze and takeover orders, it
should be dispelled by the fact that these particular remedies and the
authority of the PCGG to issue them have received constitutional
approbation and sanction. As already mentioned, the Provisional or
"Freedom" Constitution recognizes the power and duty of the President to
enact "measures to achieve the mandate of the people to . . . (r)ecover illgotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration
or freezing of assets or accounts." And as also already adverted to, Section
26, Article XVIII of the 1987 Constitution 67 treats of, and ratifies the "authority
to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986."

The institution of these provisional remedies is also premised upon the

State's inherent police power, regarded, as "the power of promoting the
public welfare by restraining and regulating the use of liberty and
property," 68 and as "the most essential, insistent and illimitable of powers . . .
in the promotion of general welfare and the public interest," 69 and said to be
"co-extensive with self-protection and . . . not inaptly termed (also) the 'law of
overruling necessity.'" 70
10. PCGG not a 'Judge"; General Functions
It should also by now be reasonably evident from what has thus far been said
that the PCGG is not, and was never intended to act as, a judge. Its general
function is to conduct investigations in order tocollect evidence establishing
instances of "ill-gotten wealth;" issue sequestration, and such orders as may
be warranted by the evidence thus collected and as may be necessary to
preserve and conserve the assets of which it takes custody and control and
prevent their disappearance, loss or dissipation; and eventually file and
prosecute in the proper court of competent jurisdiction all cases investigated
by it as may be warranted by its findings. It does not try and decide, or hear
and determine, or adjudicate with any character of finality or compulsion,
cases involving the essential issue of whether or not property should be
forfeited and transferred to the State because "ill-gotten" within the meaning
of the Constitution and the executive orders. This function is reserved to the
designated court, in this case, the Sandiganbayan. 71 There can therefore be
no serious regard accorded to the accusation, leveled by BASECO, 72 that
the PCGG plays the perfidious role of prosecutor and judge at the same time.
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts
disclosed by the record, hereafter to be discussed, the petition cannot
succeed. The writs of certiorari and prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or
controlled by President Marcos "during his administration, through nominees,
by taking undue advantage of his public office and/or using his powers,
authority, or influence," and that it was by and through the same means, that
BASECO had taken over the business and/or assets of the
National Shipyard and Engineering Co., Inc., and other government-owned
or controlled entities.
12. Organization and Stock Distribution of BASECO
BASECO describes itself in its petition as "a ship repair and shipbuilding
company . . . incorporated as a domestic private corporation . . . (on Aug. 30,
1972) by a consortium of Filipino shipowners and shipping executives. Its

main office is at Engineer Island, Port Area, Manila, where its Engineer
Island Shipyard is housed, and its main shipyard is located at
Mariveles Bataan." 73 Its Articles of Incorporation disclose that its authorized
capital stock is P60,000,000.00 divided into 60,000 shares, of which 12,000
shares with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the
incorporators. 74 The same articles identify the incorporators, numbering
fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T.
Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap,
(7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10)
Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S.
Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to
be stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3)
Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo
Torres. As of this year, 1986, there were twenty (20) stockholders listed in
BASECO's Stock and Transfer Book. 75 Their names, and the number of
shares respectively held by them are as follows:
1. Jose A. Rojas 1,248 shares
2. Severino G. de la Cruz 1,248 shares
3. Emilio T. Yap 2,508 shares
4. Jose Fernandez 1,248 shares
5. Jose Francisco 128 shares
6. Manuel S. Mendoza 96 shares
7. Anthony P. Lee 1,248 shares
8. Hilario M. Ruiz 32 shares
9. Constante L. Farias 8 shares
10. Fidelity Management, Inc. 65,882 shares
11. Trident Management 7,412 shares
12. United Phil. Lines 1,240 shares
13. Renato M. Tanseco 8 shares
14. Fidel Ventura 8 shares
15. Metro Bay Drydock 136,370 shares
16. Manuel Jacela 1 share
17. Jonathan G. Lu 1 share
18. Jose J. Tanchanco 1 share
19. Dioscoro Papa 128 shares
20. Edward T. Marcelo 4 shares

TOTAL 218,819 shares.

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

13. Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from
National Shipyard & Steel Corporation, or NASSCO, a government-owned or
controlled corporation, the latter's shipyard at Mariveles,Bataan, known as
the Bataan National Shipyard (BNS), and except for NASSCO's Engineer
Island Shops and certain equipment of the BNS, consigned for future

negotiation all its structures, buildings, shops, quarters, houses, plants,

equipment and facilities, in stock or in transit. This it did in virtue of a
"Contract of Purchase and Sale with Chattel Mortgage" executed on
February 13, 1973. The price was P52,000,000.00. As partial payment
thereof, BASECO delivered to NASSCO a cash bond of P11,400,000.00,
convertible into cash within twenty-four (24) hours from completion of the
inventory undertaken pursuant to the contract. The balance of
P41,600,000.00, with interest at seven percent (7%) per annum,
compounded semi-annually, was stipulated to be paid in equal semi-annual
installments over a term of nine (9) years, payment to commence after a
grace period of two (2) years from date of turnover of the shipyard to
BASECO. 76
14. Subsequent Reduction of Price; Intervention of Marcos

over all equipment and facilities including structures, buildings, shops,

quarters, houses, plants and expendable or semi-expendable assets, located
at the Engineer Island, known as the Engineer Island Shops, including all the
equipment of the Bataan National Shipyards (BNS) which were excluded
from the sale of NBS to BASECO but retained by BASECO and all other
selected equipment and machineries of NASSCO at J. Panganiban Smelting
Plant." In the same deed, NASSCO committed itself to cooperate with
BASECO for the acquisition from the National Government or other
appropriate Government entity of Engineer Island. Consideration for the sale
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to
have been made, and the balance was stipulated to be paid at 7% interest
per annum in equal semi-annual installments over a term of nine (9) years, to
commence after a grace period of two (2) years. Mr. Arturo Pacificador again
signed for NASSCO, together with the general manager, Mr. David R. Ines.

Unaccountably, the price of P52,000,000.00 was reduced by more than onehalf, to P24,311,550.00, about eight (8) months later. A document to this
effect was executed on October 9, 1973, entitled "Memorandum Agreement,"
and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of
the Board of Directors, and David R. Ines, as General Manager. 77 This
agreement bore, at the top right corner of the first page, the word
"APPROVED "in the handwriting of President Marcos, followed by his usual
full signature. The document recited that a down payment of P5,862,310.00
had been made by BASECO, and the balance of P19,449,240.00 was
payable in equal semi-annual installments over nine (9) years after a grace
period of two (2) years, with interest at 7% per annum.

17. Loans Obtained

15. Acquisition of 300 Hectares from Export Processing Zone Authority

In September, 1977, two (2) reports were submitted to President Marcos

regarding BASECO. The first was contained in a letter dated September 5,
1977 of Hilario M. Ruiz, BASECO president. 83 The second was embodied in
a confidential memorandum dated September 16, 1977 of Capt. A.T.
Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of
BASECO, and that of a Romualdez, a relative by affinity.

LLpr

On October 1, 1974, BASECO acquired three hundred (300) hectares of land

in Mariveles from the Export Processing Zone Authority for the price of
P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00
was paid upon its execution, and the balance stipulated to be payable in
installments. 78

It further appears that on May 27, 1975 BASECO obtained a loan from the
NDC, taken from "the last available Japanese war damage fund of
$19,000,000.00," to pay for "Japanese made heavy equipment (brand
new)." 80 On September 3, 1975, it got another loan also from the NDC in the
amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another
loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has
been made that not a single centavo has been paid on these loans. 82
18. Reports to President Marcos

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

a. BASECO President's Report
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO,
again with the intervention of President Marcos, acquired ownership of the
rest of the assets of NASSCO which had not been included in the first two (2)
purchase documents. This was accomplished by a deed entitled "Contract of
Purchase and Sale," 79 which, like the Memorandum of Agreement dated
October 9, 1973 supra also bore at the upper right-hand corner of its first
page, the handwritten notation of President Marcos reading, "APPROVED,
July 29, 1973," and underneath it, his usual full signature. Transferred to
BASECO were NASSCO's "ownership and all its titles, rights and interests

In his letter of September 5, 1977, BASECO President Ruiz reported to

Marcos that there had been "no orders or demands for ship construction" for
some time and expressed the fear that if that state of affairs persisted,
BASECO would not be able to pay its debts to the Government, which at the
time stood at the not inconsiderable amount of P165,854,000.00. 85 He
suggested that, to "save the situation," there be a "spin-off (of their)
shipbuilding activities which shall be handled exclusively by an entirely new

corporation to be created;" and towards this end, he informed Marcos that

BASECO was
". . . inviting NDC and LUSTEVECO to participate by converting
the NDC shipbuilding loan to BASECO amounting to P341.165M
and assuming and converting a portion of BASECO's
shipbuilding loans from REPACOM amounting to P52.2M or a
total of P83.365M as NDC's equity contribution in the new
corporation. LUSTEVECO will participate by absorbing and
converting a portion of the REPACOM loan of Bay Shipyard and
Drydock, Inc., amounting to P32.538M." 86

b. Romualdez' Report

He also transmitted to Marcos, together with the report, the following

documents: 88
1. "Stock certificates indorsed and assigned in blank with
assignments and waivers;" 89
2. The articles of incorporation, the amended articles, and the bylaws of BASECO;
3. "Deed of Sales, wherein NASSCO sold to BASECO four (4)
parcels of land in 'Engineer Island', Port Area, Manila;"
4. "Transfer Certificate of Title No. 124822 in the name of
BASECO, covering 'Engineer Island';"

Capt. A.T. Romualdez' report to the President was submitted eleven (11)
days later. It opened with the following caption:

5. "Contract dated October 9, 1973, between NASSCO and

BASECO re-structure and equipment at Mariveles, Bataan;"

"MEMORANDUM:
6. "Contract dated July 16, 1975, between NASSCO and
BASECO re-structure and equipment at Engineer Island, Port
Area Manila;"

FOR: The President

SUBJECT: An Evaluation and Re-assessment of a
Performance of a Mission

7. "Contract dated October 1, 1974, between EPZA and

BASECO re 300 hectares of land at Mariveles, Bataan;"

FROM: Capt. A.T. Romualdez."

8. "List of BASECO's fixed assets;"

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting
its loan obligations due chiefly to the fact that "orders to build ships as
expected . . . did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings
in blank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo
Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr.
Magiliw Torres . . . is already dead and Mr. Jose A. Rojas had a major heart
attack," he made the following quite revealing, and it may be added, quite
cynical and indurate recommendation, to wit:
". . . (that) their replacements (be effected) so we can
register their names in the stock book prior to the
implementation of your instructions to pass a board
resolution to legalize the transfers under SEC regulations;
"2. By getting their replacements, the families cannot question us
later on; and
"3. We will owe no further favors from them."

87

9. "Loan Agreement dated September 3, 1975, BASECO's loan

from NDC of P30,000,000.00;"
10. "BASECO-REPACOM Agreement dated May 27, 1975;"
11. "GSIS loan to BASECO dated January 28, 1976 of
P12,400,000.00 for the housing facilities for BASECO's rank-andfile employees." 90

Capt. Romualdez also recommended that BASECO's loans be restructured

"until such period when BASECO will have enough orders for ships in order
for the company to meet loan obligations," and that
"An LOI may be issued to government agencies using floating equipment,
that a linkage scheme be applied to a certain percent of BASECO's net profit
as part of BASECO's amortization payments to make it justifiable for you,
Sir." 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a
stockholder or officer of BASECO, yet he has presented a report on

BASECO to President Marcos, and his report demonstrates intimate

familiarity with the firm's affairs and problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates'
recommendations, particularly as regards the "spin-off" and the "linkage
scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to
Secretary Geronimo Velasco of the Philippine National Oil Company and
Chairman Constante Farias of the National Development Company,
directing them "to participate in the formation of a new corporation resulting
from the spin-off of the shipbuilding component of BASECO along the
following guidelines:
a. Equity participation of government shall be through
LUSTEVECO and NDC in the amount of P115,903,000
consisting of the following obligations of BASECO which are
hereby authorized to be converted to equity of the said new
corporation, to wit:
1. NDC P83,865,000
(P31.165M
loan
&
P52.2M
Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of nonvoting shares.
For immediate compliance." 92

Mr. Marcos' guidelines were promptly complied with by his subordinates.

Twenty-two (22) days after receiving their president's memorandum, Messrs.
Hilario M. Ruiz, Constante L. Farias and Geronimo Z. Velasco, in
representation of their respective corporations, executed a PREINCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they
undertook to form a shipbuilding corporation to be known as "PHIL-ASIA
SHIPBUILDING CORPORATION," to bring to realization their president's
instructions. It would seem that the new corporation ultimately formed was
actually named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No.

670 addressed to the Reparations Commission (REPACOM), the Philippine

National Oil Company (PNOC), the Luzon Stevedoring Company
(LUSTEVECO), and the National Development Company (NDC). What is
commanded therein is summarized by the Solicitor General, with pithy and
not inaccurate observations as to the effects thereof (in italics), as follows:
". . . 1) the shipbuilding equipment procured by BASECO
through reparations be transferred to NDC subject to
reimbursement by NDC to BASECO (of) the amount of
P18.285M allegedly representing the handling and
incidental expenses incurred by BASECO in the
installation of said equipment (so instead of NDC getting
paid on its loan to BASECO, it was made to pay BASECO
instead the amount of P18.285M); 2) the shipbuilding
equipment procured from reparations through EPZA, now
in the possession of BASECO and BSDI (Bay Shipyard &
Drydocking, Inc.) be transferred to LUSTEVECO through
PNOC; and 3) the shipbuilding equipment (thus)
transferred be invested by LUSTEVECO, acting through
PNOC and NDC, as the government's equity participation
in a shipbuilding corporation to be established in
partnership with the private sector."
xxx xxx xxx
"And so, through a simple letter of instruction and
memorandum, BASECO's loan obligation to NDC and
REPACOM . . . in the total amount of P83.365M and
BSD's REPACOM loan of P32.438M were wiped out and
converted into non-voting preferred shares." 95

20. Evidence of Marcos'

Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar,
the actuality of the control by President Marcos of BASECO has been
sufficiently shown.
LibLex

Other evidence submitted to the Court by the Solicitor General proves that
President Marcos not only exercised control over BASECO, but also that
he actually owns well nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner itself, as of April 23, 1986, there
were 218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay
Drydock, recorded as holding 136,370 shares; (2) Fidelity Management,
Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United

Phil. Lines, 1,240 shares. The first three corporations, among themselves,
own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the
outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing
circumstance that found in Malacaang shortly after the sudden flight of
President Marcos, were certificates corresponding to more than ninety-five
percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding
shares of stock of the three (3) corporations above mentioned (which hold
95.82% of all BASECO stock), signed by the owners thereof although not
notarized. 97
More specifically, found in Malacaang (and now in the custody of the
PCGG) were:
1) the deeds of assignment of all 600 outstanding shares of Fidelity
Management Inc. which supposedly owns as aforesaid 65,882 shares of
BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares
of Metro Bay Drydock Corporation which allegedly owns 136,370 shares
of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident
Management Co., Inc. which allegedly owns 7,412 shares of BASECO
stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819 outstanding
shares of BASECO stock; that is, all but 5% all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact,
assuring this Court that the BASECO stockholders were still in possession of
their respective stock certificates and had "never endorsed . . . them in blank
or to anyone else," 100 that denial is exposed by his own prior and subsequent
recorded statements as a mere gesture of defiance rather than a verifiable
factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's

counsel a period of 10 days "to SUBMIT, as undertaken by him, . . . the
certificates of stock issued to the stockholders of . . . BASECO as of April 23,
1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for
extension; and in his motion dated October 2, 1986, he declared inter
alia that "said certificates of stock are in the possession of third parties,

among whom being the respondents themselves . . . and petitioner is still

endeavoring to secure copies thereof from them." 102 On the same day he
filed another motion praying that he be allowed "to secure copies of the
Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other
Certificates, of Stock of petitioner's stockholders in possession of
respondents." 103
In a Manifestation dated October 10, 1986, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of
the stock certificates "confirms the fact that stockholders of petitioner
corporation are not in possession of . . . (their) certificates of stock," and the
reason, according to him, was "that 95% of said shares . . . have been
endorsed in blank and found in Malacaang after the former President and
his family fled the country." To this manifestation BASECO's counsel replied
on November 5, 1986, as already mentioned, stubbornly insisting that the
firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on
November 27, 1986 among other things "to require . . . the petitioner . . .
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals
of the stock certificates alleged to be in its possession or accessible to it,
mentioned and described in Annex 'P' of its petition, . . . (and other
pleadings) . . . within ten (10) days from notice." 106 In a motion filed or
December 5, 1986, 107 BASECO's counsel made the statement, quite
surprising in the premises, that "it will negotiate with the owners (of the
BASECO stock in question) to allow petitioner to borrow from them, if
available, the certificates referred to" but that "it needs a more sufficient time
therefor" (sic). BASECo's counsel however eventually had to confess inability
to produce the originals of the stock certificates, putting up the feeble excuse
that while he had "requested the stockholders to allow . . . (him) to borrow
said certificates, . . . some of . . . (them) claimed that they had delivered the
certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in
view of last national emergency." 108 He has conveniently omitted, nor has he
offered to give the details of the transactions adverted to by him, or to explain
why he had not impressed on the supposed stockholders the primordial
importance of convincing this Court of their present custody of the originals of
the stock, or if he had done so, why the stockholders are unwilling to agree to
some sort of arrangement so that the originals of their certificates might at
the very least be exhibited to the Court. Under the circumstances, the Court
can only conclude that he could not get the originals from the stockholders
for the simple reason that, as the Solicitor General maintains, said
stockholders in truth no longer have them in their possession, these having
already been assigned in blank to then President Marcos.
LexLib

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at
least, the stockholders and directors of BASECO as of April, 1986 109 were
mere "dummies, " nominees or alter egos of President Marcos; at any rate,
that they are no longer owners of any shares of stock in the corporation, the
conclusion cannot be avoided that said stockholders and directors have no
basis and no standing whatever to cause the filing and prosecution of the
instant proceeding; and to grant relief to BASECO, as prayed for in the
petition, would in effect be to restore the assets, properties and business
sequestered and taken over by the PCGG to persons who are "dummies,"
nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do
indeed show that the private corporation known as BASECO was "owned or
controlled by former President Ferdinand E. Marcos . . . during his
administration, . . . through nominees, by taking advantage of . . . (his) public
office and/or using . . . (his) powers, authority, influence . . .," and that
NASSCO and other property of the government had been taken over by
BASECO; and the situation justified the sequestration as well as the
provisional takeover of the corporation in the public interest, in accordance
with the terms of Executive Orders No. 1 and 2, pending the filing of the
requisite actions with the Sandiganbayan to cause divestment of title thereto
from Marcos, and its adjudication in favor of the Republic pursuant to
Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts
is correct; accordingly, it sustains the acts of sequestration and takeover by
the PCGG as being in accord with the law, and, in view of what has thus far
been set out in this opinion, pronounces to be without merit the theory that
said acts, and the executive orders pursuant to which they were done, are
fatally defective in not according to the parties affected prior notice and
hearing, or an adequate remedy to impugn, set aside or otherwise obtain
relief therefrom, or that the PCGG had acted as prosecutor and judge at the
same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question
are a bill of attainder. 110 "A bill of attainder is a legislative act which inflicts
punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably
construed as a determination or declaration of guilt. On the contrary, the
executive orders, inclusive of Executive Order No. 14, make it perfectly clear
that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth"
is to be handed down by a judicial tribunal, in this case,

the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In

the second place, no punishment is inflicted by the executive orders, as the
merest glance at their provisions will immediately make apparent. In no
sense, therefore, may the executive orders be regarded as a bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable
Searches and Seizures
BASECO also contends that its light against self-incrimination and
unreasonable searches and seizures had been transgressed by the Order of
April 18, 1986 which required it "to produce corporate records from 1973 to
1986 under pain of contempt of the Commission if it fails to do so." The order
was issued upon the authority of Section 3 (e) of Executive Order No. 1,
treating of the PCGG's power to "issue subpoenas requiring . . . the
production of such books, papers, contracts, records, statements of accounts
and other documents as may be material to the investigation conducted by
the Commission," and paragraph (3), Executive Order No. 2 dealing with its
power to "(r)equire all persons in the Philippines holding . . . (alleged "illgotten") assets or properties, whether located in the Philippines or abroad, in
their names as nominees, agents or trustees, to make full disclosure of the
same . . ." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to
juridical persons.
"While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an
abuse of such privileges . . ." 113

Relevant jurisprudence is also cited by the Solicitor General.

114

". . . corporations are not entitled to all of the constitutional

protections which private individuals have. . . . They are not at all
within the privilege against self-incrimination, although this court
more than once has said that the privilege runs very closely with
the 4th Amendment's Search and Seizure provisions. It is also
settled that an officer of the company cannot refuse to produce
its records in its possession, upon the plea that they will either
incriminate him or may incriminate it." (Oklahoma Press
Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor
General's).
". . . The corporation is a creature of the state. It is presumed to
be incorporated for the benefit of the public. It received certain
special privileges and franchises, and holds them subject to the
laws of the state and the limitations of its charter. Its powers are

limited by law. It can make no contract not authorized by its

charter. Its rights to act as a corporation are only preserved to it
so long as it obeys the laws of its creation. There is a reserve
right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange
anomaly to hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been employed,
and whether they had been abused, and demand the production
of the corporate books and papers for that purpose. The defense
amounts to this, that an officer of the corporation which is
charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books.
To state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a
corporation vested with special privileges and franchises may
refuse to show its hand when charged with an abuse of such
privileges. (Wilson v. United States, 55 Law Ed., 771, 780
[emphasis, the Solicitor General's])"

At any rate, Executive Order No. 14-A, amending Section 4 of Executive

Order No. 14 assures protection to individuals required to produce evidence
before the PCGG against any possible violation of his right against selfincrimination. It gives them immunity from prosecution on the basis of
testimony or information he is compelled to present. As an amended, said
Section 4 now provides that
xxx xxx xxx
"The witness may not refuse to comply with the order on the
basis of his privilege against self-incrimination; but no testimony
or other information compelled under the order (or any
information directly or indirectly derived from such testimony, or
other information) may be used against the witness in any
criminal case, except a prosecution for perjury, giving a false
statement, or otherwise failing to comply with the order."

The constitutional safeguard against unreasonable searches and seizures

finds no application to the case at bar either. There has been no search
undertaken by any agent or representative of the PCGG, and of course no
seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and
extent of the powers that may be wielded by the PCGG with regard to the

properties or businesses placed under sequestration or provisionally taken

over. Obviously, it is not a question to which an answer can be easily given,
much less one which will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or provisionally
taken over. As already earlier stressed with no little insistence, the act of
sequestration; freezing or provisional takeover of property does not import or
bring about a divestment of title over said property; does not make the PCGG
the owner thereof. In relation to the property sequestered, frozen or
provisionally taken over, the PCGG is a conservator, not an
owner. Therefore, it can not perform acts of strict ownership; and this is
specially true in the situations contemplated by the sequestration rules
where, unlike cases of receivership, for example, no court exercises effective
supervision or can upon due application and hearing, grant authority for the
performance of acts of dominion.
LLpr

Equally evident is that the resort to the provisional remedies in question

should entail the least possible interference with business operations or
activities so that, in the event that the accusation of the business enterprise
being "ill-gotten" be not proven, it may be returned to its rightful owner as far
as possible in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the
property or business sequestered or provisionally taken over, much like a
court-appointed receiver, 115 such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and generally
do such other acts and things as may be necessary to fulfill its mission as
conservator and administrator. In this context, it may in addition enjoin or
restrain any actual or threatened commission of acts by any person or entity
that may render moot and academic, or frustrate or otherwise make
ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the
assistance of any office, agency or instrumentality of the government. 116 In
the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its
essential role, as already discussed, is that of conservator, caretaker,
"watchdog" or overseer. It is not that of manager, or innovator, much less an
owner.
c. Powers over Business Enterprises Taken Over by
Marcos or Entities or Persons Close to him, Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to

have been "taken over by the government of the Marcos Administration or by
entities or persons close to former President Marcos," 117 the PCGG is given
power and authority, as already adverted to, to "provisionally take (it) over in
the public interest or to prevent . . . (its) disposal or dissipation;" and since
the term is obviously employed in reference to going concerns, or business
enterprises in operation, something more than mere physical custody is
connoted; the PCGG may in this case exercise some measure of control in
the operation, running, or management of the business itself. But even in this
special situation, the intrusion into management should be restricted to the
minimum degree necessary to accomplish the legislative will, which is "to
prevent the disposal or dissipation" of the business enterprise. There should
be no hasty, indiscriminate, unreasoned replacement or substitution of
management officials or change of policies, particularly in respect of viable
establishments. In fact, such a replacement or substitution should be avoided
if at all possible, and undertaken only when justified by demonstrably tenable
grounds and in line with the stated objectives of the PCGG. And it goes
without saying that where replacement of management officers may be
called for, the greatest prudence, circumspection, care and attention should
accompany that undertaking to the end that truly competent, experienced
and honest managers may be recruited. There should be no role to be
played in this area by rank amateurs, no matter how well meaning. The road
to hell, it has been said, is paved with good intentions. The business is not to
be experimented or played around with, not run into the ground, not driven to
bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the
ultimate objective of the whole exercise, which is to turn over the business to
the Republic, once judicially established to be "ill-gotten." Reason dictates
that it is only under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken over
may legitimately be exercised.
LexLib

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances
that the PCGG may properly exercise the prerogative to vote sequestered
stock of corporations, granted to it by the President of the Philippines through
a Memorandum dated June 26, 1986. That Memorandum authorizes the
PCGG, "pending the outcome of proceedings to determine the ownership of .
. . (sequestered) shares of stock," "to vote such shares of stock as it may
have sequestered in corporations at all stockholders' meetings called for the
election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a manner
as to be consistent with, and not contradictory of the Executive Orders earlier
promulgated on the same matter. There should be no exercise of the right to
vote simply because the right exists, or because the stocks sequestered
constitute the controlling or a substantial part of the corporate voting power.

The stock is not to be voted to replace directors, or revise the articles or bylaws, or otherwise bring about substantial changes in policy, program or
practice of the corporation except for demonstrably weighty and defensible
grounds, and always in the context of the stated purposes of sequestration or
provisional takeover, i.e., to prevent the dispersion or undue disposal of the
corporate assets. Directors are not to be voted out simply because the power
to do so exists. Substitution of directors is not to be done without reason or
rhyme, should indeed be shunned if at all possible, and undertaken only
when essential to prevent disappearance or wastage of corporate property,
and always under such circumstances as assure that the replacements are
truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos and
were no longer owners of any stock in the firm, if they ever were at all. This is
why, in its Resolution of October 28, 1986; 118 this Court declared that
"Petitioner has failed to make out a case of grave abuse or
excess of jurisdiction in respondents' calling and holding of a
stockholders' meeting for the election of directors as authorized
by the Memorandum of the President . . . (to the PCGG) dated
June 26, 1986, particularly, where as in this case, the
government can, through its designated directors, properly
exercise control and management over what appear to be
properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on
behalf of BASECO have failed to show any right or even any
shareholding in said corporation."

It must however be emphasized that the conduct of the PCGG nominees

in the BASECO Board in the management of the company's affairs
should henceforth be guided and governed by the norms herein laid
down. They should never for a moment allow themselves to forget that
they are conservators, not owners of the business; they are fiduciaries,
trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required.
prcd

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation
or revision, and the execution of certain contracts, inclusive of the termination
of the employment of some of its executives, 119this Court cannot, in the
present state of the evidence on record, pass upon them. It is not necessary
to do so. The issues arising therefrom may and will be left for initial
determination in the appropriate action. But the Court will state that absent
any showing of any important cause therefor, it will not normally substitute its

judgment for that of the PCGG in these individual transactions. It is clear

however, that as things now stand, the petitioner cannot be said to have
established the correctness of its submission that the acts of the PCGG in
question were done without or in excess of its powers, or with grave abuse of
discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order

issued on October 14, 1986 is lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

Separate Opinions
TEEHANKEE, C.J., concurring:
I fully concur with the masterly opinion of Mr. Justice Narvasa. In the process
of disposing of the issues raised by petitioner BASECO in the case at bar, it
comprehensively discusses the laws and principles governing the
Presidential Commission on Good Government (PCGG) and defines the
scope and extent of its powers in the discharge of its monumental task of
recovering the "ill-gotten wealth, accumulated by former President Ferdinand
E. Marcos, his immediate family, relatives, subordinates and close
associates, whether located in the Philippines or abroad (and) business
enterprises and entities owned or controlled by them during . . . (the Marcos)
administration, directly or through nominees, by taking undue advantage of
their public office and/or using their powers, authority, influence, connections
or relationship." 1
The Court is unanimous insofar as the judgment at bar upholds the
imperative need of recovering the ill-gotten properties amassed by the
previous regime, which "deserves the fullest support of the judiciary and all
sectors of society." 2 To quote the pungent language of Mr. Justice Cruz,
"(T)here is no question that all lawful efforts should be taken to recover the
tremendous wealth plundered from the people by the past regime in the most
execrable thievery perpetrated in all history. No right-thinking Filipino can
quarrel with this necessary objective, and on this score I am happy to concur
with theponencia." 3
The Court is likewise unanimous in its judgment dismissing the petition to
declare unconstitutional and void Executive Orders Nos. 1 and 2 to annul the
sequestration
order
of
April 14,
1986.
For
indeed,
the
1987 Constitution overwhelmingly adopted by the people at the February 2,
1987 plebiscite expressly recognized in Article XVIII, section 26 thereof 4 the
vital functions of respondent PCGG to achieve the mandate of the people to

recover such ill-gotten wealth and properties as ordained by Proclamation

No. 3 promulgated on March 25, 1986.
The Court is likewise unanimous as to the general rule set forth in the main
opinion that "the PCGG cannot exercise acts of dominion over property
sequestered, frozen or provisionally taken over" and "(The PCGG may thus
exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed
receiver, such as to bring and defend actions in its own name; receive rents;
collect debts due; pay outstanding debts; and generally do such other acts
and things as may be necessary to fulfill its mission as conservator and
administrator. In this context, it may in addition enjoin or restrain any actual
or threatened commission of acts by any person or entity that may render
moot and academic, or frustrate or otherwise make ineffectual its efforts to
carry out its task; punish for direct or indirect contempt in accordance with
the Rules of Court; and seek and secure the assistance of any office, agency
or instrumentality of the government. In the case of sequestered businesses
generally (i.e. going concerns, business in current operation), as in the case
of sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, 'watchdog' or overseer. It is not that of manager, or
innovator, much less an owner." 5
Now, the case at bar involves one where the third and most encompassing
and rarely invoked of provisional remedies, 6 the provisional takeover of the
Baseco properties and business operations has been availed of by the
PCGG, simply because the evidence on hand, not only prima facie but
convincingly with substantial and documentary evidence of record
establishes that the corporation known as petitioner BASECO "was owned or
controlled by President Marcos 'during his administration, through nominees,
by taking undue advantage of his public office and/or using his powers,
authority, or influence;' and that it was by and through the same means, that
BASECO had taken over the business and/or assets of the [governmentowned] National Shipyard and Engineering Co., Inc., and other governmentowned or controlled entities." The documentary evidence shows that
petitioner BASECO (read Ferdinand E. Marcos) in successive transactions
all directed and approved by the former President in an orgy of what
according to the PCGG's then chairman, Jovito Salonga, in his statement
before the 1986 Constitutional Commission, "Mr. Ople once called 'organized
pillage'" gobbled up the government corporation National Shipyard & Steel
Corporation (NASSCO), its shipyard at Mariveles, 300 hectares of land in
Mariveles from the Export Processing Zone Authority, Engineer Island itself
in Manila and its complex of equipment and facilities including structures,
buildings, shops, quarters, houses, plants and expendable or semiexpendable assets and obtained huge loans of $19,000,000.00 from the last
available Japanese war damage fund, P30,000,000.00 from the NDC and
P12,400,000,00 from the GSIS. The sordid details are set forth in detail in

Paragraphs 11 to 20 of the main opinion. They include confidential reports

from then BASECO president Hilario M. Ruiz and the deposed President's
brother-in-law, then Captain (later Commodore) Alfredo Romualdez, who
although not on record as an officer or stockholder of BASECO reported
directly to the deposed President on its affairs and made the
recommendations, all approved by the latter, for the gobbling up by BASECO
of all the choice government assets and properties.
All this evidence has been placed of record in the case at bar. And petitioner
has had all the time and opportunity to refute it, submittals to the contrary
notwithstanding, but has dismally failed to do so. To cite one glaring
instance: as stated in the main opinion, the evidence submitted to this Court
by the Solicitor General "proves that President Marcos not only exercised
control over BASECO, but also that he actually owns well nigh one hundred
percent of its outstanding stock." It cites the fact that three corporations,
evidently front or dummy corporations, among twenty shareholders, in name,
of BASECO, namely Metro Bay Drydock, Fidelity Management, Inc. and
Trident Management hold 209,664 shares or 95.82% of BASECO's
outstanding stock. Now, the Solicitor General points out further than
BASECO certificates "corresponding to more than ninety-five percent (95%)
of all the outstanding shares of stock of BASECO, endorsed in blank,
together with deeds of assignment of practically all the outstanding shares of
stock of the three (3) corporations above mentioned (which hold 95.82% of
all BASECO stock), signed by the owners thereof although not
notarized" 7 were found in Malacaang shortly after the deposed President's
sudden flight from the country on the night of February 25, 1986. Thus, the
main opinion's unavoidable conclusion that "(W)hile the petitioner's counsel
was quick to dispute this asserted fact, assuring this Court that the BASECO
stockholders were still in possession of their respective stock certificates and
had 'never endorsed . . . them in blank or to anyone else,' that denial is
exposed by his own prior and subsequent recorded statements as a mere
gesture of defiance rather than a verifiable factual declaration . . . Under the
circumstances, the Court can only conclude that he could not get the
originals from the stockholders for the simple reason that as the Solicitor
General maintains, said stockholders in truth no longer have them in their
possession, these having already been assigned in blank to President
Marcos." 8
With this strong unrebutted evidence of record in this Court, Justice
Melencio-Herrera, joined by Justice Feliciano, expressly concurs with the
main opinion upholding the commission's take-over, stating that "(I) have no
objection to according the right to vote sequestered stock in case of a takeover of business actually belonging to the government or whose
capitalization comes from public funds but which, somehow, landed in the
hands of private persons, as in the case of BASECO." They merely qualify
their concurrence with the injunction that such take-overs be exercised with

"caution and prudence" pending the determination of "the true and real
ownership" of the sequestered shares. Suffice it to say in this regard that
each case has to be judged from the pertinent facts and circumstances and
that the main opinion emphasizes sufficiently that it is only in the special
instances specified in the governing laws grounded on the superior national
interest and welfare and the practical necessity of preserving the property
and preventing its loss or disposition that the provisional remedy of
provisional take-over is exercised.
Here, according to the dissenting opinion, "the PCGG concludes that
sequestered property is ill-gotten wealth and proceeds to exercise acts of
ownership over said properties . . ." and adds that "the fact of ownership
must be established in a proper suit before a court of justice" which this
Court has preempted with its finding that "in the context of the proceedings at
bar, the actuality of the control by President Marcos of BASECO has been
sufficiently shown."
But BASECO who has instituted this action to set aside the sequestration
and take-over orders of respondent commission has chosen to raise these
very issues in this Court. We cannot ostrich-like hide our head in the sand
and say that it has not yet been established in the proper court that what the
PCGG has taken over here are government properties, as a matter of record
and public notice and knowledge, like the NASSCO, its Engineer Island and
Mariveles Shipyard and entire complex, which have been pillaged and placed
in the name of the dummy or front company named BASECO but from all the
documentary evidence of record shown by its street certificates all found in
Malacaang should in reality read "Ferdinand E. Marcos" and/or his brotherin-law. Such take-over can in no way be termed "lawless usurpation," for the
government does not commit any act of usurpation in taking over its own
properties that have been channeled to dummies, who are called upon to
prove in the proper court action what they have failed to do in this Court, that
they have lawfully acquired ownership of said properties, contrary to the
documentary evidence of record, which they must likewise explain away.
This Court, in the exercise of its jurisdiction on certiorari and as the guardian
of the Constitution and protector of the people's basic constitutional rights,
has entertained many petitions on the part of parties claiming to be adversely
affected by sequestration and other orders of the PCGG. This Court set the
criterion that such orders should issue only upon showing of a prima
facie case, which criterion was adopted in the 1987 Constitution. The Court's
judgment cannot be faulted if much more than a prima facie has been shown
in this case, which the faceless figures claiming to represent BASECO have
failed to refute or disprove despite all the opportunity to do so.
llcd

The record plainly shows that petitioner BASECO which is but a mere shell to
mask its real owner did not and could not explain how and why they received

such favored and preferred treatment with tailored Letters of Instruction and
handwritten personal approval of the deposed President that handed it on a
silver platter the whole complex and properties of NASSCO and Engineer
Island and the Mariveles Shipyard.
It certainly would be the height of absurdity and helplessness if this
government could not here and now take over the possession and custody
of its very own properties and assets that had been stolen from it and which it
had pledged to recover for the benefit and in the greater interest of the
Filipino people, whom the past regime had saddled with a huge $27-billion
foreign debt that has since ballooned to $28.5-billion.
Thus, the main opinion correctly concludes that "(I)n the light of the
affirmative showing by the Government that, prima facie at least, the
stockholders and directors of BASECO as of April, 1986 were mere
'dummies,' nominees or alter egos of President Marcos; at any rate, that they
are no longer owners of any shares of stock in the corporation, the
conclusion cannot be avoided that said stockholders and directors have no
basis and no standing whatever to cause the filing and prosecution of the
instant proceeding; and to grant relief to BASECO, as prayed for in the
petition, would in effect be to restore the assets, properties and business
sequestered and taken over by the PCGG to persons who are 'dummies'
nominees or alter egos of the former President." 9
And Justice Padilla in his separate concurrence "called a spade a spade,"
citing the street certificates representing 95% of BASECO's outstanding
stock found in Malacaang after Mr. Marcos' hasty flight in February, 1986
and the extent of the control he exercised over policy decisions affecting
BASECO and concluding that "Consequently, even ahead of judicial
proceedings, I am convinced that the Republic of the Philippines, thru the
PCGG, has the right and even the duty to take over full control and
supervision of BASECO."
Indeed, the provisional remedies available to respondent commission are
rooted in the police power of the State, the most pervasive and the least
limitable of the powers of Government since it represents "the power of
sovereignty, the power to govern men and things within the limits of its
domain." 10 Police power has been defined as the power inherent in the State
"to prescribe regulations to promote the health, morals, education, good
order or safety, and general welfare of the people." 11 Police power rests
upon public necessity and upon the right of the State and of the public to selfprotection. 12 "Salus populi suprema est lex" or "the welfare of the people is
the Supreme Law." 13 For this reason, it is co-extensive with the necessities
of the case and the safeguards of public interest. 14Its scope expands and
contracts with changing needs. 15 "It may be said in a general way that the
police power extends to all the great public needs. It may be put forth in aid

of what is sanctioned by usage, or held by the prevailing morality or strong

and preponderant opinion to be greatly and immediately necessary to the
public welfare." 16 That the public interest or the general welfare is subserved
by sequestering the purported ill-gotten assets and properties and taking
over stolen properties of the government channeled to dummy or front
companies is stating the obvious. The recovery of these ill-gotten assets and
properties would greatly aid our financially crippled government and hasten
our national economic recovery, not to mention the fact that they rightfully
belong to the people. While as a measure of self-protection, if, in the interest
of general welfare, police power may be exercised to protect citizens and
their businesses in financial and economic matters, it may similarly be
exercised to protect the government itself against potential financial loss and
the possible disruption of governmental functions. 17 Police power as the
power of self-protection on the part of the community bears the same relation
to the community that the principle of self-defense bears to the
individual. 18 Truly, it may be said that even more than self-defense, the
recovery of ill-gotten wealth and of the government's own properties involves
the material and moral survival of the nation, marked as the past regime was
by the obliteration of any line between private funds and the public treasury
and abuse of unlimited power and elimination of any accountability in public
office, as the evidence of record amply shows.
LLjur

It should be mentioned that the tracking down of the deposed President's

actual ownership of the BASECO shares was fortuitously facilitated by the
recovery of the street certificates in Malacaang after his hasty flight from the
country last year. This is not generally the case.
For example, in the ongoing case filed by the government to recover from the
Marcoses valuable real estate holdings in New York and the Lindenmere
estate in Long Island, former PCGG chairman Jovito Salonga has revealed
that their names "do not appear on any title to the property. Every building in
New York is titled in the name of a Netherlands Antilles corporation, which in
turn is purportedly owned by three Panamanian corporations, with bearer
shares. This means that the shares of this corporation can change hands any
time, since they can be transferred, under the law of Panama, without
previous registration on the books of the corporation. One of the first
documents that we discovered shortly after the February revolution was a
declaration of trust handwritten by Mr. Joseph Bernstein on April 4, 1982 on
a Manila Peninsula Hotel stationery stating that he would act as a trustee for
the benefit of President Ferdinand Marcos and would act solely pursuant to
the instructions of Marcos with respect to the Crown Building in New York." 19
This is just to stress the difficulties of the tasks confronting respondent
PCGG, which nevertheless has so far commendably produced
unprecedented positive results. As stated by then chairman Salonga:

"PCGG has turned over to the Office of the President

around 2 billion pesos in cash, free of any lien. it has also
delivered to the President as a result of a compromise
settlement around 200 land titles involving vast tracks of land
in Metro Manila, Rizal, Laguna, Cavite, and Bataan, worth
several billion pesos. These lands are now available for low-cost
housing projects for the benefit of the poor and the dispossessed
amongst our people.
"In the legal custody of the Commission, as a result of
sequestration proceedings, are expensive jewelry amounting to
310 million pesos, 42 aircraft amounting to 718 million pesos,
vessels amounting to 748 million pesos, and shares of stock
amounting to around 215 million pesos.
"But, as I said, the bulk of the ill-gotten wealth is located abroad,
not in the Philippines. Through the efforts of the PCGG, we have
caused the freezing or sequestration of properties, deposits, and
securities probably worth many billions of pesos in New York,
New Jersey, Hawaii, California, and more importantly in
Switzerland. Due to favorable developments in Switzerland, we
may expect, according to our Swiss lawyers, the first deliveries of
the Swiss deposits in the foreseeable future, perhaps in less than
a year's time. In New York, PCGG through its lawyers who
render their services free of cost to the Philippine government,
succeeded in getting injunctive relief against Mr. and Mrs.
Marcos and their nominees and agents. There is now an offer for
settlement that is being studied and explored by our lawyers
there.
"If we succeed in recovering not all (since this is impossible) but
a substantial part of the ill-gotten wealth here and in various
countries of the world something the revolutionary
governments of China, Ethiopia, Iran and Nicaragua were not
able to accomplish at all with respect to properties outside their
territorial boundaries the Presidential Commission on Good
Government, which has undertaken the difficult and thankless
task of trying to undo what had been done so secretly and
effectively in the last twenty years, shall have more than justified
its existence." 20

The misdeeds of some PCGG volunteers and personnel cited in the

dissenting opinion do not detract at all from the PCGG's accomplishments,
just as no one would do away with newspapers because of some undesirable
elements. The point is that all such misdeeds have been subject to public
exposure and as stated in the dissent itself, the erring PCGG representatives
have been forthwith dismissed and replaced.
The magnitude of the tasks that confront respondent PCGG with its limited
resources and staff support and volunteers should be appreciated, together

with the assistance that foreign

spontaneously given the commission.

governments

and

lawyers

have

A word about the PCGG's firing of the BASECO lawyers who filed the
present petition challenging its questioned orders, filing a motion to withdraw
the petition, after it had put in eight of its representatives as directors of the
BASECO board of directors. This was entirely proper and in accordance with
the Court's Resolution of October 28, 1986, which denied BASECO's motion
for the issuance of a restraining order against such take-over and declared
that "the government can, through its designated directors, properly exercise
control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons
who appear in this case on behalf of BASECO have failed to show any right
or even any shareholding in said corporation." In other words, these
dummies or fronts cannot seek to question the government's right to recover
the very properties and assets that have been stolen from it by using the very
same stolen properties and funds derived therefrom. If they wish to pursue
their own empty claim, they must do it on their own, after first establishing
that they indeed have a lawful right and/or shareholding in BASECO.
LLpr

Under the 1987 Constitution, the PCGG is called upon to file the judicial
proceedings for forfeiture and recovery of the sequestered or frozen
properties covered by its orders issued before the ratification of
the Constitution on February 2, 1987 within six months from such ratification,
or by August 2, 1987. (For those orders issued after such ratification, the
judicial action or proceeding must be commenced within six months from the
issuance thereof.) The PCGG has not really been given much time,
considering the magnitude of its tasks. It is entitled to some forbearance, in
availing of the maximum time granted it for the filing of the corresponding
judicial action with the Sandiganbayan.
PADILLA, J., concurring:
The majority opinion penned by Mr. Justice Narvasa maintains and upholds
the valid distinction between acts of conservation and preservation of assets
and acts of ownership. Sequestration, freeze and temporary take-over
encompass the first type of acts. They do not include the second type of acts
which are reserved only to the rightful owner of the assets or business
sequestered or temporarily taken over.
The removal and election of members of the board of directors of a corporate
enterprise is, to me, a clear act of ownership on the part of the shareholders
of the corporation. Under ordinary circumstances, I would deny the PCGG
the authority to change and elect the members of BASECO's Board of
Directors. However, under the facts as disclosed by the records, it appears

that the certificates of stock representing about ninety-five (95%) per cent of
the total ownership in BASECO's capital stock were found endorsed in blank
in Malacaang (presumably in the possession and control of Mr. Marcos) at
the time he and his family fled in February 1986. This circumstance let alone
the extent of the control Mr. Marcos exercised, while in power, over policy
decisions affecting BASECO, entirely satisfies my mind that BASECO was
owned and controlled by Mr. Marcos. This is calling a spade a spade. I am
also entirely satisfied in my mind that Mr. Marcos could not have acquired the
ownership of BASECO out of his lawfully-gotten wealth.

favor of the State. Sequestration alone, being actually an ancillary remedy to

a principal action, should not be made the basis for the exercise of acts of
dominion for an indefinite period of time.

Consequently, even ahead of judicial proceedings, I am convinced that the

Republic of the Philippines, through the PCGG, has the right and even the
duty to take-over full control and supervision of BASECO.

Feliciano, J., concurs.

MELENCIO-HERRERA, J., concurring:

I concur, in part, in the erudite opinion penned for the Court by my

distinguished colleague Mr. Justice Andres R. Narvasa. I agree insofar as it
states the principles which must govern PCGG sequestrations and
emphasizes the limitations in the exercise of its broad grant of powers.

LLjur

I would like to qualify my concurrence in so far as the voting of sequestered

stock is concerned.
The voting of sequestered stock is, to my mind, an exercise of an attribute of
ownership. It goes beyond the purpose of a writ of sequestration, which is
essentially to preserve the property in litigation (Article 2005, Civil Code).
Sequestration is in the nature of a judicial deposit (ibid.).
I have no objection to according the right to vote sequestered stock in case
of a take-over of business actually belonging to the government or whose
capitalization comes from public funds but which, somehow, landed in the
hands of private persons, as in the case of BASECO. To my mind, however,
caution and prudence should be exercised in the case of sequestered shares
of an on-going private business enterprise, specially the sensitive ones, since
the true and real ownership of said shares is yet to be determined and
proven more conclusively by the Courts.
It would be more in keeping with legal norms if forfeiture proceedings
provided for under Republic Act No. 1379 be filed in Court and the PCGG
seek judicial appointment as a receiver or administrator, in which case, it
would be empowered to vote sequestered shares under its custody (Section
55, Corporation Code). Thereby, the assets in litigation are brought within the
Court's jurisdiction and the presence of an impartial Judge, as a requisite of
due process, is assured. For, even in its historical context, sequestration is a
judicial matter that is best handled by the Courts.
I consider it imperative that sequestration measures be buttressed by judicial
proceedings the soonest possible in order to settle the matter of ownership of
sequestered shares and to determine whether or not they are legally owned
by the stockholders of record or are "ill-gotten wealth" subject to forfeiture in

Sequestration is an extraordinary, harsh, and severe remedy. It should be

confined to its lawful parameters and exercised, with due regard, in the
words of its enabling laws, to the requirements of fairness, due process
(Executive Order No. 14, May 7, 1986), and Justice (Executive Order No. 2,
March 12, 1986).

GUTIERREZ, JR., J., concurring and dissenting:

I concur in the general propositions embodied in or implied from the majority

opinion, among them:
(1) The efforts of Government to recover ill-gotten properties amassed by the
previous regime deserve the fullest support of the judicialy and all sectors of
society. I believe, however, that a nation professing adherence to the rule of
law and fealty to democratic processes must adopt ways and means which
are always within the bounds of lawfully granted authority and which meet
the tests of due process and other Bill of Rights protections.
(2) Sequestration is intended to prevent the destruction, concealment, or
dissipation of ill-gotten wealth. The object is conservation and preservation.
Any exercise of power beyond these objectives is lawless usurpation.
(3) The PCGG exercises only such powers as are granted by law and not
proscribed by the Constitution. The remedies it enforces are provisional and
contingent. Whether or not sequestered property is indeed ill-gotten must be
determined by a court of justice. The PCGG has absolutely no power to
divest title over sequestered property or to act as if its findings are final.
(4) The PCGG does not own sequestered property. It cannot and must not
exercise acts of ownership. To quote the majority opinion, "one thing is
certain . . ., the PCGG cannot exercise acts of dominion."
(5) The provisional takeover in a sequestration should not be indefinitely
maintained. It is the duty of the PCGG to immediately file appropriate criminal
or civil cases once the evidence has been gathered.

It is the difference between what the Court says and what the PCGG does
which constrains me to dissent. Even as the Court emphasizes principles of
due process and fair play, it has unfortunately validatedultra vires acts
violative of those very same principles. While we stress the rules which must
govern the PCGG in the exercise of its powers, the Court has failed to stop
or check acts which go beyond the power of sequestration given by law to
the PCGG.

or clear the names and titles of the petitioners must be filed as soon as
possible.

We are all agreed in the Court that the PCGG is not a judge. It is an
investigator and prosecutor. Sequestration is only a preliminary or ancillary
remedy. There must be a principal and independent suit filed in court to
establish the true ownership of sequestered properties. The factual premise
that a sequestered property was ill-gotten by former President Marcos, his
family, relatives, subordinates, and close associates cannot be
assumed. The fact of ownership must be established in a proper suit before a
court of justice.

And yet, the records show that the PCGG appears to concentrate more on
the means rather than the ends, in running the BASECO, taking over the
board of directors and management, getting rid of security guards, disposing
of scrap, entering into new contracts and otherwise behaving as if it were
already the owner. At this late date and with all the evidence PCGG claims to
have, no court case has been filed.

But what has the Court, in effect, ruled?

Among the interesting items elicited during the oral arguments or found in the
records of this petition are:

LLpr

Pages 21 to 33 of the majority opinion are dedicated to a statement of facts

which conclusively and indubitably shows that BASECO is owned by
President Marcos and that it was acquired and vastly enlarged by the
former President's taking undue advantage of his public office and using his
powers, authority, or influence.
There has been no court hearing, no trial, and no presentation of evidence.
All that we have is what the PCGG has given us. The petitioner has not even
been allowed to see this evidence, much less refute it.
What the PCGG has gathered in the course of its seizures and investigations
may be gospel truth. However, that truth must be properly established in a
trial court, not unilaterally determined by the PCGG or declared by this Court
in a special proceeding which only asks us to set aside or enjoin an illegal
exercise of power. After this decision, there is nothing more for a trial court to
ascertain. Certainly, no lower court would dare to arrive at findings contrary
to this Court's conclusions, no matter how insistent we may be in labelling
such conclusions as "prima facie." To me, this is the basic flaw in PCGG
procedures that the Court is, today, unwittingly legitimating. Even before the
institution of a court case, the PCGG concludes that sequestered property is
ill-gotten wealth and proceeds to exercise acts of ownership over said
properties. It treats sequestered property as its own even before the
oppositor-owners have been divested of their titles.
LLjur

The Court declares that a state of seizure is not to be indefinitely maintained.

This means that court proceedings to either forfeit the sequestered properties

This case is a good example of disregard or avoidance of this requirement.

With the kind of evidence which the PCGG professes to possess, the
forfeiture case could have been filed simultaneously with the issuance of
sequestration orders or shortly thereafter.

(1) Upon sequestering BASECO, some PCGG personnel lost no time in

digging up paved premises with jack hammers in a frantic search for buried
gold bars.
(2) Two top PCGG volunteers charged each other with stealing properties
under their custody. The PCGG had to step in, dismiss the erring
representatives, and replace them with new ones.
(3) The petitioner claims that the lower bid of a rock quarry operator was
accepted even as a higher and more favorable bid was offered. When the
questionable deal was brought to our attention, the awardee allegedly raised
his bid to the level of the better offer. The successful bidder later submitted a
comment in intervention explaining his side. Whoever is telling the truth, the
fact remains that multi-million peso contracts involving the operations of
sequestered companies should be entered into under the supervision of a
court, not freely executed by the PCGG even when the petitioner-owners
question the propriety and integrity of those transactions.
(4) The PCGG replaced eight out of eleven members of the BASECO board
of directors with its own men. Upon taking over full control of the corporation,
the newly installed board reversed the efforts of the former owners to protect
their interests. The new board fired the BASECO lawyers who instituted the
instant petition. It then filed a motion to withdraw this very same petition we
are now deciding. In other words, the "new owners" did not want the
Supreme Court to continue poking into the legality of their acts. They moved
to abort the petition filed with us.

Any suspicion of impropriety would have been avoided if the PCGG had filed
the required court proceedings and exercised its acts of management and
control under court supervision. The requirements of due process would
have been met.
LLjur

One other matter I wish to discuss in this separate opinion is PCGG's

selection of eight out of the eleven members of the BASECO board of
directors.
The election of the members of a board of directors is distinctly and
unqualifiedly an act of ownership. When stockholders of a corporation elect
or remove members of a board of directors, they exercise their right of
ownership in the company they own. By no stretch of the imagination can the
revamp of a board of directors be considered as a mere act of conserving
assets or preventing the dissipation of sequestered assets. The broad
powers of a sequestrator are more than enough to protect sequestered
assets. There is no need and no legal basis to reach out further and exercise
ultimate acts of ownership.
Under the powers which PCGG has assumed and wields, it can amend the
articles and by-laws of a sequestered corporation, decrease the capital stock,
or sell substantially all corporate assets without any effective check from the
owners not yet divested of their titles or from a court of justice. The PCGG is
tasked to preserve assets but when it exercises the acts of an owner, it could
also very well destroy. I hope that the case of the Philippine Daily Express, a
major newspaper closed by the PCGG, is an isolated example. Otherwise,
banks, merchandising firms, investment institutions, and other sensitive
businesses will find themselves in a similar quandary.
I join the PCGG and all right thinking Filipinos in condemning the totalitarian
acts which made possible the accumulation of ill-gotten wealth. I, however,
dissent when authoritarian and ultra vires methods are used to recover that
stolen wealth. One wrong cannot be corrected by the employment of another
wrong.
I, therefore, vote to grant the petition. Pending the filing of an appropriate
case in court, the PCGG must be enjoined from exercising any and all acts of
ownership over the sequestered firm.
Bidin and Cortes, JJ., concur.
CRUZ, J., dissenting:
My brother Narvasa has written a truly outstanding decision that bespeaks a
penetrating and analytical mind and a masterly grasp of the serious problem
we are asked to resolve. He deserves and I offer him my sincere admiration.

There is no question that all lawful efforts should be taken to recover the
tremendous wealth plundered from the people by the past regime in the most
execrable thievery perpetrated in all history. No right-thinking Filipino can
quarrel with this necessary objective, and on this score I am happy to concur
with the ponencia.
But for all my full agreement with the basic thesis of the majority, I regret I
find myself unable to support its conclusions in favor of the respondent
PCGG. My view is that these conclusions clash with the implacable principles
of the free society, foremost among which is due process. This demands our
reverent regard.
Due process protects the life, liberty and property of every person, whoever
he may be. Even the most despicable criminal is entitled to this protection.
Granting this distinction to Marcos, we are still not justified in depriving him of
this guaranty on the mere justification that he appears to own the BASECO
shares.
I am convinced and so submit that the PCGG cannot at this time take over
the BASECO without any court order and exercise thereover acts of
ownership without court supervision. Voting the shares is an act of
ownership. Reorganizing the board of directors is an act of ownership. Such
acts are clearly unauthorized. As the majority opinion itself stresses, the
PCGG is merely an administrator whose authority is limited to preventing the
sequestered properties from being dissipated or clandestinely transferred.
The court action prescribed in the Constitution is not inadequate and is
available to the PCGG. The advantage of this remedy is that, unlike the ad
libitum measures now being taken, it is authorized and at the same time
also limited by the fundamental law. I see no reason why it should not now
be employed by the PCGG, to remove all doubts regarding the legality of its
acts and all suspicions concerning its motives.
(Baseco, Inc. v. PCGG, G.R. No. 75885, [May 27, 1987], 234 PHIL 180256)
|||

EN BANC
[B.M. No. 553 . June 17, 1993.]
MAURICIO C. ULEP, petitioner, vs. THE LEGAL CLINIC,
INC., respondent.
SYLLABUS
1. LEGAL AND JUDICIAL ETHICS; PRACTICE OF LAW, MEANING AND
EXTENT OF. Practice of law means any activity, in or out of court, which
requires the application of law, legal procedures, knowledge, training and
experience. To engage in the practice of law is to perform those acts which
are characteristic of the profession. Generally, to practice law is to give
advice or render any kind of service that involves legal knowledge or skill.
The practice of law is not limited to the conduct of cases in court. It includes
legal advice and counsel, and the preparation of legal instruments and
contracts by which legal rights are secured, although such matter may or
may not be pending in a court. In the practice of his profession, a licensed
attorney at law generally engages in three principal types of professional
activity: legal advice and instructions to clients to inform them of their rights
and obligations, preparation for clients of documents requiring knowledge of
legal principles not possessed by ordinary layman, and appearance for
clients before public tribunals which possess power and authority to
determine rights of life, liberty, and property according to law, in order to
assist in proper interpretation and enforcement of law. When a person
participates in a trial and advertises himself as a lawyer, he is in the practice
of law. One who confers with clients, advises them as to their legal rights and
then takes the business to an attorney and asks the latter to look after the
case in court, is also practicing law. Giving advice for compensation
regarding the legal status and rights of another and the conduct with respect
thereto constitutes a practice of law. One who renders an opinion as to the
proper interpretation of a statute, and receives pay for it, is, to that extent,
practicing law.
2. ID.; ID.; LEGAL SUPPORT SERVICES IN CASE AT BAR CONSTITUTE
PRACTICE OF LAW. The practice of law, therefore, covers a wide range
of activities in and out of court. Applying the aforementioned criteria to the
case at bar, we agree with the perceptive findings and observations of the
aforestated bar associations that the activities of respondent, as advertised,
constitute "practice of law." The contention of respondent that it merely offers
legal support services can neither be seriously considered nor sustained.
Said proposition is belied by respondent's own description of the services it
has been offering, to wit: . . . While some of the services being offered by
respondent corporation merely involve mechanical and technical know-how,
such as the installation of computer systems and programs for the efficient

management of law offices, or the computerization of research aids and

materials, these will not suffice to justify an exception to the general rule.
What is palpably clear is that respondent corporation gives out legal
information to laymen and lawyers. Its contention that such function is nonadvisory and non-diagnostic is more apparent than real. In providing
information, for example, about foreign laws on marriage, divorce and
adoptation, it strains the credulity of this Court that all that respondent
corporation will simply do is look for the law, furnish a copy thereof to the
client, and stop there as if it were merely a bookstore. With its attorneys and
so called paralegals, it will necessarily have to explain to the client the
intricacies of the law and advise him or her on the proper course of action to
be taken as may be provided for by said law. That is what its advertisements
represent and for which services it will consequently charge and be paid.
That activity falls squarely within the jurisprudential definition of "practice of
law." Such a conclusion will not be altered by the fact that respondent
corporation does not represent clients in court since law practice, as the
weight of authority holds, is not limited merely to court appearances but
extends to legal research, giving legal advice, contract drafting, and so forth.
The aforesaid conclusion is further strengthened by an article published in
the January 13, 1991 issue of the Starweek/The Sunday Magazine of the
Philippine Star, entitled "Rx for Legal Problems," where an insight into the
structure, main purpose and operations of respondent corporation was given
by its own "proprietor," Atty. Rogelio P. Nogales: . . .
3. ID.; ID.; ID.; PARALEGAL OR LEGAL ASSISTANT; CONCEPT IN THE
UNITED STATES. Paralegals in the United States are trained
professionals. As admitted by respondent, there are schools and universities
there which offer studies and degrees in paralegal education, while there are
none in the Philippines. As the concept of the "paralegal" or "legal assistant"
evolved in the United States, standards and guidelines also evolved to
protect the general public. One of the major standards or guidelines was
developed by the American Bar Association which set up Guidelines for the
Approval of Legal Assistant Education Programs (1973). Legislation has
even been proposed to certify legal assistants. There are also associations of
paralegals in the United States with their own code of professional ethics,
such as the National Association of Legal Assistants, Inc. and the American
Paralegal Association.
4. ID.; ID.; ID.; ID.; CONCEPT IN THE PHILIPPINES. In the Philippines,
we still have a restricted concept and limited acceptance of what may be
considered as paralegal service. As pointed out by FIDA, some persons not
duly licensed to practice law are or have been allowed limited representation
in behalf of another or to render legal services, but such allowable services
are limited in scope and extent by the law, rules or regulations granting
permission therefor. (Illustrations: . . .)

5. ID.; ID.; ID.; ID.; PHILIPPINE JUDICIAL POLICY ON PARALEGAL. We

have to necessarily and definitely reject respondent's position that the
concept in the United States of paralegals as an occupation separate from
the law profession be adopted in this jurisdiction. Whatever may be its merits,
respondent cannot but be aware that this should first be a matter for judicial
rules or legislative action, and not of unilateral adoption as it has done. . . .
Accordingly, we have adopted the American judicial policy that, in the
absence of constitutional or statutory authority, a person who has not been
admitted as an attorney cannot practice law for the proper administration of
justice cannot be hindered by the unwarranted intrusion of an unauthorized
and unskilled person into the practice of law. That policy should continue to
be one of encouraging persons who are unsure of their legal rights and
remedies to seek legal assistance only from persons licensed to practice law
in the state.
6. ID.; ID.; ID.; ID.; ID.; PRACTICE OF LAW IN CASE AT BAR CANNOT BE
PERFORMED BY PARALEGALS; REASON. It should be noted that in our
jurisdiction the services being offered by private respondent which constitute
practice of law cannot be performed by paralegals. Only a person duly
admitted as a member of the bar, or hereafter admitted as such in
accordance with the provisions of the Rules of Court, and who is in good and
regular standing, is entitled to practice law. . . .
7. ID.; ADVERTISEMENT BY LAWYER; RULE. Anent the issue on the
validity of the questioned advertisements, the Code of Professional
Responsibility provides that a lawyer in making known his legal services shall
use only true, honest, fair, dignified and objective information or statement of
facts. He is not supposed to use or permit the use of any false, fraudulent,
misleading, deceptive, undignified, self-laudatory or unfair statement or claim
regarding his qualifications or legal services. Nor shall he pay or give
something of value to representatives of the mass media in anticipation of, or
in return for, publicity to attract legal business. Prior to the adoption of the
Code of Professional Responsibility, the Canons of Professional Ethics had
also warned that lawyers should not resort to indirect advertisements for
professional employment, such as furnishing or inspiring newspaper
comments, or procuring his photograph to be published in connection with
causes in which the lawyer has been or is engaged or concerning the
manner of their conduct, the magnitude of the interest involved, the
importance of the lawyer's position, and all other like self-laudation.
8. ID.; ID.; ID.; CHARACTER AND CONDUCT AS BEST ADVERTISEMENT.
We repeat, the canons of the profession tell us that the best advertising
possible for a lawyer is a well-merited reputation for professional capacity
and fidelity to trust, which must be earned as the outcome of character and
conduct. Good and efficient service to a client as well as to the community
has a way of publicizing itself and catching public attention. That publicity is a

normal by-product of effective service which is right and proper. A good and
reputable lawyer needs no artificial stimulus to generate it and to magnify his
success. He easily sees the difference between a normal by-product of able
service and the unwholesome result of propaganda.
9. ID.; ID.; ID.; PROHIBITION ON ADVERTISEMENT OF TALENT OR
SKILL. The standards of the legal profession condemn the lawyer's
advertisement of his talents. A lawyer cannot, without violating the ethics of
his profession, advertise his talents or skills as in a manner similar to a
merchant advertising his goods. The proscription against advertising of legal
services or solicitation of legal business rests on the fundamental postulate
that the practice of law is a profession. . . .
10. ID.; ID.; ID.; ID.; EXCEPTIONS. The first of such exceptions is the
publication in reputable law lists, in a manner consistent with the standards of
conduct imposed by the canons, of brief biographical and informative data.
"Such data must not be misleading and may include only a statement of the
lawyer's name and the names of his professional associates; addresses,
telephone numbers, cable addresses; branches of law practiced; date and
place of birth and admission to the bar; schools attended with dates of
graduation, degrees and other educational distinction; public or quasi-public
offices; posts of honor; legal authorships; legal teaching positions;
memberships and offices in bar associations and committees thereof, in legal
and scientific societies and legal fraternities; the fact of listings in other
reputable law lists; the names and addresses of references; and, with their
written consent, the names of clients regularly represented." . . . The use of
an ordinary simple professional card is also permitted. The card may contain
only a statement of his name, the name of the law firm which he is connected
with, address, telephone number and special branch of law practiced. The
publication of a simple announcement of the opening of a law firm or of
changes in the partnership, associates, firm name or office address, being for
the convenience of the profession, is not objectionable. He may likewise
have his name listed in a telephone directory but not under a designation of
special branch of law.

11. ID.; ID.; ID.; ID.; ID.; REQUIREMENT FOR LAW LIST. The law list
must be a reputable law list published primarily for that purpose; it cannot be
a mere supplemental feature of a paper, magazine, trade journal or
periodical which is published principally for other purposes. For that reason,
a lawyer may not properly publish his brief biographical and informative data
in a daily paper, magazine, trade journal or society program. Nor may a
lawyer permit his name to be published in a law list the conduct,
management or contents of which are calculated or likely to deceive or injure
the public or the bar, or to lower the dignity or standing of the profession.

12. ID.; ID.; ID.; ID.; ID.; CASE AT BAR. Verily, taking into consideration
the nature and contents of the advertisements for which respondent is being
taken to task, which even includes a quotation of the fees charged by said
respondent corporation for services rendered, we find and so hold that the
same definitely do not and conclusively cannot fall under any of the abovementioned exceptions.
13. ID.; ID.; ID.; ID.; ID.; ID.; EXCEPTION IN BATES, ET AL. vs. STATE
BAR OF ARIZONA (433 U.S. 350, 53 L Ed 2d 810, 97 S Ct. 2691) AS TO
PUBLICATION OF LEGAL FEES, NOT APPLICABLE; REASONS. The
ruling in the case of Bates, et al. vs. State Bar of Arizona, which is repeatedly
invoked and constitutes the justification relied upon by respondent, is
obviously not applicable to the case at bar. Foremost is the fact that the
disciplinary rule involved in said case explicitly allows a lawyer, as an
exception to the prohibition against advertisements by lawyers, to publish a
statement of legal fees for an initial consultation or the availability upon
request of a written schedule of fees or an estimate of the fee to be charged
for the specific services. No such exception is provided for, expressly or
impliedly, whether in our former Canons of Professional Ethics or the present
Code of Professional Responsibility. Besides, even the disciplinary rule in the
Bates case contains a proviso that the exceptions stated therein are "not
applicable in any state unless and until it is implemented by such authority in
that state." This goes to show that an exception to the general rule, such as
that being invoked by herein respondent, can be made only if and when the
canons expressly provide for such an exception. Otherwise, the prohibition
stands, as in the case at bar. It bears mention that in a survey conducted by
the American Bar Association after the decision in Bates, on the attitude of
the public about lawyers after viewing television commercials, it was found
that public opinion dropped significantly with respect to these characteristics
of lawyers: . . . Secondly, it is our firm belief that with the present situation of
our legal and judicial systems, to allow the publication of advertisements of
the kind used by respondent would only serve to aggravate what is already a
deteriorating public opinion of the legal profession whose integrity has
consistently been under attack lately by media and the community in general.
At this point in time, it is of utmost importance in the face of such negative,
even if unfair, criticisms at times, to adopt and maintain that level of
professional conduct which is beyond reproach, and to exert all efforts to
regain the high esteem formerly accorded to the legal profession.

making advertisements pertaining to the exercise of the law profession other

than those allowed by law."
cdrep

The advertisements complained of by herein petitioner are as follows:

Annex A
SECRET
P560.00
for
Info
on
ANNULMENT. VISA.

a
valid
DIVORCE.

MARRIAGE?
marriage.
ABSENCE.

THE Please
call:
521-0767,
LEGAL 5217232,
5222041
CLINIC,
INC. 8:30
am-6:00
pm
7-Flr. Victoria Bldg. UN Ave., Mla.
Annex B
GUAM DIVORCE
DON PARKINSON
an Attorney in Guam, is giving FREE BOOKS on Guam Divorce
through The Legal Clinic beginning Monday to Friday during
office hours.
Guam divorce. Annulment of Marriage. Immigration Problems,
Visa Ext. Quota/Non-quota Res. & Special Retiree's Visa.
Declaration of Absence. Remarriage to Filipina Fiancees.
Adoption. Investment in the Phil. US/Foreign Visa for Filipina
Spouse/Children. Call Marivic.
THE 7
F
Victoria
Bldg.
LEGAL Ermita,
Manila
nr.
CLINIC,
INC. 1 Tel.

429
UN
Ave.
US
Embassy
521-7232521-7251

522-2041; 521-0767

REGALADO, J :

It is the submission of petitioner that the advertisements above reproduced

are champertous, unethical, demeaning of the law profession, and
destructive of the confidence of the community in the integrity of the
members of the bar and that, as a member of the legal profession, he is
ashamed and offended by the said advertisements, hence the reliefs sought
in his petition as herein before quoted.

Petitioner prays this Court "to order the respondent to cease and desist from
issuing advertisements similar to or of the same tenor as that of Annexes `A'
and `B' (of said petition) and to perpetually prohibit persons or entities from

In its answer to the petition, respondent admits the fact of publication of said
advertisements at its instance, but claims that it is not engaged in the
practice of law but in the rendering of "legal support services" through

RESOLUTION
p

cdphil

paralegals with the use of modern computers and electronic machines.

Respondent further argues that assuming that the services advertised are
legal services, the act of advertising these services should be allowed
supposedly in the light of the case of John R. Bates and Van O'Steen vs.
State Bar of Arizona, 2 reportedly decided by the United States Supreme
Court on June 7, 1977.
Considering the critical implications on the legal profession of the issues
raised herein, we required the (1) Integrated Bar of the Philippines (IBP), (2)
Philippine Bar Association (PBA), (3) Philippine Lawyers' Association (PLA),
(4) U.P. Women Lawyers' Circle (WILOCI), (5) Women Lawyers Association
of the Philippines (WLAP), and (6) Federation International de Abogadas
(FIDA) to submit their respective position papers on the controversy and,
thereafter, their memoranda. 3 The said bar associations readily responded
and extended their valuable services and cooperation of which this Court
takes note with appreciation and gratitude.
The main issues posed for resolution before the Court are whether or not the
services offered by respondent, The Legal Clinic, Inc., as advertised by it
constitutes practice of law and, in either case, whether the same can properly
be the subject of the advertisements herein complained of.
cdphil

Before proceeding with an in-depth analysis of the merits of this case, we

deem it proper and enlightening to present hereunder excerpts from the
respective position papers adopted by the aforementioned bar associations
and the memoranda submitted by them on the issues involved in this bar
matter.
1. Integrated Bar of the Philippines:
xxx xxx xxx
Notwithstanding the subtle manner by which respondent
endeavored to distinguish the two terms, i.e., "legal support
services" vis-a-vis "legal services", common sense would readily
dictate that the same are essentially without substantial
distinction. For who could deny that document search, evidence
gathering, assistance to layman in need of basic institutional
services from government or non-government agencies like birth,
marriage, property, or business registration, obtaining documents
like clearance, passports, local or foreign visas, constitute
practice of law?
xxx xxx xxx
The Integrated Bar of the Philippines (IBP) does not wish to
make issue with respondent's foreign citations. Suffice it to state
that the IBP has made its position manifest, to wit, that it strongly

opposes the view espoused by respondent (to the effect that

today it is alright to advertise one's legal services).
The IBP accordingly declares in no uncertain terms its opposition
to respondent's act of establishing a "legal clinic" and of
concomitantly advertising the same through newspaper
publications.
The IBP would therefore invoke the administrative supervision of
this Honorable Court to perpetually restrain respondent from
undertaking highly unethical activities in the field of law practice
as aforedescribed 4 .
xxx xxx xxx
A. The use of the name "The Legal Clinic, Inc." gives the
impression that respondent corporation is being operated by
lawyers and that it renders legal services.
While the respondent repeatedly denies that it offers legal
services to the public, the advertisements in question give the
impression that respondent is offering legal services. The Petition
in fact simply assumes this to be so, as earlier mentioned,
apparently because this (is) the effect that the advertisements
have on the reading public.
The impression created by the advertisements in question can be
traced, first of all, to the very name being used by respondent
"The Legal Clinic, Inc." Such a name, it is respectfully submitted
connotes the rendering of legal services for legal problems, just
like a medical clinic connotes medical services for medical
problems. More importantly, the term "Legal Clinic" connotes
lawyers, as the term medical clinic connotes doctors.
Furthermore, the respondent's name, as published in the
advertisements subject of the present case, appears with (the)
scale(s) of justice, which all the more reinforces the impression
that it is being operated by members of the bar and that it offers
legal services. In addition, the advertisements in question appear
with a picture and name of a person being represented as a
lawyer from Guam, and this practically removes whatever doubt
may still remain as to the nature of the service or services being
offered.
It thus becomes irrelevant whether respondent is merely offering
"legal support services" as claimed by it, or whether it offers legal
services as any lawyer actively engaged in law practice does.
And it becomes unnecessary to make a distinction between
"legal services" and "legal support services," as the respondent
would have it. The advertisements in question leave no room for

doubt in the minds of the reading public that legal services are
being offered by lawyers, whether true or not.

B. The advertisements in question are meant to induce the

performance of acts contrary to law, morals, public order and
public policy.
It may be conceded that, as the respondent claims, the
advertisements in question are only meant to inform the general
public of the services being offered by it. Said advertisements,
however, emphasize a Guam divorce, and any law student ought
to know that under the Family Code, there is only one instance
when a foreign divorce, is recognized, and that is:
Article 26. . . .
Where a marriage between a Filipino citizen and a foreigner is
validly celebrated and a divorce is thereafter validly obtained
abroad by the alien spouse capacitating him or her to remarry,
the Filipino spouse shall have capacity to remarry under
Philippine Law.
It must not be forgotten, too, that the Family Code (defines) a
marriage as follows:
Article 1. Marriage is a special contract of
permanent union between a man and a woman entered
into in accordance with law for the establishment of
conjugal and family life. It is the foundation of the family
and an inviolable social institution whose nature,
consequences, and incidents are governed by law and
not subject to stipulation, except that marriage
settlements may fix the property relation during the
marriage within the limits provided by this Code.
By simply reading the questioned advertisements, it is obvious
that the message being conveyed is that Filipinos can avoid the
legal consequences of a marriage celebrated in accordance with
our law, by simply going to Guam for a divorce. This is not only
misleading, but encourages, or serves to induce, violation of
Philippine law. At the very least, this can be considered "the dark
side" of legal practice, where certain defects in Philippine laws
are exploited for the sake of profit. At worst, this is outright
malpractice. LibLex
Rule 1.02. A lawyer shall not counsel or
abet activities aimed at defiance of the law or at
lessening confidence in the legal system.

In addition, it may also be relevant to point out that

advertisements such as that shown in Annex "A" of the Petition,
which contains a cartoon of a motor vehicle with the words "Just
Married" on its bumper and seems to address those planning a
"secret marriage," if not suggesting a "secret marriage," makes
light of the "special contract of permanent union," the inviolable
social institution," which is how the Family Code describes
marriage, obviously to emphasize its sanctity and inviolability.
Worse, this particular advertisement appears to encourage
marriages celebrated in secrecy, which is suggestive of immoral
publication of applications for a marriage license. LLpr
If the article "Rx for Legal Problems" is to be reviewed, it can
readily be concluded that the above impressions one may gather
from the advertisements in question are accurate. The Sharon
Cuneta-Gabby Concepcion example alone confirms what the
advertisements suggest. Here it can be seen that criminal acts
are being encouraged or committed (a bigamous marriage in
Hong Kong or Las Vegas) with impunity simply because the
jurisdiction of Philippine courts does not extend to the place
where the crime is committed.
Even if it be assumed, arguendo, that the "legal support services"
respondent offers do not constitute legal services as commonly
understood, the advertisements in question give the impression
that respondent corporation is being operated by lawyers and
that it offers legal services, as earlier discussed. Thus, the only
logical consequence is that, in the eyes of an ordinary newspaper
reader, members of the bar themselves are encouraging or
inducing the performance of acts which are contrary to law,
morals, good customs and the public good, thereby destroying
and demeaning the integrity of the Bar.
xxx xxx xxx
It is respectfully submitted that respondent should be enjoined
from causing the publication of the advertisements in question, or
any other advertisements similar thereto. It is also submitted that
respondent should be prohibited from further performing or
offering some of the services it presently offers, or, at the very
least, from offering such services to the public in general.
The IBP is aware of the fact that providing computerized legal
research, electronic data gathering, storage and retrieval,
standardized legal forms, investigators for gathering of evidence,
and like services will greatly benefit the legal profession and
should not be stifled but instead encouraged. However, when the
conduct of such business by non-members of the Bar
encroaches upon the practice of law, there can be no choice but
to prohibit such business.

Admittedly, many of the services involved in the case at bar can

be better performed by specialists in other fields, such as
computer experts, who by reason of their having devoted time
and effort exclusively to such field cannot fulfill the exacting
requirements for admission to the Bar. To prohibit them from
"encroaching" upon the legal profession will deny the profession
of the great benefits and advantages of modern technology.
Indeed, a lawyer using a computer will be doing better than a
lawyer using a typewriter, even if both are (equal) in skill.

of regulating his activities. Also, law practice in a corporate form

may prove to be advantageous to the legal profession, but before
allowance of such practice may be considered, the corporation's
Articles of Incorporation and By-laws must conform to each and
every provision of the Code of Professional Responsibility and
the Rules of Court 5
2. Philippine Bar Association:
xxx xxx xxx

Both the Bench and the Bar, however, should be careful not to
allow or tolerate the illegal practice of law in any form, not only for
the protection of members of the Bar but also, and more
importantly, for the protection of the public. Technological
development in the profession may be encouraged without
tolerating, but instead ensuring prevention of, illegal practice.
There might be nothing objectionable if respondent is allowed to
perform all of its services, but only if such services are made
available exclusively to members of the Bench and Bar.
Respondent would then be offering technical assistance, not
legal services. Alternatively, the more difficult task of carefully
distinguishing between which service may be offered to the
public in general and which should be made available exclusively
to members of the Bar may be undertaken. This, however, may
require further proceedings because of the factual considerations
involved.
It must be emphasized, however, that some of respondent's
services ought to be prohibited outright, such as acts which tend
to suggest or induce celebration abroad of marriages which are
bigamous or otherwise illegal and void under Philippine law.
While respondent may not be prohibited from simply
disseminating information regarding such matters, it must be
required to include, in the information given, a disclaimer that it is
not authorized to practice law, that certain course of action may
be illegal under Philippine law, that it is not authorized or capable
of rendering a legal opinion, that a lawyer should be consulted
before deciding on which course of action to take, and that it
cannot recommend any particular lawyer without subjecting itself
to possible sanctions for illegal practice of law.
If respondent is allowed to advertise, advertising should be
directed exclusively at members of the Bar, with a clear and
unmistakable disclaimer that it is not authorized to practice law or
perform legal services. cdrep
The benefits of being assisted by paralegals cannot be ignored.
But nobody should be allowed to represent himself as a
"paralegal" for profit, without such term being clearly defined by
rule or regulation, and without any adequate and effective means

Respondent asserts that it "is not engaged in the practice of law

but engaged in giving legal support services to lawyers and
laymen, through experienced paralegals, with the use of modern
computers and electronic machines" (pars. 2 and 3, Comment).
This is absurd. Unquestionably, respondent's acts of holding out
itself to the public under the trade name "The Legal Clinic, Inc.,"
and soliciting employment for its enumerated services fall within
the realm of a practice which thus yields itself to the regulatory
powers of the Supreme Court. For respondent to say that it is
merely engaged in paralegal work is to stretch credulity.
Respondent's own commercial advertisement which announces a
certain Atty. Don Perkinson to be handling the fields of law belies
its pretense. From all indications, respondent "The Legal Clinic,
Inc." is offering and rendering legal services through its reserve
of lawyers. It has been held that the practice of law is not limited
to the conduct of cases in court, but includes drawing of deeds,
incorporation, rendering opinions, and advising clients as to their
legal rights and then take them to an attorney and ask the latter
to look after their case in court (See Martin, Legal and Judicial
Ethics, 1948 ed., p. 39).
It is apt to recall that only natural persons can engage in the
practice of law, and such limitation cannot be evaded by a
corporation employing competent lawyers to practice for it.
Obviously, this is the scheme or device by which respondent
"The Legal Clinic, Inc." holds out itself to the public and solicits
employment of its legal services. It is an odious vehicle for
deception, especially so when the public cannot ventilate any
grievance for malpractice against the business conduit. Precisely,
the limitation of practice of law to persons who have been duly
admitted as members of the Bar (Sec. 1, Rule 138, Revised
Rules of Court) is to subject the members to the discipline of the
Supreme Court. Although respondent uses its business name,
the persons and the lawyers who act for it are subject to court
discipline. The practice of law is not a profession open to all who
wish to engage in it nor can it be assigned to another (See 5 Am.
Jur. 270). It is a personal right limited to persons who have
qualified themselves under the law. It follows that not only
respondent but also all the persons who are acting for
respondent are the persons engaged in unethical law practice. 6

3. Philippine Lawyers' Association:

The Philippine Lawyers' Association's position, in answer to the
issues stated herein, are, to wit:
1. The Legal Clinic is engaged in the practice
of law;
2. Such practice is unauthorized;
3. The advertisements complained of are not
only unethical, but also misleading and patently
immoral; and
4. The Honorable Supreme Court has the
power to suppress and punish the Legal Clinic and its
corporate officers for its unauthorized practice of law
and for its unethical, misleading and immoral
advertising.
xxx xxx xxx
Respondent posits that it is not engaged in the practice of law. It
claims that it merely renders "legal support services" to lawyers,
litigants and the general public as enunciated in the Primary
Purpose Clause of its Article(s) of Incorporation. (See pages 2 to
5 of Respondent's Comment). But its advertised services, as
enumerated above, clearly and convincingly show that it is
indeed engaged in law practice, albeit outside the court.
As advertised, it offers the general public its advisory services on
Persons and Family Relations Law, particularly regarding foreign
divorces, annulment of marriages, secret marriages, absence
and adoption; Immigration Laws, particularly on visa related
problems, immigration problems; the Investment Law of the
Philippines and such other related laws.
Its advertised services unmistakably require the application of the
aforesaid laws, the legal principles and procedures related
thereto, the legal advises based thereon and which activities call
for legal training, knowledge and experience.
Applying the test laid down by the Court in the aforecited Agrava
Case, the activities of respondent fall squarely and are embraced
in what lawyers and laymen equally term as "the practice of
law." 7
4. U.P. Women Lawyers' Circle:

In resolving the issues before this Honorable Court, paramount

consideration should be given to the protection of the general
public from the danger of being exploited by unqualified persons
or entities who may be engaged in the practice of law.
At present, becoming a lawyer requires one to take a rigorous
four-year course of study on top of a four-year bachelor of arts or
sciences course and then to take and pass the bar examinations.
Only then, is a lawyer qualified to practice law.
While the use of a paralegal is sanctioned in many jurisdictions
as an aid to the administration of justice, there are in those
jurisdictions, courses of study and/or standards which would
qualify these paralegals to deal with the general public as such.
While it may now be the opportune time to establish these
courses of study and/or standards, the fact remains that at
present, these do not exist in the Philippines. In the meantime,
this Honorable Court may decide to take measures to protect the
general public from being exploited by those who may be dealing
with the general public in the guise of being "paralegals" without
being qualified to do so.
In the same manner, the general public should also be protected
from the dangers which may be brought about by advertising of
legal services. While it appears that lawyers are prohibited under
the present Code of Professional Responsibility from advertising,
it appears in the instant case that legal services are being
advertised not by lawyers but by an entity staffed by "paralegals."
Clearly, measures should be taken to protect the general public
from falling prey to those who advertise legal services without
being qualified to offer such services." 8
A perusal of the questioned advertisements of Respondent,
however, seems to give the impression that information regarding
validity of marriages, divorce, annulment of marriage,
immigration, visa extensions, declaration of absence, adoption
and foreign investment, which are in essence, legal matters, will
be given to them if they avail of its services. The Respondent's
name The Legal Clinic, Inc. does not help matters. It gives
the impression again that Respondent will or can cure the legal
problems brought to them. Assuming that Respondent is, as
claimed, staffed purely by paralegals, it also gives the misleading
impression that there are lawyers involved in The Legal Clinic,
Inc., as there are doctors in any medical clinic, when only
"paralegals" are involved in The Legal Clinic, Inc.
Respondent's allegations are further belied by the very
admissions of its President and majority stockholder, Atty.
Nogales, who gave an insight on the structure and main purpose
of Respondent corporation in the aforementioned "Starweek"
article." 9

5. Women Lawyer's Association of the Philippines:

Annexes "A" and "B" of the petition are clearly advertisements to
solicit cases for the purpose of gain which, as provided for under
the above cited law, (are) illegal and against the Code of
Professional Responsibility of lawyers in this country.
Annex "A" of the petition is not only illegal in that it is an
advertisement to solicit cases, but it is illegal in that in bold letters
it announces that the Legal Clinic, Inc., could work out/cause the
celebration of a secret marriage which is not only illegal but
immoral in this country. While it is advertised that one has to go
to said agency and pay P560 for a valid marriage it is certainly
fooling the public for valid marriages in the Philippines are
solemnized only by officers authorized to do so under the law.
And to employ an agency for said purpose of contracting
marriage is not necessary.
No amount of reasoning that in the USA, Canada and other
countries the trend is towards allowing lawyers to advertise their
special skills to enable people to obtain from qualified
practitioners legal services for their particular needs can justify
the use of advertisements such as are the subject matter of this
petition, for one (cannot) justify an illegal act even by whatever
merit the illegal act may serve. The law has yet to be amended
so that such as act could become justifiable. LLphil
We submit further that these advertisements that seem to project
that secret marriages and divorce are possible in this country for
a fee, when in fact it is not so, are highly reprehensible.
It would encourage people to consult this clinic about how they
could go about having a secret marriage here, when it cannot nor
should ever be attempted, and seek advice on divorce, where in
this country there is none, except under the Code of Muslim
Personal Laws in the Philippines. It is also against good morals
and is deceitful because it falsely represents to the public to be
able to do that which by our laws cannot be done (and) by our
Code of Morals should not be done. LLjur
In the case (of) In re Taguda, 53 Phil. 37, the Supreme Court
held that solicitation for clients by an attorney by circulars of
advertisements, is unprofessional and offenses of this character
justify permanent elimination from the Bar. 10
6. Federacion International de Abogadas:
xxx xxx xxx

1.7 That entities admittedly not engaged in the practice of law,

such as management consultancy firms or travel agencies,
whether run by lawyers or not, perform the services rendered by
Respondent does not necessarily lead to the conclusion that
Respondent is not unlawfully practicing law. In the same vein,
however, the fact that the business of respondent (assuming it
can be engaged in independently of the practice of law) involves
knowledge of the law does not necessarily make respondent
guilty of unlawful practice of law.
". . . Of necessity, no one . . . acting as a
consultant can render effective service unless he is
familiar with such statutes and regulations. He must be
careful not to suggest a course of conduct which the law
forbids. It seems . . . clear that (the consultant's)
knowledge of the law, and his use of that knowledge as
a factor in determining what measures he shall
recommend, do not constitute the practice of law . . .. It
is not only presumed that all men know the law, but it is
a fact that most men have considerable acquaintance
with the broad features of the law . . .. Our knowledge of
the law accurate or inaccurate moulds our conduct
not only when we are acting for ourselves, but when we
are serving others. Bankers, liquor dealers and laymen
generally possess rather precise knowledge of the laws
touching their particular business or profession. A good
example is the architect, who must be familiar with
zoning, building and fire prevention codes, factory and
tenement house statutes, and who draws plans and
specifications in harmony with the law. This is not
practicing law.
"But suppose the architect, asked by his client
to omit a fire tower, replies that it is required by the
statute. Or the industrial relations expert cites, in
support of some measure that he recommends, a
decision of the National Labor Relations Board. Are they
practicing law? In my opinion, they are not, provided no
separate fee is charged for the legal advice or
information, and the legal question is subordinate and
incidental to a major non-legal problem.
"It is largely a matter of degree and of custom.
"If it were usual for one intending to erect a
building on his land to engage a lawyer to advise him
and the architect in respect to the building code and the
like, then an architect who performed this function would
probably be considered to be trespassing on territory
reserved for licensed attorneys. Likewise, if the
industrial relations field had been pre-empted by

lawyers, or custom placed a lawyer always at the elbow

of the lay personnel man. But this is not the case. The
most important body of industrial relations experts are
the officers and business agents of the labor unions and
few of them are lawyers. Among the larger corporate
employers, it has been the practice for some years to
delegate special responsibility in employee matters to a
management group chosen for their practical knowledge
and skill in such matters, and without regard to legal
training or lack of it. More recently, consultants like the
defendant have tendered to the smaller employers the
same service that the larger employers get from their
own specialized staff.

"The handling of industrial relations is growing

into a recognized profession for which appropriate
courses are offered by our leading universities. The
court should be very cautious about declaring [that] a
widespread, well-established method of conducting
business is unlawful, or that the considerable class of
men who customarily perform a certain function have no
right to do so, or that the technical education given by
our schools cannot be used by the graduates in their
business.
"In determining whether a man is practicing
law, we should consider his work for any particular client
or customer, as a whole. I can imagine defendant being
engaged primarily to advise as to the law defining his
client's obligations to his employees, to guide his client
along the path charted by law. This, of course, would be
the practice of the law. But such is not the fact in the
case before me. Defendant's primary efforts are along
economic and psychological lines. The law only
provides the frame within which he must work, just as
the zoning code limits the kind of building the architect
may plan. The incidental legal advice or information
defendant may give, does not transform his activities
into the practice of law. Let me add that if, even as a
minor feature of his work, he performed services which
are customarily reserved to members of the bar, he
would be practicing law. For instance, if as part of a
welfare program, he drew employees' wills.
"Another branch of defendant's work is the
representation of the employer in the adjustment of
grievances and in collective bargaining, with or without a
mediator. This is not per se the practice of law. Anyone
may use an agent for negotiations and may select an

agent particularly skilled in the subject under discussion,

and the person appointed is free to accept the
employment whether or not he is a member of the bar.
Here, however, there may be an exception where the
business turns on a question of law. Most real estate
sales are negotiated by brokers who are not lawyers.
But if the value of the land depends on a disputed rightof-way and the principal role of the negotiator is to
assess the probable outcome of the dispute and
persuade the opposite party to the same opinion, then it
may be that only a lawyer can accept the assignment.
Or if a controversy between an employer and his men
grows from differing interpretations of a contract, or of a
statute, it is quite likely that defendant should not handle
it. But I need not reach a definite conclusion here, since
the situation is not presented by the proofs. cdphil
"Defendant also appears to represent the
employer before administrative agencies of the federal
government, especially before trial examiners of the
National Labor Relations Board. An agency of the
federal government, acting by virtue of an authority
granted by the Congress, may regulate the
representation of parties before such agency. The State
of New Jersey is without power to interfere with such
determination or to forbid representation before the
agency by one whom the agency admits. The rules of
the National Labor Relations Board give to a party the
right to appear `in person, or by counsel, or by other
representative.' Rules and Regulations, September
11th, 1946, S. 203.31. `Counsel' here means a licensed
attorney, and `other representative' one not a lawyer. In
this phase of his work, defendant may lawfully do
whatever the Labor Board allows, even arguing
questions purely legal." (Auerbacher v. Wood, 53 A. 2d
800, cited in Statsky, Introduction to Paralegalism
[1974], at pp. 154-156.).
1.8 From the foregoing, it can be said that a person engaged in a
lawful calling (which may involve knowledge of the law) is not
engaged in the practice of law provided that:
(a) The legal question is subordinate and
incidental to a major non-legal problem;
(b) The services performed are not customarily
reserved to members of the bar;
(c) No separate fee is charged for the legal
advice or information.

All these must be considered in relation to the work for any

particular client as a whole.
1.9. If the person involved is both lawyer and non-lawyer, the
Code of Professional Responsibility succinctly states the rule of
conduct:
"Rule 15.08 A lawyer who is engaged in
another profession or occupation concurrently with the
practice of law shall make clear to his client whether he
is acting as a lawyer or in another capacity."
1.10. In the present case, the Legal Clinic appears to render
wedding services (See Annex "A", Petition). Services on routine,
straightforward marriages, like securing a marriage license, and
making arrangements with a priest or a judge, may not constitute
practice of law. However, if the problem is as complicated as that
described in Rx for Legal Problems" on the Sharon CunetaGabby Concepcion-Richard Gomez case, then what may be
involved is actually the practice of law. If a non-lawyer, such as
the Legal Clinic, renders such services, then it is engaged in the
unauthorized practice of law.
1.11. The Legal Clinic also appears to give information on
divorce, absence, annulment of marriage and visas (See
Annexes "A" and "B", Petition). Purely giving informational
materials may not constitute practice of law. The business is
similar to that of a bookstore where the customer buys materials
on the subject and determines by himself what courses of action
to take.
It is not entirely improbable, however, that aside from purely
giving information, the Legal Clinic's paralegals may apply the
law to the particular problem of the client, and give legal advice.
Such would constitute unauthorized practice of law.
"It cannot be claimed that the publication of a
legal text which purports to say what the law is amounts
to legal practice. And the mere fact that the principles or
rules stated in the text may be accepted by a particular
reader as a solution to his problem does not affect this. .
. . Apparently it is urged that the conjoining of these two,
that is, the text and the forms, with advice as to how the
forms should be filled out, constitutes the unlawful
practice of law. But that is the situation with many
approved and accepted texts. Dacey's book is sold to
the public at large. There is no personal contact or
relationship with a particular individual. Nor does there
exist that relation of confidence and trust so necessary
to the status of attorney and client. THIS IS THE
ESSENTIAL OF LEGAL PRACTICE THE

REPRESENTATION
AND
ADVISING
OF
A
PARTICULAR
PERSON
IN
A
PARTICULAR
SITUATION. At most the book assumes to offer general
advice on common problems, and does not purport to
give personal advice on a specific problem peculiar to a
designated or readily identified person. Similarly the
defendant's publication does not purport `to give
personal advice on a specific problem peculiar to a
designated or readily identified person in a particular
situation in the publication and sale of the kits, such
publication and sale did not constitute the unlawful
practice of law . . .. There being no legal impediment
under the statute to the sale of the kit, there was no
proper basis for the injunction against defendant
maintaining an office for the purpose of selling to
persons seeking a divorce, separation, annulment or
separation agreement any printed material or writings
relating to matrimonial law or the prohibition in the
memorandum of modification of the judgment against
defendant having an interest in any publishing house
publishing his manuscript on divorce and against his
having any personal contact with any prospective
purchaser. The record does fully support, however, the
finding that for the charge of $75 or $100 for the kit, the
defendant gave legal advice in the course of personal
contacts concerning particular problems which might
arise in the preparation and presentation of the
purchaser's asserted matrimonial cause of action or
pursuit of other legal remedies and assistance in the
preparation of necessary documents (The injunction
therefore sought to) enjoin conduct constituting the
practice of law, particularly with reference to the giving
of advice and counsel by the defendant relating to
specific problems of particular individuals in connection
with a divorce, separation, annulment of separation
agreement sought and should be affirmed." (State v.
Winder, 348, NYS 2d 270 [1973], cited in Statsky, supra
at p. 101.)
1.12. Respondent, of course, states that its services are "strictly
non-diagnostic, non-advisory." It is not controverted, however,
that if the services "involve giving legal advice or counselling,"
such would constitute practice of law (Comment, par. 6.2). It is in
this light that FIDA submits that a factual inquiry may be
necessary for the judicious disposition of this case.
2.10. Annex "A" may be ethically objectionable in that it can give
the impression (or perpetuate the wrong notion) that there is a
secret marriage. With all the solemnities, formalities and other
requisites of marriages (See Articles 2, et seq., Family Code), no
Philippine marriage can be secret.

2.11. Annex "B" may likewise be ethically objectionable. The

second paragraph thereof (which is not necessarily related to the
first paragraph) fails to state the limitation that only "paralegal
services" or "legal support services", and not legal services, are
available." 11

A prefatory discussion on the meaning of the phrase "practice of law"

becomes exigent for a proper determination of the issues raised by the
petition at bar. On this score, we note that the clause "practice of law" has
long been the subject of judicial construction and interpretation. The courts
have laid down general principles and doctrines explaining the meaning and
scope of the term, some of which we now take into account.
LLjur

Practice of law means any activity, in or out of court, which requires the
application of law, legal procedures, knowledge, training and experience. To
engage in the practice of law is to perform those acts which are characteristic
of the profession. Generally, to practice law is to give advice or render any
kind of service that involves legal knowledge or skill. 12

The practice of law is not limited to the conduct of cases in court. It includes
legal advice and counsel, and the preparation of legal instruments and
contracts by which legal rights are secured, although such matter may or
may not be pending in a court. 13
In the practice of his profession, a licensed attorney at law generally engages
in three principal types of professional activity: legal advice and instructions
to clients to inform them of their rights and obligations, preparation for clients
of documents requiring knowledge of legal principles not possessed by
ordinary layman, and appearance for clients before public tribunals which
possess power and authority to determine rights of life, liberty, and property
according to law, inorder to assist in proper interpretation and enforcement of
law. 14
When a person participates in a trial and advertises himself as a lawyer, he is
in the practice of law. 15 One who confers with clients, advises them as to
their legal rights and then takes the business to an attorney and asks the
later to look after the case in court, is also practicing law. 16 Giving advice for
compensation regarding the legal status and rights of another and the
conduct with respect thereto constitutes a practice of law. 17 One who renders
an opinion as to the proper interpretation of a statute, and receives pay for it,
is, to that extent, practicing law. 18
In the recent case of Cayetano vs. Monsod, 19 after citing the doctrines in
several cases, we laid down the test to determine whether certain acts
constitute "practice of law," thus:

Black defines "practice of law" as:

"The rendition of services requiring the knowledge and the
application of legal principles and technique to serve the interest
of another with his consent. It is not limited to appearing in court,
or advising and assisting in the conduct of litigation, but
embraces the preparation of pleadings, and other papers incident
to actions and special proceedings, conveyancing, the
preparation of legal instruments of all kinds, and the giving of all
legal advice to clients. It embraces all advice to clients and all
actions taken for them in matters connected with the law."
The practice of law is not limited to the conduct of cases in court.
(Land Title Abstract and Trust Co. v. Dworken, 129 Ohio St. 23,
193 N.E. 650). A person is also considered to be in the practice
of law when he:
". . . for valuable consideration engages in the
business of advising persons, firms, associations or
corporations as to their rights under the law, or appears
in a representative capacity as an advocate in
proceedings, pending or prospective, before any court,
commissioner, referee, board, body, committee, or
commission constituted by law or authorized to settle
controversies and there, in such representative
capacity, performs any act or acts for the purpose of
obtaining or defending the rights of their clients under
the law. Otherwise stated, one who, in a representative
capacity, engages in the business of advising clients as
to their rights under the law, or while so engaged
performs any act or acts either in court or outside of
court for that purpose, is engaged in the practice of law.
(State ex. rel. Mckittrick v. C.S. Dudley and Co., 102
S.W. 2d 895, 340 Mo. 852)."
This Court, in the case of Philippine Lawyers Association v.
Agrava (105 Phil. 173, 176-177), stated:
"The practice of law is not limited to the
conduct of cases or litigation in court; it embraces the
preparation of pleadings and other papers incident to
actions and special proceedings, the management of,
such actions and proceedings on behalf of clients before
judges and courts, and in addition, conveying. In
general, all advice to clients, and all action taken for
them in matters connected with the law incorporation
services, assessment and condemnation services
contemplating an appearance before a judicial body, the
foreclosure of a mortgage, enforcement of a creditor's
claim in bankruptcy and insolvency proceedings, and
conducting proceedings in attachment, and in matters of

estate and guardianship have been held to constitute

law practice, as do the preparation and drafting of legal
instruments, where the work done involves the
determination by the trained legal mind of the legal
effect of facts and conditions. (5 Am. Jr. p. 262, 263).
"Practice of law under modern conditions
consists in no small part of work performed outside of
any court and having no immediate relation to
proceedings in court. It embraces conveyancing, the
giving of legal advice on a large variety of subjects, and
the preparation and execution of legal instruments
covering an extensive field of business and trust
relations and other affairs. Although these transactions
may have no direct connection with court proceedings,
they are always subject to become involved in litigation.
They require in many aspects a high degree of legal
skill, a wide experience with men and affairs, and great
capacity for adaptation to difficult and complex
situations. These customary functions of an attorney or
counselor at law bear an intimate relation to the
administration of justice by the courts. No valid
distinction, so far as concerns the question set forth in
the order, can be drawn between that part of the work of
the lawyer which involves appearance in court and that
part which involves advice and drafting of instruments in
his office. It is of importance to the welfare of the public
that these manifold customary functions be performed
by persons possessed of adequate learning and skill, of
sound moral character, and acting at all times under the
heavy trust obligations to clients which rests upon all
attorneys. (Moran, Comments on the Rules of Court,
Vol. 3 [1973 ed.], pp. 665-666, citing In Re Opinion of
the Justices [Mass.], 194 N.E. 313, quoted in Rhode Is.
Bar Assoc. v. Automobile Service Assoc. [R.I.] 179 A.
139, 144)."

The practice of law, therefore, covers a wide range of activities in and out of
court. Applying the aforementioned criteria to the case at bar, we agree with
the perceptive findings and observations of the aforestated bar associations
that the activities of respondent, as advertised, constitute "practice of law."
The contention of respondent that it merely offers legal support services can
neither be seriously considered nor sustained. Said proposition is belied by
respondent's own description of the services it has been offering, to wit:
"Legal support services basically consist of giving ready
information by trained paralegals to laymen and lawyers, which
are strictly non-diagnostic, non-advisory, through the extensive
use of computers and modern information technology in the

gathering, processing, storage, transmission and reproduction of

information and communication, such as computerized legal
research; encoding and reproduction of documents and
pleadings prepared by laymen or lawyers; document search;
evidence gathering; locating parties or witnesses to a case; fact
finding investigations; and assistance to laymen in need of basic
institutional services from government or non-government
agencies, like birth, marriage, property, or business registrations;
educational or employment records or certifications, obtaining
documentation like clearances, passports, local or foreign visas;
giving information about laws of other countries that they may
find useful, like foreign divorce, marriage or adoption laws that
they can avail of preparatory to emigration to that foreign country,
and other matters that do not involve representation of clients in
court; designing and installing computer systems, programs, or
software for the efficient management of law offices, corporate
legal departments, courts, and other entities engaged in
dispensing or administering legal services." 20

While some of the services being offered by respondent corporation merely

involve mechanical and technical know-how, such as the installation of
computer systems and programs for the efficient management of law offices,
or the computerization of research aids and materials, these will not suffice to
justify an exception to the general rule.
What is palpably clear is that respondent corporation gives out legal
information to laymen and lawyers. Its contention that such function is nonadvisory and non-diagnostic is more apparent than real. In providing
information, for example, about foreign laws on marriage, divorce and
adoption, it strains the credulity of this Court that all that respondent
corporation will simply do is look for the law, furnish a copy thereof to the
client, and stop there as if it were merely a bookstore. With its attorneys and
so called paralegals, it will necessarily have to explain to the client the
intricacies of the law and advise him or her on the proper course of action to
be taken as may be provided for by said law. That is what its advertisements
represent and for which services it will consequently charge and be paid.
That activity falls squarely within the jurisprudential definition of "practice of
law." Such a conclusion will not be altered by the fact that respondent
corporation does not represent clients in court since law practice, as the
weight of authority holds, is not limited merely to court appearances but
extends to legal research, giving legal advice, contract drafting, and so forth.
The aforesaid conclusion is further strengthened by an article published in
the January 13, 1991 issue of the Starweek/The Sunday Magazine of the
Philippine Star, entitled "Rx for Legal Problems," where an insight into the
structure, main purpose and operations of respondent corporation was given
by its own "proprietor," Atty. Rogelio P. Nogales:

This is the kind of business that is transacted everyday at The

Legal Clinic, with offices on the seventh floor of the Victoria
Building along U.N. Avenue in Manila. No matter what the client's
problem, and even if it is as complicated as the CunetaConcepcion domestic situation, Atty. Nogales and his staff of
lawyers, who, like doctors, are "specialists" in various fields, can
take care of it. The Legal Clinic, Inc. has specialists in taxation
and criminal law, medico-legal problems, labor, litigation and
family law. These specialists are backed up by a battery of
paralegals, counsellors and attorneys.

Atty. Nogales set up The Legal Clinic in 1984. Inspired by the

trend in the medical field toward specialization, it caters to clients
who cannot afford the services of the big law firms.
The Legal Clinic has regular and walk-in clients. "When they
come, we start by analyzing the problem. That's what doctors do
also. They ask you how you contracted what's bothering you,
they take your temperature, they observe you for the symptoms,
and so on. That's how we operate, too. And once the problem
has been categorized, then it's referred to one of our specialists."
There are cases which do not, in medical terms, require surgery
or follow-up treatment. These The Legal Clinic disposes of in a
matter of minutes. "Things like preparing a simple deed of sale or
an affidavit of loss can be taken care of by our staff or, if this
were a hospital, the residents or the interns. We can take care of
these matters on a while you wait basis. Again, kung baga sa
ospital, out-patient, hindi kailangang ma-confine. It's just like a
common cold or diarrhea," explains Atty. Nogales.
Those cases which require more extensive "treatment" are dealt
with accordingly. "If you had a rich realtive who died and named
you her sole heir, and you stand to inherit millions of pesos of
property, we would refer you to a specialist in taxation. There
would be real estate taxes and arrears which would need to be
put in order, and your relative is even taxed by the state for the
right to transfer her property, and only a specialist in taxation
would be properly trained to deal with that problem. Now, if there
were other heirs contesting your rich relative's will, then you
would need a litigator, who knows how to arrange the problem for
presentation in court, and gather evidence to support the case." 21

That fact that the corporation employs paralegals to carry out its services is
not controlling. What is important is that it is engaged in the practice of law by
virtue of the nature of the services it renders which thereby brings it within
the ambit of the statutory prohibitions against the advertisements which it has
caused to be published and are now assailed in this proceeding.
prcd

Further, as correctly and appropriately pointed out by the U.P. WILOCI, said
reported facts sufficiently establish that the main purpose of respondent is to
serve as a one-stop-shop of sorts for various legal problems wherein a client
may avail of legal services from simple documentation to complex litigation
and corporate undertakings. Most of these services are undoubtedly beyond
the domain of paralegals, but rather, are exclusive functions of lawyers
engaged in the practice of law. 22
It should be noted that in our jurisdiction the services being offered by private
respondent which constitute practice of law cannot be performed by
paralegals. Only a person duly admitted as a member of the bar, or hereafter
admitted as such in accordance with the provisions of the Rules of Court,
and who is in good and regular standing, is entitled to practice law. 23
Public policy requires that the practice of law be limited to those individuals
found duly qualified in education and character. The permissive right
conferred on the lawyers is an individual and limited privilege subject to
withdrawal if he fails to maintain proper standards of moral and professional
conduct. The purpose is to protect the public, the court, the client and the bar
from the incompetence or dishonesty of those unlicensed to practice law and
not subject to the disciplinary control of the court. 24
The same rule is observed in the American jurisdiction where from
respondent would wish to draw support for his thesis. The doctrines there
also stress that the practice of law is limited to those who meet the
requirements for, and have been admitted to, the bar, and various statutes or
rules specifically so provide. 25 The practice of law is not a lawful business
except for members of the bar who have complied with all the conditions
required by statute and the rules of court. Only those persons are allowed to
practice law who, by reason of attainments previously acquired through
education and study, have been recognized by the courts as possessing
profound knowledge of legal science entitling them to advise, counsel with,
protect, or defend the rights, claims, or liabilities of their clients, with respect
to the construction, interpretation, operation and effect of law. 26 The
justification for excluding from the practice of law those not admitted to the
bar is found, not in the protection of the bar from competition, but in the
protection of the public from being advised and represented in legal matters
by incompetent and unreliable persons over whom the judicial department
can exercise little control. 27
We have to necessarily and definitely reject respondent's position that the
concept in the United States of paralegals as an occupation separate from
the law profession be adopted in this jurisdiction. Whatever may be its merits,
respondent cannot but be aware that this should first be a matter for judicial
rules or legislative action, and not of unilateral adoption as it has done.

Paralegals in the United States are trained professionals. As admitted by

respondent, there are schools and universities there which offer studies and
degrees in paralegal education, while there are none in the Philippines. 28 As
the concept of the "paralegal" or "legal assistant" evolved in the United
States, standards and guidelines also evolved to protect the general public.
One of the major standards, or guidelines was developed by the American
Bar Association which set up Guidelines for the Approval of Legal Assistant
Education Programs (1973). Legislation has even been proposed to certify
legal assistants. There are also associations of paralegals in the United
States with their own code of professional ethics, such as the National
Association of Legal Assistants, Inc. and the American Paralegal
Association. 29
In the Philippines, we still have a restricted concept and limited acceptance
of what may be considered, as paralegal service. As pointed out by FIDA,
some persons not duly licensed to practice law are or have been allowed
limited representation in behalf of another or to render legal services, but
such allowable services are limited in scope and extent by the law, rules or
regulations granting permission therefor. 30
Accordingly, we have adopted the American judicial policy that, in the
absence of constitutional or statutory authority, a person who has not been
admitted as an attorney cannot practice law for the proper administration of
justice cannot be hindered by the unwarranted intrusion of an unauthorized
and unskilled person into the practice of law. 31 That policy should continue to
be one of encouraging persons who are unsure of their legal rights and
remedies to seek legal assistance only from persons licensed to practice law
in the state. 32
Anent the issue on the validity of the questioned advertisements, the Code of
Professional Responsibility provides that a lawyer in making known his legal
services shall use only true, honest, fair, dignified and objective information
or statement of facts. 33 He is not supposed to use or permit the use of any
false, fraudulent, misleading, deceptive, undignified, self-laudatory or unfair
statement or claim regarding his qualifications or legal services. 34 Nor shall
he pay or give something of value to representatives of the mass media in
anticipation of, or in return for, publicity to attract legal business. 35 Prior to
the adoption of the Code of Professional Responsibility, the Canons of
Professional Ethics had also warned that lawyers should not resort to indirect
advertisements for professional employment, such as furnishing or inspiring
newspaper comments, or procuring his photograph to be published in
connection with causes in which the lawyer has been or is engaged or
concerning the manner of their conduct, the magnitude of the interest
involved, the importance of the lawyer's position, and all other like selflaudation. 36

The standards of the legal profession condemn the lawyer's advertisement of

his talents. A lawyer cannot, without violating the ethics of his profession,
advertise his talents or skills as in a manner similar to a merchant advertising
his goods. 37 The proscription against advertising of legal services or
solicitation of legal business rests on the fundamental postulate that the
practice of law is a profession. Thus, in the case of The Director of Religious
Affairs vs. Estanislao R. Bavot 38 an advertisement, similar to those of
respondent which are involved in the present proceeding, 39 was held to
constitute improper advertising or solicitation.
The pertinent part of the decision therein reads:
It is undeniable that the advertisement in question was a flagrant
violation by the respondent of the ethics of his profession, it being
a brazen solicitation of business from the public. Section 25 of
Rule 127 expressly provides among other things that "the
practice of soliciting cases at law for the purpose of gain, either
personally or thru paid agents or brokers, constitutes
malpractice." It is highly unethical for an attorney to advertise his
talents or skill as a merchant advertises his wares. Law is a
profession and not a trade. The lawyer degrades himself and his
profession who stoops to and adopts the practices of
mercantilism by advertising his services or offering them to the
public. As a member of the bar, he defiles the temple of justice
with mercenary activities as the money-changers of old defiled
the temple of Jehovah. The most worthy and effective
advertisement possible, even for a young lawyer, . . . is the
establishment of a well-merited reputation for professional
capacity and fidelity to trust. This cannot be forced but must be
the outcome of character and conduct." (Canon 27, Code of
Ethics.)

We repeat, the canons of the profession tell us that the best advertising
possible for a lawyer is a well-merited reputation for professional capacity
and fidelity to trust, which must be earned as the outcome of character and
conduct. Good and efficient service to a client as well as to the community
has a way of publicizing itself and catching public attention. That publicity is a
normal by-product of effective service which is right and proper. A good and
reputable lawyer needs no artificial stimulus to generate it and to magnify his
success. He easily sees the difference between a normal by-product of able
service and the unwholesome result of propaganda. 40
Of course, not all types of advertising or solicitation are prohibited. The
canons of the profession enumerate exceptions to the rule against
advertising or solicitation and define the extent to which they may be
undertaken. The exceptions are of two broad categories, namely, those

which are expressly allowed and those which are necessarily implied from
the restrictions. 41
The first of such exceptions is the publication in reputable law lists, in a
manner consistent with the standards of conduct imposed by the canons, of
brief biographical and informative data. "Such data must not be misleading
and may include only a statement of the lawyer's name and the names of his
professional associates; addresses, telephone numbers, cable addresses;
branches of law practiced; date and place of birth and admission to the bar;
schools attended with dates of graduation, degrees and other educational
distinction; public or quasi-public offices; posts of honor; legal authorships;
legal teaching positions; membership and offices in bar associations and
committees thereof, in legal and scientific societies and legal fraternities; the
fact of listings in other reputable law lists; the names and addresses of
references; and, with their written consent, the names of clients regularly
represented." 42
The law list must be a reputable law list published primarily for that purpose;
it cannot be a mere supplemental feature of a paper, magazine, trade journal
or periodical which is published principally for other purposes. For that
reason, a lawyer may not properly publish his brief biographical and
informative data in a daily paper, magazine, trade journal or society program.
Nor may a lawyer permit his name to be published in a law list the conduct,
management or contents of which are calculated or likely to deceive or injure
the public or the bar, or to lower the dignity or standing of the profession. 43
The use of an ordinary simple professional card is also permitted. The card
may contain only a statement of his name, the name of the law firm which he
is connected with, address, telephone number and special branch of law
practiced. The publication of a simple announcement of the opening of a law
firm or of changes in the partnership, associates, firm name or office
address, being for the convenience of the profession, is not objectionable. He
may likewise have his name listed in a telephone directory but not under a
designation of special branch of law. 44
Verily, taking into consideration the nature and contents of the
advertisements for which respondent is being taken to task, which even
includes a quotation of the fees charged by said respondent corporation for
services rendered, we find and so hold that the time definitely do not and
conclusively cannot fall under any of the above-mentioned exceptions.
The ruling in the case of Bates, et al. vs. State Bar of Arizona, 45 which is
repeatedly invoked and constitutes the justification relied upon by
respondent, is obviously not applicable to the case at bar. Foremost is the
fact that the disciplinary rule involved in said case explicitly allows a lawyer,
as an exception to the prohibition against advertisements by lawyers, to

publish a statement of legal fees for an initial consultation or the availability

upon request of a written schedule of fees or an estimate of the fee to be
charged for the specific services. No such exception is provided for,
expressly or impliedly, whether in our former Canons of Professional Ethics
or the present Code of Professional Responsibility. Besides, even the
disciplinary rule in the Bates case contains a proviso that the exceptions
stated therein are "not applicable in any state unless and until it is
implemented by such authority in that state." 46 This goes to show that an
exception to the general rule, such as that being invoked by herein
respondent, can be made only if and when the canons expressly provide for
such an exception. Otherwise, the prohibition stands, as in the case at bar.
LLpr

It bears mention that in a survey conducted by the American Bar Association

after the decision in Bates, on the attitude of the public about lawyers after
viewing television commercials, it was found that public opinion dropped
significantly 47 with respect to these characteristics of lawyers:
Trustworthy from 71% to 14%
Professional from 71% to 14%
Honest from 65% to 14%
Dignified from 45% to 14%

Secondly, it is our firm belief that with the present situation of our legal and
judicial systems, to allow the publication of advertisements of the kind used
by respondent would only serve to aggravate what is already a deteriorating
public opinion of the legal profession whose integrity has consistently been
under attack lately by media and the community in general. At this point in
time, it is of utmost importance in the face of such negative, even if unfair,
criticisms at times, to adopt and maintain that level of professional conduct
which is beyond reproach, and to exert all efforts to regain the high esteem
formerly accorded to the legal profession.
In sum, it is undoubtedly a misbehavior on the part of the lawyer, subject to
disciplinary action, to advertise his services except in allowable
instances 48 or to aid a layman in the unauthorized practice of
law.49 Considering that Atty. Rogelio P. Nogales, who is the prime
incorporator, major stockholder and proprietor of The Legal Clinic, Inc. is a
member of the Philippine Bar, he is hereby reprimanded, with a warning that
a repetition of the same or similar acts which are involved in this proceeding
will be dealt with more severely.
While we deem it necessary that the question as to the legality or illegality of
the purpose/s for which the Legal Clinic, Inc. was created should be passed
upon and determined, we are constrained to refrain from lapsing into

an obiter on that aspect since it is clearly not within the adjudicative

parameters of the present proceeding which is merely administrative in
nature. It is, of course, imperative that this matter be promptly determined,
albeit in a different proceeding and forum, since, under the present state of
our law and jurisprudence, a corporation cannot be organized for or engage
in the practice of law in this country. This interdiction, just like the rule against
unethical advertising, cannot be subverted by employing some so-called
paralegals supposedly rendering the alleged support services.
llcd

The remedy for the apparent breach of this prohibition by respondent is the
concern and province of the Solicitor General who can institute the
corresponding quo warranto action, 50 after due ascertainment of the factual
background and basis for the grant of respondent's corporate charter, in light
of the putative misuse thereof. That spin-off from the instant bar matter is
referred to the Solicitor General for such action as may be necessary under
the circumstances.
ACCORDINGLY, the Court Resolved to RESTRAIN and ENJOIN herein
respondent, The Legal Clinic, Inc., from issuing or causing the publication or
dissemination of any advertisement in any form which is of the same or
similar tenor and purpose as Annexes "A" and "B" of this petition, and from
conducting, directly or indirectly, any activity, operation or transaction
proscribed by law or the Code of Professional Ethics as indicated herein. Let
copies of this resolution be furnished the Integrated Bar of the Philippines,
the Office of the Bar Confidant and the Office of the Solicitor General for
appropriate action in accordance herewith.
Narvasa, C .J ., Cruz, Feliciano, Padilla, Bidin, Grio-Aquino, Davide, Jr.,
Romero, Nocon, Bellosillo, Melo and Quiason, JJ ., concur.
|||

(Ulep v. Legal Clinic, Inc., B.M. No. 553 (Resolution), [June 17, 1993])

SECOND DIVISION
[G.R. No. 148384. April 17, 2002.]
DOCTORS ROSA P. ALFAFARA, VIVIAN DYHONGPO,
MARIA TORRES, EMMA YBAEZ, ELSA CABARDO,
REBECCA SANTIAGO, PRISCILLA NARVASA, SUSIE
CHAN, CLARO CINCO, FELIPE CINCO, CARMEN
MODESTO, FELISA LIMKIMSO, ARLENE DORIO,
ROSALINDA BONO, and SUSAN YU, in their own
behalf and in behalf of all the other 80 optometristsmembers of the SAMAHAN NG OPTOMETRISTS SA
PILIPINAS-CEBU CHAPTER, petitioners, vs. ACEBEDO
OPTICAL, CO., INC., respondent.
The Law Firm of Hermosisima and Inso for petitioners.
Chato & Eleazar for respondent Acebedo Optical, Inc.
Charter Antonio L. Tayurang for respondents.
SYNOPSIS
Petitioners brought suit to enjoin Acebedo from employing
optometrists as this allegedly constituted an indirect violation of the
Optometry Law, RA No. 1998, which prohibits corporations from
exercising professions reserved only to natural persons. The trial court
rendered judgment in favor of petitioners. On appeal, however, the CA
held that although Acebedo employed licensed optometrists, it was not
operating as an optical clinic nor engaged in the practice of optometry,
Acebedo simply dispensed optical and ophthalmic instruments and
supplies. Petitioners, however, argued that an optometrist, who is
employed by a corporation such as Acebedo, is not acting on his own
capacity but as an employee or agent of the corporation. As such, the
optometrist cannot be held personally liable for his acts done in the
course of his employment as an optometrist.
EcTIDA

In denying the petition, thereby affirming the decision of the

Court of Appeals, the Supreme Court held: that a duly licensed
optometrist is not prohibited from being employed by a corporation as
Acebedo and the latter cannot be said to be exercising the optometry
profession by reason of such employment. While the optometrists are
employees of Acebedo, their practice of optometry is separate and
distinct from the business of Acebedo of selling optical products. They
are personally liable for acts done in the course of their practice in the
same way that if Acebedo is sued in court in connection with its business

of selling optical products, the optometrists need not be impleaded as

party-defendants. In that regard, the Board of Optometry and the
Professional Regulations commission regulate their practice and have
exclusive original jurisdiction over them.
SYLLABUS
POLITICAL LAW; ADMINISTRATIVE LAW; ADMINISTRATIVE BODIES;
PROFESSIONAL REGULATION COMMISSION; HAS JURISDICTION TO
REGULATE PRACTICE OF OPTOMETRISTS EMPLOYED BY A
CORPORATION; CASE AT BAR. We see no reason to deviate from the
ruling that a duly licensed optometrist is not prohibited from being employed
by respondent and that respondent cannot be said to be exercising the
optometry profession by reason of such employment. . . . Petitioners argue
that an optometrist, who is employed by a corporation, such as Acebedo, is
not acting on his own capacity but as an employee or agent of the
corporation. They contend that, as a mere employee or agent, such
optometrist cannot be held personally liable for his acts done in the course of
his employment as an optometrist under Article 1897 of the Civil Code. This
contention has no merit. While the optometrists are employees of
respondent, their practice of optometry is separate and distinct from the
business of respondent of selling optical products. They are personally liable
for acts done in the course of their practice in the same way that if
respondent is sued in court in connection with its business of selling optical
products, the optometrists need not be impleaded as party-defendants. In
that regard, the Board of Optometry and the Professional Regulations
Commission regulate their practice and have exclusive original jurisdiction
over them.
DECISION
MENDOZA, J :
p

This is a petition for review on certiorari of the decision, 1 dated January 20,
2000, of the Court of Appeals, setting aside the decision, 2 dated September
3, 1993, of the Regional Trial Court, Branch 9, Cebu City, which enjoined
respondent Acebedo Optical Co., Inc., its agents, representatives, and/or
employees from practicing optometry, as defined in 1 (a) of Republic Act
No. 1998, in the province and cities of Cebu, and the resolution, dated May
10, 2001, of the appeals court denying petitioners' motion for
reconsideration.
HAaScT

Petitioners are optometrists. They brought, in their own behalf and in behalf
of 80 other optometrists, who are members of the Samahan ng Optometrists
sa Pilipinas-Cebu Chapter, an injunctive suit in the Regional Trial Court,
Branch 9, Cebu City to enjoin respondent Acebedo Optical Co., Inc. and its

agents, representatives, and/or employees from practicing optometry in the

province of Cebu. In their complaint, they alleged that respondent opened
several optical shops in Cebu and announced to the public, through leaflets,
newspapers, and other forms of advertisement, the availability of "ready-towear" eyeglasses for sale at P60.00 each and free services by optometrists
in such outlets. They claimed that, through the licensed optometrists under
its employ, respondent had been engaging in the practice of optometry by
examining the human eye, analyzing the ocular functions, prescribing
ophthalmic lenses, prisms, and contact lenses; and conducting ocular
exercises, visual trainings, orthoptics, prosthetics, and other preventive or
corrective measures for the aid, correction, or relief of the human eye. They
contended that such acts of respondent were done in violation of the
Optometry Law (R.A. No. 1998) 3 and the Code of Ethics for Optometrists,
promulgated by the Board of Examiners in Optometry on July 11, 1983. They
sought payment to them of attorney's fees, litigation expenses, and the costs
of the suit. 4
The trial court at first dismissed the suit but, on motion of petitioners,
reinstated the action and granted their prayer for a writ of preliminary
injunction and/or restraining order. Petitioners argued that the case involved
a pure question of law, i.e., whether or not respondent's hiring of optometrists
was violative of the applicable laws, and that, as such, the case was an
exception to the rule requiring exhaustion of administrative remedies as a
condition for the filing of an injunctive stilt. They further alleged that the Board
of Optometry held itself to be without jurisdiction over the president of
respondent Acebedo Company as he was not duly registered with the
Professional Regulation Commission.
In its answer, respondent averred that the advertisements referred to by
petitioner were part of its promotion to make known to the public the opening
of its new branches in Cebu; that incidental to its business of selling optical
products, it hired duly licensed optometrists who conducted eye examination,
prescribed ophthalmic lenses, and rendered other services; that it exercised
neither control nor supervision over the optometrists under its employ; and
that the hired optometrists exercised neither control nor supervision in the
sale of optical products and accessories by respondent. By way of special
and affirmative defense, respondent stated that the optometrists should be
impleaded as party-defendants because they were indispensable parties;
that the trial court had no jurisdiction over the case; that the filing of the
complaint was barred by res judicata as similar suits had been previously
dismissed by the Court of First Instance of Lucena City and the Securities
and Exchange Commission; and that the petitioners were guilty of forumshopping. Respondent sought the recovery of P100,000.00 as moral
damages, P500,000.00 as exemplary damages, and P100,000.00 as
attorney's fees. 5

During the pre-trial conference, the parties entered into the following
stipulation of facts: that the petitioners were duly licensed optometrists; that
the petitioners were all members of the Samahan ng Optometrists ng
Pilipinas (SOP)-Cebu Chapter; that SOP-Cebu Chapter was a chapter of
SOP Incorporated, a national organization; that the SOP-Cebu Chapter had
a program called "Sight Saving Month"; that the "Sight Saving Month"
program was also a program of the SOP nationwide; that petitioners' SOP
"Sight Saving Month" program provided free consultations; that respondent
was a corporation with several outlets in Cebu; that respondent was selling
optical products and "ready-to-wear" eyeglasses of limited grades; that
during the opening of its new branches in Cebu, the respondent advertised
its products through leaflets, newspapers, and other similar means, such as
streamers and loudspeakers on board a vehicle; that respondent hired
optometrists who conducted eye examinations, prescribed ophthalmic
lenses, and rendered other optometry services; and that while the hired
optometrists received their salary from respondent, they are not precluded
from seeking other sources of income. 6
The evidence for the petitioners showed that respondent advertised its
"ready-to-wear" eyeglasses in newspapers, posters pasted on the walls, and
announcements made in roving jeeps. A witness testified that he purchased
a pair of eyeglasses for P66.00 (P60.00 plus P6.00 for VAT) without any prior
eye examination by an optometrist. A week later, he had vision difficulty and
consulted an optometrist who advised him to buy a pair of eyeglasses with
the correct grade. Petitioners thus sought to prove that the selling of "readyto-wear" eyeglasses by respondent was detrimental to the public.
On the other hand, respondent maintained that before the customers
purchased the "ready-to-wear" eyeglasses on display, they either have a
prior prescription from an optometrist or had to be examined first by the
branch optometrist. Customers thus had the option either to buy the "readyto-wear" eyeglasses on display or to order a new pair of eyeglasses.
After hearing, judgment was rendered in favor of petitioners. The trial court
found that the hiring of licensed optometrists by the respondent was unlawful
because it resulted in the practice of the optometry profession by respondent,
a juridical person. It ruled that respondent could not raise the issue of res
judicata as there was no decision on the merits of the case rendered by any
court of competent jurisdiction and, consequently, petitioners could not be
guilty of forum-shopping. As to petitioners' failure to implead the optometrists
in the employ of respondent, the trial court explained that since the issue
involved the propriety of respondent's hiring of optometrists to perform
optometry services, the optometrists did not have to be impleaded as
defendants. As to whether respondent's selling of "ready-to-wear"
eyeglasses to customers without prior eye examination violated the

applicable laws and was detrimental to the public, the trial court ruled that
petitioners failed to substantiate such claim.

Respondent appealed to the Court of Appeals contending that the trial court
erred in holding that respondent was illegally engaged in the practice of
optometry; that being indispensable parties, the licensed optometrists
employed by respondent should have been impleaded as defendants; and
that the trial court erred in not holding that petitioners, by filing several
harassment suits before various fora, were guilty of forum-shopping.
The Court of Appeals reversed the decision of the trial court and dismissed
the complaint of petitioners. Citing the case of Samahan ng Optometrists sa
Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International Corporation, 7 the
appeals court ruled that respondent's hiring of licensed optometrists did not
constitute practice of optometry nor violate any law. As to the second issue
raised, the Court of Appeals stated that since the complaint was lodged
solely against respondent for its hiring of optometrists, whatever decision the
trial court would render would solely affect respondent since what was
sought to be restrained was the employment of licensed optometrists; hence,
the optometrists were not indispensable parties. Anent the issue of forumshopping, the appeals court found no cogent reason to reverse the findings
of the trial court that the administrative case before the Professional
Regulation Commission was not decided on the merits while the letters of
petitioners sent to government officials did not constitute judicial
proceedings.
Petitioners filed a motion for reconsideration but their motion was denied.
Hence, this petition alleging that the Court of Appeals erred in holding that
respondent Acebedo was not engaged in the practice of optometry.

Acebedo's clientele (free eye consultations and refractions), petitioners were

guilty of unprofessional conduct. Consequently, their professional licenses as
optometrists were suspended for two (2) years. This was because the
services of the two optometrists were the ones being offered to the public for
free. The decision of the Professional Regulation Commission was affirmed
by the Court of Appeals and later by this Court. As our resolution, dated July
12, 1999, 10 stated in pertinent parts:
Thus, the instant petition which trust likewise fail.
The Court finds the decision of the Court of Appeals to be in
accordance with the law. The Rules and Regulation[s] of the
Board of Examiners for [O]ptometry are quite explicit, and Rule
56 provides:
Rule 56. Acts Constituting Unprofessional Conduct. - It
shall be considered unprofessional for any registered
optometrist:
(1) To make optometric examinations outside
of his regular clinic, unless he
shall
have
received
an
unsolicited written request by
the person or persons to be
examined;
(2) To advertise a price or prices [of] spectacle
frames,
mountings,
or
ophthalmic lenses and other
ophthalmic devices used in the
practice of Optometry and to
be associated with, or remain
in the employ of, any person
who does such advertising;

The petition has no merit.

...

First. Petitioners contend that the ruling in Samahan ng Optometrists sa

Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International Corporation 8 is
no longer controlling because of the later case ofApacionado v. Professional
Regulation
Commission. 9 In Apacionado,
petitioners
Ma.
Cristina
Apacionado and Zenaida Robil, who were employed by Acebedo as
optometrists, were suspended from the practice of optometry for two (2)
years by the Board of Optometry for violation of R.A. No. 1998 and Art.
III, 6 of the Code of Ethics for Optometrists for having participated in the
promotional advertisement of Acebedo, entitled "Libreng Konsulta sa Mata:
Reading Glasses P60.00," held from July 5-14, 1989 in Tuguegarao,
Cagayan. In affirming the suspension of the optometrists, the Professional
Regulation Commission found that by rendering professional services to

(4) To

advertise
"free
examination,"
"examination
included,"
"discounts,"
"installments,"
"wholesale and retail," or
similar words and phrases
which would tend to remove
the spirit of professionalism;
xxx xxx xxx

(11) To use Mobile Units for conducting

refraction in any area within ten

(10)
kilometers
Municipality.

of

Likewise, Section 6 of the Code of Ethics for optometrists states:

SEC. 6. The following are deemed, among others, to he
unethical and are deemed to constitute unprofessional
conduct:
xxx xxx xxx
c. Performing optometric examination outside
of the regular office, unless he shall have
received unsolicited request to make such an
examination.
xxx xxx xxx
u. To use Mobile Units for conducting refraction
in any area within ten (10) kilometers of a
Municipality.
These provisions petitioners, through Acebedo, were found to
have violated.
Petitioners cannot deny that it was their skills as optometrists as
well as their licenses which Acebedo used in order to enable
itself to render optometric services to its clientele. Under such
arrangement, petitioners acted as tools of Acebedo so that the
latter can offer the whole package of services to its clientele.
Corollarily, Republic Act No. 1998 pertinently provides:
SEC. 20. Revocation or suspension of certificate.
The Board may, after giving proper notice and hearing
to the party concerned, revoke or suspend a certificate
of registration for the causes mentioned in the next
preceding section, or for unprofessional conduct. . . .
Having knowingly allowed themselves to be used as tools in
furtherance of [the] unauthorized practice of optometry,
petitioners are clearly liable for unethical and unprofessional
practice of their profession. The Court, thus finds no error
committed by the Court of Appeals.
WHEREFORE, petition is denied due course.

Petitioners cite the Tennessee Supreme Court statement in Lens Crafter, Inc.
v. Sunquist, 11 stating that:

The logical result would be that corporations and business

partnerships might practice law, medicine, dentistry or any other
profession by the simple expedient of employing licensed agents.
And, if this were permitted, professional standards would be
practically destroyed and professions requiring special training
would be commercialized, to the public detriment. . . . The ethics
of any profession is based upon personal or individual
responsibility.

The contention has no merit. An "optometrist" is a person who has been

certified by the Board of Optometry and registered with the Professional
Regulation Commission as qualified to practice optometry in the
Philippines. 12 Thus, only natural persons can engage in the practice of
optometry and not corporations. Respondent, which is not a natural person,
cannot take the licensure examinations for optometrist and, therefore, it
cannot be registered as an optometrist under R.A. No. 1998. It is noteworthy
that, in Apacionado, the Court did not find Acebedo to be engaged in the
practice of optometry. The optometrists in that case were found guilty of
unprofessional conduct and their licenses were suspended for two (2) years
for having participated, in their capacities as optometrists, in the
implementation of the promotional advertisement of Acebedo. In contrast, in
the case at bar, respondent is merely engaged in the business of selling
optical products, not in the practice of optometry, whether directly or
indirectly, through its hired optometrists.
In Samahan ng Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v.
Acebedo International Corporation, 13 petitioners opposed respondent
Acebedo's application for a municipal permit to operate a branch in Candon,
Ilocos Sur. They brought suit to enjoin respondent Acebedo from employing
optometrists as this allegedly constituted an indirect violation of R.A. No.
1998, which prohibits corporations from exercising professions reserved only
to natural persons. The committee created by the Mayor of Candon to pass
on Acebedo's application denied the same and ordered the closure of
Acebedo optical shops. Acebedo appealed but its appeal was dismissed by
the trial court on the ground that it was practicing optometry. On appeal, the
Court of Appeals held that Acebedo was not operating as an optical clinic nor
engaged in the practice of optometry, although it employed licensed
optometrists. Acebedo simply dispensed optical and ophthalmic instruments
and supplies. It was pointed out that R.A. No. 1998 does not prohibit
corporations from employing licensed optometrists. What it prohibits is the
practice of optometry by individuals who do not have a license to practice.
The prohibition is addressed to natural persons who are required to have "a
valid certificate of registration as optometrist" and who must be of "good
moral character." This Court affirmed the ruling of the appeals court and
explained that even under R.A. No. 8050 (Revised Optometry Law) there is
no prohibition against the hiring by corporations of optometrists. The fact that
Acebedo hired optometrists who practiced their profession in the course of

2. Acebedo cannot examine and/or prescribe reading and similar

optical glasses for patients, because these are functions
of optical clinics;

their employment in Acebedo's optical shops did not mean that it was itself
engaged in the practice of optometry.
We see no reason to deviate from the ruling that a duly licensed optometrist
is not prohibited from being employed by respondent and that respondent
cannot be said to be exercising the optometry profession by reason of such
employment.

3. Acebedo cannot sell reading and similar eyeglasses without a

prescription having first been made by an independent
optometrist (not its employee) or independent optical
clinic. Acebedo can only sell directly to the public,
without need of a prescription, Ray-Ban and similar
eyeglasses;

Second. Petitioners argue that an optometrist, who is employed by a

corporation, such as Acebedo, is not acting on his own capacity but as an
employee or agent of the corporation. They contend that, as a mere
employee or agent, such optometrist cannot be held personally liable for his
acts done in the course of his employment as an optometrist under the
following provisions of the Civil Code. Thus,
Art. 1897. The agent who acts as such is not personally liable to
the party with whom lie contracts, unless he expressly binds
himself or exceeds the limits of his authority without giving such
party sufficient notice of his powers.

Art. 1910. The principal must comply with all the obligations
which the agent may have contracted within the scope of his
authority.
As for any obligation wherein the agent has exceeded his power,
the principal is not bound except when he ratifies it expressly or
tacitly.

This contention likewise has no merit. While the optometrists are employees
of respondent, their practice of optometry is separate and distinct from the
business of respondent of selling optical products. They are personally liable
for acts done in the course of their practice in the same way that if
respondent is sued in Court in connection with its business of selling optical
products, the optometrists need not be impleaded as party-defendants. In
that regard, the Board of Optometry and the Professional Regulation
Commission regulate their practice and have exclusive original jurisdiction
over them.
In the later case of Acebedo Optical Company, Inc. v. Court of
Appeals, 14 Petitioner Acebedo was granted by the City Mayor of Iligan a
business permit subject to certain conditions, to wit:
1. Since it is a corporation, Acebedo cannot put up an optical
clinic but only a commercial store;

4. Acebedo cannot advertise optical lenses and eyeglasses, but

can advertise Ray-Ban and similar glasses and frames,
5. Acebedo is allowed to grind lenses but only upon the
prescription of an independent optometrist.

The Samahang Optometrist sa Pilipinas-Iligan Chapter sought the

cancellation and/or revocation of Acebedo's permit on the ground that it had
violated the conditions for its business permit. After due investigation,
Acebedo was found guilty of violating the conditions of its permit and, as a
consequence, its permit was cancelled. Acebedo was advised that its permit
would not be renewed. Acebedo filed a petition for certiorari, prohibition,
and mandamus in the Regional Trial Court, but its petition was dismissed for
non-exhaustion of administrative remedies. Acebedo then filed a petition
for certiorari, prohibition, and mandamus with the Court of Appeals. At first,
its petition was dismissed. On appeal, however, the decision of the Court of
Appeals was reversed. This Court held that a business permit is issued
primarily to regulate the conduct of a business and, therefore, the City Mayor
cannot, through the issuance of such permit, regulate the practice of a
profession, like optometry. This Court held Acebedo to be entitled to a permit
to do business as an optical shop because, although it had duly licensed
optometrists in its employ, it did not apply for a license to engage in the
practice of optometry as a corporate body or entity.
ICAcHE

WHEREFORE, the petition is DENIED for lack of showing that the Court of
Appeals committed a reversible error.
SEHDIC

SO ORDERED.
Bellosillo, Quisumbing and De Leon, Jr., JJ., concur.
Corona, J., took no part in the deliberation of this case.
|||

(Alfafara v. Acebedo Optical Co., Inc., G.R. No. 148384, [April 17, 2002])

SECOND DIVISION
[G.R. No. L-27155. May 18, 1978.]
PHILIPPINE NATIONAL BANK, petitioner, vs. THE
COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO
GUECO and THE PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Corua & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.
SYNOPSIS
Upon failure of Rita Tapnio to pay her account with
the Philippine National Bank which was secured by a bond of
the Philippine American General Insurance Company, Inc.
(PHILAMGEN), the latter paid the same and then sued Rita Tapnio on
their indemnity agreement. Rita Tapnio filed a third party complaint
against petitioner Bank because, earlier, the bank, as mortgagee of her
sugar quota allocation for the year 1956-1957 at a reasonable lease
price and demanded parties to the lease contract to further raise their
consideration, the difference between the lease price offered and that
demanded by the Bank being a measly total of P200.00. As a result
thereof, Rita Tapnio failed to utilize her sugar quota for that particular
crop year and to realize an amount which was more than enough to pay
the balance of her indebtedness to the bank which was secured and
subsequently paid by the bonding company. The trial court ordered
the Philippine National Bank to pay Rita Tapnio the same amounts she
was ordered to pay to the PHILAMGEN. This decision was affirmed by
the Court of Appeals.
The Supreme Court found no reasonable basis for the Board of
Directors of petitioner Bank to disapprove the lease contract because of
the measly sum of P200.00 and ruled that although theBank had the
ultimate authority of approving or disapproving the proposed lease, since
the sugar quota was mortgaged to it, it still had the responsibility of
observing, for the protection and interest of the mortgagor, that degree of
care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of said sugar quota.
SYLLABUS
1. MORTGAGES; RIGHT AND CORRESPONDING OBLIGATION OF
MORTGAGE. While a mortgagee bank has the authority of approving or

disapproving a proposed lease of sugar quota which are mortgaged to it, it

certainly cannot escape its responsibility of observing, for the protection and
interest of the mortgagor, that degree of care, precaution and vigilance which
the circumstances justly demand in approving or disapproving the lease of
said sugar quota.
2. ID.; ID.; DAMAGES; LIABILITY UNDER ARTICLE 21 OF THE NEW CIVIL
CODE FOR FAILURE TO OBSERVE CARE AND VIGILANCE UNDER
ARTICLE 19 OF THE NEW CIVIL CODE. The Philippine NationalBank, as
mortgagee of sugar quota allegations, is liable for damages under Article 21
of the New Civil Code for its failure to observe reasonable care and vigilance
as required under Article 19 of the New Civil Code, by refusing to approve
the lease of the mortgaged sugar quota for a measly P200 difference in the
lease price offered and the price demanded by the Bank, and despite the fact
that all the mortgagor's accounts with the Bank were secured and that she
had apparently the means to pay her obligation to the Bank.
3. CORPORATION
LAW;
LIABILITY
FOR
TORTS.

The Philippine National Bank, as a corporation, is civilly liable in the same

manner as natural persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort committed by an agent
or servant are the same whether the principal or master be a natural person
or a corporation, and whether the servant or agent be a natural or artificial
person. All the authorities agree that a principal or master is liable for every
tort which he expressly directs or authorizes, and this is just as true of a
corporation as of a natural person. A corporation is liable, therefor, whenever
a tortious act is committed by an officer or agent under express direction or
authority from the stockholders or members acting as a body, or, generally,
from the directors as the governing body."
4. APPEALS; JURISDICTION OF THE SUPREME COURT. The
jurisdiction of the Supreme Court in a petition for review is limited to
reviewing only errors of law, accepting as conclusive the factual findings of
the Court of Appeals upon its own assessment of the evidence.
DECISION
ANTONIO, J :
p

Certiorari to review the decision of the Court of Appeals which affirmed the
judgment of the Court of First Instance of Manila in Civil Case No. 34185,
ordering petitioner, as third-party defendant, to pay respondent Rita
Gueco Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12%
interest per annum from September 19, 1957 until the same is fully paid,
P200.00 attorney's fees and costs, the same amounts which Rita
Gueco Tapnio was ordered to pay the Philippine American General

Insurance Co., Inc., to be paid directly to the Philippine American General

Insurance Co., Inc. in full satisfaction of the judgment rendered against Rita
Gueco Tapnio in favor of the former; plus P500.00 attorney's fees for Rita
Gueco Tapnio and costs. The basic action is the complaint filed by
Philamgen (Philippine American General Insurance Co., Inc.) as surety
against Rita Gueco Tapnio and Cecilio Gueco, for the recovery of the sum of
P2,379.71 paid by Philamgen to the Philippine National Bank on behalf of
respondentsTapnio and Gueco, pursuant to an indemnity agreement.
Petitioner Bank was made third-party defendant by Tapnio and Gueco on the
theory that their failure to pay the debt was due to the fault or negligence of
petitioner.
LibLex

The facts as found by the respondent Court of Appeals, in affirming the

decision of the Court of First Instance of Manila, are quoted hereunder:
"Plaintiff executed its Bond, Exh. A, with defendant Rita
Gueco Tapnio as
principal,
in
favor
of
the Philippine National Bank Branch
at
San
Fernando,
Pampanga, to guarantee the payment of defendant Rita
Gueco Tapnio's account with said Bank. In turn, to guarantee the
payment of whatever amount the bonding company would pay to
the Philippine National Bank, both defendants executed the
indemnity agreement, Exh. B. Under the terms and conditions of
this indemnity agreement, whatever amount the plaintiff would
pay would earn interest at the rate of 12% per annum, plus
attorney's fees in the amount of 15% of the whole amount due in
case of court litigation.
"The original amount of the bond was for P4,000.00; but the
amount was later reduced to P2.000.00.
"It is not disputed that defendant Rita Gueco Tapnio was
indebted to the bank in the sum of P2,000.00, plus accumulated
interests unpaid, which she failed to pay despite demands.
The Bank wrote a letter of demand to plaintiff, as per Exh. C;
whereupon, plaintiff paid the bank on September 18, 1957, the
full amount due and owing in the sum of P2,379.91, for and on
account of defendant Rita Gueco's obligation (Exhs. D and D-1).
"Plaintiff, in turn, made several demands, both verbal and written,
upon defendants (Exhs. E and F), but to no avail.
"Defendant Rita Gueco Tapnio admitted all the foregoing facts.
She claims, however, when demand was made upon her by
plaintiff for her to pay her debt to the Bank, that she told the
plaintiff that she did not consider herself to be indebted to
the Bank at all because she had an agreement with one Jacobo
Tuazon whereby she had leased to the latter her unused export
sugar quota for the 1956-1957 agricultural year, consisting of

1,000 piculs at the rate of P2.80 per picul, or for a total of

P2,800.00, which was already in excess of her obligation
guaranteed by plaintiff's bond, Exh. A. This lease agreement,
according to her, was with the knowledge of the bank. But
the Bank has placed obstacles to the consummation of the lease,
and the delay caused by said obstacles forced Tuazon to rescind
the lease contract. Thus, Rita Gueco Tapnio filed her third-party
complaint against the Bank to recover from the latter any and all
sums of money which may be adjudged against her and in favor
of the plaintiff, plus moral damages, attorney's fees and costs.
"Insofar as the contentions of the parties herein are concerned,
we quote with approval the following findings of the lower court
based on the evidence presented at the trial of the case:
'It has been established during the trial that
Mrs. Tapnio had an export sugar quota of 1,000 piculs
for the agricultural year 1956-1957 which she did not
need. She agreed to allow Mr. Jacobo C. Tuazon to use
said quota for the consideration of P2,500.00 (Exh. "4"Gueco). This agreement was called a contract of lease
of sugar allotment.
'At the time of the agreement, Mrs. Tapnio was
indebted
to
the Philippine National Bank at
San
Fernando, Pampanga. Her indebtedness was known as
a crop loan and was secured by a mortgage on her
standing crop including her sugar quota allocation for
the agricultural year corresponding to said standing
crop. This arrangement was necessary in order that
when Mrs.Tapnio harvests, the P.N.B., having a lien on
the crop, may effectively enforce collection against her.
Her sugar cannot be exported without sugar quota
allotment. Sometimes, however, a planter harvest less
sugar than her quota, so her excess quota is utilized by
another who pays her for its use. This is the
arrangement entered into between Mrs. Tapnio and Mr.
Tuazon regarding the former's excess quota for 19561957 (Exh. "4"-Gueco).
'Since the quota was mortgaged to the P.N.B.,
the contract of lease had to be approved by said Bank.
The same was submitted to the branch manager at San
Fernando, Pampanga. The latter required the parties to
raise the consideration of P2.80 per picul or a total of
P2,800.00 (Exh "2-Gueco") informing them that "the
minimum lease rental acceptable to the Bank, is P2.80
per picul." In a letter addressed to the branch manager
on August 10, 1956, Mr. Tuazon informed the manager
that he was agreeable to raising the consideration to
P2.80 per picul. He further informed the manager that

he was ready to pay said amount as the funds were in

his folder which was kept in the bank.

'Explaining the meaning of Tuazon's statement

as to the funds, it was stated by him that he had an
approved loan from the bank but he had not yet utilized
it as he was intending to use it to pay for the quota.
Hence, when he said the amount needed to pay
Mrs. Tapnio was in his folder which was in the bank, he
meant and the manager understood and knew he had
an approved loan available to be used in payment of the
quota. In said Exh. "6-Gueco", Tuazon also informed the
manager that he would want for a notice from the
manager as to the time when the bank needed the
money so that Tuazon could sign the corresponding
promissory note.'
"Further consideration of the evidence discloses that when the
branch manager of the Philippine National Bank at San Fernando
recommended the approval of the contract of lease at the price of
P2.80 per picul (Exh. 11-Bank), whose recommendation was
concurred in by the Vice president of said Bank, J. V.
Buenaventura, the board of directors required that the amount be
raised to P3.00 per picul. This act of the board of directors was
communicated to Tuazon, who in turn asked for a
reconsideration thereof. On November 19, 1956, the branch
manager submitted Tuazon's request for reconsideration to the
board of directors with another recommendation for the approval
of the lease at P2.80 per picul, but the board returned the
recommendation unacted upon, considering that the current price
prevailing at the time was P3.00 per picul (Exh. 9-Bank).
"The parties were notified of the refusal on the part of the board
of directors of the Bank to grant the motion for reconsideration.
The matter stood as it was until February 22, 1957, when Tuazon
wrote a letter (Exh. 10-Bank) informing the Bank that he was no
longer interested to continue the deal referring to the lease of
sugar quota allotment in favor of defendant Rita Gueco Tapnio.
The result is that the latter lost the sum of P2,800.00 which she
should have received from Tuazon and which she could have
paid the Bank to cancel off her indebtedness.
"The court below held, and in this holding we concur, that failure
of the negotiation for the lease of the sugar quota allocation of
Rita Gueco Tapnio to Tuazon was due to the fault of the directors
of the Philippine National Bank. The refusal on the part of
the bank to approve the lease at the rate of P2.80 per picul
which, as stated above, would have enabled Rita
Gueco Tapnio to realize the amount of P2,800.00 which was

more than sufficient to pay off her indebtedness to the Bank, and
its insistence on the rental price of P3.00 per picul thus
unnecessarily increasing the value by only a difference of
P200.00, inevitably brought about the rescission of the lease
contract to the damage and prejudice of Rita Gueco Tapnio in the
aforesaid sum of P2,800.00. The unreasonableness of the
position
adopted
by
the
board
of
directors
of
the Philippine National Bank in refusing to approve the lease at
the rate of P2.80 per picul and insisting on the rate of P3.00 per
picul, if only to increase the retail value by only P200.00 is shown
by the fact that all the accounts of Rita Gueco Tapnio with
the Bank were secured by chattel mortgage on standing crops,
assignment of leasehold rights and interests on her properties,
and surety bonds, aside from the fact that from Exh. 8-Bank, it
appears that she was offering to execute a real estate mortgage
in favor of the Bank to replace the surety bond. This statement is
further bolstered by the fact that Rita Gueco Tapnio apparently
had the means to pay her obligation to the Bank, as shown by
the fact that she has been granted several sugar crop loans of
the total value of almost P80,000.00 for the agricultural years
from 1952 to 1956." 1

Its motion for the reconsideration of the decision of the Court of Appeals
having been denied, petitioner filed the present petition.
LLphil

The petitioner contends that the Court of Appeals erred:

(1) In finding that the rescission of the lease contract of the 1,000 piculs of
sugar quota allocation of respondent Rita Gueco Tapnio by Jacobo C.
Tuazon was due to the unjustified refusal of petitioner to approve said lease
contract, and its unreasonable insistence on the rental price of P3.00 instead
of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of
sugar quota in the possession of the petitioner, the latter's Board of Directors
correctly fixed the rental of price per picul of 1,000 piculs of sugar quota
leased by respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per
picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the
right, both under its own Charter and under the Corporation Law, to
safeguard and protect its rights and interests under the deed of assignment,
which include the right to approve or disapprove the said lease of sugar
quota and in the exercise of that authority, its Board of Directors necessarily
had authority to determine and fix the rental price per picul of the sugar quota
subject of the lease between private respondents and Jacobo C. Tuazon, It
argued further that both under its Charter and the Corporation Law,
petitioner, acting thru its Board of Directors, has the perfect right to adopt a

policy with respect to fixing of rental prices of export sugar quota allocations,
and in fixing the rentals at P3.00 per picul, it did not act arbitrarily since the
said Board was guided by statistics of sugar price and prices of sugar quotas
prevailing at the time. Since the fixing of the rental of the sugar quota is a
function lodged with petitioner's Board of Directors and is a matter of policy,
the respondent Court of Appeals could not substitute its own judgment for
that of said Board of Directors, which acted in good faith, making as its basis
therefore the prevailing market price as shown by statistics which were then
in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall
suffer a great injustice because as a creditor, it shall be deprived of a just
claim against its debtor (respondent Rita Gueco Tapnio) as it would be
required to return to respondent Philamgen the sum of P2,379.71, plus
interest, which amount had been previously paid to petitioner by said
insurance company in behalf of the principal debtor, herein respondent Rita
Gueco Tapnio, and without recourse against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in
proceedings of this nature is limited to reviewing only errors of law, accepting
as conclusive the factual findings of the Court of Appeals upon its own
assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul between
Rita Gueco Tapnio and Jacobo C. Tuazon was executed on April 17, 1956.
This
contract
was
submitted
to
the
Branch
Manager
of
thePhilippine National Bank at San Fernando, Pampanga. This arrangement
was necessary because Tapnio's indebtedness to petitioner was secured by
a mortgage on her standing crop including her sugar quota allocation for the
agricultural year corresponding to said standing crop. The latter required the
parties to raise the consideration to P2.80 per picul, the minimum lease
rental acceptable to the Bank, or a total of P2,800.00. Tuazon informed the
Branch Manager, thru a letter dated August 10, 1956, that he was agreeable
to raising the consideration to P2.80 per picul. He further informed the
manager that he was ready to pay the said sum of P2,800.00 as the funds
were in his folder which was kept in the said Bank. This referred to the
approved loan of Tuazon from the Bank which he intended to use in paying
for the use of the sugar quota. The Branch Manager submitted the contract
of lease of sugar quota allocation to the Head Office on September 7, 1956,
with a recommendation for approval, which recommendation was concurred
in by the Vice-President of the Bank, Mr. J. V. Buenaventura. This
notwithstanding, the Board of Directors of petitioner required that the
consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked
for a reconsideration thereof. On November 19, 1956, the Branch Manager

submitted the request for reconsideration and again recommended the

approval of the lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing at that time
was P3.00 per picul.
cdrep

On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was
no longer interested in continuing the lease of sugar quota allotment. The
crop year 1956-1957 ended and Mrs. Tapnio failed to utilize her sugar quota,
resulting in her loss in the sum of P2,800.00 which she should have received
had the lease in favor of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of petitioner
required the parties to raise the consideration of the lease from P2.50 to
P2.80 per picul, or a total of P2,800.00, they readily agreed. Hence, in his
letter to the Branch Manager of the Bank on August 10, 1956, Tuazon
informed him that the minimum lease rental of P2.80 per picul was
acceptable to him and that he even offered to use the loan secured by him
from petitioner to pay in full the sum of P2,800.00 which was the total
consideration of the lease. This arrangement was not only satisfactory to the
Branch Manager but it was also approved by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco Tapnio could
have realized the amount of P2,800.00, which was more than enough to pay
the balance of her indebtedness to the Bank which was secured by the bond
of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the
crop year 1956-1957 was due to the disapproval of the lease by the Board of
Directors of petitioner. The issue, therefore, is whether or not petitioner is
liable for the damage caused.

As observed by the trial court, time is of the essence in the approval of the
lease of sugar quota allotments, since the same must be utilized during the
milling season, because any allotment which is not filled during such milling
season may be reallocated by the Sugar Quota Administration to other
holders of allotments. 3 There was no proof that there was any other person
at that time willing to lease the sugar quota allotment of private respondents
for a price higher than P2.80 per picul. "The fact that there were isolated
transactions wherein the consideration for the lease was P3.00 a picul",
according to the trial court, "does not necessarily mean that there are always
ready takers of said price." The unreasonableness of the position adopted by
the petitioner's Board of Directors is shown by the fact that the difference
between the amount of P2.80 per picul offered by Tuazon and the P3.00 per
picul demanded by the Board amounted only to a total sum of P200.00.
Considering that all the accounts of Rita Gueco Tapnio with the Bank were

secured by chattel mortgage on standing crops, assignment of leasehold

rights and interests on her properties, and surety bonds and that she had
apparently "the means to pay her obligation to the Bank, as shown by the
fact that she has been granted several sugar crop loans of the total value of
almost P80,000.00 for the agricultural years from 1952 to 1956", there was
no reasonable basis for the Board of Directors of petitioner to have rejected
the lease agreement because of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or disapproving the
proposed lease since the quota was mortgaged to the Bank, the latter
certainly cannot escape its responsibility of observing, for the protection of
the interest of private respondents, that degree of care, precaution and
vigilance which the circumstances justly demand in approving or
disapproving the lease of said sugar quota. The law makes it imperative that
every person "must in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and
good faith." 4 This petitioner failed to do. Certainly, it knew that the
agricultural year was about to expire, that by its disapproval of the lease
private respondents would be unable to utilize the sugar quota in question. In
failing to observe the reasonable degree of care and vigilance which the
surrounding circumstances reasonably impose, petitioner is consequently
liable for the damages caused on private respondents. Under Article 21 of
the New Civil Code, "any person who wilfully causes loss or injury to another
in a manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage." The afore-cited provisions on human
relations were intended to expand the concept of torts in this jurisdiction by
granting adequate legal remedy for the untold number of moral wrongs which
is impossible for human foresight to specifically provide in the statutes. 5
A corporation is civilly liable in the same manner as natural persons for torts,
because "generally speaking, the rules governing the liability of a principal or
master for a tort committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation, and whether the
servant or agent be a natural or artificial person. All of the authorities agree
that a principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a natural person. A
corporation is liable, therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority from the stockholders or
members acting as a body, or, generally, from the directors as the governing
body." 6
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals
is hereby AFFIRMED.
LibLex

Fernando, Aquino, Concepcion, Jr. and Santos, JJ., concur.

Separate Opinions
BARREDO, J., concurring:
Concurs on the basis of Article 19 of the Civil Code, or at least, of equity. He
reserves his opinion on the matter of torts relied upon in the main opinion.
(PNB v. Court of Appeals, G.R. No. L-27155, [May 18, 1978], 172 PHIL
592-602)
|||

FIRST DIVISION
[G.R. No. 8527. March 30, 1914.]
WEST COAST LIFE INSURANCE CO., plaintiff, vs. GEO.
N. HURD, Judge of Court of First Instance, defendant.

corporation, and also against John Northcott and Manuel C. Grey,

charging said corporation and said individuals with the crime of libel. On
the 17th day of December the defendant in his official capacity as judge
of the Court of First Instance signed and issued a process directed to the
plaintiff and the other accused in said criminal action, which said process
reads as follows:
"UNITED STATES OF AMERICA,

Southworth, Harges & Springer for plaintiff.

"PHILIPPINE ISLANDS.

Haussermann, Cohn & Fisher for defendant.

"In the Court of First Instance of the Judicial District of

SYLLABUS

Manila.

1. CORPORATIONS; CRIMINAL PROSECUTIONS. There is

no provision in the law relating to practice and procedure in criminal
actions whereby a corporation, as such, may be proceeded against
criminally and brought into court.

"THE UNITED STATES}

versus} "No. 9661.
"WEST COAST LIFE INSURANCE CO., JOHN} "Libel

2. COURTS; JURISDICTION AND POWERS. The courts of

the Philippine Islands have no powers except those conferred by statute
and those implied powers which are necessary to make the express
powers effective.

NORTHCOTT, AND MANUEL C. GREY.}

"To West Coast Life Insurance Co., John Northcott, and
Manuel C. Grey, Manila.

3. ID; ID. The courts of the Philippine Islands have no

common law jurisdiction, and, even if they have powers derived from
native sources which are not expressly or impliedly conferred by statute,
there is not included among them that of creating a process and
procedure by which a corporation, a such, may be proceeded against in
a criminal action.

"SUMMONS.
"You are hereby summoned to appear before the Court
of First Instance of the city of Manila, P. I., on the 18th day of
December, 1912, at the hour of 8 a.m., to answer the charge
made against you upon the information of F.H. Nesmith,
assistant prosecuting attorneys of the city of Manila, for libel, as
set forth in the said information filed in this court on December
16, 1912, a copy of which is hereto attached and herewith served
upon you.

DECISION
MORELAND, J :
p

"Dated at the city of Manila, P. I., this 17th day of

December 1912.

This is an action for the issuance of a writ of prohibition against

the defendant "commanding the defendant to desist or refrain from
further proceedings in a criminal action pending in that court."

(Sgd.) "GEO
HURD,

The petitioner is a foreign life-insurance corporation, duly

organized under and by virtue of the laws of the State of California, doing
business regularly and legally in the Philippine Islands pursuant to its
laws.
On the 16th of December, 1912, the assistant prosecuting
attorneys of the city of Manila filed an information in a criminal action in
the Court of First Instance of that city against the plaintiff, said

"Judge, Court
Instance."

N.

of

First

The information upon which said process was issued is as

follows:

[Heading omitted.]
"The
undersigned
accuses
the West Coast Life Insurance Company, John Northcott, and
Manuel C. Grey of the crime of libel, committed as follows:
"That on or about the 14th day of September, 1912, and
continuously thereafter up to and including the date of this
complaint, in the city of Manila, P. I., the said
defendant West Coast LifeInsurance Company was and has
been a foreign corporation duly organized in the State of
California, United States of America, and registered and doing
business in the Philippine Islands; that the said defendant John
Northcott then and there was and has been the general agent
and manager for the Philippine Islands of the said defendant
corporation West Coast Life Insurance Company, and the said
defendant Manuel C. Grey was and has been an agent and
employee
of
the
said
defendant
corporation West Coast Life Insurance Company, acting in the
capacity of treasurer of the branch of the said defendant
corporation in the Philippine Islands; that on or about the said
14th day of September, 1912, and for some time thereafter, to
wit, during the months of September and October 1912, in the
city
of
Manila,
P.
I.,
the
said
defendants West Coast Life Insurance Company, John Northcott,
and Manuel C. Grey, conspiring and confederating together, did
then and there willfully, unlawfully, and maliciously, and to the
damage of the Insular Life Insurance Company, a domestic
corporation duly organized, registered, and doing business in the
Philippine Islands, and with intent to cause such damage and to
expose the said Insular Life Insurance Company to public hatred,
contempt, and ridicule, compose and print, and cause to be
printed a large number of circulars, and, in numerous printing in
the form of said circulars, did publish and distributed, and cause
to be published and distributed, among other persons, to policy
holders and prospective policy holders of the said
Insular Life Insurance Company, among other things, a malicious
defamation and libel in the Spanish language, of the words and
tenor following:
"First. For some time past various rumors are current to
the effect that the Insular Life Insurance Company is not in a
good a condition as it should be at the present time, and that
really it is in bad shape. Nevertheless, the investigations made by
the representative of the "Bulletin" have failed fully to confirm
these rumors. It is known that the Insular Auditor has examined
the books of the company and has found that its capital has
diminished, and that by direction of the said official the company
has decided to double the amount of its capital, and also to pay
its reserve fund. All this is true.'

"That the said circulars, and the matters therein

contained hereinbefore set forth in this information, tend to
impeach and have impeached the honesty, virtue, and reputation
of the said Insular Life Insurance Company by exposing it to
public hatred, contempt, and ridicule; that by the matters printed
in said circulars, and hereinbefore set forth in this information, the
said defendants West Coast Life Insurance Company , John
Northcott, and Manuel C. Grey meant and intended to state and
represent to those to whom the said defendants delivered said
circulars as aforesaid, that the said Insular Life Insurance
Company was then and there in a dangerous financial condition
and on the point of going into insolvency, to the detriment of the
policy holders of the said Insular Life Insurance Company, and
those with whom the said Insular Life Insurance Company have
and have had business transactions, and each and all of said
persons to whom the said defendants delivered said circulars,
and all persons as well who read said circulars understood the
said matters in said circulars to have said libelous sense and
meaning. Contrary to law."

On the 20th day of December, 1912, the plaintiff, together with

the other persons named as accused in said process, through their
attorneys, served upon the prosecuting attorney and filed with the clerk
of the court a motion to quash said summons and the service thereof, on
the ground that the court had no jurisdiction over the said company,
there being no authority in the court for the issuance of the process,
Exhibit B, the order under which it was issued being void. The court
denied the motion and directed plaintiff to appear before it on the 28th
day of December, 1912, and to plead to the information, to which order
the plaintiff then and there duly expected.
It is alleged in the complaint that "unless restrained by this Court
the respondent will proceed to carry out said void order and compel; your
petitioner to appear before his court and plead and submit to criminal
prosecution without having acquired any jurisdiction whatever over your
petitioner."
The prayer of the complaint is, "your petitioner prays judgment
for the issuance of a writ of prohibition against the respondent,
commanding the respondent absolutely to desist or refrain from further
proceedings against your petitioner in the said criminal action."
The basis of the action is that the Court of First Instance has no
power or authority, under the laws of the Philippine Islands, to proceed
against a corporation, as such criminally, to bring it into court for the
purpose of making it amenable to the criminal laws. It is contended that
the court had no jurisdiction to issue the process in evidence against the
plaintiff corporation; that the issuance and service thereof upon the

plaintiff corporation were outside of the authority and jurisdiction of the

court, were authorized by no law, conferred no jurisdiction over said
corporation, and that they were absolutely void and without force or
effect.
The plaintiff, further attacking said process, alleges that the
process is a mixture of civil and criminal process, that it is not properly
signed, that it does not direct or require an arrest; that it is an order to
appear and answer on a date certain without restraint of the person, and
that it is not in the form required by law.
Section 5 of General Orders, No. 58, defines an information as
"an accusation in writing charging a person with a public offense.'
Section 6 provides that a complaint or information is sufficient if it shows
"the name of the defendant, or his name cannot be discovered, that he is
described under a fictitious name with a statement that his true name is
unknown to the informant or official signing the same. His true name may
be inserted at any stage of the proceedings instituted against him,
whenever ascertained." These provisions, as well as those which relate
to arraignment and counsel, and to demurrers and pleas, indicate clearly
that the maker of the Code of Criminal Procedure had no intention or
expectations that corporations would be included among those who
would fall within the provisions thereof. The only process known to the
Code of Criminal Procedure, or which any court is by that order
authorized to issue, is an order of arrest. The Code of Criminal
Procedure provides that "if the magistrate be satisfied from the
investigations that the crime complained of has been committed, and
there is reasonable ground to believe that the party charged has
committed it, he must issuean order for his arrest. If the offense be
bailable, and the defendant offer a sufficient security, he shall be
admitted to bail; otherwise he shall be committed to prison." There is no
authority for the issuance of any other process than an order of arrest.
As a necessary consequence, the process issued in the case before us
is without express authorization of statute.

The question remains as to whether or not the court may, of itself

and on its own motion, create not only a process but a procedure by
which the process may be made effective.
We do not believe that the authority of the courts of the
Philippine Islands extends so far. While having the inherent powers
which usually go with courts of general jurisdiction, we are of the opinion
that, under the circumstances of their creation, they have only such
authority in criminal matters as is expressly conferred upon them by

statute or which it is necessary to imply from such authority in order to

carry out fully and adequately the express authority conferred. We do not
feel that Courts of First Instance have authority to create new procedure
and new processes in criminal law. The exercise of such power verges
too closely on legislation. Even though it be admitted, a question we do
not now decide, that there are various penal laws in the Philippine
Islands which corporations as such may violate, still we do not believe
that the courts are authorized to go to the extent of creating special
procedure and special processes for the purpose of carrying out those
penal statutes, when the legislature itself has neglected to do so. To
bring a corporation into court criminally requires many additions to the
present criminal procedure. While it may be said to be the duty of courts
to see to it that criminals are punished, it is no less their duty to follow
prescribed forms of procedure and not to go out upon unauthorized
manner.
There are many case cited by counsel for the defendant which
shows that corporations have been proceeded against criminally by
indictment and otherwise and have been punished as malefactors by the
courts. Of this, of course, there can be no doubt; but it is clear that, in
those cases, the statute, by express words or by necessary intendment,
included corporations within the persons who could offend against the
criminal laws; and the legislature, at the same time established a
procedure applicable to corporations. No case has been cited to us
where a corporation has been proceeded against under a criminal
statute where the court did not exercise its common law powers or where
there was not in force a special procedure applicable to corporations.
The courts of the Philippine Islands are creatures of statute and,
as we have said, have only those powers conferred upon them by statute
and those which are required to exercise that authority fully and
adequately. The courts here have no common law jurisdiction or powers.
If they have any powers not conferred by statute, expressly or impliedly,
they would naturally come from Spanish and not from common law
sources. It is undoubted that, under the Spanish criminal law and
procedure, a corporation could not have been proceeded against
criminally, as such, if such an entity as a corporation in fact existed under
the Spanish law, and such it could not have committed a crime in which
a willful purpose or a malicious intent was required. Criminal actions
would have been restricted or limited, under that system, to the officials
of such corporations and never would have been directed against the
corporation itself. This was the rule with relation to associations or
combinations of persons approaching, more or less, the corporations as
it is now understood, and it would undoubtedly have been the rule with
corporations. From this source, then, the courts derive no authority to

bring corporations before them in criminal actions, nor to issue

processes for that purpose.
The case was submitted to this Court on an agreed statements
of facts with a stipulation for a decision upon the merits. We are of the
opinion that the plaintiff is entitled, under the stipulation, to the remedy
prayed for.
It is adjudged that the Court of First Instance of the city of Manila
be and it is hereby enjoined and prohibited from proceeding, entitled
United States vs. West Coast Life Insurance Company, a corporation,
John Northcott and Manuel c. Grey, so far as said proceedings relate to
the said West Coast Life Insurance Company, a corporation, the plaintiff
in the case.
Arellano, C. J., and Araullo, J., concur.
Carson, J., concurs in the result.

(West Coast Life Insurance Co. v. Hurd, G.R. No. 8527, [March 30, 1914],
27 PHIL 401-408)
|||

EN BANC
[G.R. No. 32652. March 15, 1930.]
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiffappellant, vs. TAN BOON KONG, defendant-appellee.
Attorney-General Jaranilla, for appellant.
Alejandro de Aboitiz Pinaga, for appellee.
SYLLABUS
1. CORPORATIONS; LIABILITY OF OFFICERS AND AGENTS.
A corporation can act only through its officers and agents, and where
the business itself involves a violation of the law, the correct rule is that
all who participate in it are liable.
2. ID.; ID.; CRIMINAL LIABILITY. The manager of a
corporation who fails to make true return of the corporation's receipts and
sales in violation of sections 1458 and 2723 of theAdministrative Code,
may be held criminally liable.
DECISION
OSTRAND, J :
p

This is an appeal from an order of the Judge of the Twenty-third

Judicial District sustaining a demurrer to an information charging the
defendant Tan Boon Kong with the violation of section 1458 ofAct No.
2711 as amended. The information reads as follows:
"That on and during the four quarters of the year 1924,
in the municipality of Iloilo, Province of Iloilo, Philippine Islands,
the said accused, as manager of the Visayan General Supply
Co., Inc., a corporation organized under the laws of the Philippine
Islands and engaged in the purchase and sale of sugar, 'bayon,'
coprax, and other native products and as such subject to the
payment of internal-revenue taxes upon its sales, did then and
there voluntarily, illegally, and criminally declare in 1924 for the
purpose of taxation only the sum of P2,352,761.94, when in truth
and in fact, and the accused well knew that the total gross sales
of said corporation during that year amounted to P2,543,303.44,
thereby failing to declare for the purpose of taxation the amount
of P190,541.50, and voluntarily and illegally not paying the
Government as internal-revenue percentage taxes the sum of

P2,960.12, corresponding to 1 per cent of said undeclared

sales."

The question to be decided is whether the information sets forth

facts rendering the defendant, as manager of the corporation liable
criminally under section 2723 of the Act No. 2711 for violation of section
1458 of the same Act for the benefit of said corporation. Sections 1458
and 2723 read as follows:
"SEC. 1458. Payment of percentage taxes Quarterly
report of earnings. The percentage taxes on business shall be
payable at the end of each calendar quarter in the amount
lawfully due on the business transacted during each quarter; and
it shall be the duty of every person conducting a business subject
to such tax, within the same period as is allowed for the payment
of the quarterly installments of the fixed taxes without penalty, to
make a true and complete return of the amount of the receipts or
earnings of his business during the preceding quarter and pay
the tax due thereon. . . ." (Act No. 2711.)
"SEC. 2723. Failure to make true return of receipts and
sales. Any person who, being required by law to make a return
of the amount of his receipts, sales, or business, shall fail or
neglect to make such return within the time required, shall be
punished by a fine not exceeding two thousand pesos or by
imprisonment for a term not exceeding one year, or both.
"And any such person who shall make a false or
fraudulent return shall be punished by a fine not exceeding ten
thousand pesos or by imprisonment for a term not exceeding two
years, or both." (Act No. 2711.)

Apparently, the court below based the appealed ruling on the

ground that the offense charged must be regarded as committed by the
corporation and not by its officials or agents. This view is in direct conflict
with the great weight of authority. A corporation can act only through its
officers and agents, and where the business itself involves a violation of
the law, the correct rule is that all who participate in it are liable (Grall
and Ostrander's Case, 103 Va., 855, and authorities there cited).
In case of State vs. Burnam (71 Wash., 199), the court went so
far as to hold that the manager of a dairy corporation was criminally
liable for the violation of a statute by the corporation though he was not
present when the offense was committed.
In the present case the information or complaint alleges that the
defendant was the manager of a corporation which was engaged in
business as a merchant, and as such manager, he made a false return,

for purposes of taxation, of the total amount of sales made by said

corporation during the year 1924. As the filing of such false return
constitutes a violation of law, the defendant, as the author of the illegal
act, must necessarily answer for its consequences, provided that the
allegations are proven.
The ruling of the court below sustaining the demurrer to the
complaint is therefore reversed, and the case will be returned to said
court for further proceedings not inconsistent with our view as
hereinbefore stated. Without costs. So ordered.
Johnson, Malcolm, Villamor, Johns, Romualdez and Villa-Real,
JJ., concur.
(People v. Tan Boon Kong, G.R. No. 32652, [March 15, 1930], 54 PHIL
607-609)
|||

SECOND DIVISION
[G.R. No. L-40324. October 5, 1988.]
JOSE O. SIA, petitioner, vs. COURT OF APPEALS and THE
PEOPLE OF THE PHILIPPINES, respondents.
Faustino B. Tobia and Roberto H. Tobia for petitioner.
The Solicitor General for respondents.
SYLLABUS
CRIMINAL LAW; REVISED PENAL CODE; LIABILITY OF PARTY IF ACTS
INVOLVED OCCURRED AFTER JANUARY 29, 1975; PRESIDENTIAL
DECREE NO. 115; SIA V. PEOPLE, (121 SCRA 655) CITED. This case
presents issues similar to those resolved by the Court en banc
in Sia vs. People. The decision in the cited case calls for a reversal of the
respondent appellate court's herein appealed judgment thereby resulting in
the acquittal of the petitioner. It should be pointed out, however, that if the
acts herein involved occurred after 29 January 1975, petitioner would be
criminally liable for estafa under paragraph 1(b), Article 315 of the Revised
Penal Code, pursuant to the following provisions of PD 115 "Sec.
13. Penalty clause. The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to
the extent of the amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if they were not
sold or disposed of in accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the provisions of Article
Three hundred and fifteen, paragraph one(b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty provided for in
this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense."

". . . on October 31, 1963 Jose O. Sia (appellant herein),

President and General Manager of the Metal Manufacturing of
the Philippines, Inc. for in its behalf, applied for and was granted
a Letter of Credit (Exhibit 'A') with the Continental Bank, Manila to
cover the importation of One Hundred (100) pieces of Safe
Deposit Locks No. 4440, complete with keys, amounting
P1,979.06. A marginal deposit was made with the Bank and the
Letter of Credit was confirmed with its foreign correspondent.
Thereafter, appellant, for and in behalf of the Metal
Manufacturing of the Philippines, Inc., executed a trust receipt
(Exhibit 'C') in favor of the Continental Bank, the terms and
conditions of which read, in part as follows:
'. . . and in consideration thereof, I/We
HEREBY AGREE TO HOLD SAID GOODS IN
TRUST FOR THE SAID BANK as its property with
liberty to sell the same for its account but without
any authority to make any other disposition
whatsoever of the said goods or any part thereof
(or the proceeds thereof) either by way of
conditional sale, pledge or otherwise.
'In case of sale I/We further agree to hand
the proceeds as soon as received to the Bank to
apply against the relative acceptance (as described
above) and for the payment of any other
indebtedness of mine/ours to Continental Bank.
'I/We agree to keep said goods insured to
their full value against fire and other casualties as
directed by the Bank, the sum insured to be
payable in case of loss to the Bank, with the
understanding that the Bank is not to be charged
with the storage, premium of insurance or any other
expenses incurred on said goods.
'I/We also agree to keep the said goods,
manufactured products, or proceeds thereof,
whether in the form of money or bills, receivables
or accounts, separate and capable of identification
as property of the Bank.

DECISION
xxx xxx xxx

PADILLA, J :
p

The facts in this case are not disputed. As stated by the Court of Appeals in
its assailed decision, * dated 29 November 1974, rendered in CA-G.R. No.
12602-CR, they are as follows:

'The Bank may at any time cancel this trust and take possession
of said goods or the proceeds of the same as may then have
been sold wherever the said goods or proceeds may then be
found, and in the event of any suspensions, or failure, or
assignment for the benefit of creditor on my/our part or nonfulfillment of any obligation, or of the non-payment at maturity of
any acceptance specified hereon or under any credit issued by

the Bank on my/our account, or of any indebtedness on my/our

part, all of my/our obligations, acceptances, indebtedness, and
liabilities whatsoever shall thereupon (with or without notice)
mature and become due and payable . . .'
When the said trust receipt became due and demandable,
the Metal Manufacturing of the Philippines, Inc. failed to
pay or deliver the merchandise to the Bank despite the
latter's demands (Exh. 'D'). . . ." 1

Consequently, before the Court of First Instance of Manila, Branch XI, an

information for estafa was filed against petitioner for violation of the trust
receipt agreement executed by him in his capacity as President and General
Manager of Metal Manufacturing of the Philippines, Inc. in favor of
Continental Bank (docketed as Criminal Case No. 77092).

There is no further point in discussing the issues raised by petitioner, as met

by the respondents, because the Court's decision in the earlier Sia case has
pre-empted the subject (although there are pronouncements in said decision
which may be open to question so much so that the decision was not
reached by a unanimous court).
It should be pointed out, however, that if the acts herein involved occurred
after 29 January 1975, petitioner would be criminally liable for estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, pursuant to the
following provisions of PD 115
"Sec. 13. Penalty clause. The failure of an entrustee to turn
over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold
or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one(b)
of Act Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in
this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for
the offense, without prejudice to the civil liabilities arising from the
criminal offense." 3

Upon petitioner's plea of not guilty, trial proceeded. The trial court entered a
verdict of guilty beyond reasonable doubt for the offense of estafa defined
and penalized in paragraph 1(b), Article 315 of the Revised Penal Code, and
sentenced the accused (petitioner) to an indeterminate penalty of from One
(1) Month and One (1) Day of arresto mayor, as minimum, to One (1) Year
of prision correccional, as maximum, to indemnify the offended party in the
sum of P1,979.06 and to pay the costs.
Elevating the trial court's decision to the Court of Appeals (docketed therein
as CA G.R. No. 16026-CR), the conviction of the accused, as aforestated,
was affirmed with the modification to the effect that the accused is to
indemnify the offended party in the sum of P1,278.65 only (after deducting
the marginal deposit). A motion for reconsideration followed, but was denied
for lack of merit. Hence, this petition for review on certiorari.
LLpr

From the assignment of errors submitted by the petitioner, the following

issues are raised:

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby

GRANTED. The decision of the Court of Appeals is SET ASIDE. Defendant
is ACQUITTED without prejudice to the institution of a civil action against the
Metal Manufacturing of the Phil., Inc. for collection of the sum due plus
damages if any. No costs.
SO ORDERED.

1) whether petitioner Sia, as President and General Manager of Metal

Manufacturing of the Phil., Inc. having acted for and on its behalf in executing
the Trust Receipt Agreement in favor of the Continental Bank may be held
liable for the crime charged; and
2) the real nature of a trust receipt agreement or transaction.
This case presents issues similar to those resolved by the Court en banc
in Sia vs. People. 2 The decision in the cited case calls for a reversal of the
respondent appellate court's herein appealed judgment thereby resulting in
the acquittal of the petitioner.

Melencio-Herrera, Paras, Sarmiento and Regalado, JJ., concur.

(Sia v. Court of Appeals, G.R. No. L-40324, [October 5, 1988], 248 PHIL
504-509)
|||

RST DIVISION
[G.R. No. 164317. February 6, 2006.]
ALFREDO CHING, petitioner, vs.
THE SECRETARY OF JUSTICE,
ASST.
CITY
PROSECUTOR
CECILYN
BURGOS-VILLAVERT,
JUDGE EDGARDO SUDIAM of the Regional Trial
Court, Manila, Branch 52; RIZAL COMMERCIAL
BANKING
CORP.
and
THE
PEOPLE OF THE
PHILIPPINES, respondents.
Balgos & Perez for petitioner.
The Solicitor General for public respondents.
Ponce Enrile Reyes & Manalastas for RCBC.
SYLLABUS
1.REMEDIAL LAW; CIVIL PROCEDURE; FORUM SHOPPING;
PETITIONER'S CERTIFICATION IS INCOMPLETE AND UNINTELLIGIBLE
AS IT FAILED TO CERTIFY THAT HE "HAD NOT COMMENCED ANY
OTHER ACTION INVOLVING THE SAME ISSUES BEFORE THE COURTS,
ANY OTHER TRIBUNAL OR AGENCY." We agree with the ruling of the
CA that the certification of non-forum shopping petitioner incorporated in his
petition before the appellate court is defective. Under Section 1, second
paragraph of Rule 65 of the Revised Rules of Court, the petition should be
accompanied by a sworn certification of non-forum shopping, as provided in
the third paragraph of Section 3, Rule 46 of said Rules. Compliance with the
certification against forum shopping is separate from and independent of the
avoidance of forum shopping itself. The requirement is mandatory. The
failure of the petitioner to comply with the foregoing requirement shall be
sufficient ground for the dismissal of the petition without prejudice, unless
otherwise provided. Indubitably, the first paragraph of petitioner's certification
is incomplete and unintelligible. Petitioner failed to certify that he "had not
heretofore commenced any other action involving the same issues in the
Supreme Court, the Court of Appeals or the different divisions thereof or any
other tribunal or agency" as required by paragraph 4, Section 3, Rule
46 of the Revised Rules of Court. We agree with petitioner's contention that
the certification is designed to promote and facilitate the orderly
administration of justice, and therefore, should not be interpreted with
absolute literalness. In his works on the Revised Rules of Civil Procedure,
former Supreme Court Justice Florenz Regalado states that, with respect to
the contents of the certification which the pleader may prepare, the
rule ofsubstantial compliance may be availed of. However, there must be a

special circumstance or compelling reason which makes the strict

application of the requirement clearly unjustified. The instant petition has not
alleged any such extraneous circumstance. Moreover, as worded, the
certification cannot even be regarded as substantial compliance with the
procedural requirement. Thus, the CA was not informed whether, aside from
the petition before it, petitioner had commenced any other action involving
the same issues in other tribunals.
2.ID.; SPECIAL CIVIL ACTIONS; CERTIORARI; MAY NULLIFY
ACTS OF THE SECRETARY OF JUSTICE THAT IS CONTRARY TO LAW,
WITHOUT AUTHORITY AND/OR IN EXCESS OF AUTHORITY.
In Mendoza-Arce v. Office of the Ombudsman (Visayas), this Court held that
the acts of a quasi-judicial officer may be assailed by the aggrieved party via
a petition for certiorari and enjoined (a) when necessary to afford adequate
protection to the constitutional rights of the accused; (b) when necessary for
the orderly administration of justice; (c) when the acts of the officer are
without or in excess of authority; (d) where the charges are manifestly false
and motivated by the lust for vengeance; and (e) when there is clearly
no prima facie case against the accused. The Court also declared that, if the
officer conducting a preliminary investigation (in that case, the Office of the
Ombudsman) acts without or in excess of his authority and resolves to file an
Information despite the absence of probable cause, such act may be nullified
by a writ of certiorari. Indeed, under Section 4, Rule 112 of the 2000
Rules of Criminal Procedure, the Information shall be prepared by the
Investigating Prosecutor against the respondent only if he or she finds
probable cause to hold such respondent for trial. The Investigating
Prosecutor acts without or in excess of his authority under the Rule if the
Information is filed against the respondent despite absence of evidence
showing probable cause therefore. If the Secretary of Justice reverses the
Resolution of the Investigating Prosecutor who found no probable cause to
hold the respondent for trial, and orders such prosecutor to file the
Information
despite
the
absence of probable
cause;
the Secretary of Justice acts contrary to law, without authority and/or in
excess of authority. Such resolution may likewise be nullified in a petition
for certiorari under Rule 65 of the Revised Rules of Civil Procedure.
3.ID.; ID.; ID.; THE SECRETARY OF JUSTICE ACTED IN ACCORD WITH
LAW AND EVIDENCE IN HIS RESOLUTIONS UPHOLDING THE
FINDING OF PROBABLE CAUSE; CASE AT BAR. A preliminary
investigation, designed to secure the respondent against hasty, malicious
and oppressive prosecution, is an inquiry to determine whether (a) a crime
has been committed; and (b) whether there is probable cause to believe that
the accused is guilty thereof. It is a means of discovering the person or
persons who may be reasonably charged with a crime. Probable cause need
not be based on clear and convincing evidence of guilt, as the investigating
officer acts upon probable cause of reasonable belief. Probable cause

implies probability of guilt and requires more than bare suspicion but less
than evidence which would justify a conviction. A finding of probable cause
needs only to rest on evidence showing that more likely than not, a crime has
been committed by the suspect. However, while probable cause should be
determined in a summary manner, there is a need to examine the evidence
with care to prevent material damage to a potential accused's constitutional
right to liberty and the guarantees of freedom and fair play and to protect the
State from the burden of unnecessary expenses in prosecuting alleged
offenses and holding trials arising from false, fraudulent or groundless
charges.
In
this
case,
petitioner
failed
to
establish
that
the Secretary of Justice committed grave abuse of discretion in issuing the
assailed resolutions. Indeed, he acted in accord with law and the evidence.
4.MERCANTILE LAW; TRUST RECEIPTS LAW (P.D. NO. 115);
TRANSACTION BETWEEN PETITIONER AND RESPONDENT BANK
FALLS UNDER THE TRUST RECEIPT TRANSACTIONS ENVISAGED
IN P.D. NO. 115; RESPONDENT BANK IMPORTED THE GOODS AND
ENTRUSTED THE SAME TO PETITIONER'S COMPANY UNDER THE
TRUST RECEIPTS SIGNED BY PETITIONER, AS ENTRUSTEE, WITH
THE BANK AS ENTRUSTER. An entrustee is one having or taking
possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the
purpose ofpayment specified in the trust receipt agreement. The entrustee is
obliged to: (1) hold the goods, documents or instruments in trust for the
entruster and shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt; (2) receive the proceeds in trust for the
entruster and turn over the same to the entruster to the extent of the amount
owing to the entruster or as appears on the trust receipt; (3) insure the goods
for their total value against loss from fire, theft, pilferage or other casualties;
(4) keep said goods or proceeds thereof whether in money or whatever form,
separate and capable of identification as property of the entruster; (5) return
the goods, documents or instruments in the event of non-sale or upon
demand of the entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to the provisions of the decree.
The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to
the extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in
case of non-sale, and to the enforcement of all other rights conferred on him
in the trust receipt; provided, such are not contrary to the provisions of the
document. In the case at bar, the transaction between petitioner and
respondent bank falls under the trust receipt transactions envisaged in P.D.
No. 115. Respondent bank imported the goods and entrusted the same to
PBMI under the trust receipts signed by petitioner, as entrustee, with the
bank as entruster.

5.ID.; ID.; THE TRUST RECEIPTS LAW APPLIES TO GOODS USED BY

THE ENTRUSTEE IN THE OPERATION OF ITS MACHINERIES AND
EQUIPMENT. It must be stressed that P.D. No. 115 is a declaration by
legislative authority that, as a matter of public policy, the failure of person to
turn over the proceeds of the sale of the goods covered by a trust receipt or
to return said goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions. The Court likewise rules that the
issue of whether P.D. No. 115 encompasses transactions involving goods
procured as a component of a product ultimately sold has been resolved in
the affirmative in Allied Banking Corporation v. Ordoez. The law applies to
goods used by the entrustee in the operation of its machineries and
equipment. The non-payment of the amount covered by the trust receipts or
the non-return of the goods covered by the receipts, if not sold or otherwise
not disposed of, violate the entrustee's obligation to pay the amount or to
return the goods to the entruster.
6.ID.; ID.; PENALTY CLAUSE OF P.D. NO. 115; ALTHOUGH PETITIONER
SIGNED THE TRUST RECEIPTS MERELY AS SENIOR VICEPRESIDENT OF THE
COMPANY
AND
HAS
NO
PHYSICAL
POSSESSION OF THE GOODS, HE CANNOT AVOID PROSECUTION
FOR VIOLATION OF THE LAW. In Colinares v. Court of Appeals, the
Court declared that there are two possible situations in a trust receipt
transaction. The first is covered by the provision which refers to money
received under the obligation involving the duty to deliver it (entregarla) to the
owner of the merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation to return it
(devolvera) to the owner. Thus, failure of the entrustee to turn over the
proceeds of the sale of the goods covered by the trust receipts to the
entruster or to return said goods if they were not disposed of in accordance
with the terms of the trust receipt is a crime under P.D. No. 115, without
need of proving intent to defraud. The law punishes dishonesty and
abuse of confidence in the handling of money or goods to the prejudice of the
entruster, regardless of whether the latter is the owner or not. A mere failure
to deliver the proceeds of the sale of the goods, if not sold, constitutes a
criminal offense that causes prejudice, not only to another, but more to the
public interest. The Court rules that although petitioner signed the trust
receipts merely as Senior Vice-President of PBMI and had no physical
possession of the goods, he cannot avoid prosecution for violation of P.D.
No. 115.
7.ID.;
ID.;
PERSONS
HELD
RESPONSIBLE
FOR
VIOLATION OF THE TRUST RECEIPTS LAW WHEN ENTRUSTEE IS A
CORPORATION; RATIONALE. The crime defined in P.D. No.
115 is malum prohibitumbut is classified as estafa under paragraph 1 (b),
Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or by natural

persons. However, the penalty for the crime is imprisonment for the periods
provided in said Article 315. Article 315. Swindling (estafa). Any person
who shall defraud another by any of the means mentioned hereinbelow shall
be punished by: 1st. The penalty of prision correccional in its maximum
period to prision mayor in its minimum period, if the amount of the fraud is
over 12,000 pesos but does not exceed 22,000 pesos; and if such amount
exceeds the latter sum, the penalty provided in this paragraph shall be
imposed in its maximum period, adding one year for each additional 10,000
pesos; but the total penalty which may be imposed shall not exceed twenty
years. In such cases, and in connection with the accessory penalties which
may be imposed and for the purpose of the other provisions ofthis Code, the
penalty shall be termed prision mayor or reclusion temporal, as the case may
be. Though the entrustee is a corporation, nevertheless, the law specifically
makes the officers, employees or other officers or persons responsible for
the offense, without prejudice to the civil liabilities of such corporation and/or
board of directors, officers, or other officials or employees responsible for the
offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus,
they have a responsible share in the violations of the law. If the crime is
committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be
charged and penalized for the crime, precisely because of the nature of the
crime and the penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment. However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes both fine
and imprisonment as penalty, a corporation may be prosecuted and, if found
guilty, may be fined.
8.ID.; ID.; WHETHER THE OFFICERS AND EMPLOYEES ARE
BENEFITED
BY
THEIR
DELICTUAL
ACTS
IS
NOT
A
TOUCHSTONE OF THEIR CRIMINAL LIABILITY; BENEFIT IS NOT AN
OPERATIVE FACT OF THE OFFENSE. A crime is the doing of that which
the penal code forbids to be done, or omitting to do what it commands. A
necessary part of the definition of every crime is the designation of the
author of the crime upon whom the penalty is to be inflicted. When a criminal
statute designates an act of a corporation or a crime and prescribes
punishment therefor, it creates a criminal offense which, otherwise, would not
exist and such can be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not create an
offense for which a corporation may be punished. On the other hand, if the
State, by statute, defines a crime that may be committed by a corporation but
prescribes the penalty therefor to be suffered by the officers, directors, or
employees ofsuch corporation or other persons responsible for the offense,
only such individuals will suffer such penalty. Corporate officers or

employees, through whose act, default or omission the corporation commits

a crime, are themselves individually guilty of the crime. The principle applies
whether or not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the crime and to
those, who, by virtue of their managerial positions or other similar relation to
the corporation, could be deemed responsible for its commission, if by
virtue of their relationship to the corporation, they had the power to prevent
the act. Moreover, all parties active in promoting a crime, whether agents or
not, are principals. Whether such officers or employees are benefited by their
delictual acts is not a touchstone of their criminal liability. Benefit is not an
operative fact. In this case, petitioner signed the trust receipts in question. He
cannot, thus, hide behind the cloak of the separate corporate
personality of PBMI. In the words of Chief Justice Earl Warren, a corporate
officer cannot protect himself behind a corporation where he is the actual,
present and efficient actor.
DECISION
CALLEJO, SR., J :
p

Before the Court is a petition for review on certiorari of the Decision 1 of the
Court of Appeals (CA) in CA-G.R. SP No. 57169 dismissing the petition
for certiorari, prohibition and mandamus filed by petitioner Alfredo Ching, and
its Resolution 2 dated June 28, 2004 denying the motion for reconsideration
thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc.
(PBMI). Sometime in September to October 1980, PBMI, through petitioner,
applied with the Rizal Commercial Banking Corporation (respondent bank)
for
the
issuance of commercial
letters of credit
to
finance
its
importation of assorted goods. 3
Respondent bank approved the application, and irrevocable letters of credit
were issued in favor of petitioner. The goods were purchased and delivered
in trust to PBMI. Petitioner signed 13 trust receipts 4as surety, acknowledging
delivery of the following goods:

T/R

Date

Maturity

Nos.

Granted

Date

Principal

Description of

Goods

1845

12-05-80

03-05-81

P1,596,470.05

79.9425 M/T "SDK" Brand

1801

11-21-80

02-19-81

P2,001,715.17

Synthetic Graphite Electrode

1853

12-08-80

03-06-81

P198,150.67

3,000 pcs. (15 bundles) Calorized

tapered pitch filed nipples

1857

12-09-80

03-09-81

P197,843.61

Lance Pipes

1824

11-28-80

02-26-81

P707,879.71

One Lot High Fired Refractory

Synthetic Graphite Electrode [with]

3,000 pcs. (15 bundles calorized

lance pipes [)]

1895

12-17-80

03-17-81

P67,652.04

Spare parts for Spectrophotometer

1911

12-22-80

03-20-81

P91,497.85

50 pcs. Ingot moulds

2041

01-30-81

04-30-81

P91,456.97

50 pcs. Ingot moulds

2099

02-10-81

05-11-81

P66,162.26

8 pcs. Kubota Rolls for rolling mills

2100

02-10-81

05-12-81

P210,748.00

Spare parts for Lacolaboratory

Tundish Bricks

1798

1808

2042

11-21-80

11-21-80

01-30-81

02-19-81

02-19-81

04-30-81

P835,526.25

P370,332.52

P469,669.29

5 cases spare parts for CCM

200 pcs. ingot moulds

High Fired Refractory Nozzle

Bricks

Equipment 5

Under the receipts, petitioner agreed to hold the goods in trust for the said
bank, with authority to sell but not by way of conditional sale, pledge or
otherwise; and in case such goods were sold, to turn over the proceeds
thereof as soon as received, to apply against the relative acceptances and
payment of other indebtedness to respondent bank. In case the goods
remained unsold within the specified period, the goods were to be returned to
respondent bank without any need of demand. Thus, said "goods,
manufactured products or proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable of identification" were
respondent bank's property.
When the trust receipts matured, petitioner failed to return the goods to
respondent bank, or to return their value amounting to P6,940,280.66 despite
demands. Thus, the bank filed a criminal complaint for estafa 6 against
petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found
probable cause estafa under Article 315, paragraph 1(b) of the Revised
Penal Code, in relation to Presidential Decree (P.D.) No. 115, otherwise
known as the Trust Receipts Law. Thirteen (13) Informations were filed
against the petitioner before the Regional Trial Court (RTC) of Manila. The
cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to
Branch 31 of said court.
ACIDSc

Petitioner appealed the resolution of the City Prosecutor to the then

Minister of Justice. The appeal was dismissed in a Resolution 7 dated March
17, 1987, and petitioner moved for its reconsideration. On December 23,
1987, the Minister of Justice granted the motion, thus reversing the previous
resolution finding probable cause against petitioner. 8 The City Prosecutor
was ordered to move for the withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which,
however, was denied on February 24, 1988. 9 The RTC, for its part, granted
the Motion to Quash the Informations filed by petitioner on the ground that
the material allegations therein did not amount to estafa. 10
In the meantime, the Court rendered judgment in Allied Banking Corporation
v. Ordoez, 11 holding that the penal provision of P.D. No. 115 encompasses
any act violative of an obligation covered by the trust receipt; it is not limited
to transactions involving goods which are to be sold (retailed), reshipped,
stored or processed as a component of a product ultimately sold. The Court
also ruled that "the non-payment of the amount covered by a trust receipt is
an act violative of the obligation of the entrustee to pay." 12

On February 27, 1995, respondent bank re-filed the criminal complaint

for estafa against
petitioner
before
the
Office of the
City
Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor
ruled that there was no probable cause to charge petitioner with
violating P.D. No. 115, as petitioner's liability was only civil, not criminal,
having signed the trust receipts as surety. 13 Respondent bank appealed the
resolution to the Department of Justice (DOJ) via petition for review, alleging
that the City Prosecutor erred in ruling:
1.That there is no evidence to show that respondent participated
in the misappropriation of the goods subject of the trust
receipts;
2.That the respondent is a mere surety of the trust receipts; and
3.That the liability of the respondent is only civil in nature. 14

On July 13, 1999, the Secretary of Justice issued Resolution No.

250 15 granting the petition and reversing the assailed resolution of the City
Prosecutor. According to the Justice Secretary, the petitioner, as Senior
Vice-President of PBMI, executed the 13 trust receipts and as such, was the
one responsible for the offense. Thus, the execution of said receipts is
enough to indict the petitioner as the official responsible for violation of P.D.
No. 115. The Justice Secretary also declared that petitioner could not
contend that P.D. No. 115 covers only goods ultimately destined for sale, as
this issue had already been settled in Allied Banking Corporation v.
Ordoez, 16 where the Court ruled that P.D. No. 115 is "not limited to
transactions in goods which are to be sold (retailed), reshipped, stored or
processed as a component of a product ultimately sold but covers failure to
turn over the proceeds of the sale of entrusted goods, or to return said goods
if unsold or not otherwise disposed of in accordance with the terms of the
trust receipts."
The Justice Secretary further stated that the respondent bound himself under
the terms of the trust receipts not only as a corporate official of PBMI but also
as its surety; hence, he could be proceeded against in two (2) ways: first, as
surety as determined by the Supreme Court in its decision in Rizal
Commercial Banking Corporation v. Court of Appeals; 17 and second, as the
corporate official responsible for the offense under P.D. No. 115, via criminal
prosecution.
Moreover, P.D.
No.
115 explicitly
allows
the
prosecution of corporate officers "without prejudice to the civil liabilities
arising from the criminal offense." Thus, according to the Justice Secretary,
following Rizal Commercial Banking Corporation, the civil liability imposed is
clearly separate and distinct from the criminal liability of the accused
underP.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City

Prosecutor filed 13 Informations against petitioner for violation of P.D. No.
115 before the RTC of Manila. The cases were docketed as Criminal Cases
No. 99-178596 to 99-178608 and consolidated for trial before Branch
52 of said court. Petitioner filed a motion for reconsideration, which
the Secretary of Justice denied in a Resolution 18dated January 17, 2000.

THE
HONORABLE SECRETARY OF JUSTICE CORRECTLY
RULED THAT PETITIONER ALFREDO CHING IS THE
OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED
AND THAT THE ACTS OF PETITIONER FALL WITHIN THE
AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO
ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.

Petitioner then filed a petition for certiorari, prohibition and mandamus with
the CA, assailing the resolutions of the Secretary of Justice on the following
grounds:

B.

1.THE RESPONDENTS ARE ACTING WITH AN UNEVEN

HAND AND IN FACT, ARE ACTING OPPRESSIVELY AGAINST
ALFREDO CHING WHEN
THEY
ALLOWED
HIS
PROSECUTION DESPITE THE FACT THAT NO EVIDENCE
HAD BEEN PRESENTED TO PROVE HIS PARTICIPATION IN
THE ALLEGED TRANSACTIONS.
2.THE RESPONDENT SECRETARY OF JUSTICE COMMITTED
AN ACT IN GRAVE ABUSE OF DISCRETION AND IN
EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE
PETITIONER
DESPITE
THE
LENGTH OF TIME INCURRED IN THE TERMINATION OF THE
PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE
DISMISSAL OF THE INSTANT CASE.
3.THE
RESPONDENT SECRETARY OF JUSTICE AND
ASSISTANT CITY PROSECUTOR ACTED IN GRAVE
ABUSE OF DISCRETION
AMOUNTING
TO
AN
EXCESS OF JURISDICTION WHEN THEY CONTINUED THE
PROSECUTION OF THE
PETITIONER
DESPITE
LACK OF SUFFICIENT BASIS. 19

THERE IS NO MERIT IN PETITIONER'S CONTENTION THAT

EXCESSIVE DELAY HAS MARRED THE CONDUCT OF THE
PRELIMINARY INVESTIGATION OF THE CASE, JUSTIFYING
ITS DISMISSAL. TcHCDI
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI,
PROHIBITION AND MANDAMUS IS NOT THE PROPER
MODE OF REVIEW
FROM
THE
RESOLUTION OF THE
DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST
THEREFORE BE DISMISSED. 21

On April 22, 2004, the CA rendered judgment dismissing the petition for
lack of merit, and on procedural grounds. On the procedural issue, it ruled
that (a) the certification of non-forum shopping executed by petitioner and
incorporated in the petition was defective for failure to comply with the first
two of the three-fold undertakings prescribed in Rule 7, Section 5 of the
Revised Rules of Civil Procedure; and (b) the petition for certiorari,
prohibition and mandamus was not the proper remedy of the petitioner.

In his petition, petitioner incorporated a certification stating that "as far as this
Petition is concerned, no action or proceeding in the Supreme Court, the
Court of Appeals or different divisions thereof, or any tribunal or agency. It is
finally certified that if the affiant should learn that a similar action or
proceeding has been filed or is pending before the Supreme Court, the
Court of Appeals, or different divisions thereof, of any other tribunal or
agency, it hereby undertakes to notify this Honorable Court within five (5)
days from such notice." 20

On the merits of the petition, the CA ruled that the assailed

resolutions of the Secretary of Justice were correctly issued for the following
reasons: (a) petitioner, being the Senior Vice-President of PBMI and the
signatory to the trust receipts, is criminally liable for violation of P.D. No. 115;
(b) the issue raised by the petitioner, on whether he violated P.D. No. 115 by
his actuations, had already been resolved and laid to rest in Allied Bank
Corporation v. Ordoez; 22 and (c) petitioner was estopped from raising the
City Prosecutor's delay in the final disposition of the preliminary investigation
because he failed to do so in the DOJ.

In its Comment on the petition, the Office of the Solicitor General alleged that

Thus, petitioner filed the instant petition, alleging that:

I

A.
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE
PETITION
ON
THE
GROUND
THAT
THE

CERTIFICATION OF NON-FORUM
INCORPORATED THEREIN WAS DEFECTIVE.

SHOPPING

II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION
WAS
COMMITTED
BY
THE SECRETARY OF JUSTICE IN COMING OUT WITH THE
ASSAILED RESOLUTIONS. 23

The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere
technicality. He claims that the rules of procedure should be used to
promote, not frustrate, substantial justice. He insists that the Rules of Court
should be construed liberally especially when, as in this case, his substantial
rights are adversely affected; hence, the deficiency in his certification of nonforum shopping should not result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and
asserts that indubitably, the certificate of non-forum shopping incorporated in
the petition before the CA is defective because it failed to disclose essential
facts about pending actions concerning similar issues and parties. It asserts
that petitioner's failure to comply with the Rules of Court is fatal to his
petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court
in Melo v. Court of Appeals. 24
We agree with the ruling of the CA that the certification of non-forum
shopping petitioner incorporated in his petition before the appellate court is
defective. The certification reads:
It is further certified that as far as this Petition is concerned, no
action or proceeding in the Supreme Court, the Court of Appeals
or different divisions thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar
action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions
thereof, ofany other tribunal or agency, it hereby undertakes to
notify this Honorable Court within five (5) days from such
notice. 25

Under Section 1, second paragraph of Rule 65 of the Revised

Rules of Court, the petition should be accompanied by a sworn
certification of non-forum
shopping,
as
provided
in
the
third
paragraph ofSection 3, Rule 46 of said Rules. The latter provision reads in
part:

SEC. 3.Contents and filing of petition; effect of non-compliance

with requirements. The petition shall contain the full names
and actual addresses of all the petitioners and respondents, a
concise statement of the matters involved, the factual
background of the case and the grounds relied upon for the relief
prayed for.
xxx xxx xxx
The petitioner shall also submit together with the petition a sworn
certification that he has not theretofore commenced any other
action involving the same issues in the Supreme Court, the
Courtof Appeals or different divisions thereof, or any other
tribunal or agency; if there is such other action or proceeding, he
must state the status of the same; and if he should thereafter
learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or
different divisions thereof, or any other tribunal or agency, he
undertakes to promptly inform the aforesaid courts and other
tribunal or agency thereof within five (5) days therefrom. . . .

Compliance with the certification against forum shopping is separate from

and independent of the avoidance of forum shopping itself. The requirement
is mandatory. The failure of the petitioner to comply with the foregoing
requirement shall be sufficient ground for the dismissal of the petition without
prejudice, unless otherwise provided. 26
Indubitably, the first paragraph of petitioner's certification is incomplete and
unintelligible. Petitioner failed to certify that he "had not heretofore
commenced any other action involving the same issues in the Supreme
Court, the Court of Appeals or the different divisions thereof or any other
tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the
Revised Rules of Court.
We agree with petitioner's contention that the certification is designed to
promote and facilitate the orderly administration of justice, and therefore,
should not be interpreted with absolute literalness. In his works on the
Revised Rules of Civil Procedure, former Supreme Court Justice Florenz
Regalado states that, with respect to the contents of the certification which
the pleader may prepare, the rule ofsubstantial compliance may be
availed of. 27 However, there must be a special circumstance or compelling
reason which makes the strict application of the requirement clearly
unjustified. The instant petition has not alleged any such extraneous
circumstance. Moreover, as worded, the certification cannot even be
regarded as substantial compliance with the procedural requirement. Thus,
the CA was not informed whether, aside from the petition before it, petitioner
had commenced any other action involving the same issues in other
tribunals.
DcCIAa

On the merits of the petition, the CA ruled that the petitioner failed to
establish that the Secretary of Justice committed grave abuse of discretion in
finding probable cause against the petitioner for violationof estafa under
Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D. No.
115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in
support of the petition are not persuasive enough to justify the
desired conclusion that respondent Secretary of Justice gravely
abused its discretion in coming out with his assailed Resolutions.
Petitioner posits that, except for his being the Senior VicePresident of the PBMI, there is no iota of evidence that he was
aparticipes crimines in violating the trust receipts sued upon; and
that his liability, if at all, is purely civil because he signed the said
trust receipts merely as a . . . surety and not as the entrustee.
These assertions are, however, too dull that they cannot even
just dent the findings of the respondent Secretary, viz:
". . . it is apropos to quote section 13 of PD 115 which
states in part, viz:
'. . . If the violation or offense is committed by a
corporation, partnership, association or other
judicial entities, the penalty provided for in this
Decree shall be imposed upon the directors,
officers, employees or other officials or persons
therein responsible for the offense, without
prejudice to the civil liabilities arising from the
criminal offense.'
"There is no dispute that it was the respondent, who as senior
vice-president of PBM, executed the thirteen (13) trust receipts.
As such, the law points to him as the official responsible for the
offense. Since a corporation cannot be proceeded against
criminally because it cannot commit crime in which personal
violence or malicious intent is required, criminal action is limited
to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself (West Coast Life Ins. Co. vs.
Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus,
the execution by respondent of said receipts is enough to indict
him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD
115 covers only goods which are ultimately destined for sale and
not goods, like those imported by PBM, for use in manufacture.
This issue has already been settled in the Allied Banking
Corporation case, supra, where he was also a party, when the
Supreme Court ruled that PD 115 is 'not limited to transactions in
goods which are to be sold (retailed), reshipped, stored or
processed as a component or a product ultimately sold' but

'covers failure to turn over the proceeds of the sale of entrusted

goods, or to return said goods if unsold or disposed of in
accordance with the terms of the trust receipts.'
"In regard to the other assigned errors, we note that the
respondent bound himself under the terms of the trust receipts
not only as a corporate official of PBM but also as its surety. It is
evident that these are two (2) capacities which do not exclude the
other. Logically, he can be proceeded against in two (2) ways:
first, as surety as determined by the Supreme Court in its
decision in RCBC vs. Court of Appeals, 178 SCRA 739; and,
secondly, as the corporate official responsible for the offense
under PD 115, the present case is an appropriate remedy under
our penal law.

"Moreover, PD 115 explicitly allows the prosecution of corporate

officers 'without prejudice to the civil liabilities arising from the
criminal offense' thus, the civil liability imposed on respondent
inRCBC vs. Court of Appeals case is clearly separate and distinct
from his criminal liability under PD 115.'" 28

Petitioner asserts that the appellate court's ruling is erroneous because (a)
the transaction between PBMI and respondent bank is not a trust receipt
transaction; (b) he entered into the transaction and was sued in his capacity
as PBMI Senior Vice-President; (c) he never received the goods as an
entrustee for PBMI, hence, could not have committed any dishonesty or
abused the confidence of respondent bank; and (d) PBMI acquired the goods
and used the same in operating its machineries and equipment and not for
resale.
The OSG, for its part, submits a contrary view, to wit:
34.Petitioner further claims that he is not a person responsible for
the offense allegedly because "[b]eing charged as the Senior
Vice-President of Philippine Blooming Mills (PBM), petitioner
cannot be held criminally liable as the transactions sued upon
were clearly entered into in his capacity as an officer of the
corporation" and that [h]e never received the goods as an
entrustee for PBM as he never had or took possession of the
goods nor did he commit dishonesty nor "abuse of confidence in
transacting with RCBC." Such argument is bereft of merit.
35.Petitioner's being a Senior Vice-President of the Philippine
Blooming Mills does not exculpate him from any liability.
Petitioner's responsibility as the corporate official of PBM who
received the goods in trust is premised on Section 13 of P.D. No.
115, which provides:

Section 13.Penalty Clause. The failure of an entrustee

to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to
the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and
fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation,
partnership, association or other juridical entities,
the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or
other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities
arising from the criminal offense. (Emphasis
supplied)
36.Petitioner having participated in the negotiations for the trust
receipts and having received the goods for PBM, it was inevitable
that the petitioner is the proper corporate officer to be proceeded
against by virtue of the PBM's violation of P.D. No. 115. 29

The ruling of the CA is correct.

respondent for trial, and orders such prosecutor to file the Information despite
the absence of probable cause, the Secretary of Justice acts contrary to law,
without authority and/or in excess of authority. Such resolution may likewise
be nullified in a petition for certiorari under Rule 65 of the Revised
Rules of Civil Procedure. 35
A preliminary investigation, designed to secure the respondent against hasty,
malicious and oppressive prosecution, is an inquiry to determine whether (a)
a crime has been committed; and (b) whether there is probable cause to
believe that the accused is guilty thereof. It is a means of discovering the
person or persons who may be reasonably charged with a crime. Probable
cause need not be based on clear and convincing evidence of guilt, as the
investigating officer acts upon probable cause of reasonable belief. Probable
cause implies probability of guilt and requires more than bare suspicion but
less than evidence which would justify a conviction. A finding of probable
cause needs only to rest on evidence showing that more likely than not, a
crime has been committed by the suspect. 36
However, while probable cause should be determined in a summary manner,
there is a need to examine the evidence with care to prevent material
damage to a potential accused's constitutional right to liberty and the
guarantees of freedom and fair play 37 and to protect the State from the
burden of unnecessary expenses in prosecuting alleged offenses and
holding trials arising from false, fraudulent or groundless charges. 38

SDaHEc

In Mendoza-Arce v. Office of the Ombudsman (Visayas), 30 this Court held

that the acts of a quasi-judicial officer may be assailed by the aggrieved party
via a petition for certiorari and enjoined (a) when necessary to afford
adequate protection to the constitutional rights of the accused; (b) when
necessary for the orderly administration of justice; (c) when the acts of the
officer are without or in excess ofauthority; (d) where the charges are
manifestly false and motivated by the lust for vengeance; and (e) when there
is clearly no prima facie case against the accused. 31 The Court also declared
that, if the officer conducting a preliminary investigation (in that case, the
Office of the Ombudsman) acts without or in excess of his authority and
resolves to file an Information despite the absence of probable cause, such
act may be nullified by a writ of certiorari. 32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal
Procedure, 33 the Information shall be prepared by the Investigating
Prosecutor against the respondent only if he or she finds probable cause to
hold such respondent for trial. The Investigating Prosecutor acts without or in
excess of his authority under the Rule if the Information is filed against the
respondent despite absence of evidence showing probable cause
therefor. 34 If
the Secretary of Justice reverses
the
Resolution of the
Investigating Prosecutor who found no probable cause to hold the

In
this
case,
petitioner
failed
to
establish
that
the Secretary of Justice committed grave abuse of discretion in issuing the
assailed resolutions. Indeed, he acted in accord with law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4.What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree as
entrustee, whereby the entruster, who owns or holds absolute
title or security interests over certain specified goods, documents
or instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the
entruster of a signed document called a "trust receipt" wherein
the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with
the obligation to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as appears in
the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust

receipt, or for other purposes substantially equivalent to

any of the following:
1.In case of goods or documents, (a) to sell the goods or procure
their sale; or (b) to manufacture or process the goods with the
purpose of ultimate sale; Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its
title over the goods whether in its original or processed form until
the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or otherwise deal with them in
a manner preliminary or necessary to their sale; or

receipt, or to the return of the goods, documents or instruments in

case of non-sale, and to the enforcement of all other rights conferred on him
in the trust receipt; provided, such are not contrary to the provisions of the
document. 41
In the case at bar, the transaction between petitioner and respondent bank
falls under the trust receipt transactions envisaged in P.D. No. 115.
Respondent bank imported the goods and entrusted the same to PBMI under
the trust receipts signed by petitioner, as entrustee, with the bank as
entruster. The agreement was as follows:

2.In the case of instruments a) to sell or procure their sale or

exchange; or b) to deliver them to a principal; or c) to effect the
consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation, collection
or renewal.

And in consideration thereof, I/we hereby agree to hold said

goods in trust for the said BANK as its property with liberty to sell
the same within ____ days from the date of the execution of this
Trust Receipt and for the Bank's account, but without authority to
make any other disposition whatsoever of the said goods or any
part thereof (or the proceeds) either by way of conditional sale,
pledge or otherwise.

The sale of goods, documents or instruments by a person in the

business of selling goods, documents or instruments for profit
who, at the outset of the transaction, has, as against the buyer,
general property rights in such goods, documents or instruments,
or who sells the same to the buyer on credit, retaining title or
other interest as security for the payment of the purchase price,
does not constitute a trust receipt transaction and is outside the
purview and coverage of this Decree.

I/we agree to keep the said goods insured to their full value
against loss from fire, theft, pilferage or other casualties as
directed by the BANK, the sum insured to be payable in
case of loss to the BANK, with the understanding that the BANK
is, not to be chargeable with the storage premium or insurance or
any other expenses incurred on said goods.

An entrustee is one having or taking possession of goods, documents or

instruments under a trust receipt transaction, and any successor in
interest of such person for the purpose of payment specified in the trust
receipt agreement. 39 The entrustee is obliged to: (1) hold the goods,
documents or instruments in trust for the entruster and shall dispose of them
strictly in accordance with the terms and conditions of the trust receipt; (2)
receive the proceeds in trust for the entruster and turn over the same to the
entruster to the extent of the amount owing to the entruster or as appears on
the trust receipt; (3) insure the goods for their total value against loss from
fire, theft, pilferage or other casualties; (4) keep said goods or proceeds
thereof whether in money or whatever form, separate and
capable of identification as property of the entruster; (5) return the goods,
documents or instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust receipt
not contrary to the provisions of the decree. 40

The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to
the extent of the amount owing to the entruster or as appears in the trust

In case of sale, I/we further agree to turn over the proceeds

thereof as soon as received to the BANK, to apply against the
relative acceptances (as described above) and for the
payment of any other indebtedness of mine/ours to the BANK. In
case of non-sale within the period specified herein, I/we agree to
return the goods under this Trust Receipt to the BANK without
any need ofdemand. EcDSHT
I/we agree to keep the said goods, manufactured products or
proceeds thereof, whether in the form of money or bills,
receivables, or accounts separate and capable of identification as
property ofthe BANK. 42

It must be stressed that P.D. No. 115 is a declaration by legislative authority

that, as a matter of public policy, the failure of person to turn over the
proceeds of the sale of the goods covered by a trust receipt or to return said
goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions. 43
The Court likewise rules that the issue of whether P.D. No.
115 encompasses transactions involving goods procured as a
component of a product ultimately sold has been resolved in the affirmative
inAllied Banking Corporation v. Ordoez. 44 The law applies to goods used by

the entrustee in the operation of its machineries and equipment. The nonpayment of the amount covered by the trust receipts or the non-return of the
goods covered by the receipts, if not sold or otherwise not disposed of,
violate the entrustee's obligation to pay the amount or to return the goods to
the entruster.
In Colinares v. Court of Appeals, 45 the Court declared that there are two
possible situations in a trust receipt transaction. The first is covered by the
provision which refers to money received under the obligation involving the
duty to deliver it (entregarla) to the owner of the merchandise sold. The
second is covered by the provision which refers to merchandise
received under the obligation to return it (devolvera) to the owner. 46 Thus,
failure of the entrustee to turn over the proceeds of the sale of the goods
covered by the trust receipts to the entruster or to return said goods if they
were not disposedof in accordance with the terms of the trust receipt is a
crime under P.D. No. 115, without need of proving intent to defraud. The law
punishes dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the entruster, regardless of whether the latter is the
owner or not. A mere failure to deliver the proceeds of the sale of the goods,
if not sold, constitutes a criminal offense that causes prejudice, not only to
another, but more to the public interest. 47
The Court rules that although petitioner signed the trust receipts merely as
Senior Vice-President of PBMI and had no physical possession of the goods,
he cannot avoid prosecution for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13.Penalty Clause. The failure of an entrustee to turn
over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold
or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen,
as amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in
this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for
the offense, without prejudice to the civil liabilities arising from the
criminal offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified
as estafa under paragraph 1(b), Article 315 of the Revised Penal Code,
or estafa with abuse of confidence. It may be committed by a corporation or

other juridical entity or by natural persons. However, the penalty for the crime
is imprisonment for the periods provided in said Article 315, which reads:
ARTICLE 315.Swindling (estafa). Any person who shall
defraud another by any of the means mentioned hereinbelow
shall be punished by:
1st.The penalty of prision correccional in its maximum period
to prision mayor in its minimum period, if the amount of the fraud
is over 12,000 pesos but does not exceed 22,000 pesos; and if
such amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one
year for each additional 10,000 pesos; but the total penalty which
may be imposed shall not exceed twenty years. In such cases,
and in connection with the accessory penalties which may be
imposed and for the purpose of the other provisions of this Code,
the penalty shall be termed prision mayor or reclusion temporal,
as the case may be;
2nd.The penalty of prision correccional in its minimum and
medium periods, if the amount of the fraud is over 6,000 pesos
but does not exceed 12,000 pesos;
3rd.The penalty of arresto mayor in its maximum period to prision
correccional in its minimum period, if such amount is over 200
pesos but does not exceed 6,000 pesos; and
4th.By arresto mayor in its medium and maximum periods, if
such amount does not exceed 200 pesos, provided that in the
four cases mentioned, the fraud be committed by any of the
following means; . . .

Though the entrustee is a corporation, nevertheless, the law specifically

makes the officers, employees or other officers or persons responsible for
the offense, without prejudice to the civil liabilities ofsuch corporation and/or
board of directors, officers, or other officials or employees responsible for the
offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus,
they have a responsible share in the violations of the law. 48
If the crime is committed by a corporation or other juridical entity, the
directors, officers, employees or other officers thereof responsible for the
offense shall be charged and penalized for the crime, precisely
because of the nature of the crime and the penalty therefor. A corporation
cannot be arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment. 49 However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is fine. Even if the statute

prescribes both fine and imprisonment as penalty, a corporation may be

prosecuted and, if found guilty, may be fined. 50
A crime is the doing of that which the penal code forbids to be done, or
omitting to do what it commands. A necessary part of the definition of every
crime is the designation of the author of the crime upon whom the penalty is
to be inflicted. When a criminal statute designates an act of a corporation or
a crime and prescribes punishment therefor, it creates a criminal offense
which, otherwise, would not exist and such can be committed only by the
corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be
punished. On the other hand, if the State, by statute, defines a crime that
may be committed by a corporation but prescribes the penalty therefor to be
suffered by the officers, directors, or employees of such corporation or other
persons responsible for the offense, only such individuals will suffer such
penalty. 51 Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves individually
guilty of the crime. 52
The principle applies whether or not the crime requires the
consciousness of wrongdoing. It applies to those corporate agents who
themselves commit the crime and to those, who, by virtue of their managerial
positions or other similar relation to the corporation, could be deemed
responsible for its commission, if by virtue of their relationship to the
corporation, they had the power to prevent the act.53 Moreover, all parties
active in promoting a crime, whether agents or not, are principals. 54 Whether
such officers or employees are benefited by their delictual acts is not a
touchstone of their criminal liability. Benefit is not an operative fact.
aHcDEC

In this case, petitioner signed the trust receipts in question. He cannot, thus,
hide behind the cloak of the separate corporate personality of PBMI. In the
words of Chief Justice Earl Warren, a corporate officer cannot protect himself
behind a corporation where he is the actual, present and efficient actor. 55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for
lack of merit. Costs against the petitioner.
SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Chico-Nazario,
JJ., concur.
(Ching v. Sec. of Justice, G.R. No. 164317, [February 6, 2006], 517 PHIL
151-178)
|||

EN BANC
[G.R. No. L-22973. January 30, 1968.]
MAMBULAO LUMBER COMPANY, plaintiffappellant, vs. PHILIPPINE NATIONAL BANK and
ANACLETO HERADO, ETC., defendants-appellees.
Ernesto P. Villar and Arthur Tordesillas for plaintiff-appellant.
Tomas Besa, and Jose B. Galang for defendants-appellees.
SYLLABUS
1.CONTRACTS; LOAN; INTEREST; COMPOUNDED; WHEN SHALL IT BE
RECKONED. In computing the interest on any obligation, promissory note
or other instrument or contract, compound interest shall not be reckoned,
except by agreement, or in default thereof, whenever the debt is judicially
claimed. Interest due shall earn legal interest only from the time it is judicially
demanded. Interest due and unpaid shall not earn interest. The parties may,
by stipulation, capitalize the interest due and unpaid, which as added
principal, shall earn new interest; but such stipulation is nowhere to be found
in terms of the promissory note involved in this case. Clearly, therefore, the
trial court fell into error when it awarded interest on accrued interests, without
any agreement to that effect and before they had been judicially demanded.
2.ID.; MORTGAGE; EXTRA-JUDICIAL FORECLOSURE SALE; EXPENSES.
The fees enumerated under paragraphs k and n, Section 7, of Rule 130
(now Rule 141) are demandable only by a sheriff serving processes of the
court in connection with judicial foreclosure of mortgages, under Rule 68 of
the new Rules, and not in cases of extra-judicial foreclosure of mortgages
under Act 3135. The law applicable is Section 4 of Act 3135 which provides
that the officer conducting the sale is entitled to collect a fee of P5.00 for
each day of actual work performed in addition to his expenses in connection
with foreclosure sale. The PNB failed to prove that it actually spent any
amount in connection with the said foreclosure sale. In the absence of
evidence to show at least the number of working days the sheriff concerned
actually spent in connection with the extra-judicial foreclosure sale, the most
that he may be entitled to, would be the amount of P10.00 as a reasonable
allowance for two day's work. Obviously, therefore, the award of amount of
P298.54 as expenses of the sale should be set aside.
3.ID.; ID.; ID.; ATTORNEY'S FEES. Where the contract of mortgage
clearly stipulates that the mortgagor agrees that in all cases (extra- judicial or
judicial foreclosure), attorney's fees is fixed at ten percent (10%) of the total
indebtedness then unpaid, which in no case shall be less than P100

exclusive of all fees allowed by law, and the expenses of collections shall be
the obligation of the mortgagor and shall with priority, be paid to the
mortgagee out of any sums realized from the proceeds of the sale of said
property the said stipulation to pay attorney's fees is clear enough to cover
both cases of foreclosure sale, i.e., judicially or extrajudicially. While the
phrase "in all cases" appears to be part of the second sentence, a reading of
the whole context of the stipulation would readily show that it logically refers
to extra-judicial foreclosure found in the first sentence, and to judicial
foreclosure mentioned in the next sentence. The ambiguity by reason of
faulty sentence construction should not be made to defeat the otherwise
clear intention of the parties in the agreement.
4.ID.; ID.; EXTENT OF AUTHORITY OF MORTGAGEE TO SELL
PROPERTY MORTGAGED. While the law grants power and authority to
the mortgagee to sell the mortgaged property at a public place in the
municipality where the mortgagor resides, or where the property is situated,
the sale of a mortgaged chattel may be made in a place other than that
where it is found, provided that the owner thereof consents thereto; or that
there is an agreement to this effect between the mortgagor and the
mortgagee. But when the parties agreed to have the property mortgaged sold
at the residence of the mortgagor, the mortgagee can not retain that power
and authority to select from among the places provided for in the law and
place designated in their agreement, over the objection of the mortgagor.
5.ID.; ID.; CHATTEL MORTGAGE; SALE OF PROPERTY; DUTY OF
SHERIFFS. Section 14, of Act 1508, as amended, provides that the officer
making the sale should make a return of his doings which shall particularly
describe the articles sold and the amount received from each article. From
this, it is clear that the law requires that sale be made article by article,
otherwise, it would be impossible for him to state the amount received for
each item. This requirement was totally disregarded by the Deputy Sheriff of
Camarines Norte when he sold the chattels in question in bulk,
notwithstanding the fact that the said chattels consisted of no less than
twenty different items as shown in the bill of sale. This makes the sale of the
chattels manifestly objectionable. And in the absence of any evidence to
show that the mortgagor had agreed or consented to such sale in gross, the
same should be set aside.
6.ID.; ID.; CHATTEL MORTGAGE; SALE OF PROPERTY NOT IN
ACCORDANCE WITH TERMS OF CONTRACT; LIABILITY OF
MORTGAGEE. The mortgagee is guilty of conversion when he sells under
the mortgage but not in accordance with its terms, or where the proceedings
as to the sale or foreclosure do not comply with the statute. This rule applies
squarely to the facts of this case where, as earlier shown, herein appellee
bank insisted, and the appellee deputy sheriff of Camarines Norte proceeds
with the sale of the mortgaged chattels at Jose Panganiban, Camarines

Norte, in utter disregard of the valid objection of the mortgagor thereto for the
reason that it is not the place of sale agreed upon in the mortgage contract;
and the said deputy sheriff sold all the chattels (among which were a skagit
with caterpillar engine, three GMC 6x6 trucks, a Herring Hall Safe, and
Sawmill equipment consisting of a 150 HP Murply Engine, plainer, large
circular saws, etc.) as a single lot in violation of the requirement of the law to
sell the same article by article. The PNB has resold the chattels to another
buyer with whom it appears to have actively cooperated in subsequently
taking possession of and removing the chattels from appellant's compound
by force, as shown by the circumstance that they had to take along PC
soldiers and municipal policemen of Jose Panganiban who placed the chief
security officer of the premises in jail to deprive herein appellant of its
possession thereof. To exonerate itself of any liability for the breach of peace
thus committed, the PNB would want us to believe that it was the subsequent
buyer alone, who is not a party to this case, that was responsible for the
forcible taking of the property; but assuming this to be so, still PNB cannot
escape liability for the conversion of the mortgaged chattels by parting with
its interest in the property. Neither would its claim that it afterwards gave a
chance to herein appellant to repurchase or redeem the chattels, improve its
position, for the mortgagor is not under obligation to take affirmative steps to
repossess the chattels that were converted by the mortgagee. As a
consequence of the said wrongful acts of the PNB and the Deputy Sheriff of
Camarines Norte, therefore, We have to declare that herein appellant is
entitled to collect from them jointly and severally, the full value of the chattels
in question at the time they were illegally sold by them. To this effect was the
holding of this Court in a similar situation.

9.ID.; CIRCUMSTANCES TO CONSIDER. In determining the

compensation of an attorney, the following circumstances should be
considered: the amount and character of the services rendered; the
responsibility imposed; the amount of money or the value of the property
affected by the controversy or involved in the employment; the skill and
experience called for in the performance of the service; the professional
standing of the attorney; the results secured; and whether or not the fee is
contingent or absolute, it being a recognized rule that an attorney may
properly charge a much larger fee when it is to be contingent than when it is
not.
10.DAMAGES; MORAL DAMAGES; AWARD OF DAMAGE TO JURIDICAL
PERSONS. Herein appellant's claim for moral damages however, seems
to have no legal or factual basis. Obviously, an artificial person like herein
appellant corporation cannot experience physical sufferings, mental anguish,
fright, serious anxiety, wounded feelings, moral shock or social humiliation
which are the basis of moral damages. A corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral
damages. The same cannot be considered under the facts of this case,
however, not only because it is admitted that herein appellant had already
ceased in its business operation at the time of the foreclosure sale of the
chattels, but also for the reason that whatever adverse effect the foreclosure
sale of the chattels, could have upon its reputation or business standing
would undoubtedly be the same whether the sale was conducted at Jose
Panganiban, Camarines Norte, or in Manila which is the place agreed upon
by the parties in the mortgage contract.

7.ID.; ID.; CHATTEL MORTGAGE; SALE OF PROPERTY NOT IN

ACCORDANCE WITH CONTRACT; EXEMPLARY DAMAGES AND
ATTORNEY'S FEES. But for the wrongful acts of herein appellee bank
and the deputy sheriff of Camarines Norte in proceeding with the sale in utter
disregard of the agreement to have the chattels sold in Manila as provided
for in mortgage contract, to which their attentions were timely called by
herein appellant and in disposing of the chattels in gross for the miserable
amount of P4,201.00, herein appellant should be awarded exemplary
damages in the sum of P10,000.00. The circumstances of the case also
warrant the award of P3,000.00 as attorney's fees for herein appellant.

ANGELES, J :

8.ATTORNEY'S FEES; RULE OF QUANTUM MERUIT. This Court has

invariably fixed counsel fees on a quantum meruit basis whenever the fees
stipulated appear excessive, unconscionable, or unreasonable, because a
lawyer is primarily a court officer charged with the duty of assisting the court
in administering impartial justice between the parties. The fees should be
subject to judicial control. Sound public policy demands that courts disregard
stipulations for counsel fees, whenever they appear to be a source of
speculative profit at the expense of the debtor or mortgagor.

In seeking the reversal of the decision, the plaintiff advances several

propositions in its brief which may be restated as follows:

DECISION
p

An appeal from a decision, dated April 2, 1964, of the Court of First Instance
of Manila in Civil case No. 52089, entitled "Mambulao Lumber Company,
plaintiff, vs. Philippine National Bank and Anacleto Heraldo, defendants,"
dismissing the complaint against both defendants and sentencing the plaintiff
to pay to defendant Philippine National Bank (PNB for short) the sum of
P3,582.52 with interest thereon at the rate of 6% per annum from December
22, 1961 until fully paid, and the costs of suit.

1.That its total indebtedness to the PNB as of November 21, 1961, was only
P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the

proceeds of the foreclosure sale of its real property alone in the amount of
P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB
thereafter was more than sufficient to liquidate its obligation, thereby
rendering the subsequent foreclosure sale of its chattels unlawful;
2.That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees
and the additional sum of P298.54 as expenses of the foreclosure sale;
3.That the subsequent foreclosure sale of its chattels is null and void, not
only because it had already settled its indebtedness to the PNB at the time
the sale was effected, but also for the reason that the said sale was not
conducted in accordance with the provisions of the Chattel Mortgage
Law and the venue agreed upon by the parties in the mortgage contract;
4.That the PNB, having illegally sold the chattels, is liable to the plaintiff for
its value; and
5.That for the acts of the PNB in proceeding with the sale of the chattels, in
utter disregard of plaintiff's vigorous opposition thereto, and in taking
possession thereof after the sale thru force, intimidation, coercion, and by
detaining its "man-in-charge" of said properties, the PNB is liable to plaintiff
for damages and attorney's fees.
The antecedent facts of the case, as found by the trial court, are as follows:
"On May 5, 1956, the plaintiff applied for an industrial loan of
P155,000 with the Naga Branch of defendant PNB and the
former offered real estate, machinery, logging and transportation
equipments as collaterals. The application, however, was
approved for a loan of P100,000 only. To secure the payment of
the loan, the plaintiff mortgaged to defendant PNB a parcel of
land, together with the buildings and improvements existing
thereon, situated in the poblacion of Jose Panganiban
(formerly Mambulao), province of Camarines Norte, and covered
by Transfer Certificate of Title No. 381 of the land records of said
province, as well as various sawmill equipment, rolling unit and
other fixed assets of the plaintiff, all situated in its compound in
the aforementioned municipality.
"On August 2, 1956, the PNB released from the approved loan
the sum of P27,500, for which the plaintiff signed a promissory
note wherein it promised to pay to the PNB the said sum in five
equal yearly installments at the rate of P6,528.40 beginning July
31, 1957, and every year thereafter, the last of which would be
on July 31, 1961.
"On October 19, 1956, the PNB made another release of
P15,500 as part of the approved loan granted to the plaintiff and

so on the said date, the latter executed another promissory note

wherein it agreed to pay to the former the said sum in five equal
yearly installments at the rate of P3,679.64 beginning July 31,
1957, and ending on July 31, 1961.
"The plaintiff failed to pay the amortizations on the amounts
released to and received by it. Repeated demands were made
upon the plaintiff to pay its obligation but it failed or otherwise
refused to do so. Upon inspection and verification made by
employees of the PNB, it was found that the plaintiff had already
stopped operation about the end of 1957 or early part of 1958.
"On September 27, 1961, the PNB sent a letter to the Provincial
Sheriff of Camarines Norte requesting him to take possession of
the parcel of land, together with the improvements existing
thereon, covered by Transfer Certificate of Title No. 381 of the
land records of Camarines Norte, and to sell it at public auction in
accordance with the provisions of Act No. 3135, as amended, for
the satisfaction of the unpaid obligation of the plaintiff, which as
of September 22, 1961, amounted to P57,646.59, excluding
attorney's fees. In compliance with the request, on October 16,
1961, the Provincial Sheriff of Camarines Norte issued the
corresponding notice of extra-judicial foreclosure sale and sent a
copy thereof to the plaintiff. According to the notice, the
mortgaged property would be sold at public auction at 10:00 a.m.
on November 21, 1961, at the ground floor of the Court House in
Daet, Camarines Norte.
"On November 6, 1961, the PNB sent a letter to the Provincial
Sheriff of Camarines Norte requesting him to take possession of
the chattels mortgaged to it by the plaintiff and sell them at public
auction also on November 21, 1961, for the satisfaction of the
sum of P57,646.59, plus 6% annual interest thereon from
September 23, 1961, attorney's fees equivalent to 10% of the
amount due and the costs and expenses of the sale. On the
same day, the PNB sent notice to the plaintiff that the former was
foreclosing extrajudicially the chattels mortgaged by the latter
and that the auction sale thereof would be held on November 21,
1961, between 9:00 and 12:00 a.m., in Mambulao, Camarines
Norte, where the mortgaged chattels were situated.
"On November 8, 1961, Deputy Provincial Sheriff Anacleto
Heraldo took possession of the chattels mortgaged by the plaintiff
and made an inventory thereof in the presence of a PC Sergeant
and a policeman of the municipality of Jose Panganiban. On
November 9, 1961, the said Deputy Sheriff issued the
corresponding notice of public auction sale of the mortgaged
chattels to be held on November 21, 1961, at 10:00 a.m., at the
plaintiffs compound situated in the municipality of Jose
Panganiban, Province of Camarines Norte.

"On November 19, 1961, the plaintiff sent separate letters,

posted as registered air mail matter, one to the Naga Branch of
the PNB and another to the Provincial Sheriff of Camarines
Norte, protesting against the foreclosure of the real estate and
chattel mortgages on the grounds that they could not be effected
unless a Court's order was issued against it (plaintiff) for said
purpose and that the foreclosure proceedings, according to the
terms of the mortgage contracts, should be made in Manila. In
said letter to the Naga Branch of the PNB, it was intimated that if
the public auction sale would be suspended and the plaintiff
would be given an extension of ninety (90) days, its obligation
would be settled satisfactorily because an important negotiation
was then going on for the sale of its "whole interest" for an
amount more than sufficient to liquidate said obligation.
"The letter of the plaintiff to the Naga Branch of the PNB was
construed by the latter as a request for extension of the
foreclosure sale of the mortgaged chattels and so it advised the
Sheriff of Camarines Norte to defer it to December 21, 1961, at
the same time and place. A copy of said advice was sent to the
plaintiff for its information and guidance.
"The foreclosure sale of the parcel of land, together with the
buildings and improvements thereon, covered by Transfer
Certificate of Title No. 381, was, however, held on November 21,
1961, and the said property was sold to the PNB for the sum of
P56,908.00, subject to the right of the plaintiff to redeem the
same within a period of one year. On the same date, Deputy
Provincial Sheriff Heraldo executed a certificate of sale in favor of
the PNB and a copy thereof was sent to the plaintiff.
"In a letter dated December 14, 1961 (but apparently posted
several days later), the plaintiff sent a bank draft for P738.59 to
the Naga Branch of the PNB, allegedly in full settlement of the
balance of the obligation of the plaintiff after the application
thereto of the sum of P56,908.00 representing the proceeds of
the foreclosure sale of parcel of land described in Transfer
Certificate of Title No. 881. In the said letter, the plaintiff
reiterated its request that the foreclosure sale of the mortgaged
chattels be discontinued on the grounds that the mortgaged
indebtedness had been fully paid and that it could not be legally
effected at a place other than the City of Manila.
"In a letter dated December 16, 1961, the plaintiff advised the
Provincial Sheriff of Camarines Norte that it had fully paid its
obligation to the PNB, and enclosed therewith a copy of its letter
to the latter dated December 14, 1961.
"On December 18, 1961, the Attorney of the Naga Branch of the
PNB, wrote to the plaintiff acknowledging the remittance of
P738.59 with the advice, however, that as of that date the

balance of the account of the plaintiff was P9,161.76, to which

should be added the expenses of guarding the mortgaged
chattels at the rate of P4.00 a day beginning December 19, 1961.
It was further explained in said letter that the sum of P57,646.59,
which was stated in the request for the foreclosure of the real
estate mortgage, did not include the 10% attorney's fees and
expenses of the sale. Accordingly, the plaintiff was advised that
the foreclosure sale scheduled on the 21st of said month would
be stopped if a remittance of P9,161.76, plus interest thereon
and guarding fees, would be made.
"On December 21, 1961, the foreclosure sale of the mortgaged
chattels was held at 10:00 a.m. and they were awarded to the
PNB for the sum of P4,200 and the corresponding bill of sale was
issued in its favor by Deputy Provincial Sheriff Heraldo.
"In a letter dated December 26, 1961, the Manager of the Naga
Branch of the PNB advised the plaintiff giving it priority to
repurchase the chattels acquired by the former at public auction.
This offer was reiterated in a letter dated January 3, 1962, of the
Attorney of the Naga Branch of the PNB to the plaintiff, with the
suggestion that it exercise its right of redemption and that it apply
for the condonation of the attorney's fees. The plaintiff did not
follow the advice but on the contrary it made known of its
intention to file appropriate action or actions for the protection of
its interests.

"On May 24, 1962, several employees of the PNB arrived in the
compound of the plaintiff in Jose Panganiban, Camarines Norte,
and they informed Luis Salgado, Chief Security Guard of the
premises, that the properties therein had been auctioned and
bought by the PNB, which in turn sold them to Mariano Bundok.
Upon being advised that the purchaser would take delivery of the
things he bought, Salgado was at first reluctant to allow any
piece of property to be taken out of the compound of the plaintiff.
The employees of the PNB explained that should Salgado refuse,
he would be exposing himself to a litigation wherein he could be
held liable to pay big sum of money by way of damages.
Apprehensive of the risk that he would take, Salgado immediately
sent a wire to the President of the plaintiff in Manila, asking
advice as to what he should do. In the meantime, Mariano
Bundok was able to take out from the plaintiffs compound two
truck loads of equipment.
"In the afternoon of the same day, Salgado received a telegram
from plaintiffs President directing him not to deliver the 'chattels'
without court order, with the information that the company was
then filing an action for damages against the PNB. On the
following day, May 25, 1962, two trucks and men of Mariano

Bundok arrived but Salgado did not permit them to take out any
equipment from inside the compound of the plaintiff. Thru the
intervention, however, of the local police and PC soldiers, the
trucks of Mariano Bundok were able finally to haul the properties
originally mortgaged by the plaintiff to the PNB, which were
bought by it at the foreclosure sale and subsequently sold to
Mariano Bundok."

Upon the foregoing facts, the trial court rendered the decision appealed from
which, as stated in the first paragraph of this opinion, sentenced
the Mambulao Lumber Company to pay to the defendant PNB the sum of
P3,582.52 with interest thereon at the rate of 6% per annum from December
22, 1961 (day following the date of the questioned foreclosure of plaintiff's
chattels) until fully paid, and the costs.Mambulao Lumber Company
interposed the instant appeal.
We shall discuss the various points raised in appellant's brief in seriatim.
The first question Mambulao Lumber Company poses is that which relates to
the amount of its indebtedness to the PNB arising out of the principal loans
and the accrued interest thereon. It is contended that its obligation under the
terms of the two promissory notes it had executed in favor of the PNB
amounts only to P56,485.87 as of November 21, 1961, when the sale of real
property was effected, and not P58,213.51 as found by the trial court.
There is merit to this claim. Examining the terms of the promissory note
executed by the appellant in favor of the PNB, we find that the agreed
interest on the loan of P43,000.00 P27,500.00 released on August 2,
1956, as per promissory note of even date (Exhibit C-3), and P15,500.00
released on October 19, 1956, as per promissory note of the same date
(Exhibit C-4) was six per cent (6%) per annum from the respective date of
said notes "until paid." In the statement of account of the appellant as of
September 22, 1961, submitted by the PNB, it appears that in arriving at the
total indebtedness of P57,646.59 as of that date, the PNB had compounded
the principal of the loan and the accrued 6% interest thereon each time the
yearly amortizations became due, and on the basis of these compounded
amounts charged additional delinquency interest on them up to September
22, 1961; and to this erroneously computed total of P57,646.59, the trial
court added 6% interest per annum from September 23, 1961 to November
21 of the same year. In effect, the PNB has claimed, and the trial court has
adjudicated to it, interest on accrued interests from the time the various
amortizations of the loan became due until the real estate mortgage
executed to secure the loan was extrajudicially foreclosed on November 21,
1961. This is an error. Section 5 of Act No. 2655 expressly provides that in
computing the interest on any obligation, promissory note or other instrument
or contract, compound interest shall not be reckoned, except by agreement,
or in default thereof, whenever the debt is judicially claimed. This is also the

clear mandate of Article 2212 of the new Civil Code which provides that
interest due shall earn legal interest only from the time it is judicially
demanded, and of Article 1959 of the same code which ordains that interest
due and unpaid shall not earn interest. Of course, the parties may, by
stipulation, capitalize the interest due and unpaid, which as added principal
shall earn new interest; but such stipulation is nowhere to be found in the
terms of the promissory notes involved in this case. Clearly therefore, the trial
court fell into error when it awarded interest on accrued interests, without any
agreement to that effect and before they had been judicially demanded.
Appellant next assails the award of attorney's fees and the expenses of the
foreclosure sale in favor of the PNB. With respect to the amount of P298.54
allowed as expenses of the extra-judicial sale of the real property, appellant
maintains that the same has no basis, factual or legal, and should not have
been awarded. It likewise decries the award of attorney's fees which,
according to the appellant, should not be deducted from the proceeds of the
sale of the real property, not only because there is no express agreement in
the real estate mortgage contract to pay attorney's fees in case the same is
extra-judicially foreclosed, but also for the reason that the PNB neither spent
nor incurred any obligation to pay attorney's fees in connection with the said
extra-judicial foreclosure under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses
of the sale. In this respect, the trial court said:
"The parcel of land, together with the buildings and
improvements existing thereon covered by Transfer Certificate of
Title No. 381, was sold for P56,908. There was, however, no
evidence how much was the expenses of the foreclosure sale
although from the pertinent provisions of the Rules of Court, the
Sheriff's fees would be P1 for advertising the sale (par. k, Sec. 7,
Rule 130 of the Old Rules) and P297.54 as his commission for
the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of
P298.54."

There is really no evidence of record to support the conclusion that the

PNB is entitled to the amount awarded as expenses of the extra- judicial
foreclosure sale. The court below committed error in applying the
provisions of the Rules of Court for purposes of arriving at the amount
awarded. It is to be borne in mind that the fees enumerated under
paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are
demandable only by a sheriff serving processes of the court in
connection with judicial foreclosure of mortgages under Rule 68 of the
new Rules, and not in cases of extra-judicial foreclosure of mortgages
under Act 3135. The law applicable is Section 4 of Act 3135 which
provides that the officer conducting the sale is entitled to collect a fee of
P5.00 for each day of actual work performed in addition to his expenses

in connection with the foreclosure sale. Admittedly, the PNB failed to

prove during the trial of the case, that it actually spent any amount in
connection with the said foreclosure sale. Neither may expenses for
publication of the notice be legally allowed in the absence of evidence on
record to support it. 1 It is true, as pointed out by the appellee bank, that
courts should take judicial notice of the fees provided for by law which
need not be proved; but in the absence of evidence to show at least the
number of working days the sheriff concerned actually spent in
connection with the extra-judicial foreclosure sale, the most that he may
be entitled to, would be the amount of P10.00 as a reasonable allowance
for two day's work one for the preparation of the necessary notices of
sale, and the other for conducting the auction sale and issuance of the
corresponding certificate of sale in favor of the buyer. Obviously,
therefore, the award of P298.54 as expenses of the sale should be set
aside.
But the claim of the appellant that the real estate mortgage does not provide
for attorney's fees in case the same is extra-judicially foreclosed, cannot be
favorably considered, as would readily be revealed by an examination of the
pertinent provision of the mortgage contract. The parties to the mortgage
appear to have stipulated under paragraph (c) thereof, inter alia:
". . . For the purpose of extra-judicial foreclosure, the Mortgagor
hereby appoints the Mortgagee his attorney-in-fact to sell the
property mortgaged under Act 3135, as amended, to sign all
documents and to perform all acts requisite and necessary to
accomplish said purpose and to appoint its substitute as such
attorney-in-fact with the same powers as above specified. In case
of judicial foreclosure, the Mortgagor hereby consents to the
appointment of the Mortgagee or any of its employees as
receiver, without any bond, to take charge of the mortgaged
property at once, and to hold possession of the same and the
rents, benefits and profits derived from the mortgaged property
before the sale, less the costs and expenses of the receivership;
the Mortgagor hereby agrees further that in all cases, attorney's
fees hereby fixed at Ten Per Cent (10%) of the total
indebtedness then unpaid, which in no case shall be less than
P100.00 exclusive of all fees allowed by law, and the expenses
of collection shall be the obligation of the Mortgagor and shall
with priority, be paid to the Mortgagee out of any sums realized
as rents and profits derived from the mortgaged property or from
the proceeds realized from the sale of the said property and this
mortgage shall likewise stand as security therefor . . ."

We find the above stipulation to pay attorney's fees clear enough to

cover both cases of foreclosure sale mentioned thereunder, i.e., judicially
or extra-judicially. While the phrase "in all cases" appears to be part of
the second sentence, a reading of the whole context of the stipulation

would readily show that it logically refers to extra-judicial foreclosure

found in the first sentence and to judicial foreclosure mentioned in the
next sentence. And the ambiguity in the stipulation suggested and
pointed out by the appellant by reason of the faulty sentence
construction should not be made to defeat the otherwise clear intention
of the parties in the agreement.

It is suggested by the appellant, however, that even if the above stipulation to

pay attorney's fees were applicable to the extra- judicial foreclosure sale of
its real properties, still, the award of P5,821.35 for attorney's fees has no
legal justification, considering the circumstance that the PNB did not actually
spend anything by way of attorney's fees in connection with the sale. In
support of this proposition, appellant cites authorities to the effect: (1) that
when the mortgagee has neither paid nor incurred any obligation to pay an
attorney in connection with the foreclosure sale, the claim for such fees
should be denied; 2 and (2) that attorney's fees will not be allowed when the
attorney conducting the foreclosure proceedings is an officer of the
corporation (mortgagee) who receives a salary for all the legal services
performed by him for the corporation. 3 These authorities are indeed
enlightening; but they should not be applied in this case. The very same
authority first cited suggests that said principle is not absolute, for there is
authority to the contrary. As to the fact that the foreclosure proceedings were
handled by an attorney of the legal staff of the PNB, we are reluctant to
exonerate herein appellant from the payment of the stipulated attorney's fees
on this ground alone, considering the express agreement between the
parties in the mortgage contract under which appellant became liable to pay
the same. At any rate, we find merit in the contention of the appellant that the
award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable
and unreasonable, considering that all that the branch attorney of the said
bank did in connection with the foreclosure sale of the real property was to
file a petition with the provincial sheriff of Camarines Norte requesting the
latter to sell the same in accordance with the provisions of Act 3135.
The principle that courts should reduce stipulated attorney's fees whenever it
is found under the circumstances of the case that the same is unreasonable,
is now deeply rooted in this jurisdiction to entertain any serious objection to it.
Thus, this Court has explained:
"But the principle that it may be lawfully stipulated that the legal
expenses involved in the collection of a debt shall be defrayed by
the debtor does not imply that such stipulations must be enforced
in accordance with the terms, no matter how injurious or
oppressive they may be. The lawful purpose to be accomplished
by such a stipulation is to permit the creditor to receive the
amount due him under his contract without a deduction of the

expenses caused by the delinquency of the debtor. It should not

be permitted for him to convert such a stipulation into a source of
speculative profit at the expense of the debtor.
"Contracts for attorney's services in this jurisdiction stands upon
an entirely different footing from contracts for the payment of
compensation for any other services. By express provision of
section 29 of the Code of Civil Procedure, an attorney is not
entitled in the absence of express contract to recover more than
a reasonable compensation for his services; and even when an
express contract is made the court can ignore it and limit the
recovery to reasonable compensation of the amount of the
stipulated fee is found by the court to be unreasonable. This is a
very different rule from that announced in section 1091 of the
Civil Code with reference to the obligation of contracts in general,
where it is said that such obligation has the force of law between
the contracting parties. Had the plaintiff herein made an express
contract to pay his attorney an uncontingent fee of P2,115.25 for
the services to be rendered in reducing the note here in suit to
judgment, it would not have been enforced against him had he
seen fit to oppose it, as such a fee is obviously far greater than is
necessary to remunerate the attorney for the work involved and
is therefore unreasonable. In order to enable the court to ignore
an express contract for an attorney's fees, it is not necessary to
show, as in other contracts, that it is contrary to morality or public
policy (Art. 1255, Civil Code). It is enough that it is unreasonable
or unconscionable." 4

properly charge a much larger fee when it is to be contingent than when it is

not. 7 From the stipulation in the mortgage contract earlier quoted, it appears
that the agreed fee is 10% of the total indebtedness, irrespective of the
manner the foreclosure of the mortgage is to be effected. The agreement is
perhaps fair enough in case the foreclosure proceedings is prosecuted
judicially but, surely, it is unreasonable when, as in this case, the mortgage
was foreclosed extrajudicially, and all that the attorney did was to file a
petition for foreclosure with the sheriff concerned. It is to be assumed though,
that the said branch attorney of the PNB made a study of the case before
deciding to file the petition for foreclosure: but even with this in mind, we
believe the amount of P5,821.35 is far too excessive a fee for such services.
Considering the above circumstances mentioned, it is our considered opinion
that the amount of P1,000.00 would be more than sufficient to compensate
the work aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the
real properties alone together with the amount it remitted to the PNB later
was more than sufficient to liquidate its total obligation to herein appellee
bank. Again, we find merit in this claim. From the foregoing discussion of the
first two errors assigned, and for purposes of determining the total obligation
of herein appellant to the PNB as of November 21, 1961 when the real estate
mortgage was foreclosed, we have the following illustration in support of this
conclusion:
A.

Since then this Court has invariably fixed counsel fees on a quantum
meruit basis whenever the fees stipulated appear excessive,
unconscionable, or unreasonable, because a lawyer is primarily a court
officer charged with the duty of assisting the court in administering
impartial justice between the parties, and hence, the fees should be
subject to judicial control. Nor should it be ignored that sound public
policy demands that courts disregard stipulations for counsel fees,
whenever they appear to be a source of speculative profit at the expense
of the debtor or mortgagor. 5 And it is not material that the present action
is between the debtor and the creditor, and not between attorney and
client. As courts have power to fix the fee as between attorney and client,
it must necessarily have the right to say whether a stipulation like this,
inserted in a mortgage contract, is valid. 6
In determining the compensation of an attorney, the following circumstances
should be considered: the amount and character of the services rendered,
the responsibility imposed: the amount of money or the value of the property
affected by the controversy, or involved in the employment: the skill and
experience called for in the performance of the service, the professional
standing of the attorney; the results secured; and whether or not the fee is
contingent or absolute, it being a recognized rule that an attorney may

I.Principal Loan
(a)Promissory note dated August
(1)Interest
at
6%
per
Aug. 2, 1956 to Nov. 21, 19618,751.78

2,

1956P27,500.00
annum
from

(b)Promissory note dated October 19, 1956P15,500.00

(1)Interest
at
6%
per
annum
from
Oct. 19, 1956 to Nov. 21, 19614,734.08
II.Sheriff's fees [for two [2]day's work]10.00
III.Attorney's

Total obligation as of Nov. 21, 1961P57,495.86

fees1,000.00

B.
I.Proceeds
of
the
foreclosure
sale
the real estate mortgage on Nov. 21, 196156,908.00.
II.Additional
PNB
on

amount
Dec.

remitted
18,

of

to
the
1961738.59


Total
amount
of
Payment
PNB
as
of
Dec.
18,

Deduct:
Total
obligation
to
the

Excess
Payment
to
the
=======

made
to
1961P57,646.59
PNBP57,495.86
PNBP150.73

From the foregoing illustration or computation, it is clear that there was no

further necessity to foreclose the mortgage of herein appellant's chattels on
December 21, 1961; and on this ground alone, we may declare the sale of
appellant's chattels on the said date, illegal and void. But we take into
consideration the fact that the PNB must have been led to believe that the
stipulated 10% of the unpaid loan for attorney's fees in the real estate
mortgage was legally maintainable, and in accordance with such belief,
herein appellee bank insisted that the proceeds of the sale of appellant's real
property was deficient to liquidate the latter's total indebtedness. Be that as it
may, however, we still find the subsequent sale of herein appellant's chattels
illegal and objectionable on other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage
after the foreclosure of its real estate mortgage on November 21, 1961,
cannot be doubted, as shown not only by its letter to the PNB on November
19, 1961, but also in its letter to the provincial sheriff of Camarines Norte on
the same date. These letters were followed by another letter to the appellee
bank on December 14, 1961, wherein herein appellant, in no uncertain
terms, reiterated its objection to the scheduled sale of its chattels on
December 21, 1961 at Jose Panganiban, Camarines Norte for the reasons
therein stated that: (1) it had settled in full its total obligation to the PNB by
the sale of the real estate and its subsequent remittance of the amount of
P738.59; and (2) that the contemplated sale at Jose Panganiban would
violate their agreement embodied under paragraph (i) in the Chattel
Mortgage which provides as follows:
"(i)In case of both judicial and extra-judicial foreclosure under Act
1508, as amended, the parties hereto agree that the
corresponding complaint for foreclosure or the petition for sale
should be filed with the courts or the sheriff of the City of Manila,
as the case may be; and that the Mortgagor shall pay attorney's
fees hereby fixed at ten per cent (10%) of the total indebtedness
then unpaid but in no case shall it be less than P100.00,
exclusive of all costs and fees allowed by law and of other
expenses incurred in connection with the said foreclosure."
[Emphasis supplied]

Notwithstanding the above-quoted agreement in the chattel mortgage

contract, and in utter disregard of the objection of herein appellant to the sale
of its chattels at Jose Panganiban, Camarines Norte and not in the City of
Manila as agreed upon, the PNB proceeded with the foreclosure sale of said
chattels. The trial court, however justified said action of the PNB in the
decision appealed from in the following rationale:
"While it is true that it was stipulated in the chattel mortgage
contract that a petition for the extra-judicial foreclosure thereof
should be filed with the Sheriff of the City of Manila, nevertheless,
the effect thereof was merely to provide another place where the
mortgage chattel could be sold, in addition to those specified in
the Chattel Mortgage Law. Indeed, a stipulation in a contract
cannot abrogate much less impliedly repeal a specific provision
of the statute. Considering that Section 14 of Act No. 1508 vests
in the mortgagee the choice where the foreclosure sale should be
held, hence, in the case under consideration, the PNB has three
places from which to select, namely: (1) the place of residence of
the mortgagor; (2) the place of the mortgaged chattels were
situated; and (3) the place stipulated in the contract. The PNB
selected the second and, accordingly, the foreclosure sale held in
Jose Panganiban, Camarines Norte, was legal and valid."

To the foregoing conclusion, We disagree. While the law grants power and
authority to the mortgagee to sell the mortgaged property at a public place in
the municipality where the mortgagor resides, or where the property is
situated, 8 this Court has said that the sale of a mortgaged chattel may be
made in a place other than that where it is found, provided that the owner
thereof consents thereto; or that there is an agreement to this effect between
the mortgagor and the mortgagee. 9 But when, as in this case, the parties
agreed to have the sale of the mortgaged chattels in the City of Manila,
which, any way, is the residence of the mortgagor, it cannot be rightly said
that the mortgagee still retained the power and authority to select from
among the places provided for in the law and the place designated in their
agreement, over the objection of the mortgagor. In providing that the
mortgaged chattel may be sold at the place of residence of the mortgagor or
the place where it is situated, at the option of the mortgagee, the law clearly
contemplated benefits not only to the mortgagor but to the mortgagee as
well. Their rights arising thereunder, however, are personal to them; they do
not affect either public policy or the rights of third persons. They may validly
be waived. So, when herein mortgagor and mortgagee agreed in the
mortgage contract that in cases of both judicial and extra-judicial foreclosure
underAct 1508, as amended, the corresponding complaint for foreclosure or
the petition for sale should be filed with the courts or the Sheriff of Manila, as
the case may be, they waived their corresponding rights under the law. The
correlative obligation arising from that agreement have the force of law
between them and should be complied with in good faith. 10

"By said agreement the parties waived the legal venue, and such
waiver is valid and legally effective, because it was merely a
personal privilege they waived, which is not contrary to public
policy or to the prejudice of third persons. It is a general principle
that a person may renounce any right which the law gives unless
such renunciation is expressly prohibited or the right conferred is
of such nature that its renunciation would be against public
policy." 11
"On the other hand, if a place of sale is specified in the mortgage
and statutory requirements in regard thereto are complied with, a
sale is properly conducted in that place. Indeed, in the absence
of a statute to the contrary, a sale conducted at a place other
than that stipulated for in the mortgage is invalid, unless the
mortgagor consents to such sale." 12

Moreover, Section 14 of Act 1508, as amended, provides that the officer

making the sale should make a return of his doings which shall particularly
describe the articles sold and the amount received from each article. From
this, it is clear that the law requires that sale be made article by article,
otherwise, it would be impossible for him to state the amount received for
each item. This requirement was totally disregarded by the Deputy Sheriff of
Camarines Norte which he sold the chattels in question in bulk,
notwithstanding the fact that the said chattels consisted of no less than
twenty different items as shown in the bill of sale. 13 This makes the sale of
the chattels manifestly objectionable. And in the absence of any evidence to
show that the mortgagor had agreed or consented to such sale in gross, the
same should be set aside.
It is said that the mortgagee is guilty of conversion when he sells under the
mortgage but not in accordance with its terms, or where the proceedings as
to the sale or foreclosure do not comply with the statute. 14 This rule applies
squarely to the facts of this case where, as earlier shown, herein appellee
bank insisted, and the appellee deputy sheriff of Camarines Norte proceeded
with the sale of the mortgaged chattels at Jose Panganiban, Camarines
Norte, in utter disregard of the valid objection of the mortgagor thereto for the
reason that it is not the place of sale agreed upon in the mortgage contract;
and the said deputy sheriff sold all the chattels (among which were a skagit
with caterpillar engine, three GMC 6x6 trucks, a Herring Hall Safe, and
Sawmill equipment consisting of a 150 HP Murphy Engine, plainer, large
circular saws, etc.) as a single lot in violation of the requirement of the law to
sell the same article by article. The PNB has resold the chattels to another
buyer with whom it appears to have actively cooperated in subsequently
taking possession of and removing the chattels from appellant's compound
by force, as shown by the circumstance that they had to take along PC
soldiers and municipal policemen of Jose Panganiban who placed the chief
security officer of the premises in jail to deprive herein appellant of its
possession thereof. To exonerate itself of any liability for the breach of peace

thus committed, the PNB would want us to believe that it was the subsequent
buyer alone, who is not a party to this case, that was responsible for the
forcible taking of the property; but assuming this to be so, still the PNB
cannot escape liability for the conversion of the mortgaged chattels by
parting with its interest in the property. Neither would its claim that it
afterwards gave a chance to herein appellant to repurchase or redeem the
chattels, improve its position, for the mortgagor is not under obligation to take
affirmative steps to repossess the chattels that were converted by the
mortgagee. 15As a consequence of the said wrongful acts of the PNB and the
Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein
appellant is entitled to collect from them, jointly and severally, the full value of
the chattels in question at the time they were illegally sold by them. To this
effect was the holding of this Court in a similar situation. 16
"The effect of this irregularity was in our opinion to make the
plaintiff liable to the defendant for the full value of the truck at the
time the plaintiff thus carried it off to be sold; and of course, the
burden is on the defendant to prove the damage to which he was
thus subjected. . . ."

This brings us to the problem of determining the value of the mortgaged

chattels at the time of their sale in 1961. The that court did not make any
finding on the value of the chattels in the decision appealed from and denied
altogether the right of the appellant to recover the same. We find enough
evidence of record, however, which may be used as a guide to ascertain
their value. The record shows that at the time herein appellant applied for its
loan with the PNB in 1956, for which the chattels in question were mortgaged
as part of the security therefor, herein appellant submitted a list of the
chattels together with its application for the loan with a stated value of
P107,115.85. An official of the PNB made an inspection of the chattels in the
same year giving it an appraised value of P42,850.00 and a market value of
P85,700.00. 17 The same chattels with some additional equipment acquired
by herein appellant with part of the proceeds of the loan were reappraised in
a reinspection conducted by the same official in 1958, in the report of which
he gave all the chattels an appraised value of P26,850.00 and a market
value of P48,200.00. 18 Another reinspection report in 1959 gave the
appraised value as P19,400.00 and the market value of P25,600.00. 19 The
said official of the PNB who made the foregoing reports of inspection and
reinspections testified in court that in giving the values appearing in the
reports, he used a conservative method of appraisal which, of course, is to
be expected of an official of the appellee bank. And it appears that the values
were considerably reduced in all the reinspection reports for the reason that
when he went to herein appellant's premises at the time, he found the
chattels no longer in use with some of the heavier equipment dismantled with
parts thereof kept in the bodega; and finding it difficult to ascertain the value
of the dismantled chattels in such condition, he did not give them anymore
any value in his reports. Noteworthy is the fact, however, that in the last

reinspection report he made of the chattels in 1961, just a few months before
the foreclosure sale, the same inspector of the PNB reported that the heavy
equipments of herein appellant were "lying idle and rusty," but were "with a
shed, free from rains," 20 showing that although they were no longer in use at
the time, they were kept in a proper place and not exposed to the elements.
The President of the appellant company, on the other hand, testified that its
caterpillar (tractor) alone is worth P35,000.00 in the market, and that the
value of its two trucks acquired by it with part of the proceeds of the loan and
included as additional items in the mortgaged chattels were worth no less
than P14,000.00. He likewise appraised the worth of its Murphy engine at
P16,000.00 which, according to him, when taken together with the heavy
equipment he mentioned, the sawmill itself and all other equipment forming
part of the chattels under consideration, and bearing in mind the current cost
of equipment these days which he alleged to have increased by about five
(5) times, could safely be estimated at P120,000.00. This testimony, except
for the appraised and market values appearing in the inspection and
reinspection reports of the PNB official earlier mentioned, stand
uncontroverted in the record; but We are not inclined to accept such
testimony at its par value, knowing that the equipment of herein appellant
had been idle and unused since it stopped operating its sawmill in 1958 up to
the time of the sale of the chattels in 1961. We have no doubt that the value
of the chattels was depreciated after all those years of inoperation, although
from the evidence aforementioned, We may also safely conclude that the
amount of P4,200.00 for which the chattels were sold in the foreclosure sale
in question was grossly unfair to the mortgagor. Considering, however, the
facts that the appraised value of P42,850.00 and the market value of
P85,700.00 originally given by the PNB official were admittedly conservative;
that two 6x6 trucks subsequently bought by the appellant company had
thereafter been added to the chattels; and that the real value thereof,
although depreciated after several years of inoperation, was in a way
maintained because the depreciation is off-set by the marked increase in the
cost of heavy equipment in the market, it is our opinion that the market value
of the chattels at the time of the sale should be fixed at the original appraised
value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no

legal or factual basis. Obviously, an artificial person like herein appellant
corporation cannot experience physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shock or social humiliation which
are the basis of moral damages. 21 A corporation may have a good reputation
which, if besmirched, may also be a ground for the award of moral damages.
The same cannot be considered under the facts of this case, however, not
only because it is admitted that herein appellant had already ceased in its
business operation at the time of the foreclosure sale of the chattels, but also

for the reason that whatever adverse effect the foreclosure sale of the
chattels could have upon its reputation or business standing would
undoubtedly be the same whether the sale was conducted at Jose
Panganiban. Camarines Norte, or in Manila which is the place agreed upon
by the parties in the mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of
Camarines Norte in proceeding with the sale in utter disregard of the
agreement to have the chattels sold in Manila as provided for in the
mortgage contract, to which their attentions were timely called by herein
appellant, and in disposing of the chattels in gross for the miserable amount
of P4,200.00, herein appellant should be awarded exemplary damages in the
sum of P10,000.00. The circumstances of the case also warrant the award of
P3,000.00 as attorney's fees for herein appellant.
Wherefore and considering all the foregoing, the decision appealed from
should be, as hereby, it is set aside. The Philippine National Bank and the
Deputy Sheriff of the province of Camarines Norte are ordered to pay, jointly
and severally, to Mambulao Lumber Company the total amount of
P56,000.73, broken as follows: P150.73 overpaid by the latter to the PNB,
P42,850.00 the value of the chattels at the time of the sale with interest at the
rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00
in exemplary damages, and P3,000.00 as attorney's fees. Costs against both
appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar,
Sanchez, Ruiz Castro and Fernando, JJ., concur.
(Mambulao Lumber Co. v. PNB, G.R. No. L-22973, [January 30, 1968], 130
PHIL 366-392)
|||

THIRD DIVISION
[G.R. No. 126204. November 20, 2001.]
NATIONAL
POWER
CORPORATION, petitioner, vs. PHILIPP BROTHERS OC
EANIC, INC., respondent.
The Solicitor General for petitioner.
Quasha Ancheta Pea & Nolasco for respondent.
SYNOPSIS
In October 1987, NAPOCOR advertised for the delivery of coal to its Calaca
thermal plant. PHIBRO's application for pre-qualification to bid was
disapproved for not meeting the minimum requirements. PHIBRO, however,
alleged that the real reason for the disapproval was its purported failure to
satisfy NAPOCOR's demand for damages due to the delay in the delivery of
the first coal shipment in its previous contract with NAPOCOR. Thus,
PHIBRO filed an action for damages against NAPOCOR alleging that the
former's disqualification was tainted with malice and bad faith.
NAPOCOR puts in issue the factual findings of the Court of Appeals on the
liability of PHIBRO in its previous contract with NAPOCOR. This, however, is
not proper under Rule 45 as only questions of law may be raised therein.
Whether NAPOCOR rejected the bid of PHIBRO with bad faith, the Court
ruled in the negative. NAPOCOR acted on the strong conviction that
PHIBRO had a seriously impaired track record based on its experience in the
previous contract. This policy is necessary to protect the interest of the
awarding body against irresponsible bidders. The decision of the Court of
Appeals was modified. The award of damages in favor of PHIBRO was
deleted.
SYLLABUS
1. REMEDIAL LAW; APPEAL; ONLY QUESTIONS OF LAW MAY BE
RAISED. It is axiomatic that only questions of law, not questions of fact,
may be raised before this Court in a petition for review under Rule 45 of the
Rules of Court. The findings of facts of the Court of Appeals are conclusive
and binding on this Court and they carry even more weight when the said
court affirms the factual findings of the trial court. Stated differently, the
findings of the Court of Appeals, by itself, which are supported by substantial
evidence, are almost beyond the power of review by this Court.

2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NO LIABILITY FOR

EVENTS UNFORESEEN OR WERE INEVITABLE. The Court of Appeals
is justified in sustaining the Regional Trial Court's decision exonerating
PHIBRO from any liability for damages to NAPOCOR as it was clearly
established from the evidence, that what prevented PHIBRO from complying
with its obligation was the industrial disputes which besieged Australia during
that time. Extant in our Civil Code is the rule that no person shall be
responsible for those events which could not be foreseen, or which, though
foreseen, were inevitable. This means that when an obligor is unable to fulfill
his obligation because of a fortuitous event or force majeure, he cannot be
held liable for damages for non-performance.
3. POLITICAL LAW; GOVERNMENT PROJECTS; WHERE RIGHT TO
REJECT BID IS RESERVED. This Court has held that where the right to
reject is so reserved, the lowest bid or any bid for that matter may be rejected
on a mere technicality. And where the government as advertiser, availing
itself of that right, makes its choice in rejecting any or all bids, the losing
bidder has no cause to complain nor right to dispute that choice unless an
unfairness or injustice is shown. Accordingly, a bidder has no ground of
action to compel the Government to award the contract in his favor, nor to
compel it to accept his bid.Even the lowest bid or any bid may be rejected.
Verily, a reservation of the government of its right to reject any bid, generally
vests in the authorities a wide discretion as to who is the best and most
advantageous bidder. The exercise of such discretion involves inquiry,
investigation, comparison, deliberation and decision, which are quasi-judicial
functions, and when honestly exercised, may not be reviewed by the
court.
TacADE

4. ID.; ID.; ID.; PROPRIETY OF THE ACT SHOULD BE JUDGED BASED

ON THE GENERAL PRINCIPLES ON HUMAN RELATIONS. Owing to the
discretionary character of the right involved in this case, the propriety of
NAPOCOR's act in rejecting bids should therefore be judged on the basis of
the general principles regulating human relations, the forefront provision of
which is Article 19 of the Civil Codewhich provides that "every person must,
in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith."
Accordingly, a person will be protected only when he acts in the legitimate
exercise of his right, that is, when he acts with prudence and in good faith;
but not when he acts with negligence or abuse.
5. REMEDIAL LAW; DUTY OF COURTS TO DETERMINE WHEN THE
EXERCISE OF RIGHT IS UNJUST. In practice, courts, in the sound
exercise of their discretion, will have to determine under all the facts and
circumstances when the exercise of a right is unjust, or when there has been
an abuse of right.

6. POLITICAL LAW; GOVERNMENT PROJECTS; PURPOSE OF PREQUALIFICATION DOCUMENTS. The very purpose of requiring a bidder
to furnish the awarding authority its pre-qualification documents is to ensure
that only those "responsible" and "qualified" bidders could bid and be
awarded with government contracts. It bears stressing that the award of a
contract is measured not solely by the smallest amount of bid for its
performance, but also by the "responsibility" of the bidder. Consequently, the
integrity, honesty, and trustworthiness of the bidder is to be considered. An
awarding official is justified in considering a bidder not qualified or not
responsible if he has previously defrauded the public in such contracts or if,
on the evidence before him, the official bona fide believes the bidder has
committed such fraud, despite the fact that there is yet no judicial
determination to that effect. Otherwise stated, if the awarding body bona
fide believes that a bidder has seriously impaired its track record because of
a particular conduct, it is justified in disqualifying the bidder. This policy is
necessary to protect the interest of the awarding body against irresponsible
bidders.
7. CIVIL LAW; DAMAGES; BAD FAITH; ELUCIDATED. One who acted
pursuant to the sincere belief that another willfully committed an act
prejudicial to the interest of the government cannot be considered to have
acted in bad faith. Bad faith has always been a question of intention. It is that
corrupt motive that operates in the mind. As understood in law, it
contemplates a state of mind affirmatively operating with furtive design or
with some motive of self-interest or ill-will or for ulterior purpose. While
confined in the realm of thought, its presence may be ascertained through
the party's actuation or through circumstantial evidence. The circumstances
under which NAPOCOR disapproved PHIBRO's pre-qualification to bid do
not show an intention to cause damage to the latter. The measure it adopted
was one of self-protection. Consequently, we cannot penalize NAPOCOR for
the course of action it took. NAPOCOR cannot be made liable for actual,
moral and exemplary damages.
8. ID.; ID.; ACTUAL DAMAGES; REQUIRES COMPETENT PROOF.
Basic is the rule that to recover actual damages, the amount of loss must not
only be capable of proof but must actually be proven with reasonable degree
of certainty, premised upon competent proof or best evidence obtainable of
the actual amount thereof. A court cannot merely rely on speculations,
conjectures or guesswork as to the fact and amount of damages. Thus, while
indemnification for damages shall comprehend not only the value of the loss
suffered, but also that of the profits which the obligee failed to obtain, it is
imperative that the basis of the alleged unearned profits is not too
speculative and conjectural as to show the actual damages which may be
suffered on a future period.

9. ID.; ID.; MORAL DAMAGES; NOT PROPER IN THE ABSENCE OF BAD

FAITH AND NOT GRANTED TO A CORPORATION. The award of moral
damages is improper. NAPOCOR did not act in bad faith. Moreover, moral
damages are not, as a general rule, granted to a corporation. While it is true
that besmirched reputation is included in moral damages, it cannot cause
mental anguish to a corporation, unlike in the case of a natural person, for a
corporation has no reputation in the sense that an individual has, and
besides, it is inherently impossible for a corporation to suffer mental anguish.
10. ID.; ID.; EXEMPLARY DAMAGES; NOT PROPER WHEN PARTY NOT
ENTITLED TO OTHER DAMAGES. Neither can we award exemplary
damages under Article 2234 of the Civil Code. Before the court may consider
the question of whether or not exemplary damages should be awarded, the
plaintiff must show that he is entitled to moral, temperate, or compensatory
damages.
11. ID.; ID.; ATTORNEY'S FEES; WHEN PROPER IN THE ABSENCE OF
STIPULATION. This Court has laid down the rule that in the absence of
stipulation, a winning party may be awarded attorney's fees only in case
plaintiff's action or defendant's stand is so untenable as to amount to gross
and evident bad faith. Trial courts must be reminded that attorney's fees may
not be awarded to a party simply because the judgment is favorable to him,
for it may amount to imposing a premium on the right to redress grievances
in court. We adopt the same policy with respect to the expenses of litigation.
A winning party may be entitled to expenses of litigation only where he, by
reason of plaintiff's clearly unjustifiable claims or defendant's unreasonable
refusal to his demands, was compelled to incur said expenditures.
ASIETa

MELO, J., dissenting opinion:

1. REMEDIAL LAW; APPEAL; ONLY QUESTIONS OF LAW MAY BE
RAISED. As correctly pointed out in the majority opinion, the rules are
explicit that a petition under Rule 45 of the Rules of Court can raise only
questions of law (Section 1, Rule 45, 1997 Rules of Civil Procedure).
PHIBRO's delay in the delivery of imported coal was found by both the trial
court and the Court of Appeals to have been due to the industrial unrest,
occasioned by strikes and work stoppages, that occurred in Australia from
the first week of July to the third week of September, 1987. The general rule
is that findings of fact of the Court of Appeals are binding and conclusive
upon this Court (DBP vs. CA, 302 SCRA 362 [1999]). These factual findings
carry even more weight when said court affirms the factual findings of the
trial court(Lagrosa vs. CA, 312 SCRA 298 [1999]). Thus, it is beyond
question that PHIBRO's delay in the delivery of coal is not attributable to its
fault or negligence, these being the factual findings of both the trial court and
the appellate court.

2. CIVIL LAW; DAMAGES; MORAL, EXEMPLARY, AND ATTORNEY'S

FEES ARE PROPER IN CASE AT BAR. The instant case does not
involve the rejection of PHIBRO's bid by NAPOCOR. The fact is that
PHIBRO was not even allowed to bid by NAPOCOR. PHIBRO was barred
from submitting bids for subsequent tenders of NAPOCOR. This barring of
PHIBRO caused the latter to incur damages, all because of what both the
trial court and the Court of Appeals viewed to be an unfounded imputation of
delay to PHIBRO in the July 8, 1987 contract for delivery of coal. Private
respondent's business reputation and credibility in the market greatly
suffered because of this malicious act of petitioner. That despite the
favorable findings of the lower court and the Court of Appeals attributing no
fault to PHIBRO, the harm done to PHIBRO's good standing in the market by
the blacklisting of NAPOCOR, at least as far as Philippine setting is
concerned, has already been done. And for the damage done to the
business reputation of PHIBRO, I respectfully submit that the Court of
Appeals was correct in sustaining the award of US$100,000.00 as moral
damages to private respondent a corporate body under Article 2217 of
theCivil Code. The Court, in a number of cases (i.e. Asset Privatization Trust
vs. CA, 300 SCRA 579 [1998]; Maersk Tabacalera Shipping Agency
(Filipina), Inc. vs. CA, 197 SCRA 646 [1991]), has sustained the award of
moral damages to a corporation despite the general rule that moral damages
cannot be awarded to an artificial person which has no feelings, emotions or
senses, and which cannot experience physical suffering and mental anguish
(LBC Express, Inc. vs. CA, 236 SCRA 602 [1994]; see also Solid Homes,
Inc. vs. CA, 275 SCRA 267 [1997]) because a corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral
damages (Mambulao Lumber Co. vs. PNB, 22 SCRA 359 [1968]). It must be
noted that trial courts are generally given discretion to determine the amount
of moral damages, the same being incapable of pecuniary estimation. The
Court of Appeals can only modify or change the amount awarded when they
are palpably or scandalously excessive so as to indicate that it was the result
of passion, prejudice or corruption on the part of the trial court. In the case at
bar, the conclusive finding of the Court of Appeals of petitioner's malice and
bad faith justify the award of both moral and exemplary damages. In addition,
NAPOCOR's baseless and unwarranted discrimination against PHIBRO
constrained the latter to seek the aid of the courts in order to obtain redress.
This calls for an award of attorney's fees, which the lower court correctly
made.
DECISION
SANDOVAL-GUTIERREZ, J :
p

Where a person merely uses a right pertaining to him, without bad faith or
intent to injure, the fact that damages are thereby suffered by another will not
make him liable. 1

This principle finds useful application to the present case.

Before us is a petition for review of the Decision 2 dated August 27, 1996 of
the Court of Appeals affirming in toto the Decision 3 dated January 16, 1992
of the Regional Trial Court, Branch 57, Makati City.
The facts are:
On May 14, 1987, the National Power Corporation (NAPOCOR) issued
invitations to bid for the supply and delivery of 120,000 metric tons of
imported coal for its Batangas Coal-Fired Thermal Power Plant in Calaca,
Batangas. The Philipp Brothers Oceanic, Inc. (PHIBRO) prequalified and was
allowed to participate as one of the bidders. After the public bidding was
conducted, PHIBRO's bid was accepted. NAPOCOR's acceptance was
conveyed in a letter dated July 8, 1987, which was received by PHIBRO on
July 15, 1987.
The "Bidding Terms and Specifications" 4 provide for the manner of shipment
of coals, thus:
"SECTION V
SHIPMENT
The winning TENDERER who then becomes the SELLER shall
arrange and provide gearless bulk carrier for the shipment of coal
to arrive at discharging port on or before thirty (30) calendar days
after receipt of the Letter of Credit by the SELLER or its
nominee as per Section XIV hereof to meet the vessel arrival
schedules at Calaca, Batangas, Philippines as follows:
60,000 +/ - 10 % July 20, 1987
60,000 +/ - 10% September 4, 1987" 5

On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial disputes
might soon plague Australia, the shipment's point of origin, which could
seriously hamper PHIBRO's ability to supply the needed coal. 6 From July 23
to July 31, 1987, PHIBRO again apprised NAPOCOR of the situation in
Australia, particularly informing the latter that the ship owners therein are not
willing to load cargo unless a "strike-free" clause is incorporated in the
charter party or the contract of carriage. 7 In order to hasten the transfer of
coal, PHIBRO proposed to NAPOCOR that they equally share the burden of
a "strike-free" clause. NAPOCOR refused.
On August 6, 1987, PHIBRO received from NAPOCOR a confirmed and
workable letter of credit. Instead of delivering the coal on or before the

thirtieth day after receipt of the Letter of Credit, as agreed upon by the parties
in the July contract, PHIBRO effected its first shipment only on November 17,
1987.
Consequently, in October 1987, NAPOCOR once more advertised for the
delivery of coal to its Calaca thermal plant. PHIBRO participated anew in this
subsequent bidding. On November 24, 1987, NAPOCOR disapproved
PHIBRO's application for pre-qualification to bid for not meeting the minimum
requirements. 8 Upon further inquiry, PHIBRO found that the real reason for
the disapproval was its purported failure to satisfy NAPOCOR's demand for
damages due to the delay in the delivery of the first coal shipment.
This prompted PHIBRO to file an action for damages with application for
injunction against NAPOCOR with the Regional Trial Court, Branch 57,
Makati City. 9 In its complaint, PHIBRO alleged that NAPOCOR's act of
disqualifying it in the October 1987 bidding and in all subsequent biddings
was tainted with malice and bad faith. PHIBRO prayed for actual, moral and
exemplary damages and attorney's fees.
In its answer, NAPOCOR averred that the strikes in Australia could not be
invoked as reason for the delay in the delivery of coal because PHIBRO itself
admitted that as of July 28, 1987 those strikes had already ceased. And,
even assuming that the strikes were still ongoing, PHIBRO should have
shouldered the burden of a "strike-free" clause because their contract was "C
and F Calaca, Batangas, Philippines," meaning, the cost and freight from the
point of origin until the point of destination would be for the account of
PHIBRO. Furthermore, NAPOCOR claimed that due to PHIBRO's failure to
deliver the coal on time, it was compelled to purchase coal from ASEA at a
higher price. NAPOCOR claimed for actual damages in the amount of
P12,436,185.73, representing the increase in the price of coal, and a claim of
P500,000.00 as litigation expenses. 10
Thereafter, trial on the merits ensued.
On January 16, 1992, the trial court rendered a decision in favor of PHIBRO,
the dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered in favor of
plaintiff Philipp Brothers Oceanic, Inc. (PHIBRO) and against the
defendant National Power Corporation (NAPOCOR) ordering the
said defendant NAPOCOR:
1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the
defendant National Power Corporation's list of
accredited bidders and allow PHIBRO to participate in
any and all future tenders of National Power Corporation
for the supply and delivery of imported steam coal;

2. To pay Philipp Brothers Oceanic, Inc. (PHIBRO);

a. The peso equivalent at the time of payment of
$864,000 as actual damages,
b. The peso equivalent at the time of payment of
$100,000 as moral damages;
c. The peso equivalent at the time of payment of
$50,000 as exemplary damages;
d. The peso equivalent at the time of payment of
$73,231.91 as reimbursement for expenses,
cost of litigation and attorney's fees;
3. To pay the costs of suit;
4. The counterclaims of defendant NAPOCOR are dismissed for
lack of merit.
SO ORDERED." 11

Unsatisfied, NAPOCOR, through the Solicitor General, elevated the case to

the Court of Appeals. On August 27, 1996, the Court of Appeals rendered a
Decision affirming in toto the Decision of the Regional Trial Court. It
ratiocinated that:
"There is ample evidence to show that although PHIBRO's
delivery of the shipment of coal was delayed, the delay was in
fact caused by a) Napocor's own delay in opening a workable
letter of credit; and b) the strikes which plaqued the Australian
coal industry from the first week of July to the third week of
September 1987. Strikes are included in the definition of force
majeure in Section XVII of the Bidding Terms and Specifications,
(supra), so Phibro is not liable for any delay caused thereby.
Phibro was informed of the acceptance of its bid on July 8, 1987.
Delivery of coal was to be effected thirty (30) days from
Napocor's opening of a confirmed and workable letter of credit.
Napocor was only able to do so on August 6, 1987.
By that time, Australia's coal industry was in the middle of a
seething controversy and unrest, occasioned by strikes, overtime
bans, mine stoppages. The origin, the scope and the effects of
this industrial unrest are lucidly described in the uncontroverted
testimony of James Archibald, an employee of Phibro and
member of the Export Committee of the Australian Coal
Association during the time these events transpired.

xxx xxx xxx

The records also attest that Phibro periodically informed Napocor
of these developments as early as July 1, 1987, even before the
bid was approved. Yet, Napocor did not forthwith open the letter
of credit in order to avoid delay which might be caused by the
strikes and their after-effects.

"Respondent Court of Appeals gravely and seriously erred in

concluding and so holding that NAPOCOR acted maliciously and
unjustifiably in disqualifying PHIBRO from participating in the
December 8, 1987 and future biddings for the supply of imported
coal despite the existence of valid grounds therefor such as
serious impairment of its track record." 14
III

"Strikes" are undoubtedly included in the force majeure clause of

the Bidding Terms and Specifications (supra). The renowned
civilist, Prof. Arturo Tolentino, defines force majeure as "an event
which takes place by accident and could not have been
foreseen." (Civil Code of the Philippines, Volume IV, Obligations
and Contracts, 126, [1991]) He further states:

"Respondent Court of Appeals gravely and seriously erred in

concluding and so holding that PHIBRO was entitled to injunctive
relief, to actual or compensatory, moral and exemplary damages,
attorney's fees and litigation expenses despite the clear absence
of legal and factual bases for such award." 15
IV

"Fortuitous events may be produced by two general

causes: (1) by Nature, such as earthquakes, storms,
floods, epidemics, fires, etc., and (2) by the act of man,
such as an armed invasion, attack by bandits,
governmental prohibitions, robbery, etc."

"Respondent Court of Appeals gravely and seriously erred in

absolving PHIBRO from any liability for damages to NAPOCOR
for its unjustified and deliberate refusal and/or failure to deliver
the contracted imported coal within the stipulated period." 16
V

Tolentino adds that the term generally applies, broadly speaking,

to natural accidents. In order that acts of man such as a strike,
may constitute fortuitous event, it is necessary that they have the
force of an imposition which the debtor could not have resisted.
He cites a parallel example in the case of Philippine National
Bank v. Court of Appeals, 94 SCRA 357 (1979), wherein the
Supreme Court said that the outbreak of war which prevents
performance exempts a party from liability.
Hence, by law and by stipulation of the parties, the strikes which
took place in Australia from the first week of July to the third
week of September, 1987, exempted Phibro from the effects of
delay of the delivery of the shipment of coal." 12

Twice thwarted, NAPOCOR comes to us via a petition for review ascribing to

the Court of Appeals the following errors:
I
"Respondent Court of Appeals gravely and seriously erred in
concluding and so holding that PHIBRO's delay in the delivery of
imported coal was due to NAPOCOR's alleged delay in opening
a letter of credit and to force majeure, and not to PHIBRO's own
deliberate acts and faults." 13
II

"Respondent Court of Appeals gravely and seriously erred in

dismissing NAPOCOR's counterclaims for damages and litigation
expenses." 17

It is axiomatic that only questions of law, not questions of fact, may be raised
before this Court in a petition for review under Rule 45 of the Rules of
Court. 18 The findings of facts of the Court of Appeals are conclusive and
binding on this Court 19 and they carry even more weight when the said court
affirms the factual findings of the trial court. 20 Stated differently, the findings
of the Court of Appeals, by itself, which are supported by substantial
evidence, are almost beyond the power of review by this Court. 21
With the foregoing settled jurisprudence, we find it pointless to delve lengthily
on the factual issues raised by petitioner. The existence of strikes in Australia
having been duly established in the lower courts, we are left only with the
burden of determining whether or not NAPOCOR acted wrongfully or with
bad faith in disqualifying PHIBRO from participating in the subsequent public
bidding.
Let us consider the case in its proper perspective.
The Court of Appeals is justified in sustaining the Regional Trial Court's
decision exonerating PHIBRO from any liability for damages to NAPOCOR
as it was clearly established from the evidence, testimonial and

documentary, that what prevented PHIBRO from complying with its obligation
under the July 1987 contract was the industrial disputes which besieged
Australia during that time. Extant in our Civil Codeis the rule that no person
shall be responsible for those events which could not be foreseen, or which,
though foreseen, were inevitable. 22 This means that when an obligor is
unable to fulfill his obligation because of a fortuitous event or force majeure,
he cannot be held liable for damages for non-performance. 23

where the government as advertiser, availing itself of that right, makes its
choice in rejecting any or all bids, the losing bidder has no cause to complain
nor right to dispute that choice unless an unfairness or injustice is
shown. Accordingly, a bidder has no ground of action to compel the
Government to award the contract in his favor, nor to compel it to accept his
bid. Even the lowest bid or any bid may be rejected. 28 In Celeste v. Court of
Appeals, 29 we had the occasion to rule:

In addition to the above legal precept, it is worthy to note that PHIBRO and
NAPOCOR explicitly agreed in Section XVII of the "Bidding Terms and
Specifications" 24 that "neither seller (PHIBRO) nor buyer (NAPOCOR) shall
be liable for any delay in or failure of the performance of its obligations, other
than the payment of money due, if any such delay or failure is due to Force
Majeure." Specifically, they defined force majeure as "any disabling cause
beyond the control of and without fault or negligence of the party, which
causes may include but are not restricted to Acts of God or of the public
enemy; acts of the Government in either its sovereign or contractual
capacity; governmental restrictions; strikes, fires, floods, wars, typhoons,
storms, epidemics and quarantine restrictions."

"Moreover, paragraph 15 of the Instructions to Bidders states that

'the Government hereby reserves the right to reject any or all bids
submitted.' In the case of A.C. Esguerra and Sons v. Aytona, 4
SCRA 1245, 1249 (1962), we held:

The law is clear and so is the contract between NAPOCOR and PHIBRO.
Therefore, we have no reason to rule otherwise.

Since there is no evidence to prove bad faith and arbitrariness on

the part of the petitioners in evaluating the bids, we rule that the
private respondents are not entitled to damages representing lost
profits." (Emphasis supplied)

However, proceeding from the premise that PHIBRO was prevented by force
majeure from complying with its obligation, does it necessarily follow that
NAPOCOR acted unjustly, capriciously, and unfairly in disapproving
PHIBRO's application for pre-qualification to bid?
First, it must be stressed that NAPOCOR was not bound under any contract
to approve PHIBRO's pre-qualification requirements. In fact, NAPOCOR had
expressly reserved its right to reject bids. The Instruction to Bidders found in
the "Post-Qualification Documents/Specifications for the Supply and Delivery
of Coal for the Batangas Coal-Fired Thermal Power Plant I at Calaca,
Batangas Philippines," 25 is explicit, thus:
"IB-17 RESERVATION OF NAPOCOR TO REJECT BIDS
NAPOCOR reserves the right to reject any or all bids, to
waive any minor informality in the bids received. The
right is also reserved to reject the bids of any bidder
who has previously failed to properly perform or
complete on time any and all contracts for delivery of
coal
or
any
supply
undertaken
by
a
bidder." 26 (Emphasis supplied)

This Court has held that where the right to reject is so reserved, the lowest
bid or any bid for that matter may be rejected on a mere technicality. 27 And

'. . .[I]n the invitation to bid, there is a condition imposed

upon the bidders to the effect that the bidders shall be
subject to the right of the government to reject any and
all bids subject to its discretion. Here the government
has made its choice, and unless an unfairness or
injustice is shown, the losing bidders have no cause to
complain, nor right to dispute that choice.'

Verily, a reservation of the government of its right to reject any bid, generally
vests in the authorities a wide discretion as to who is the best and most
advantageous bidder. The exercise of such discretion involves inquiry,
investigation, comparison, deliberation and decision, which are quasi-judicial
functions, and when honestly exercised, may not be reviewed by the
court. 30 In Bureau Veritas v. Office of the President, 31 we decreed:
"The discretion to accept or reject a bid and award contracts is
vested in the Government agencies entrusted with that function.
The discretion given to the authorities on this matter is of such
wide latitude that the Courts will not interfere therewith, unless it
is apparent that it is used as a shield to a fraudulent award.
(Jalandoni v. NARRA, 108 Phil. 486 [1960]). . . . . The exercise of
this discretion is a policy decision that necessitates prior inquiry,
investigation, comparison, evaluation, and deliberation. This task
can best be discharged by the Government agencies concerned,
not by the Courts. The role of the Courts is to ascertain whether a
branch or instrumentality of the Government has transgresses its
constitutional boundaries. But the Courts will not interfere with
executive or legislative discretion exercised within those
boundaries. Otherwise, it strays into the realm of policy decisionmaking. . . . . (Emphasis supplied)

Owing to the discretionary character of the right involved in this case, the
propriety of NAPOCOR's act should therefore be judged on the basis of the
general principles regulating human relations, the forefront provision of which
is Article 19 of the Civil Code which provides that "every person must, in the
exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith." 32 Accordingly,
a person will be protected only when he acts in the legitimate exercise of his
right, that is, when he acts with prudence and in good faith; but not when he
acts with negligence or abuse. 33
Did NAPOCOR abuse its right or act unjustly in disqualifying PHIBRO from
the public bidding?
We rule in the negative.

as to render it impossible for the debtor to fulfill his obligation in a normal

manner." 36 Faced with the above circumstance, NAPOCOR is justified in
assuming that, may be, there was really no fortuitous event or force
majeure which could render it impossible for PHIBRO to effect the delivery of
coal. Correspondingly, it is also justified in treating PHIBRO's failure to
deliver a serious impairment of its track record. That the trial court, thereafter,
found PHIBRO's unexpected offer actually a result of its desire to minimize
losses on the part of NAPOCOR is inconsequential. In determining the
existence of good faith, the yardstick is the frame of mind of the actor at the
time he committed the act, disregarding actualities or facts outside his
knowledge. We cannot fault NAPOCOR if it mistook PHIBRO's unexpected
offer a mere attempt on the latter's part to undercut ASEA or an indication of
PHIBRO's inconsistency. The circumstances warrant such contemplation.

EHSIcT

In practice, courts, in the sound exercise of their discretion, will have to

determine under all the facts and circumstances when the exercise of a right
is unjust, or when there has been an abuse of right. 34

We went over the record of the case with painstaking solicitude and we are
convinced that NAPOCOR's act of disapproving PHIBRO's application for
pre-qualification to bid was without any intent to injure or a purposive motive
to perpetrate damage. Apparently, NAPOCOR acted on the strong conviction
that PHIBRO had a "seriously-impaired" track record. NAPOCOR cannot be
faulted from believing so. At this juncture, it is worth mentioning that at the
time NAPOCOR issued its subsequent Invitation to Bid, i.e., October 1987,
PHIBRO had not yet delivered the first shipment of coal under the July 1987
contract, which was due on or before September 5, 1987. Naturally,
NAPOCOR is justified in entertaining doubts on PHIBRO's qualification or
capability to assume an obligation under a new contract.
Moreover, PHIBRO's actuation in 1987 raised doubts as to the real situation
of the coal industry in Australia. It appears from the records that when
NAPOCOR was constrained to consider an offer from another coal supplier
(ASEA) at a price of US$33.44 per metric ton, PHIBRO unexpectedly offered
the immediate delivery of 60,000 metric tons of Ulan steam coal at US$31.00
per metric ton for arrival at Calaca, Batangas on September 20-21,
1987." 35 Of course, NAPOCOR had reason to ponder how come PHIBRO
could assure the immediate delivery of 60,000 metric tons of coal from the
same source to arrive at Calaca not later than September 20/21, 1987 but it
could not deliver the coal it had undertaken under its contract?
Significantly, one characteristic of a fortuitous event, in a legal sense, and
consequently in relations to contracts, is that "the concurrence must be such

That NAPOCOR believed all along that PHIBRO's failure to deliver on time
was unfounded is manifest from its letters 37 reminding PHIBRO that it was
bound to deliver the coal within 30 days from its (PHIBRO's) receipt of the
Letter of Credit, otherwise it would be constrained to take legal action. The
same honest belief can be deduced from NAPOCOR's Board Resolution,
thus:
"On the legal aspect, Management stressed that failure of PBO to
deliver under the contract makes them liable for damages,
considering that the reasons invoked were not valid. The
measure of the damages will be limited to actual and
compensatory
damages.
However,
it
was
reported
that Philipp Brothers advised they would like to have continuous
business relation with NPC so they are willing to sit down or even
proposed that the case be submitted to the Department of Justice
as to avoid a court action or arbitration.
xxx xxx xxx
On the technical-economic aspect, Management claims that if
PBO delivers in November 1987 and January 1988, there are
some advantages. If PBO reacts to any legal action and fails to
deliver, the options are: one, to use 100% Semirara and second,
to go into urgent coal order. The first option will result in a 75 MW
derating and oil will be needed as supplement. We will stand to
lose around P30 M. On the other hand, if NPC goes into an
urgent coal order, there will be an additional expense of
$786,000 or P16.11 M, considering the price of the latest
purchase with ASEA. On both points, reliability is decreased." 38

The very purpose of requiring a bidder to furnish the awarding authority its
pre-qualification documents is to ensure that only those "responsible" and
"qualified" bidders could bid and be awarded with government contracts. It
bears stressing that the award of a contract is measured not solely by the

smallest amount of bid for its performance, but also by the "responsibility" of
the bidder. Consequently, the integrity, honesty, and trustworthiness of the
bidder is to be considered. An awarding official is justified in considering a
bidder not qualified or not responsible if he has previously defrauded the
public in such contracts or if, on the evidence before him, the official bona
fide believes the bidder has committed such fraud, despite the fact that there
is yet no judicial determination to that effect. 39 Otherwise stated, if the
awarding body bona fide believes that a bidder has seriously impaired its
track record because of a particular conduct, it is justified in disqualifying the
bidder. This policy is necessary to protect the interest of the awarding body
against irresponsible bidders.
Thus, one who acted pursuant to the sincere belief that another willfully
committed an act prejudicial to the interest of the government cannot be
considered to have acted in bad faith. Bad faith has always been a question
of intention. It is that corrupt motive that operates in the mind. As understood
in law, it contemplates a state of mind affirmatively operating with furtive
design or with some motive of self-interest or ill-will or for ulterior
purpose. 40 While confined in the realm of thought, its presence may be
ascertained through the party's actuation or through circumstantial
evidence. 41 The circumstances under which NAPOCOR disapproved
PHIBRO's pre-qualification to bid do not show an intention to cause damage
to the latter. The measure it adopted was one of self-protection.
Consequently, we cannot penalize NAPOCOR for the course of action it
took. NAPOCOR cannot be made liable for actual, moral and exemplary
damages.
Corollarily, in awarding to PHIBRO actual damages in the amount of
$864,000, the Regional Trial Court computed what could have been the
profits of PHIBRO had NAPOCOR allowed it to participate in the subsequent
public bidding. It ruled that "PHIBRO would have won the tenders for the
supply of about 960,000 metric tons out of at least 1,200,000 metric tons"
from the public bidding of December 1987 to 1990. We quote the trial court's
ruling, thus:
". . . . PHIBRO was unjustly excluded from participating in at least
five (5) tenders beginning December 1987 to 1990, for the supply
and delivery of imported coal with a total volume of about
1,200,000 metric tons valued at no less than US$32 Million.
(Exhs. "AA", "AA-1", to "AA-2"). The price of imported coal for
delivery in 1988 was quoted in June 1988 by bidders at
US$41.35 to US$43.95 per metric ton (Exh. "JJ"); in September
1988 at US$41.50 to US$49.50 per metric ton (Exh. "J-1"); in
November 1988 at US$39.00 to US$48.50 per metric ton (Exh.
"J-2") and for the 1989 deliveries, at US$44.35 to US$47.35 per
metric ton (Exh. "J-3") and US$38.00 to US$48.25 per metric ton
in September 1990 (Exh. "JJ-6" and "JJ-7"). PHIBRO would have
won the tenders for the supply and delivery of about 960,000

metric tons of coal out of at least 1,200,000 metric tons awarded

during said period based on its proven track record of 80%. The
Court, therefore finds that as a result of its disqualification,
PHIBRO suffered damages equivalent to its standard 3% margin
in 960,000 metric tons of coal at the most conservative price of
US$30,000 per metric ton, or the total of US$864,000 which
PHIBRO would have earned had it been allowed to participate in
biddings in which it was disqualified and in subsequent tenders
for supply and delivery of imported coal."

We find this to be erroneous.

Basic is the rule that to recover actual damages, the amount of loss must not
only be capable of proof but must actually be proven with reasonable degree
of certainty, premised upon competent proof or best evidence obtainable of
the actual amount thereof. 42 A court cannot merely rely on speculations,
conjectures, or guesswork as to the fact and amount of damages. Thus,
while indemnification for damages shall comprehend not only the value of the
loss suffered, but also that of the profits which the obligee failed to obtain, 43 it
is imperative that the basis of the alleged unearned profits is not too
speculative and conjectural as to show the actual damages which may be
suffered on a future period.
In Pantranco North Express, Inc. v. Court of Appeals, 44 this Court denied the
plaintiff's claim for actual damages which was premised on a contract he was
about to negotiate on the ground that there was still the requisite public
bidding to be complied with, thus:
"As to the alleged contract he was about to negotiate with
Minister Hipolito, there is no showing that the same has been
awarded to him. If Tandoc was about to negotiate a contract with
Minister Hipolito, there was no assurance that the former would
get it or that the latter would award the contract to him since
there was the requisite public bidding. The claimed loss of profit
arising out of that alleged contract which was still to be
negotiated is a mere expectancy. Tandoc's claim that he could
have earned P2 million in profits is highly speculative and no
concrete evidence was presented to prove the same. The only
unearned income to which Tandoc is entitled to from the
evidence presented is that for the one-month period, during
which his business was interrupted, which is P6,125.00,
considering that his annual net income was P73,500.00."

In Lufthansa German Airlines v. Court of Appeals, 45 this Court likewise

disallowed the trial court's award of actual damages for unrealized profits in
the amount of US$75,000.00 for being highly speculative. It was held that
"the realization of profits by respondent . . . was not a certainty, but

depended on a number of factors, foremost of which was his ability to invite

investors and to win the bid." This Court went further saying that actual or
compensatory damages cannot be presumed, but must be duly proved, and
proved with reasonable degree of certainty.

faith. 50 This cannot be said of the case at bar. NAPOCOR is justified in

resisting PHIBRO's claim for damages. As a matter of fact, we partially grant
the prayer of NAPOCOR as we find that it did not act in bad faith in
disapproving PHIBRO's pre-qualification to bid.

And in National Power Corporation v. Court of Appeals, 46 the Court, in

denying the bidder's claim for unrealized commissions, ruled that even if
NAPOCOR does not deny its (bidder's) claims for unrealized commissions,
and that these claims have been transmuted into judicial admissions, these
admissions cannot prevail over the rules and regulations governing the
bidding for NAPOCOR contracts, which necessarily and inherently include
the reservation by the NAPOCOR of its right to reject any or all bids.

Trial courts must be reminded that attorney's fees may not be awarded to a
party simply because the judgment is favorable to him, for it may amount to
imposing a premium on the right to redress grievances in court. We adopt the
same policy with respect to the expenses of litigation. A winning party may
be entitled to expenses of litigation only where he, by reason of plaintiff's
clearly unjustifiable claims or defendant's unreasonable refusal to his
demands, was compelled to incur said expenditures. Evidently, the facts of
this case do not warrant the granting of such litigation expenses to PHIBRO.

The award of moral damages is likewise improper. To reiterate, NAPOCOR

did not act in bad faith. Moreover, moral damages are not, as a general rule,
granted to a corporation. 47 While it is true that besmirched reputation is
included in moral damages, it cannot cause mental anguish to a corporation,
unlike in the case of a natural person, for a corporation has no reputation in
the sense that an individual has, and besides, it is inherently impossible for a
corporation to suffer mental anguish. 48 In LBC Express, Inc. v. Court of
Appeals, 49 we ruled:
"Moral damages are granted in recompense for physical
suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation,
and similar injury. A corporation, being an artificial person and
having existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows
from real ills, sorrows, and griefs of life all of which cannot be
suffered by respondent bank as an artificial person."

Neither can we award exemplary damages under Article 2234 of the Civil
Code. Before the court may consider the question of whether or not
exemplary damages should be awarded, the plaintiff must show that he is
entitled to moral, temperate, or compensatory damages.

At this point, we believe that, in the interest of fairness, NAPOCOR should

give PHIBRO another opportunity to participate in future public bidding. As
earlier mentioned, the delay on its part was due to a fortuitous event.
But before we dispose of this case, we take this occasion to remind PHIBRO
of the indispensability of coal to a coal-fired thermal plant. With households
and businesses being entirely dependent on the electricity supplied by
NAPOCOR, the delivery of coal cannot be venturesome. Indeed, public
interest demands that one who offers to deliver coal at an appointed time
must give a reasonable assurance that it can carry through. With the
deleterious possible consequences that may result from failure to deliver the
needed coal, we believe there is greater strain of commitment in this kind of
obligation.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No.
126204 dated August 27, 1996 is hereby MODIFIED. The award, in favor of
PHIBRO, of actual, moral and exemplary damages, reimbursement for
expenses, cost of litigation and attorney's fees, and costs of suit, is
DELETED.
SO ORDERED.
Vitug, Panganiban and Carpio, JJ., concur.

NAPOCOR, in this petition, likewise contests the judgment of the lower

courts awarding PHIBRO the amount of $73,231.91 as reimbursement for
expenses, cost of litigation and attorney's fees.

Melo, J., see dissenting opinion.

Separate Opinions

We agree with NAPOCOR.

This Court has laid down the rule that in the absence of stipulation, a winning
party may be awarded attorney's fees only in case plaintiff's action or
defendant's stand is so untenable as to amount to gross and evident bad

MELO, J., dissenting:

While I agree with the majority opinion insofar as it finds that the delay in
delivery of coal by respondent Philipp Brothers Oceanic, Inc. (hereafter

PHIBRO) to petitioner National Power Corporation (hereafter NAPOCOR)

was not due to the former's fault, I have to dissent from the majority insofar
as it denies the award of actual, moral, and exemplary damages to PHIBRO
for the latter's act of excluding PHIBRO from participating in biddings
conducted by NAPOCOR.
The facts are undisputed.
On July 8, 1987, private respondent PHIBRO, one of the largest trading firms
in energy worldwide, was awarded by NAPOCOR the contract to supply
120,000 MT of steam coal for the Batangas Coal Fired Thermal Power Plant,
the same to be delivered in two (2) equal shipments on July 20 and
September 14, 1987.
However, while the contract provided for the arrival schedule of the two coal
shipments, it also provided that PHIBRO had to effect delivery not later than
30 days from receipt of the letter of credit to be opened by NAPOCOR.
Petitioner NAPOCOR was able to open its letter of credit only on August 6,
1987. Moreover, the contract had a clause which excused any delay
occasioned by force majeure. This clause included strikes as one of the
events to be considered as constituting force majeure.
From July to September 1987, a series of strikes in the collieries in New
South Wales (NSW), Australia, and the coal loading facility at Newcastle Port
took place, which adversely affected PHIBRO's ability to deliver the first
shipment on time.
Pursuant to the contract, PHIBRO notified NAPOCOR of these force
majeure conditions and that as a result of the strikes, vessels were not
readily available and shipowners were unwilling to load cargo unless a strikefree risk was incorporated in the charter party.
PHIBRO proposed an equal sharing in the strike-free risk, but NAPOCOR
refused. Instead, it demanded delivery of the first shipment not later than 30
days from the opening of its letter of credit.
In the meantime, NAPOCOR negotiated to buy from a company called ASEA
60,000MT imported steam coal at US$33.00/MT. This higher priced coal was
purchased by NAPOCOR despite PHIBRO's offer for the same tonnage and
delivery date at only US$31.00/MT, a price differential of US$2.00/MT. The
PHIBRO offer was with the understanding that the existing 120,000MT
contract would be delivered in accordance with a shipping schedule to be
mutually agreed between PHIBRO and NAPOCOR, taking into account the
strikes and NAPOCOR's needs. NAPOCOR ignored the offer and bought the
higher priced material from ASEA.

In October 1987, NAPOCOR conducted a tender for the supply of 180,000

MT imported coal. PHIBRO, as in prior tenders, complied with all
prequalification requirements of the tender. However, NAPOCOR disqualified
PHIBRO allegedly for "not meeting the minimum prequalification
requirements." PHIBRO was also refused the tender documents. In addition,
NAPOCOR, in total disregard of the force majeureclause incorporated in the
July 8, 1987 contract, demanded that unless its claims for damages due to
the delayed delivery of the coal in said contract were first settled, PHIBRO
would not be allowed to participate in any and all subsequent tenders to be
conducted by NAPOCOR for the supply of imported coal. On November 25,
1987, PHIBRO protested the wrongful and unjust action taken by NAPOCOR
inasmuch as PHIBRO had all the qualifications and none of the
disqualifications. PHIBRO demanded that it be provided with tender and post
qualification documents but NAPOCOR withheld the release of tender
documents to PHIBRO. After, inquiry, PHIBRO was told that the real reason
for the disqualification was not its "failure to meet the minimum
prequalification requirements," but was principally the claim of NAPOCOR for
alleged damages due to the delayed delivery of the first shipment of the July
8, 1987 contract. PHIBRO, on the other hand, maintained that its delayed
deliveries were due to force majeure and NAPOCOR's delayed opening of its
letter of credit. Despite this, however, NAPOCOR continued to bar PHIBRO
from participating in tenders.
Consequently, PHIBRO initiated suit before the Makati Regional Trial Court
on December 4, 1987 against NAPOCOR, docketed therein as Civil Case
No. 18473, complaining against the latter's alleged capricious, malevolent,
iniquitous, discriminatory, oppressive and unjustified disqualification of
PHIBRO, and asking for damages and that NAPOCOR be enjoined from
blacklisting PHIBRO in the subsequent NAPOCOR tenders.
After trial on the merits, the Makati Regional Trial Court, Branch 57, rendered
its Decision on January 16, 1992 in favor of PHIBRO and against
NAPOCOR, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff Philipp Brothers Oceanic, Inc. (PHIBRO) and against the
defendant National Power Corporation (NAPOCOR) ordering the
said defendant NAPOCOR:

1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the

defendant National Power Corporation's list of accredited bidders
and allow PHIBRO to participate in any and all future tenders of
National Power Corporation for the supply and delivery of
imported steam coal;

2. To pay Philipp Brothers Oceanic, Inc. (PHIBRO):

a) The peso equivalent at the time of payment of
$864,000 actual damages;
b) The peso equivalent at the time of payment of
$100,000 as moral damages;
c) The peso equivalent at the time of payment of
$50,000 as exemplary damages;
d) The peso equivalent at the time of payment of
$73,231.91 as reimbursement for expenses,
cost of litigation and attorney's fees;

supply of imported coal despite the existence of valid grounds

therefore such as serious impairment of its track record;
(3) in concluding and so holding that PHIBRO was entitled to
injunctive relief, to actual or compensatory, moral and exemplary
damages, attorney's fees and litigation expenses despite the
clear absence of legal and factual bases for such award;
(4) in absolving PHIBRO from any liability for damages to
NAPOCOR for its unjustified and deliberate refusal and/or failure
to deliver the contracted imported coal within the stipulated
period; and
(5) in dismissing NAPOCOR's counterclaims for damages and
litigation expenses.

3. To pay the costs of suit;

4. The counterclaim of defendant NAPOCOR are dismissed for
lack of merit.

On January 27, 1992, the Office of the Solicitor General appealed the lower
court's decision to the Court of Appeals. The appeal, docketed therein as
CA-G.R. CV No. 37906, was decided on August 27, 1996 with the appellate
court handing down an affirmance of the decision.
Petitioner NAPOCOR now comes to this Court by way of a petition for review
by certiorari under Rule 45 of the Rules of Court seeking to review, reverse,
and set aside the aforementioned decision.
Petitioner alleges that the Court of Appeals committed serious errors of law,
overlooked certain substantial facts which if properly considered would affect
the results of the case, drew incorrect conclusions from facts established by
evidence or based on misapprehension of facts, its factual findings being
incomplete and do not reflect the actual events that transpired and the
important points were left out and decided the case in a way not in accord
with law or the applicable decisions of this Court, which collectively amount
to grave abuse of discretion, to the damage and prejudice of petitioner's right
to due process. Specifically, petitioner maintains that the Court of Appeals
gravely and seriously erred:
(1) in concluding and so holding that PHIBRO's delay in the
delivery of imported coal was due to NAPOCOR's alleged delay
in opening letter of credit to force majeure, and not to PHIBRO's
own deliberate acts and faults;
(2) in concluding and so holding that NAPOCOR acted
maliciously and unjustifiably in disqualifying PHIBRO from
participating in the December 8, 1987 and future biddings for the

As correctly pointed out in the majority opinion, the rules are explicit that a
petition under Rule 45 of the Rules of Court can raise only questions of law
(Section 1, Rule 45, 1997 Rules of Civil Procedure). PHIBRO's delay in the
delivery of imported coal was found by both the trial court and the Court of
Appeals to have been due to the industrial unrest, occasioned by strikes and
work stoppages, that occurred in Australia from the first week of July to the
third week of September, 1987. As aptly observed by the Court of Appeals:
There is ample evidence to show that although PHIBRO's
delivery of the shipment of coal was delayed, the delay was in
fact caused by a) NAPOCOR's own delay in opening a workable
letter of credit; and b) the strikes which plagued the Australian
coal industry from the first week of July to the week of
September, 1987. Strikes are included in the definition of force
majeure in Section XVII of the Bidding Terms and Specifications,
(supra), so PHIBRO is not liable for any delay caused thereby.
PHIBRO was informed of the acceptance of its bid on July 8,
1987. Delivery of coal was to be effected thirty (30) days from
NAPOCOR's opening of a confirmed and workable letter of
credit. NAPOCOR was only able to do so on August 6, 1987.

By that time, Australia's coal industry was in the middle of a seething

controversy and unrest, occasioned by strikes, overtime bans, and mine
stoppages.
The general rule is that findings of fact of the Court of Appeals are binding
and conclusive upon this Court (DBP vs. CA, 302 SCRA 362 [1999]). These
factual findings carry even more weight when said court affirms the factual
findings of the trial court (Lagrosa vs. CA, 312 SCRA 298 [1999]). Thus, it is
beyond question that PHIBRO's delay in the delivery of coal is not
attributable to its fault or negligence, these being the factual findings of both
the trial court and the appellate court.

However, despite this finding, the majority would find NAPOCOR free from
liability to PHIBRO for its act of excluding the PHIBRO from NAPOCOR's
subsequent biddings on the ground that the exclusion is merely the legitimate
exercise of a right vested in NAPOCOR. In fine, The majority opinion would
characterize PHIBRO's exclusion as damnum absque injuria. I beg to
disagree.
The majority opinion anchors its thesis on the Instruction to Bidders found in
the "Post-Qualification Documents/Specifications for the Supply and Delivery
of Coal for the Batangas Coal-Fired Thermal Power Plant I at Calaca,
Batangas, Philippines" providing that:
NAPOCOR reserves the right to reject any and all bids, to waive
any minor informality in the bids received. The right is also
reserved to reject the bids of any bidder who has previously
failed to properly perform or complete on time any and all
contracts for delivery of coal or any supply undertaken by a
bidder.
(Original Records, p. 250.)

My esteemed colleagues declare that since NAPOCOR has reserved the

right to reject the bid of any bidder, the exclusion of PHIBRO was, in effect,
only the use by NAPOCOR of a right pertaining to it, without bad faith or
intent to injure and that the fact that PHIBRO may have suffered injuries
thereby would not make NAPOCOR liable. The majority opinion goes on to
state that where the government rejects any or all bids, the losing bidder has
no cause to complain and that accordingly, "a bidder has no ground of action
to compel the Government to award the contract in his favor, nor to compel it
to accept his bid."
I would wish to point out the following circumstances which I believe were
ignored by the majority.
Firstly, the instant case does not involve the rejection of PHIBRO's bid by
NAPOCOR. The fact is that PHIBRO was not even allowed to bid by
NAPOCOR. While it may be true that any bid may be rejected on a mere
technicality if the right to reject is reserved, there is a whale of a difference
between rejecting a bid and excluding a prospective bidder from participating
in tenders, more so in this case where the prospective bidder has complied
with all the prequalification requirements. Indubitably, the reservation of the
right to reject any and all bids does not include the right to exclude a
prospective bidder, perforce a qualified one at that.
Secondly, the reservation of the right to reject bids contained in the
Instruction to Bidders is of doubtful applicability in this case since PHIBRO
was not even allowed to submit a bid by NAPOCOR. The right to reject a bid

implies that there was a bid submitted. In this case, PHIBRO was barred
from submitting bids for subsequent tenders of NAPOCOR.
Thirdly, this is not a simple case of rejecting a bid but one of barring
participation in any and all subsequent bids for the supply of coal. This
barring of PHIBRO caused the latter to incur damages, all because of what
both the trial court and the Court of Appeals viewed to be an unfounded
imputation of delay to PHIBRO in the July 8, 1987 contract for delivery of
coal.
As adverted to earlier, this delay was covered by the force majeure clause of
the contract which validly excused the non-compliance with the specified
delivery date. The situation was further exacerbated to private respondent's
disadvantage when NAPOCOR, instead of accepting PHIBRO's offer to
shoulder half the burden of a strike free clause, used the non-delivery on
time of the coal as an excuse to exclude private respondent from future
bidding processes at NAPOCOR. Thus, the Court of Appeals correctly found
that:
Under the factual milieu, the court a quo correctly made an award
of damages to PHIBRO for Napocor's malicious and unjustified
act of disqualifying it from any and all subsequent bids for the
supply of coal. It was sufficiently established that Phibro was
entitled to an amount of US$864,000.00 representing unrealized
profits or lucro cessante. Article 2200 of the Civil Code provides:
"Article 2200. Indemnification for damages shall
comprehend not only the value for the loss suffered, but
also that of the profits when the obligee failed to obtain."
Undoubtedly, PHIBRO could have earned the questioned amount
if NAPOCOR did not unjustly discriminate against it during the
October, 1987 bidding and all other bidding subsequent thereto. .
...

Moreover, private respondent's business reputation and credibility in the

market greatly suffered because of this malicious act of petitioner. As
attested to by Vicente del Castillo:
Q. In addition to loss of earnings and opportunity loss which you
quantified earlier to be in the range of 770,000.00, what
other damage, if any, did Philip Brothers incur?
A Well, when we were blacklisted by the National Power
Corporation, it became known to the international
market, and with such an unfair reputation, we had
difficulty in obtaining business, new clients since our old
clients know what kind of company we are and they

continued to do business with us, and our business with

Ulan Coal Mines for market other than the Philippines
became difficult and we could no longer do business
that we used to before this problem came about.

(TSN, January 31, 1989, pp. 50-51.)

Furthermore, James Archibald, an employee of PHIBRO and a member of

the Export Committee of the Australia Coal Association stated in his
deposition, thus:
NBP Can you please state what affect the banning of NPC of
PHIBRO tendering a supply of coal has had on
PHIBRO?
JMA Well, it ended the special relationship between Phibro and
Ulan for a start out now I am in the cost trading business
and I can tell you that when you loss a significant
portion of your throughout like that the industry is
extremely incestuous and everybody known very quickly
that you have not been so successful as your past years
which makes it that much more difficult to gain support
from supplier in bidding for other spot contracts.

quo, as sustained by the Court of Appeals, correctly made the following

findings:
PHIBRO is therefore entitled to damages for the discriminatory,
oppressive and unjustified disqualification imposed upon it by
NAPOCOR. PHIBRO was unjustly excluded from participating in
at least five (5) tenders beginning December 1987 to 1990, for
the supply and delivery of imported coal with a total volume of
about 1,200,00 metric tons valued at no less than US$32 Million
(Exhs. "AA", "AA-1", to "AA-2"). The price of imported coal for
delivery in 1988 was quoted in June 1988 by bidders at
US$41.35 to US$43.95 per metric ton (Exh. "JJ"); in September
1988 at US$41.50 to US$49.50 per metric ton (Exh. J-1); in
November 1988 at US$39.00 to US$48.50 per metric ton (Exh.
"J-2"); and for the 1989 deliveries, at US$44.35 to US$47.35 per
metric ton (Exh. "J-3") and US$38.00 to US$48.25 per metric ton
in September 1990 (Exhs. "JJ-6" and "JJ-7"). PHIBRO would
have won the tenders for the supply and delivery of about
960,000 metric tons of coal out of at least 1,200,000 metric tons
awarded during said period based on its proven track record of
80%. The Court, therefore, finds that as a result of its
disqualification, PHIBRO suffered damages equivalent to its
standard 3% margin in 960,000 metric tons of coal at the most
conservative price of US$30.00 per metric ton, or the total of
US$864,000 which PHIBRO would have earned had it been
allowed to participate in biddings in which it was disqualified and
in subsequent tenders for supply and delivery of imported coal.

NBP Can you explain what you mean by incestuous?

JMA It is a very tight industry. Most people have worked in it in a
number of companies such as myself, with deals with
some markets such as Japan, we have actually joint
negotiations and we actually go in to customers, on a
collective needs. It is inevitable that we get to know
each other very well. Also at the port of Newcastle, ten
per cent of the coal shipped is actually traded amongst
the various shippers because often one shipper may be
short say ten thousand tonnes for a particular cargo and
they would buy in or swap coal with other shippers. A
very common port practice. So you know everybody
quite well. And also I am a representative of the Coal
Association so I may have had a lot more exposure to
the people in the industry.
(Exh. (CC-30, 30-31.)

Despite the favorable findings of the lower court and the Court of Appeals
attributing no fault to PHIBRO, the harm done to PHIBRO's good standing in
the market by the blacklisting of NAPOCOR, at least as far as Philippine
setting is concerned, has already been done. Thus, I believe that the court a

There is likewise uncontested or unrefuted evidence that as a

result of PHIBRO's disqualification by NAPOCOR, PHIBRO
suffered damages in its international reputation and lost
credibility in Government and business circle, and hence an
award is authorized by Art. 2205 of our Civil Code.

For the damage done to the business reputation of PHIBRO, I respectfully

submit that the Court of Appeals was likewise correct in sustaining the award
of US$100,000.00 as moral damages to private respondent a corporate
body under Article 2217 of the Civil Code.
The Court, in a number of cases (i.e. Asset Privatization Trust vs. CA, 300
SCRA 579 [1998]; Maersk Tabacalera Shipping Agency (Filipina), Inc. vs.
CA, 197 SCRA 646 [1991]), has sustained the award of moral damages to a
corporation despite the general rule that moral damages cannot be awarded
to an artificial person which has no feelings, emotions or senses, and which
cannot experience physical suffering and mental anguish (LBC Express, Inc.
vs. CA, 236 SCRA 602 [1994]; see also Solid Homes, Inc. vs. CA, 275 SCRA
267 [1997]) because a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages
(Mambulao Lumber Co. vs. PNB, 22 SCRA 359 [1968]). Thus, in the case

example or correction for the public good, in addition to moral,

temperate, liquidated or compensatory damages. According to
the Code Commission, "exemplary damages are required by
public policy, for wanton acts must be suppressed. They are an
antidote so that the poison of wickedness may not run through
the body politic." These damages are legally assessible against
him. IDEHCa

of Simex International (Manila), Inc. vs. CA (183 SCRA 360 [1990]), the
Court held:
From every viewpoint except that of the petitioner's, its claim of
moral damages in the amount of Php1,000,000.00 is nothing
short of preposterous. Its business certainly is not that big, or its
name that prestigious, to sustain such an extravagant pretense.
Moreover, a corporation is not as a rule entitled to moral
damages because, not being a natural person, it cannot
experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish and moral shock. The
only exception to this rule is where the corporation has a good
reputation that is debased, resulting in its social humiliation.
We shall recognize that the petitioner did suffer injury because of
the private respondent's negligence that caused the dishonor of
the checks issued by it. The immediate consequence was that its
prestige was impaired because of the bouncing checks and
confidence in it as a reliable debtor was diminished. The private
respondent makes much of the one instance when the petitioner
was sued in a collection case, but that did not prove that it did not
have a good reputation that could not be marred, more so since
that case was ultimately settled. It does not appear that, as the
private respondent would portray it, the petitioner is an unsavory
and disreputable entity that has no good name to protect.
Considering all this, we feel that the award of nominal damages
in the sum of Php20,000.00 was not the proper relief to which the
petitioner was entitled. Under Article 2221 of the Civil Code,
"nominal damages are adjudicated in order that a right of the
plaintiff, which has been violated or invaded by the defendant,
may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him." As we
have found that the petitioner has indeed incurred loss through
the fault of the private respondent, the proper remedy is the
award to it of moral damages, which we impose, in our discretion,
in the same amount of Php20,000.00.

It must be noted that trial courts are generally given discretion to determine
the amount of moral damages, the same being incapable of pecuniary
estimation. The Court of Appeals can only modify or change the amount
awarded when they are palpably or scandalously excessive so as to indicate
that it was the result of passion, prejudice or corruption on the part of the trial
court. In the case at bar, the conclusive finding of the Court of Appeals of
petitioner's malice and bad faith justify the award of both moral and
exemplary damages. As held in De Guzman vs. NLRC, (211 SCRA 723
[1992]):
When moral damages are awarded, exemplary damages may
also be decreed. Exemplary damages are imposed by way of

In addition, NAPOCOR's baseless and unwarranted discrimination against

PHIBRO constrained the latter to seek the aid of the courts in order to obtain
redress. This calls for an award of attorney's fees, which the lower court
correctly made.
Consequently, I vote to dismiss the petition and to affirm the decision of the
Court of Appeals.
(National Power Corp. v. Philipp Brothers Oceanic, Inc., G.R. No. 126204,
[November 20, 2001], 421 PHIL 532-566)
|||

FIRST DIVISION

The Court of Appeals affirmed the RTC decision and sustained the monetary
awards, VIVA's and Del Rosario's appeals were denied.

[G.R. No. 128690. January 21, 1999.]

ABS-CBN BROADCASTING
CORPORATION, petitioner, vs.
HONORABLE COURT OF APPEALS,
REPUBLIC
BROADCASTING CORP., VIVA PRODUCTIONS, INC.,
and VICENTE DEL ROSARIO, respondents.
Gancayco Law Offices for petitioner.
Penaflor & Perez Law Offices for Republic Broadcasting System, Inc.
Bengzon Narciso Cudala Jimenez Gonzales & Liwanag for VIVA Productions
and V. del Rosario.
Belo Gozon Elma Parel Asuncion & Lucila for Republic Broadcasting
System, Inc.
SYNOPSIS
In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement whereby
the latter gave the former an exclusive right to exhibit 24 VIVA Films for TV
telecast. Later, VIVA, through respondent Vincent del Rosario, offered ABSCBN a list of 3 film packages (36 titles) from which the latter may exercise its
right of first refusal under their agreement. ABS-CBN ticked off 10 titles
therefrom. Thereafter, in February 1992, Del Rosario offered ABS-CBN airing
rights over a package of 104 movies for P60 million. In April, 1992, Del
Rosario, and Eugenio Lopez of ABS-CBN, met at a restaurant to discuss the
package proposal. According to Lopez, however, what they agreed upon
was ABS-CBN's exclusive film rights to 14 films for P36 million. Del Rosario
denied the same. He insisted that the discussion was on VIVA's offer of 104
films for P60 million, to which ABS-CBN later made a counter proposal but
rejected by VIVA's Board of Directors. Hence, VIVA later granted RBS the
exclusive right to air the 104 VIVA films, including the 14 films supposedly
granted to ABS-CBN. ABS-CBN then filed a complaint for specific
performance with prayer for injunction. The RTC granted the prayer and
required ABS-CBN post a P35 million bond, But while ABS-CBN was moving
for reduction of the bond, RBS offered to put up a counterbond and was
allowed to post P30 million. Later, the RTC rendered a decision in favor of
RBS and VIVA, ordering ABS-CBN to pay RBS the amount it paid for the
print advertisement and premium on the counterbond, moral damages,
exemplary
damages
and
attorney's
fee. ABS-CBN appealed
to
theCourt of Appeals. Viva and Del Rosario also appealed seeking moral and
exemplary
damages
and
additional
attorney's
fees.

The key issues are: 1. Whether there was a perfected contract between VIVA
and ABS-CBN; and 2. Whether RBS is entitled to damages and attorney's
fees.
The first issue is resolved against ABS-CBN, in the absence of the requisites
to make a valid contract. The alleged agreement on the 14 films, if there is
one, is not binding to VIVA as it is not manifested that Del Rosario has an
authority to bind VIVA. Thus, when ABS-CBN made a counter-proposal to
VIVA, the same was submitted to its Board of Directors, who rejected the
same. Further, the Court agreed that the alleged agreement is not a
continuation of the 1990 Contract as the right of first refusal under the said
contract had already been exercised by ABS-CBN. However, on the issue of
damages, the Court found ABS-CBN. RBS is not entitled to actual damages
as the claim thereof did not arise from that which allows the same to be
recovered. Neither is RBS entitled to attorney's fees as there is no showing
of bad faith in the other party's persistence in his case. Also, being a
corporation, RBS is not entitled to moral damages as the same is awarded to
compensate actual injuries suffered. Lastly, exemplary damages cannot be
awarded in the absence of proof that ABS-CBN was inspired by malice or
bad faith.
SYLLABUS
1. CIVIL LAW; CONTRACT; ELUCIDATED. A contract is a meeting of
minds between two persons whereby one binds himself to give something or
to render some service to another for a consideration. There is no contract
unless the following requisites concur: (1) consent of the contracting parties;
(2) object certain which is the subject of the contract; and (3) cause of the
obligation, which is established. A contract undergoes three stages: (a)
preparation, conception, or generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of the parties; (b) perfection
or birth of the contract, which is the moment when the parties come to agree
on the terms of the contract; and (c) consummation or death, which is the
fulfillment or performance of the terms agreed upon in the contract. Contracts
that are consensual in nature are perfected upon mere meeting of the minds.
Once there is concurrence between the offer and the acceptance upon the
subject matter, consideration, and terms of payment, a contract is produced.
The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it
must be plain, unequivocal, unconditional, and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original offer.
Consequently, when something is desired which is not exactly what is

proposed in the offer, such acceptance is not sufficient to generate consent

because any modification or variation from the terms of the offer annuls the
offer.
2. CORPORATION LAW; BOARD OF DIRECTORS; POWER TO ENTER
INTO CONTRACTS; DELEGATION; VALIDITY THEREOF. Under
the Corporation Code, unless otherwise provided by said Code, corporate
powers, such as the power to enter into contracts, are exercised by the
Board of Directors. However, the Board may delegate such powers to either
an executive committee or officials or contracted managers. The delegation,
except for the executive committee, must be for specific purposes.
Delegation to officers makes the latter agents of the corporation; accordingly,
the general rules of agency as to the binding effects of their acts would apply.
For such officers to be deemed fully clothed by the corporation to exercise a
power of the Board, the latter must specially authorize them to do so. That
Del Rosario did not have the authority to accept ABS-CBN's counter-offer
was best evidenced by his submission of the draft contract to VIVA'S Board
of Directors for the latter's approval. In any event, there was between Del
Rosario and Lopez III no meeting of minds.
3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; DAMAGES; ACTUAL
DAMAGES; ELABORATED. Chapter 2, Title XVIII, Book IV of the Civil
Code is the specific law on actual or compensatory damages. Except as
provided by law or by stipulation, one is entitled to compensation for actual
damages only for such pecuniary loss suffered by him as he has duly proved.
The indemnification shall comprehend not only the value of the loss suffered,
but also that of the profits that the obligee failed to obtain. In contracts and
quasi-contracts the damages which may be awarded are dependent on
whether the obligor acted with good faith or otherwise. In case of good faith,
the damages recoverable are those which are the natural and probable
consequences of the breach of the obligation and which the parties have
foreseen or could have reasonably foreseen at the time of the constitution of
the obligation. If the obligor acted with fraud, bad faith, malice, or wanton
attitude, he shall be responsible for all damages which may be reasonably
attributed to the non-performance of the obligation. In crimes and quasidelicts, the defendant shall be liable for all damages which are the natural
and probable consequences of the act or omission complained of, whether or
not such damages have been foreseen or could have reasonably been
foreseen by the defendant. Actual damages may likewise be recovered for
loss or impairment of earning capacity in cases of temporary or permanent
personal injury, or for injury to the plaintiff's business standing or commercial
credit.
DIETcC

4. ID.; ID.; ID.; ID.; CASE AT BAR. The claim of RBS for actual damages
did not arise from contract, quasi-contract, delict, or quasi-delict. It arose
from the fact of filing of the complaint despite ABS-CBN's alleged knowledge

of lack of cause of action. Needless to state, the award of actual damages

cannot be comprehended under the law on actual damages. RBS could only
probably take refuge under Articles 19, 20, and 21 of the Civil Code. It may
further be observed that in cases where a writ of preliminary injunction is
issued, the damages which the defendant may suffer by reason of the writ
are recoverable from the injunctive bond. In this case, ABS-CBN had not yet
filed the required bond; as a matter of fact, it asked for reduction of the bond
and even went to the Court of Appeals to challenge the order on the matter.
Clearly then, it was not necessary for RBS to file a counterbond.
Hence, ABS-CBN cannot be held responsible for the premium RBS paid for
the counterbond. Neither could ABS-CBN be liable for the print
advertisements for "Maging Sino Ka Man" for lack of sufficient legal basis.
The RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient
grounds for the issuance thereof. Notably, the RTC did not dissolve the
injunction on the ground of lack of legal and factual basis, but because of the
plea of RBS that it be allowed to put up a counterbond.
5. ID.; ID.; ID.; ID.; ATTORNEY'S FEES; ELABORATED. As regards
attorney's fees, the law is clear that in the absence of stipulation, attorney's
fees may be recovered as actual or compensatory damages under any of the
circumstances provided for in Article 2208 of the Civil Code. The general rule
is that attorney's fees cannot be recovered as part of damages because of
the policy that no premium should be placed on the right of litigate. They are
not to be awarded every time a party wins a suit. The power of the court to
award attorney's fees under Article 2208 demands factual, legal, and
equitable justification. Even when a claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees may not
be awarded where no sufficient showing of bad faith could be reflected in a
party's persistence in a case other than an erroneous conviction of the
righteousness of his cause.

6. ID.; ID.; ID.; MORAL DAMAGES; ELABORATED. As to moral damages

the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article
2217 thereof defines what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered. Article 2220 provides
that moral damages may be recovered in breaches of contract where the
defendant acted fraudulently or in bad faith. Moral damages are in the
category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer. The award is not
meant to enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements that will
serve to obviate the moral suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the spiritual status quo ante,

and should be proportionate to the suffering inflicted. Trial courts must then
guard against the award of exorbitant damages; they should exercise
balanced restrained and measured objectivity to avoid suspicion that it was
due to passion, prejudice, or corruption on the part of the trial court.

se make the action wrongful and subject the actor to damages, for the law
could not have meant to impose a penalty on the right to litigate. If damages
result from a person's exercise of a right, it is damnum absque injuria.
TIADCc

DECISION
7. ID.; ID.; ID.; ID.; CASE AT BAR. RBS's claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads: (10)
Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
However, the award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence only in
legal contemplation, it has no feelings, no emotions, no senses. It cannot,
therefore, experience physical suffering and mental anguish, which can be
experienced only by one having a nervous system. The statement
in People v. Maneroand Mambulao Lumber Co. v. PNB that a corporation
may recover moral damages if it "has a good reputation that is debased,
resulting in social humiliation" is an obiter dictum. On this score alone the
award for damages must be set aside, since RBS is a corporation.
8. ID.; ID.; ID.; EXEMPLARY DAMAGES; ELUCIDATED. The basic law
on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the
Civil Code. These are imposed by way of example or correction for the public
good, in addition to moral, temperate, liquidated, or compensatory damages.
They are recoverable in criminal cases as part of the civil liability when the
crime was committed with one or more aggravating circumstances; in quasidelicts, if the defendant acted with gross negligence; and in contracts and
quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.
9. ID.; ID.; ID.; ID.; CASE AT BAR. The claim of RBS against ABS-CBN is
not based on contract, quasi-contract, delict, or quasi-delict. Hence, the
claims for moral and exemplary damages can only be based on Articles 19,
20, and 21 of the Civil Code. The elements of abuse of right under Article 19
are the following: (1) the existence of a legal right or duty, (2) which is
exercised in bad faith, and (3) for the sole intent of prejudicing or injuring
another. Article 20 speaks of the general sanction for all other provisions of
law which do not especially provide for their own sanction; while Article 21
deals with actscontra bonus mores, and has the following elements: (1) there
is an act which is legal, (2) but which is contrary to morals, good custom,
public order, or public policy, and (3) and it is done with intent to injure. Verily
then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or
bad faith implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity. Such must be substantiated by
evidence. There is no adequate proof that ABS-CBN was inspired by malice
or bad faith. It was honestly convinced of the merits of its cause after it had
undergone serious negotiations culminating in its formal submission of a draft
contract. Settled is the rule that the adverse result of an action does not per

DAVIDE, JR., C.J :

p

In this petition for review on certiorari, petitioner ABSCBN Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set
aside the decision 1 of 31 October 1996 and the resolution 2 of 10 March
1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former
affirmed with modification the decision 3 of 28 April 1993 of the Regional
Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-9212309. The latter denied the motion to reconsider the decision of 31
October 1996.
llcd

The antecedents, as found by the RTC and adopted by

the Court of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition
Agreement (Exh. "A") whereby Viva gave ABS-CBN an exclusive
right to exhibit some Viva films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of said agreement stating
that
1.4 ABS-CBN shall have the right of first refusal to the
next twenty-four (24) Viva films for TV telecast under
such terms as may be agreed upon by the parties
hereto, provided, however, that such right shall be
exercised by ABS-CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN,
through its vice-president Charo Santos-Concio, a list of three (3)
film packages (36 title) from which ABS-CBN may exercise its
right of first refusal under the afore-said agreement (Exhs. "1"
par. 2, "2," "2-A" and "2-B" - Viva). ABS-CBN, however through
Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we
can purchase" (Exh. "3" - Viva) and therefore did not accept said
list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film
"Maging Sino Ka Man."
For further enlightenment, this rejection letter dated
January 06, 1992 (Exh "3" - Viva) is hereby quoted:
6 January 1992

Dear Vic,
This is not a very formal business letter I am writing to
you as I would like to express my difficulty in
recommending the purchase of the three film packages
you are offering ABS-CBN.
From among the three packages I can only tick off 10
titles we can purchase. Please see attached. I hope you
will understand my position. Most of the action pictures
in the list do not have big action stars in the cast. They
are not for primetime. In line with this I wish to mention
that I have not scheduled for telecast several action
pictures in our very first contract because of the cheap
production value of these movies as well as the lack of
big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces
only big action pictures.
In fact, I would like to request two (2) additional runs for
these movies as I can only schedule them in our nonprimetime slots. We have to cover the amount that was
paid for these movies because as you very well know
that non-primetime advertising rates are very low. These
are the unaired titles in the first contract.
1. Kontra Persa [sic]
2. Raider Platoon
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before
and have been rejected because of the ruling of MTRCB
to have them aired at 9:00 p.m. due to their very adult
themes.

As for the 10 titles I have choosen [sic] from the 3

packages please consider including all the other Viva
movies produced last year. I have quite an attractive
offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo
SantosConcio
On February 27, 1992, defendant Del Rosario approached ABSCBN's Ms. Concio, with a list consisting of 52 original movie titles
(i.e. not yet aired on television) including the 14 titles subject of
the present case, as well as 104 re-runs (previously aired on
television) from which ABS-CBN may choose another 52 titles,
as a total of 156 titles, proposing to sell to ABS-CBN airing rights
over this package of 52 originals and 52 re-runs for
P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots (Exh. "4" to "4-C" - Viva;
"9" - Viva).
On April 2, 1992, defendant Del Rosario and ABSCBN's general manager, Eugenio Lopez III, met at the Tamarind
Grill Restaurant in Quezon City to discuss the package proposal
of Viva. What transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he and Mr. Del
Rosario allegedly agreed that ABS-CBN was granted exclusive
film rights to fourteen (14) films for a total consideration of P36
million; that he allegedly put this agreement as to the price and
number of films in a "napkin" and signed it and gave it to Mr. Del
Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On the
other hand, Del Rosario denied having made any agreement with
Lopez regarding the 14 Viva films; denied the existence of a
napkin in which Lopez wrote something; and insisted that what
he and Lopez discussed at the lunch meeting was Viva's film
package offer of 104 films (52 originals and 52 re-runs) for a total
price of P60 million. Mr. Lopez promising [sic] to make a counter
proposal which came in the form of a proposal contract Annex
"C" of the complaint (Exh. "1" - Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon
of RBS Senior vice-president for Finance discussed the terms
and conditions of Viva's offer to sell the 104 films, after the
rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received
through his secretary, a handwritten note from Ms. Concio, (Exh.
"5" - Viva), which reads: "Here's the draft of the contract. I hope

you find everything in order," to which was attached a draft

exhibition agreement (Exh. "C" - ABS-CBN; Exh. "9" - Viva, p. 3)
a counter-proposal covering 53 films, 52 of which came from the
list sent by defendant Del Rosario and one film was added by
Ms. Concio, for a consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted film rights to 53 films and
contains a right of first refusal to "1992 Viva Films." The said
counter proposal was however rejected by Viva's Board of
Directors [in the] evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of 104 films for
P60 million pesos (Exh. "9" - Viva), and such rejection was
relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and

following several negotiations and meetings defendant Del
Rosario and Viva's President Teresita Cruz, in consideration of
P60 million, signed a letter of agreement dated April 24, 1992,
granting RBS the exclusive right to air 104 Viva-produced and/or
acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including the
fourteen (14) films subject of the present case. 4

counterbond to answer for whatever damages ABS-CBN might suffer by

virtue of such dissolution. However, it reduced petitioner's injunction
bond to P15 million as a condition precedent for the reinstatement of the
writ of preliminary injunction should private respondents be unable to
post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion
of the court, agreed to explore the possibility of an amicable settlement.
In the meantime, RBS prayed for and was granted reasonable time
within which to put up a P30 million counterbond in the event that no
settlement would be reached.
As the parties failed to enter into an amicable settlement, RBS
posted on 1 October 1992 a counterbond, which the RTC approved in its
Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for
reconsideration 14 of the 3 August and 15 October 1992 Orders, which
RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16

On 27 May 1992, ABS-CBN filed before the RTC a complaint for

specific performance with a prayer for a writ of preliminary injunction
and/or temporary restraining order against private respondents Republic
Broadcasting Corporation 5 (hereafter RBS), Viva Productions (hereafter
VIVA), and Vicente del Rosario. The complaint was docketed as Civil
Case No. Q-92-12309.
On 28 May 1992, the RTC issued a temporary restraining
order 6 enjoining private respondents from proceeding with the airing,
broadcasting, and televising of the fourteen VIVA films subject of the
controversy, starting with the film Maging Sino Ka Man, which was
scheduled to be shown on private respondent RBS' channel 7 at seven
o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued
an order 7 directing the issuance of a writ of preliminary injunction
upon ABS-CBN's posting of a P35 million bond. ABS-CBN moved for the
reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a counterbond. 9
In the meantime, private respondents filed separate answers
with counterclaim. 10 RBS also set up a cross-claim against VIVA.
On 3 August 1992, the RTC issued an order 11 dissolving the writ
of preliminary injunction upon the posting by RBS of a P30 million

Pending resolution of its motion for reconsideration, ABSCBN filed with the Court of Appeals a petition 17 challenging the RTC's
Orders of 3 August and 15 October 1992 and praying for the issuance of
a writ of preliminary injunction to enjoin the RTC from enforcing said
orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary
restraining order 18 to enjoin the airing, broadcasting, and televising of
any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision 19 dismissing the petition in CA-G.R. SP No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for review
filed with this Court on 19 January 1993, which was docketed as G.R.
No. 108363.
In the meantime the RTC received the evidence for the parties in
Civil Case No. Q-92-12309. Thereafter, on 28 April 1993, it rendered a
decision 20 in favor of RBS and VIVA and against ABS-CBNdisposing as
follows:
WHEREFORE, under cool reflection and prescinding
from the foregoing, judgment is rendered in favor of defendants
and against the plaintiff.

(1) The complaint is hereby dismissed;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the
following:
a) P107,727.00, the amount of premium paid by RBS to
the surety which issued defendant RBS's bond
to lift the injunction;
b) P191,843.00 for the amount of print advertisement for
"Maging Sino Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay
P212,000.00 by way of reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is
dismissed.
(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the

price and terms of the offer. The alleged agreement between Lopez III
and Del Rosario was subject to the approval of the VIVA Board of
Directors, and said agreement was disapproved during the meeting of
the Board on 7 April 1992. Hence, there was no basis for ABS-CBN's
demand that VIVA signed the 1992 Film Exhibition Agreement.
Furthermore, the right of first refusal under the 1990 Film Exhibition
Agreement had previously been exercised per Ms. Concio's letter to Del
Rosario ticking off ten titles acceptable to them, which would have made
the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied 21 ABS-CBN's petition for
review in G.R. No. 108363, as no reversible error was committed by
the Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main action
by the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to
the Court of Appeals claiming that there was a perfected contract
between ABS-CBN and VIVA granting ABS-CBN the exclusive right to
exhibit the subject films. Private respondents VIVA and Del Rosario also

appealed seeking moral and exemplary damages and additional

attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed
with the RTC that the contract between ABS-CBN and VIVA had not
been perfected, absent the approval by the VIVA Board of Directors of
whatever Del Rosario, it's agent, might have agreed with Lopez III. The
appellate court did not even believe ABS-CBN's evidence that Lopez III
actually wrote down such an agreement on a "napkin," as the same was
never produced in court. It likewise rejected ABS-CBN's insistence on its
right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be
true that a Film Exhibition Agreement was entered into between
Appellant ABS-CBN and appellant VIVA under Exhibit "A" in
1990, and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the
next twenty-four (24) VIVA films for TV telecast under
such terms as may be agreed upon by the parties
hereto, provided, however, that such right shall be
exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor
of ABS-CBN shall still be subject to such terms as may be
agreed upon by the parties thereto, and that the said right shall
be exercised by ABS-CBN within fifteen (15) days from the actual
offer in writing. cdll
Said parag. 1.4 of the agreement Exhibit "A" on the right
of first refusal did not fix the price of the film right to the twentyfour (24) films, nor did it specify the terms thereof. The same are
still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit
3 (Records, p. 89) stated that it can only tick off ten (10) films,
and the draft contract Exhibit "C" accepted only fourteen (14)
films, while parag. 1.4 of Exhibit "A" speaks of the next twentyfour (24) films.
The offer of VIVA was sometime in December 1991
(Exhibits 2, 2-A, 2-B; Records, pp. 86-88; Decision, p. 11,
Records, p. 1150), when the first list of VIVA films was sent by
Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN,
Mrs. Charo Santos-Concio, sent a letter dated January 6, 1992
(Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of
refusal by rejecting the offer of VIVA. As aptly observed by the
trial court, with the said letter of Mrs. Concio of January 6,

1992, ABS-CBN had lost its right of first refusal. And even if We
reckon the fifteen (15) day period from February 27, 1992
(Exhibit 4 to 4-C) when another list was sent to ABS-CBN after
the letter of Mrs. Concio, still the fifteen (15) day period within
which ABS-CBN shall exercise its right of first refusal has already
expired. 22

Accordingly, respondent court sustained the award of actual

damages consisting in the cost of print advertisements and the premium
payments for the counterbond, there being adequate proof of the
pecuniary loss which RBS had suffered as a result of the filing of the
complaint by ABS-CBN. As to the award of moral damages,
the Court of Appeals found reasonable basis therefor, holding that RBS's
reputation was debased by the filing of the complaint in Civil Case No. Q92-12309 and by the non-showing of the film "Maging Sino Ka Man."
Respondent court also held that exemplary damages were correctly
imposed by way of example or correction for the public good in view of
the filing of the complaint despite petitioner's knowledge that the contract
with VIVA had not been perfected. It also upheld the award of attorney's
fees, reasoning that with ABS-CBN's act of instituting Civil Case No. Q92-12309, RBS was "unnecessarily forced to litigate." The appellate
court, however, reduced the awards of moral damages to P2 million,
exemplary damages to P2 million, and attorney's fees to P500,000.00.
On the other hand, respondent Court of Appeals denied VIVA
and Del Rosario's appeal because it was "RBS and not VIVA which was
actually prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABSCBN filed the petition in this case, contending that
the Court of Appeals gravely erred in

I
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT
BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONDERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY
DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.
III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN

FAVOR OF PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition Agreement,
as it had chosen only ten titles from the first list. It insists that we give
credence to Lopez's testimony that he and Del Rosario met at the
Tamarind Grill Restaurant, discussed the terms and conditions of the
second list (the 1992 Film Exhibition Agreement) and upon agreement
thereon, wrote the same on a paper napkin. It also asserts that the
contract has already been effective, as the elements thereof, namely,
consent, object, and consideration were established. It then concludes
that the Court of Appeals' pronouncements were not supported by law
and jurisprudence, as per our decision of 1 December 1995 in Limketkai
Sons Milling, Inc. v. Court ofAppeals, 23 which cited Toyota Shaw,
Inc. v. Court of Appeals, 24 Ang Yu
Asuncion v. Court of Appeals; 25 and Villonco Realty
Company v. Bormaheco, Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond of its
own volition in order to negate the injunction issued by the trial court after
the parties had ventilated their respective positions during the hearings
for the purpose. The filing of the counterbond was an option available to
RBS, but it can hardly be argued that ABS-CBN compelled RBS to incur
such expense. Besides, RBS had another available option, i.e., move for
the dissolution of the injunction; or if it was determined to put up a
counterbond, it could have presented a cash bond. Furthermore under
Article 2203 of the Civil Code, the party suffering loss or injury is also
required to exercise the diligence of a good father of a family to minimize
the damages resulting from the act or omission. As regards the cost of
print advertisements, RBS had not convincingly established that this was
a loss attributable to the non-showing of "Maging Sino Ka Man"; on the
contrary, it was brought out during trial that with or without the case or
the injunction, RBS would have spent such an amount to generate
interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy
involving ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise
from any contractual dealings or from specific acts committed by ABSCBN against RBS that may be characterized as wanton, fraudulent, or

reckless; they arose by virtue only of the filing of the complaint. An award
of moral and exemplary damages is not warranted where the record is
bereft of any proof that a party acted maliciously or in bad faith in filing
an action. 27 In any case, free resort to courts for redress of wrongs is a
matter of public policy. The law recognizes the right of every one to sue
for that which he honestly believes to be his right without fear of standing
trial for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the matter, the
case would lose ground. 28 One who makes use of his own legal right
does no injury. 29 If damage results from the filing of the complaint, it
is damnum absque injuria. 30 Besides, moral damages are generally not
awarded in favor of a juridical person, unless it enjoys a good reputation
that was debased by the offending party resulting in social humiliation. 31

advertisements were good and relevant for the particular date of

showing, and since the film could not be shown on that particular date
and hour because of the injunction, the expenses for the advertisements
had gone to waste.

As regards the award of attorney's fees, ABS-CBN maintains

that the same had no factual, legal, or equitable justification. In
sustaining the trial court's award, the Court of Appeals acted in clear
disregard of the doctrine laid down in Buan v. Camaganacan 32 that the
text of the decision should state the reason why attorney's fees are being
awarded; otherwise, the award should be disallowed. Besides, no bad
faith has been imputed on, much less proved as having been committed
by, ABS-CBN. It has been held that "where no sufficient showing of bad
faith would be reflected in a party's persistence in a case other than an
erroneous conviction of the righteousness of his cause, attorney's fees
shall not be recovered as cost." 33

In support of its stand that a juridical entity can recover moral

and exemplary damages, private respondent RBS
cited People v. Manero, 35 where it was stated that such entity may
recover moral and exemplary damages if it has a good reputation that is
debased resulting in social humiliation. It then ratiocinates; thus:

On the other hand, RBS asserts that there was no perfected

contract between ABS-CBN and VIVA absent any meeting of minds
between them regarding the object and consideration of the alleged
contract. It affirms that ABS-CBN's claim of a right of first refusal was
correctly rejected by the trial court. RBS insists the premium it had paid
for the counterbond constituted a pecuniary loss upon which it may
recover. It was obliged to put up the counterbond due to the injunction
procured by ABS-CBN. Since the trial court found that ABS-CBN had no
cause of action or valid claim against RBS and, therefore not entitled to
the writ of injunction, RBS could recover from ABS-CBN the premium
paid on the counterbond. Contrary to the claim of ABS-CBN, the cash
bond would prove to be more expensive, as the loss would be equivalent
to the cost of money RBS would forego in case the P30 million came
from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of
advertisements for the cancelled showing of the film "Maging Sino Ka
Man" because the print advertisements were put out to announce the
showing on a particular day and hour on Channel 7, i.e., in its entirety at
one time, not as series to be shown on a periodic basis. Hence, the print

As regards moral and exemplary damages, RBS asserts

that ABS-CBN filed the case and secured injunctions purely for the
purpose of harassing and prejudicing RBS. Pursuant then to Articles 19
and 21 of the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino, 34 damages may be awarded in cases of
abuse of rights even if the act done is not illicit, and there is abuse of
rights where a plaintiff institutes an action purely for the purpose of
harassing or prejudicing the defendant.

There can be no doubt that RBS' reputation has been

debased by ABS-CBN's acts in this case. When RBS was not
able to fulfill its commitment to the viewing public to show the film
"Maging Sino Ka Man" on the scheduled dates and times (and on
two occasions that RBS advertised), it suffered serious
embarrassment and social humiliation. When the showing was
canceled, irate viewers called up RBS' offices and subjected RBS
to verbal abuse ("Announce kayo ng announce, hindi ninyo
naman ilalabas", "nanloloko yata kayo") (Exh. 3-RBS, par. 3).
This alone was not something RBS brought upon itself. It was
exactly what ABS-CBN had planned to happen.
The amount of moral and exemplary damages cannot
be said to be excessive. Two reasons justify the amount of the
award.
The first is that the humiliation suffered by RBS is
national in extent. RBS' operations as a broadcasting company is
[sic] nationwide. Its clientele, like that of ABS-CBN, consists of
those who own and watch television. It is not an exaggeration to
state, and it is a matter of judicial notice that almost every other
person in the country watches television. The humiliation suffered
by RBS is multiplied by the number of televiewers who had
anticipated the showing of the film "Maging Sino Ka Man" on May
28 and November 3, 1992 but did not see it owing to the
cancellation. Added to this are the advertisers who had placed
commercial spots for the telecast and to whom RBS had a
commitment in consideration of the placement to show the film in
the dates and times specified.

The second is that it is a competitor that caused RBS to

suffer the humiliation. The humiliation and injury are far greater in
degree when caused by an entity whose ultimate business
objective is to lure customers (viewers in this case) away from
the competition. 36

For their part, VIVA and Vicente del Rosario contend that the
findings of fact of the trial court and the Court of Appeals do not
support ABS-CBN's claim that there was a perfected contract. Such
factual findings can no longer be disturbed in this petition for review
under Rule 45, as only questions of law can be raised, not questions of
fact. On the issue of damages and attorneys fees, they adopted the
arguments of RBS.
The key issues for our consideration are (1) whether there was a
perfected contract between VIVA and ABS-CBN, and (2) whether RBS is
entitled to damages and attorney's fees. It may be noted that the award
of attorney's fees of P212,000 in favor of VIVA is not assigned as
another error.
I
The first issue should be resolved against ABS-CBN. A contract
is a meeting of minds between two persons whereby one binds himself
to give something or to render some service to another 37for a
consideration. There is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) object certain which is
the subject of the contract; and (3) cause of the obligation, which is
established. 38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of

negotiation and bargaining, ending at the moment of
agreement of the parties;
(b) perfection or birth of the contract, which is the moment when
the parties come to agree on the terms of the contract;
and
(c) consummation or death, which is the fulfillment or
performance of the terms agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere

meeting of the minds. Once there is concurrence between the offer and
the acceptance upon the subject matter, consideration, and terms of
payment a contract is produced. The offer must be certain. To convert

the offer into a contract, the acceptance must be absolute and must not
qualify the terms of the offer; it must be plain, unequivocal, unconditional,
and without variance of any sort from the proposal. A qualified
acceptance, or one that involves a new proposal, constitutes a counteroffer and is a rejection of the original offer. Consequently, when
something is desired which is not exactly what is proposed in the offer,
such acceptance is not sufficient to generate consent because any
modification or variation from the terms of the offer annuls the offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABSCBN at the Tamarind Grill on 2 April 1992 to discuss the package of
films, said package of 104 VIVA films was VIVA's offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through
Ms. Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counterproposal could be nothing less than the counter-offer of Mr. Lopez during
his conference with Del Rosario at Tamarind Grill Restaurant. Clearly,
there was no acceptance of VIVA's offer, for it was met by a counter-offer
which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling,
Inc. v. Court of Appeals 41 and Villonco Realty Company v. Bormaheco,
Inc., 42 is misplaced. In these cases, it was held that an acceptance may
contain a request for certain changes in the terms of the offer and yet be
a binding acceptance as long as "it is clear that the meaning of the
acceptance is positively and unequivocally to accept the offer, whether
such request is granted or not." This ruling was, however, reversed in the
resolution of 29 March 1996, 43 which ruled that the acceptance of an
offer must be unqualified and absolute, i.e., it "must be identical in all
respects with that of the offer so as to produce consent or meeting of the
minds."
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but merely
clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v. Franklin Life Insurance Co. 44 that "a vendor's
change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a rejection
of the offer and the tender of a counter-offer." 45 However, when any of
the elements of the contract is modified upon acceptance, such alteration
amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of
VIVA's offer. Hence, they underwent a period of bargaining. ABSCBN then formalized its counter-proposals or counter-offer in a draft
contract. VIVA through its Board of Directors, rejected such counter-

offer. Even if it be conceded arguendo that Del Rosario had accepted the
counter-offer, the acceptance did not bind VIVA, as there was no proof
whatsoever that Del Rosario had the specific authority to do so.
Under the Corporation Code, 46 unless otherwise provided by
said Code, corporate powers, such as the power to enter into contracts,
are exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or
contracted managers. The delegation, except for the executive
committee, must be for specific purposes. 47 Delegation to officers makes
the latter agents of the corporation; accordingly, the general rules of
agency as to the binding effects of their acts would apply. 48 For such
officers to be deemed fully clothed by the corporation to exercise a
power of the Board, the latter must specially authorize them to do so.
That Del Rosario did not have the authority to accept ABS-CBN's
counter-offer was best evidenced by his submission of the draft contract
to VIVA's Board of Directors for the latter's approval. In any event, there
was between Del Rosario and Lopez III no meeting of minds. The
following findings of the trial court are instructive:
A number of considerations militate against ABS-CBN's
claim that a contract was perfected at that lunch meeting on April
02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon
at the Tamarind Grill referred to the price and the number of
films, which he wrote on a napkin. However, Exhibit "C"
contains numerous provisions which were not discussed at the
Tamarind Grill, if Lopez testimony was to be believed nor could
they have been physically written on a napkin. There was even
doubt as to whether it was a paper napkin or a cloth napkin. In
short what were written in Exhibit "C" were not discussed, and
therefore could not have been agreed upon, by the parties. How
then could this court compel the parties to sign Exhibit "C" when
the provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed
upon as the subject matter of the contract was 14 films. The
complaint in fact prays for delivery of 14 films. But Exhibit "C"
mentions 53 films as its subject matter. Which is which? If Exhibit
"C" reflected the true intent of the parties, then ABS-CBN's claim
for 14 films in its complaint is false or if what it alleged in the
complaint is true, then Exhibit "C" did not reflect what was agreed
upon by the parties. This underscores the fact that there was no
meeting of the minds as to the subject matter of the contract, so
as to preclude perfection thereof. For settled is the rule that there
can be no contract where there is no object certain which is its
subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his

affidavit testimony (Exh. "D") states:
"We were able to reach an agreement. VIVA gave us
the exclusive license to show these fourteen (14) films,
and we agreed to pay Viva the amount of
P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked this
P16,050,000.00."
which gives a total consideration of P36 million (P19,950,000.00
plus P16,050,000.00 equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q What was written in this napkin?
A The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies
because the price was broken down accordingly. The
none [sic] Viva and the seven other Viva movies and the
sharing between the cash portion and the concerned
spot portion in the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This
weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated
that she transmitted Exhibit "C" to Mr. Del Rosario with a
handwritten note, describing said Exhibit "C" as a "draft." (Exh.
"5" - Viva; tsn pp. 23-24, June 08, 1992). The said draft has a
well defined meaning.
xxx xxx xxx
Since Exhibit "C" is only a draft, or a tentative,
provisional or preparatory writing prepared for discussion, the
terms and conditions thereof could not have been previously
agreed upon byABS-CBN and Viva. Exhibit "C" could not
therefore legally bind Viva, not having agreed thereto. In fact, Ms.
Concio admitted that the terms and conditions embodied in
Exhibit "C" were prepared byABS-CBN's lawyers and there was
no discussion on said terms and conditions . . .
As the parties had not yet discussed the proposed terms
and conditions in Exhibit "C," and there was no evidence
whatsoever that Viva agreed to the terms and conditions thereof,
said document cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic] well that it did

not agree on its terms and conditions, and this court has no
authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr.
Del Rosario agreed upon at the Tamarind Grill was only
provisional, in the sense that it was subject to approval by the
Board of Directors of Viva. He testified: LLpr
Q Now, Mr. Witness, and after that Tamarind meeting . . . the
second meeting wherein you claimed that you have the
meeting of the minds between you and Mr. Vic del
Rosario, what happened?
A Vic Del Rosario was supposed to call us up and tell us
specifically the result of the discussion with the Board of
Directors.
Q And you are referring to the so-called agreement which you
wrote in [sic] a piece of paper?
A Yes, sir.
Q So, he was going to forward that to the board of Directors for
approval?
A Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
xxx xxx xxx
Q Did Mr. Del Rosario tell you that he will submit it to his Board
for approval?
A Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt
that he knew Mr. Del Rosario had no authority to bind Viva to a
contract with ABS-CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that Mr. Del Rosario
"is the Executive Producer of defendant Viva" which "is a
corporation." (par. 2, complaint). As a mere agent of Viva, Del
Rosario could not bind Viva unless what he did is ratified by its
Board of Directors. (Vicente vs. Geraldez, 52 SCRA
210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere
agent, recognized as such by plaintiff, Del Rosario could not be
held liable jointly and severally with Viva and his inclusion as
party defendant has no legal basis. (Salonga vs. Warner Barner
[sic], COLTA, 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the

complaint are clear admissions that what was supposed to have
been agreed upon at the Tamarind Grill between Mr. Lopez and
Del Rosario was not a binding agreement. It is as it should be
because corporate power to enter into a contract is lodged in the
Board of Directors. (Sec. 23, Corporation Code). Without such
board approval by the Viva board, whatever agreement Lopez
and Del Rosario arrived at could not ripen into a valid contract
binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209
SCRA 763). The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit "C" and insisted that the film
package for 104 films be maintained (Exh. "7-1" - Viva). 49

The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario was a
continuation of said previous contract is untenable. As observed by the
trial court, ABS-CBN's right of first refusal had already been exercised
when Ms. Concio wrote to VIVA ticking off ten films. Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after
this letter was sent, was for an entirely different package. Ms.
Concio herself admitted on cross-examination to having used or
exercised the right of first refusal. She stated that the list was not
acceptable and was indeed not accepted by ABS-CBN (TSN,
June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that
the right of first refusal may have been already exercised by Ms.
Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del
Rosario himself knew and understand [sic] that ABS-CBN has
lost its right of first refusal when his list of 36 titles were rejected
(Tsn, June 9, 1992, pp. 10-11). 50

II
However, we find for ABS-CBN on the issue of damages. We
shall first take up actual damages. Chapter 2, Title XVIII, Book IV of the
Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss suffered
by him as he has duly proved. 51 The indemnification shall comprehend
not only the value of the loss suffered, but also that of the profits that the
obligee failed to obtain. 52 In contracts and quasi-contracts the damages
which may be awarded are dependent on whether the obligor acted with
good faith or otherwise. In case of good faith, the damages recoverable
are those which are the natural and probable consequences of the
breach of the obligation and which the parties have foreseen or could
have reasonably foreseen at the time of the constitution of the obligation.
If the obligor acted with fraud, bad faith, malice, or wanton attitude, he
shall be responsible for all damages which may be reasonably attributed

to the non-performance of the obligation. 53 In crimes and quasi-delicts,

the defendant shall be liable for all damages which are the natural and
probable consequences of the act or omission complained of, whether or
not such damages have been foreseen or could have reasonably been
foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or
impairment of earning capacity in cases of temporary or permanent
personal injury, or for injury to the plaintiff's business standing or
commercial credit. 55
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing of the
complaint despite ABS-CBN's alleged knowledge of lack of cause of
action. Thus paragraph 12 of RBS's Answer with Counterclaim and
Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no
cause of action against RBS. As a result thereof, RBS
suffered actual damages in the amount of
P6,621,195.32. 56

Needless to state the award of actual damages cannot be

comprehended under the above law on actual damages. RBS could only
probably take refuge under Articles 19, 20, and 21 of the Civil Code,
which read as follows.
ART. 19. Every person must, in the exercise of his rights
and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith.
ART. 20. Every person who, contrary to law, wilfully or
negligently causes damage to another, shall indemnify the latter
for the same.
ART. 21. Any person who wilfully causes loss or injury
to another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for the damage.

It may further be observed that in cases where a writ of

preliminary injunction is issued, the damages which the defendant may
suffer by reason of the writ are recoverable from the injunctive bond. 57 In
this case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to
the Court of Appeals to challenge the order on the matter. Clearly then, it
was not necessary for RBS to file a counterbond. Hence, ABS-

CBN cannot be held responsible for the premium RBS paid for the
counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC issued
a temporary restraining order and later, a writ of preliminary injunction on
the basis of its determination that there existed sufficient ground for the
issuance thereof. Notably, the RTC did not dissolve the injunction on the
ground of lack of legal and factual basis, but because of the plea of RBS
that it be allowed to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of
stipulation, attorney's fees may be recovered as actual or compensatory
damages under any of the circumstances provided for in Article 2208 of
the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as
part of damages because of the policy that no premium should be placed
on the right to litigate. 59 They are not to be awarded every time a party
wins a suit. The power of the court to award attorney's fees under Article
2208 demands factual, legal, and equitable justification. 60 Even when a
claimant is compelled to litigate with third persons or to incur expenses to
protect his rights, still attorney's fees may not be awarded where no
sufficient showing of bad faith could be reflected in a party's persistence
in a case other than an erroneous conviction of the righteousness of his
cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII,
Book IV of the Civil Code. Article 2217 thereof defines what are included
in moral damages, while Article 2219 enumerates the cases where they
may be recovered. Article 2220 provides that moral damages may be
recovered in breaches of contract where the defendant acted
fraudulently or in bad faith. RBS's claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30,
32, 34 and 35.

Moral damages are in the category of an award designed to

compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. 62 The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured
party to obtain means, diversion, or amusements that will serve to
obviate the moral suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the spiritual status quo
ante, and should be proportionate to the suffering inflicted. 63 Trial courts

must then guard against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity to avoid suspicion
that it was due to passion, prejudice, or corruption on the part of the trial
court. 64

There is no adequate proof that ABS-CBN was inspired by

malice or bad faith. It was honestly convinced of the merits of its cause
after it had undergone serious negotiations culminating in its formal
submission of a draft contract. Settled is the rule that the adverse result
of an action does not per se make the action wrongful and subject the
actor to damages, for the law could not have meant to impose a penalty
on the right to litigate. If damages result from a person's exercise of a
right, it is damnum absque injuria. 75

The award of moral damages cannot be granted in favor of a

corporation because, being an artificial person and having existence only
in legal contemplation, it has no feelings, no emotions, no senses. It
cannot, therefore, experience physical suffering and mental anguish
which can be experienced only by one having a nervous system. 65 The
statement in People v. Manero 66 and Mambulao Lumber
Co. v. PNB 67 that a corporation may recover moral damages if it "has a
good reputation that is debased, resulting in social humiliation" is
an obiter dictum. On this score alone the award for damages must be set
aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3,
Title XVIII, Book IV of the Civil Code. These are imposed by way of
example or correction for the public good, in addition to moral,
temperate, liquidated, or compensatory damages. 68 They are
recoverable in criminal cases as part of the civil liability when the crime
was committed with one or more aggravating circumstances; 69 in quasidelicts, if the defendant acted with gross negligence; 70 and in contracts
and quasi-contracts, if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner. 71
It may be reiterated that the claim of RBS against ABS-CBN is
not based on contract, quasi-contract, delict, or quasi-delict. Hence, the
claims for moral and exemplary damages can only be based on Articles
19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following:
(1) the existence of a legal right or duty, (2) which is exercised in bad
faith, and (3) for the sole intent of prejudicing or injuring another. Article
20 speaks of the general sanction for all other provisions of law which do
not especially provide for their own sanction; while Article 21 deals with
acts contra bonus mores, and has the following elements: (1) there is an
act which is legal, (2) but which is contrary to morals, good custom,
public order, or public policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20,
and 21. Malice or bad faith implies a conscious and intentional design to
do a wrongful act for a dishonest purpose or moral obliquity.73 Such must
be substantiated by evidence. 74

WHEREFORE, the instant petition is GRANTED. The challenged

decision of the Court of Appeals in CA-G.R. CV No. 44125 is hereby
REVERSED except as to unappealed award of attorney's fees in favor of
VIVA Productions, Inc.
No pronouncement as to costs.

prLL

SO ORDERED.
Melo, Kapunan, Martinez and Pardo, JJ., concur.
(ABS-CBN Broadcasting Corp. v. Court of Appeals, G.R. No. 128690,
[January 21, 1999], 361 PHIL 499-532)
|||

SECOND DIVISION

prejudice to its religious relations with the latter which are governed
by the Common Law or their rules and regulations.

[G.R. No. L-8451. December 20, 1957.]

THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATO
R OF DAVAO,
INC., petitioner, vs. THE LAND
REGISTRATION
COMMISSION
and THE REGISTER OF DEEDS OF DAVAO CITY,respo
ndents.
Teodoro Padilla for petitioner.
Solicitor General Ambrosio Padilla, Assistant Solicitor General
Jose G. Bautista and Solicitor Troadio T. Quianzon, Jr. for respondents.
SYLLABUS
1. CORPORATIONS
SOLE;
COMPONENTS
AND
PURPOSE OF; POWER TO HOLD AND TRANSMIT CHURCH
PROPERTIES TO HIS SUCCESSOR IN OFFICE. A corporation sole
is a special form ofcorporation usually associated with clergy . . .
designed
to
facilitate the exercise of the functions of ownership of the church which
was regarded as the property owner (I Bouvier's Law Dictionary, p. 682683). It consists of one person only, and his successors (who will always
be one at a time), in some particular, who are incorporated by law in
order to give them some legal advantages particularly that ofperpetuity
which in their natural persons they could not have . . . (Reid vs. Barry, 93
Fla. 849 112 So. 846). Through this legal fiction, church properties
acquired
by the incumbent of a
corporation
sole
pass,
by
operation of law, upon his death not to his personal heirs but to his
successor in office. A corporation sole, therefore, is created not only to
administer the temporalities of the church or religious society where he
belongs, but also to hold and transmit the same to his successor in said
office.
2. ID.; PERSONALITY OF SEPARATE AND DISTINCT FROM
THAT OF ROMAN PONTIFF.

Although
a
branch of the Universal Roman Catholic Apostolic Church,
every Roman Catholic Church in different countries, if it exercises its
mission and is lawfully incorporated in accordance with
laws of the country where it is located, is considered an entity or person
with all the rights and privileges granted to such artificial being under
laws of that
country,
separate
and
distinct
from the personality of the Roman Pontiff or the Holy See, without

3. ID.; ID.; POWER AND QUALIFICATION TO PURCHASE IN

ITS NAME PRIVATE LANDS; 60 PER CENTUM REQUIREMENT NOT
INTENDED
TO
CORPORATION
SOLE.

Under the circumstances ofthe present case, it is safe to state that even
before the establishment of the Philippine
Commonwealth
and of the Republic of the Philippines every corporation sole then
organized and registered had by express provision of law (Corporation
Law, Public Act. 1459) the necessary power and qualification to
purchase in its name private lands located in the territory in which it
exercised its functions or ministry and for which it was created,
independently of the nationality of its incumbent unique and single
number and head, the bishop of the diocese. It can be also maintained
without fear of being gainsaid that the Roman Catholic Apostolic Church
in the Philippines
has
no
nationality
and
that the frames of the Constitution did not have in mind the religious
corporation sole when they provided that 60 per centum of the capital
thereof be owned by Filipino citizens. Thus, if this constitutional provision
were not intended for corporation sole, it is obvious that this could not be
regulated or restricted by said provision.
4. ID.; ID.; ID.; ID.; CONSTITUTIONAL REQUIREMENT
LIMITED TO OWNERSHIP NOT TO CONTROL. But the Corporation
Law and the Canon Law are explicit in their provisions that a corporation
sole or "ordinary" is not the owner of the properties that he may acquire
but merely the administrator thereof and holds the same in trust
for the church to which the corporation is an organized and constituents
part. Being mere administrator of the temporalities or properties titled in
his name, the constitutional provision requiring 60 per centum Filipino
ownership is not applicable.The said constitutional provision is limited by
it
terms
to ownership alone
and
does
not
extend
to control unless the control over the property affected has been devised
to circumvent the real purposeof the constitution.
5. ID.; CORPORATION SOLE WITHOUT NATIONALITY;
NATIONALITY OF CONSTITUENTS
DETERMINES
WHETHER
CONSTITUTIONAL
REQUIREMENTS
IS
APPLICABLE.

The corporation sole by reason of their peculiar constitution and

form of operation have no designed owner of its temporalities, although
by the terms of the law it can be safely implied that they ordinarily hold
them in
trust forthe benefit of the Roman Catholic faithful of their
respective locality or diocese. They can not be considered as aliens
because they have no nationality at all. In determining, therefore,
whether theconstitutional provision requiring 60 per centum Filipino

capital
is
applicable
to
corporations
sole, the nationality of the constituents of the diocese,
and
not the nationality of the actual incumbent of theparish, must be taken
into consideration. In the present case, even if the question of nationality
be considered, the aforesaid constitutional requirement is fully met and
satisfied, considering that thecorporation sole in question is
composed of an overwhelming majority of Filipinos.
DECISION
FELIX, J :
p

This is a petition for mandamus filed

by the Roman Catholic Apostolic Administrator of Davao seeking the rev
ersal of a resolution issued by the Land Registration Commissioner in
L.R.C. Consulta No. 14. The facts of the case are as follows:
On October 4, 1954, Mateo L. Rodis, a Filipino citizen and
resident of the City of Davao, executed a deed of sale of a parcel of land
located in the same city covered by Transfer Certificate of Title No. 2263,
in favor of the Roman Catholic Administrator of Davao, Inc., a
corporation sole organized and existing in accordance with Philippine
laws, with Msgr. Clovis Thibault, a Canadian citizen, as actual
incumbent. When the deed of sale was presented
to the Register of Deeds of Davao for registration, the latter
having
in
mind
a
previous
resolution of the Fourth
Branch of the Court of First
Instance of Manila
wherein the Carmelite Nuns of Davao were made to prepare an
affidavit to the effect that 60 per cent of the members of their
corporation were Filipino citizens when they sought to register in
favor of their congregation a deed of donation of a parcel of land

required said corporation sole to submit a similar affidavit declaring that

60 per cent of the members thereof were Filipino citizens.
The vendee in a letter dated June 28, 1954, expressed
willingness to submit an affidavit, but not in the same tenor as that made
by the Prioress of the Carmelite Nuns because the two cases were not
similar, for whereas the congregation of the Carmelite Nuns had five
incorporators, the corporation sole has only one; that according to their
articles of incorporation, the organization of theCarmelite Nuns
became the owner of properties donated to it, whereas the case at
bar, the totality of the Catholic population of Davao would
become the owner of the property sought to be registered.

As the Register of Deeds entertained some doubts as

to the registerability of the document, the matter was referred to the Land
Registration Commissioner en consulta for resolution in accordance with
section 4 of Republic Act No. 1151. Proper hearing on the matter was
conducted by the Commissioner and after the petitioner corporation had
filed its memorandum, a resolution was rendered on September 21,
1954, holding that in view of the provisions of Sections 1 and 5 of Article
XIII of the Philippine Constitution, the vendee was not qualified to acquire
private lands in thePhilippines in the absence of proof that at least 60 per
centum of the capital, property, or
assets of the Roman Catholic Administrator of Davao, Inc., was actually
owned or controlled by Filipino citizens, there being no question
that the present incumbent of the corporation sole was a Canadian
citizen. It was also the opinion of the Land Registration Commissioner
that section 159 of the Corporation Lawrelied upon by the vendee was
rendered inoperative by the aforementioned
provisions of the Constitution with respect to real estate,
unless the precise condition set therein that at least 60 per centof its
capital is owned by Filipino citizens be present, and, therefore,
ordered the Register of Deeds of Davao to deny
registration of the deed of sale in the absence of proof of compliance
with such condition.
After the motion to reconsider said resolution was denied, an
action for mandamus was instituted with this Court by said corporation
sole, alleging that under the Corporation Law, the Canon Law as well
as the settled jurisprudence on the matter, the deed of sale executed by
Mateo L. Rodis in favor of petitioner is actually a deed of sale in
favor of the Catholic Church which is qualified to acquire private
agricultural lands for the establishment and
maintenance of places of worship, and prayed that judgment be
rendered reserving and setting aside the resolution of the Land
Registration Commissioner in question. In its resolution of November 15,
1954, this Court gave due course to this petition providing
that the procedure prescribed for appeals from the Public Service
Commission orthe Securities and Exchange Commission (Rule 43), be
followed.
Section 5 of Article XIII of the Philippine Constitution reads as
follows:
SEC. 5. Save in cases of hereditary succession, no
private agricultural land shall be transferred or assigned except to
individuals, corporations, or associations qualified to acquire or
hold lands of the public domain in the Philippines.

Section 1 of the same Article also provides the following:

SECTION 1. All agricultural, timber, and mineral

lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, and other
natural resources of the Philippines belong to the State, and their
disposition, exploitation, development, or utilization shall be
limited to citizens of the Philippines, or to corporations or
associations at least sixty per centum of the capital of which is
owned by such citizens, SUBJECT TO ANY EXISTING RIGHT,
grant,
lease,
or
concession
AT THE TIME OF THE INAUGURATION OF THE GOVERNMEN
T ESTABLISHED UNDER THIS CONSTITUTION. Natural
resources, with the exception of public agricultural land, shall not
be alienated, and no license, concession, or lease
for the exploitation,
development,
or
utilization of any of the natural resources shall be granted for a
period exceeding twenty-five years, renewable for another
twenty-five years, except as to water rights for irrigation, water
supply,
fisheries,
or
industrial
uses
other
than the development of water power, in which cases beneficial
use may be the measure and limit of the grant.

In virtue of the foregoing mandates of the Constitution, who are

considered "qualified" to acquire and hold agricultural lands
in the Philippines? What is the effect of these constitutional prohibition
on the right of a religious corporation recognized by our Corporation
Law and registered as a corporation sole, to possess, acquire and
register real estates in its name when the Head,
Manager,Administrator or actual incumbent is an alien?
Petitioner consistently maintained that a corporation sole,
irrespective of the citizenship of its incumbent, is not prohibited or
disqualified to acquire and hold real properties. The Corporation
Lawand the Canon Law are explicit in their provisions that a corporation
sole or "ordinary" is not the owner of the properties that he may acquire
but merely the administrator thereof. The Canon Law also specified that
church temporalities are owned by the Catholic Church as a "moral
person" or by the dioceses as minor "moral persons" with the ordinary or
bishop as administrator.
And elaborating on the composition of the Catholic Church
in the Philippines, petitioner explained that as a religious society or
organization, it is made up of 2 elements or divisions the clergy or
religious members and the faithful or lay members. The 1948
figures of the Bureau of Census and Statistics showed that there were
277,551 Catholics in Davao and aliens residing therein numbered 3,465.
Even granting that all these foreigners are Catholics, petitioner contends

that Filipino citizens form more than 80 per cent of the entire Catholics
population of that area. As to its clergy and religious composition,
counsel for petitioner presented the Catholic Directory of the Philippines
for 1954 (Annex A) which revealed that as of that year, Filipino clergy
and women novices comprise already 60.5 per cent of the group. It was,
therefore, alleged that the constitutional requirement was fully met and
satisfied.
Respondents, on the other hand, averred that although it might
be true that petitioner is not the owner of the land purchased, yet he has
control over the same, with full power to administer, take possession of,
alienate, transfer, encumber, sell or dispose of any or all lands and their
improvements registered in the name of the corporation sole and can
collect, receive, demand or sue for all money or values of any kind that
may become due or owing to said corporation, and vested with authority
to enter into agreements with any persons, concerns or entities in
connection with said real properties, or in other words, actually
exercising all rights of ownership over the properties. It was their stand
that the theory that properties registered in the name of the corporation
sole are held in trust for the benefit of the Catholic population of a place,
as of Davao in the case at bar, should not be sustained because a
conglomeration of persons cannot just be pointed out as the cestui que
trust or recipient of the benefits from the property allegedly administered
in their behalf. Neither can it be said that the mass of people referred to
as such beneficiary exercise any right of ownership over thesame. This
set-up, respondents argued, falls short of a trust. Respondents instead
tried to prove that in reality, the beneficiary of ecclesiastical properties
are not the members or faithful of the church but someone else, by
quoting a portion of the oath of fidelity subscribed by a bishop upon his
elevation to the episcopacy wherein he promises to render
to the Pontifical Father or his successors an account of his pastoral office
and of all things appertaining to the state of this church.
Respondents likewise advanced the opinion that in
construing the constitutional provision calling for 60 per cent Filipino
citizenship, the criterion is not membership in the society but
ownership ofthe properties or assets thereof.
In solving the problem thus submitted to our consideration, We
can say the following: A corporation sole is a special form of corporation
usually associated with the clergy. Conceived and introduced
into the common law by sheer necessity, this legal creation which was
referred to as "that unhappy freak of English law" was designed to
facilitate the exercise of the functions of ownership carried on
by the clerics for and on behalf of the church which was regarded
as the property owner (See I Bouvier's Law Dictionary, p. 682-683).

A corporation sole consists of one person only, and his

successors (who will always be one at a time), in some particular station,
who are incorporated by law in order to give them some legal capacities
and advantages, particularly that of perpetuity, which in their natural
persons they could not have had. In this sense, the king is a sole
corporation; so is a bishop, or deans, distinct from their several chapters
(Reid vs. Barry, 93 Fla. 849, 112 So. 846).
The provisions of our Corporation law on religious corporations
are illuminating and sustain the stand of petitioner. Section 154 thereof
provides:
SEC
154.

For the administration of the temporalities of any

religious
denomination,
society
or
church
and the management of the estates and properties thereof, it
shall be lawful for thebishop, chief priest, or presiding
elder of any such religious denomination, society or church to
become a corporation sole, unless inconsistent with the rules,
regulations or discipline of his religious denomination, society, or
church or forbidden by competent authority thereof.

See also the pertinent provisions of the succeeding

sections of the same Corporation Law copied hereunder:

preceding such bishop, chief priest, or presiding elder,

as the case may be, shall become a corporation sole, and all
temporalities,
estates,
and
properties of the religious
denomination, society, or church therefore administered or
managed by him as such bishop, chief priest, or presiding
elder shall be held in trust by him as a corporation sole,
for the use, purpose, behoof, and sole benefit of his religious
denomination, society, or church, including hospitals, schools,
colleges, orphan asylums; parsonages, and cemeteries thereof.
For the filing of such articles of incorporation, the Securities &
Exchange Commissioner shall collect twenty-five pesos. (As
amended by Commonwealth Act No. 287); and
SEC. 163. The right to administer all temporalities and
all property held or owned by a religious order or society, or
by the diocese, synod, or district organization of any religious
denomination or church shall, on its incorporation, pass
to the corporation and shall be held in trust for the use, purpose,
behoof, and benefit of the religious society, or order so
incorporated orof the church of which the diocese, synod, or
district organization is an organized and constituent part.

The Canon Law contains similar provisions

regarding the duties of the corporation sole or ordinary
as administrator of the church properties, as follows:

SEC. 155. In order to become a corporation

sole the bishop, chief priest, or presiding elder of any religious
denomination, society, or church must file with the Securities and
Exchange
Commissioner
articles of incorporation
setting
forth the following facts:

"Al Ordinario local pertenence vigilar diligentemente

sobre la administracion de todos los bienes eclesiasticos que se
hallan en su territorio y no estuvieren sustraidos de su jurisdiccio
n, salvas las prescripciones legitimas que le concedan mas
amplios dsrechos.

xxx xxx xxx

"Teniendo en cuenta los derechos y las legitimas

costumbres y circunstancias, procuraran los Ordinarios regular
todo lo concerniente a la administracion de los bienes
eclesiasticos, dando las oportunas instrucciones particulares
dentro del marco del derecho comun". (Title XXVIII, Codigo da
Derecho Canonico, Lib. III, Canon 1519). *

(3) That as such bishop, chief priest, or presiding elder

he
is charged
with the administration of the temporalities
and the management of the estates,
and
properties of his
religious denomination, society, or church within its territorial
jurisdiction, describing it;
xxx xxx xxx
(As amended by Commonwealth Act No. 287).
SEC. 157. From and after the filing with the Securities &
Exchange Commissioner of the said articles of incorporation,
verified by affidavit or affirmation as aforesaid and accompanied
bythe copy of the commission,
certificate of election,
or
letters of appointment of the bishop, chief priest, or presiding
elder, duly certified as prescribed in the section immediately

That leaves no room for doubt that the bishops or archbishops,

as the case may be, as corporation's sole are
merely administrators of the church properties that come to their
possession, and which they hold in trust for the church. It can also be
said that while it is true that church properties could be administered by a
natural person, problems regarding succession to said properties can not
be avoided to rise upon his death. Through this legal fiction, however,
church properties acquired by the incumbent of a corporation sole pass,
by operation of law, upon his death not to his personal heirs but to his
successor in office. It could be seen, therefore, that a corporation sole is

created not only to administer the temporalities of the church or religious

society where he belongs but also to hold and transmit the same to his
successor in said office. If the ownership or title to the properties do not
pass to the administrators, who are the owners of church properties?

acquiring the same. Although this question of ownership of ecclesiastical

properties has off and on been mentioned in several decisions of this
Court yet in no instance was the subject ofcitizenship of this religious
society been passed upon.

Bouscaren and Elis, S. J., authorities on canon law, on their

treatise comment:

We are not unaware of the opinion expressed by the late Justice

Perfecto in his dissent in the case of Agustines vs. Court of First
Instance of Bulacan, 80 Phil. 565, to the effect that
"the RomanCatholic Archbishop of Manila is only a branch of a universal
church by the Pope, with permanent residence in Rome, Italy". There is
no question that the Roman Catholic Church existing in the Philippines is
a tributary and part of that international religious organization,
for the word "Roman" clearly expresses its unity with and
recognizes the authority of the Pope in Rome. However, lest We become
hasty in drawing conclusions, We have to analyze and take
note of the nature of the government established in the Vatican
City, of which it was said:

"In
matters
regarding
property
belonging
to the Universal Church and to the Apostolic See, the Supreme
Pontiff
exercises
his
office of supreme administrator through the Roman Curia; in
matters
regarding
other
church
property, through the administrators of the individual
moral
persons in the Church according to that norms, laid down
in the Code of Cannon Law. This does not mean, however,
that the Roman Pontiff is the owner of all church property; but
merely that he is the supreme guardian" (Bouscaren and Ellis,
Canon Law, A Text and Commentary, p. 764).

And this Court, citing Campos y Pulido, Legislacion y Jurisprudencia

Canonica, ruled
in the case of Trinidad vs. Roman Catholic Archbishop of Manila, 63 Phil.
881, that:
"The second question to be decided is in
whom the ownership of the properties
constituting the endowment of the ecclesiastical
or
collative
chaplaincies is vested.
'Canonists entertain different opinions as to the person
in whom the ownership of the ecclesiastical properties is vested,
with respect to which we shall, for our purpose, confine ourselves
to stating with Donoso that, while many doctors cited by Fagnano
believe
that
it
resides
in the Roman Pontiff
as
Head of the Universal Church, it is more probable that ownership,
strictly speaking, does not reside in the latter, and, consequently,
ecclesiastical properties are owned by churches, institutions and
canonically established private corporations to which said
properties have been donated'."

Considering that nowhere can We find any provision conferring

ownership of church properties on the Pope although he appears to
be the supreme administrator or guardian of his flock, nor
onthe corporations sole or heads of dioceses as they are admittedly
mere administrators of said properties, ownership of these temporalities
logically fall and devolve upon the church, diocese or congregation

"GOVERNMENT. In the Roman Catholic Church

supreme authority and jurisdiction over clergy and laity alike is
held by the pope who (since the Middle Ages) is elected
by the cardinals assembled in conclave, and holds office until his
death or legitimate abdication. . . . While the pope is obviously
independent of the laws made, and the officials appointed, by
himself or his predecessors, he usually exercises his
administrative authority according to the code of canon law and
through the congregations, tribunals and offices of the Curia
Romana. In their respective territories (called generally dioceses)
and over their respective subjects, the patriarchs, metropolitans
or archbishops and bishops exercise a jurisdiction which is called
ordinary (as attached by law to an office and so distinguished
from delegated jurisdiction which is given to a person. . . . ."
(Collier's Encyclopedia, Vol. 17, p. 93.)

While it is true and We have to concede that

in the profession of their faith, the Roman Pontiff is the supreme head;
that in religious matters, in the exercise of their
belief, the Catholiccongregation of the faithful throughout world
seeks the guidance and direction of their Spiritual Father in the Vatican,
yet it cannot be said that there is a merger of personalities resultant
therein. Neither can it be said that the political and civil
rights of the faithful, inherent or acquired under the laws of their country,
are affected by that relationship with the Pope. The fact
that the Roman Catholic Church in almost every country springs from
that society that saw its beginning in Europe and the fact
that the clergy of this faith derive their authorities and receive orders
from the Holy See do not give or bestow the citizenship of the Pope upon
these branches. Citizenship is a political right which cannot be acquired

by a sort of "radiation". We have to realize that although there is a

fraternity among all thecatholic countries and the dioceses therein all
over the globe, this universality that the word "catholic" implies, merely
characterize their faith, a uniformity in the practice and
interpretation of their dogma and in the exercise of their belief, but
certainly they are separate and independent from one another in
jurisdiction, governed by different laws under which they are
incorporated, and entirely independent of the others in the management
and ownership of their temporalities. To allow theory
that the Roman Catholic Churches all over the world
follow the citizenship of their Supreme Head,the Pontifical Father, would
lead to the absurdity of finding the citizens of a country who
embrace the Catholic faith and become members of that religious
society, likewise citizens of the Vatican or ofItaly. And this is more so if
We consider that the Pope himself may be an Italian or national of any
other country of the world. The same thing may be said with regard
to the nationality or citizenship ofthe corporation sole created
under the laws of the Philippines, which is not altered
by the change of citizenship of the incumbent bishops or heads of said
corporations sole.
We must, therefore, declare that although a
branch of the Universal Roman Catholic Apostolic Church,
every Roman Catholic Church in different countries, if it exercises its
mission and is lawfully incorporated in accordance
with the laws of the country where it is located, is considered an entity or
person with all the rights and privileges granted to such artificial being
under the laws of that country, separate and distinct
from the personality of the Roman Pontiff or the Holy See, without
prejudice to its religious relations with the latter which are governed
by the Canon Law or their rules and regulations.
We certainly are conscious of the fact that whatever conclusion
We may draw on this matter will have a far reaching influence, nor can
We overlook the pages of history that arouse indignation and criticisms
against church landholdings. This nurtured feeling that showballed into a
strong nationalistic sentiment manifested itself when the provisions on
natural resources to be embodied in thePhilippines Constitution were
framed, but all that has been said on this regard referred more
particularly to landholdings of religious corporations known as "Friar
Estates" which have already been acquired by our Government, and not
to properties held corporations sole which, We repeat, are properties
held in trust for the benefit of the faithful residing within its territorial
jurisdiction. Though that same feeling probably precipitated and
influenced to a large extent the doctrine laid down in the celebrated
Krivenko decision, We have to take this matter in the light of legal

provisions and jurisprudence actually obtaining,

irrespective of sentiments.
The question now left for our determination is
whether the Roman Catholic Apostolic Church in the Philippines, or
better still, the corporation sole
named the Roman Catholic ApostolicAdministrator of Davao, Inc., is
qualified to acquire private agricultural lands in the Philippines pursuant
to the provisions of Article XIII of the Constitution.
We see from sections 1 and 5 of said Article quoted before, that
only persons or corporations qualified to acquire or hold
lands of the public domain in the Philippines may acquire or be assigned
and hold private agricultural lands. Consequently, the decisive factor
in the present controversy hinges on the proposition of whether or
not the petitioner in this case can acquire agricultural lands of thepublic
domain.
From the data secured from the Securities and Exchange
Commission, We find that the Roman Catholic Bishop of Zamboanga
was incorporated as a corporation sole) in September, 1912, principally
to administer its temporalities and manage its properties. Probably due
to the ravages of the last war, its articles of incorporation were
reconstructed in the Securities and Exchange Commission on April 8,
1948. At first, this corporation sole administered
all the temporalities of the church existing or located
in the island of Mindanao. Later on, however, new dioceses were formed
and new corporations sole were created to correspond with the territorial
jurisdiction of the new dioceses, one of them being petitioner
herein, the Roman Catholic Apostolic Administrator of Davao, Inc., which
was registered with the Securities and Exchange Commission on
September 12, 1950, and succeeded
in the administration of all the "temporalities" of the Roman Catholic Chur
ch existing inDavao.
According to our Corporation Law, Public Act No. 1459,
approved April 1, 1906, a corporation sole
is organized and composed of a single individual, the head of any
religious
society
or
church, for the ADMINISTRATION of the temporalities of such
society of church. By "temporalities" is meant estates and
properties
not
used
exclusively
for
religious
worship. The successors in office of such religious head or chief
priest
incorporated
as
a
corporation
sole
shall
become the corporation sole on ascension to office, and shall be
permitted to transact business as such on filing

with the Securities and Exchange Commission a copy of his

commission, certificate of election or letter ofappointment duly
certified by any notary public or clerk of court of record
(Guevara's The Philippine Corporation Law, p. 223).

The Corporation Law also contains the following provisions:

SECTION 159. Any corporation sole may purchase and
hold real estate and personal property for its church, charitable,
benevolent, or educational purposes, and may receive bequests
or gifts for such purposes. Such corporation may mortgage or sell
real property held by it upon obtaining an order for that purpose
from the Court of First
Instance of the province
in
which theproperty is situated; but before making the order proof
must
be
made
to the satisfaction of the Court
that
notice of the application for leave to mortgage or sell has been
given by publication or otherwise in such manner and for such
time as said Court or the Judge thereof may have directed, and
that it is to the interest of the corporation that leave to mortgage
or sell should be granted.The application for leave to mortgage or
sell must be made by petition, duly verified by the bishop, chief
priest, or presiding elder, acting as corporation sole, and may be
opposed by any memberof the religious denomination, society or
church represented by the corporation sole: Provided, however,
That
in
cases
where the rules,
regulations,
and
discipline of the religious denomination, society or church
concerned
represented
by
such
corporation
sole
regulate the methods of acquiring,
holding,
selling
and
mortgaging real estate and personal property, such rules,
regulations,
and
discipline
shall
control
and the intervention of the Courts shall not be necessary.

It can, therefore, be noticed that the power of a corporation sole

to purchase real property, like the power exercised in the case at bar, is
not restricted although the power to sell or mortgagesometimes is,
depending upon the rules, regulations, and discipline of the church
concerned represented by said corporation sole. If corporations sole can
purchase and sell real estate for its church, charitable, benevolent, or
educational purposes, can they register said real properties? As provided
by law, lands held in trust for specific purposes may be
subject of registration (section 69, Act 496), and the capacity of a
corporation sole, like petitioner herein, to register lands belonging to it is
acknowledged, and title thereto may be issued in its name
(Bishop of Nueva Segovia vs. Insular Government, 26 Phil. 300-1913).
Indeed it is absurd to conceive that while the corporations sole that might
be in need of acquiring lands for the erection of temples
where the faithful can pray, or schools and cemeteries which they are

expressly authorized by law to acquire in connection

with the propagation of the Roman Catholic Apostolic faith or in
furtherance of their freedom of religion, they could not register said
properties in their name. As professor Javier J. Nepomuceno very well
says "Man in his search for the immortal and imponderable, has, even
before the dawn of recorded history, erected temples to the Unknown
God, and there is no doubt that he will continue to do so for all time to
come, as long as he continues 'imploring the aid of Divine Providence'"
(Nepomuceno's Corporation Sole, VI Ateneo Law Journal, No. 1, p. 41,
September, 1956). Under the circumstances of this case, We might
safely state that even before the establishment of the Philippine
Commonwealth and of the Republic of the Philippines every corporation
sole then organized and registered had by express
provision of law the necessary power and qualification to purchase in its
name private lands located in the territory in which it exercised its
functions or ministry and for which it was created,
independently of the nationality of its incumbent unique and single
member and head, the bishop of thediocese. It can be also maintained
without fear of being gainsaid that the Roman Catholic Apostolic Church
in the Philippines has no nationality and
that the framers of the Constitution, as will be hereunder explained, did
not have in mind the religious corporations sole when they provided that
60 per centum of the capital thereof be owned by Filipino citizens.
There could be no controversy as to the fact that a duly
registered corporation sole is an artificial being
having the right of succession and the power, attributes, and properties
expressly authorized by law or incident to its existence (section
1, Corporation Law). In outlining the general powers of a corporation,
Public Act No. 1459 provides among others:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(5) To purchase, hold, convey, sell, lease, let, mortgage,
encumber, and otherwise deal with such real and personal
property as the purposes for which the corporation was formed
may
permit,
and the transaction of the lawful
business of the corporation may reasonably and necessarily
require, unless otherwise prescribed in this Act: . . . .

In implementation of the same and specifically made applicable

to a form of corporation recognized by the same law, Section 159
aforequoted expressly allowed the corporation sole to purchase and hold
real as well as personal properties necessary
for the promotion of the objects for which said corporation sole is

created. Respondent Land Registration Commissioner, however,

maintained that since the Philippine Constitution is a later enactment
than Public Act No. 1459, the provisions of Section 159 in
amplification of Section 13 thereof, as regard real properties, should be
considered repealed by the former.
There is reason to believe that when the specific
provision of the Constitution invoked by respondent Commissioner was
under consideration, the framers of the same did not have in mind or
overlooked this particular form of corporation. It is undeniable
that the nationalization and conservation of our natural resources was
one of the dominating objectives of the Convention and in
draftingthe present Article XIII of the Constitution, the delegates were
goaded by the desire (1) to insure their conservation for Filipino posterity;
(2) to serve as an instrument of national defense, helping
prevent the extension into the country of foreign control through peaceful
economic penetration; and (3) to prevent making the Philippines a
source of international conflicts with the consequent danger to its internal
security and independence (See The Framing of the Philippine
Constitution by Professor Jose M. Aruego, a Delegate
to the Constitutional Convention, Vol. II. P. 592-604). In the same book
Delegate Aruego, explaining the reason behind the first consideration,
wrote:
"At the time of the framing of the Philippine Constitution.
Filipino capital had been known to be rather shy. Filipinos
hesitated as a general rule to invest a considerable sum of their
capital
forthe development,
exploitation
and
utilization of the natural resources of the country. They had not
as
yet
been
so
used
to
corporate
enterprises
as the peoples of the west. This general apathy, thedelegates
knew,
would
mean the retardation of the development of the natural
resources, unless foreign capital would be encouraged to come
and
help
in
that
development. They
knew
that thenationalization of the natural resources would certainly
not encourage the INVESTMENT OF FOREIGN CAPITAL, into
them. But there was a general feeling in the Convention that it
was better to have such a development retarded or even
postponed together until such time when the Filipinos would be
ready and willing to undertake it rather than permit the natural
resources
to
be
placed
underthe ownership
or
control of foreigners in order that they might be immediately
developed, with the Filipinos of the future serving not as owners
but utmosts as tenants or workers under foreign masters. By all
means, the delegates believed, the natural resources should be
conserved for Filipino posterity".

It could be distilled from the foregoing

that the framers of the Constitution intended said provisions as barrier for
foreigners or corporations financed by such foreigners to acquire, exploit
and develop our natural resources, saving these undeveloped wealth for
our people to clear and enrich when they are already prepared and
capable of doing so. But that is not the case of corporations sole
in the Philippines, for, We repeat, they are mere
administrators of the "temporalities" or properties titled in their name and
for the benefit of the members of their respective religion
composed of an overwhelming majority of Filipinos. No mention nor
allusion whatsoever is made in the Constitution as to the prohibition
against or the ability of the Roman Catholic Church in the Philippines to
acquire and hold agricultural lands. Although there were some
discussions on landholdings, they were mostly confined
in the inclusion of the provision allowing the Government to break big
landed estates to put an end to absentee landlordism.
But let us suppose, for the sake of argument, that the above
referred to inhibitory clause of Section 1 of Article XIII of the Constitution
does have bearing on the petitioner's case; even so theclause requiring
that at least 60 per centum of the capital of the corporation be owned by
Filipinos is subordinated to the petitioner's aforesaid right already
existing at the time of the inauguration of theCommonwealth
and the Republic of the Philippines. In the language of Mr. Justice Jose
P. Laurel (a Delegate to the Constitutional Convention), in his concurring
opinion in the case of Gold Creek Mining Corporation
petitioner vs. Eulogio Rodriguez, Secretary of Agriculture and
Commerce, and Quirico Abadilla, Director of the Bureau of Mines,
respondent, 66 Phil. 259:
"The saving
clause
in the section
involved of the Constitution was originally embodied in the report
submitted
by the Committee
on
Nationalization
and
Preservation of Lands
and
Other
Natural
Resources
to the Constitutional Convention on September 17, 1934. It was
later inserted in the first draft of the Constitution as section
13 of Article XIII thereof, and finally incorporated as we find it
now. Slight have been the changes undergone by the proviso
from the time when it came out of the committee until it was
finally adopted. When first submitted and as inserted in the first
draft of the Constitution it reads: 'subject to any right, grant, lease
or
concession
existing
in
respect
thereto
as the date of the adoption of the Constitution'.
As
finally
adopted, the proviso reads: 'subject to any existing right, grant,
lease
or
concession
at the time of the inauguration of the Government
established
under this Constitution'. This recognition is not mere
graciousness
but
springs
from the just

character of the government

established. The framers of the Constitution were not obscured
by the rhetoric of democracy or swayed to hostility by an intense
spirit ofnationalism. They well knew that conservation of our
natural
resources
did
not
mean
destruction
or
annihilation of acquired property rights. Withal, they erected a
government neither episodic nor stationary but well-nigh
conservative
in the protection of property
rights.
This
notwithstanding nationalistic and socialistic traits discoverable
upon even a sudden dip into a variety of theprovisions embodied
in the instrument."

The writer of this decision wishes to state at this juncture that

during the deliberation of this case he submitted
to the consideration of the Court the question that may be
termed the "vested right saving clause" contained in Section 1, Article
XIII of the Constitution, but some of the members of this Court either did
not agree with the theory of the writer, or were not ready to take a
definite stand on the particular point I am now to discuss deferring our
ruling on such debatable question for a better occasion, inasmuch
as the determination thereof is not absolutely necessary
for the solution of theproblem involved in this case. In his desire to
face the issues squarely, the writer will endeavour, at least as a
digression, to explain and develop his theory, not as a
lucubration of the Court, but of his own, for he deems it better and
convenient to go over the cycle of reasons that are linked to one another
and that step by step lead Us to conclude as We do in the dispositive
part of this decision.

It will be noticed that Section 1 of Article XIII of the Constitution

provides, among other things, that "all agricultural lands of the public
domain and their disposition shall be limited to citizens ofPhilippines or
to corporations at least 60 per centum of the capital of which is owned by
such citizens, SUBJECT TO ANY EXISTING RIGHT
AT THE TIME OF THE INAUGURATION OF THE GOVERNMENT
ESTABLISHED UNDER THIS CONSTITUTION."
As recounted by Mr. Justice Laurel in the aforementioned
case of Gold Creek Mining Corporation vs. Rodriguez et al., 66 Phil. 259,
"this recognition (in the clause already quoted), is not mere
graciousness but springs from the just character of the government
established. The framers of the Constitution were not obscured
by the rhetoric of democracy or swayed to hostility by an intense
spirit of nationalism. They well knew that conservation of our natural

resources did not mean destruction or annihilation of ACQUIRED

PROPERTY RIGHTS".
But respondents' counsel may argue that the preexisting
right of acquisition of public or private lands by a corporation which does
not fulfill this 60 per cent requisite, refers to purchases or acquisitions
made prior to the effectivity of the Constitution and not
to later transactions. This argument would imply that even assuming that
petitioner had at the time of the enactment of theConstitution the right to
purchase real property, that power or right could not be exercised
after the effectivity of our Constitution, because said power or
right of corporations sole, like the herein petitioner, conferred in
virtue of the aforequoted provisions of the Corporation Law, could no
longer be exercised in view of the requisite therein prescribed that at
least 60 per centum of the capital ofthe corporation had to be Filipino. It
has been shown before that: (1) the corporation sole, unlike the ordinary
corporations which are formed by no less than 5 incorporators, is
composed of only one person, usually the head or bishop of the diocese,
a unit which is not subject to expansion for the purpose of determining
any percentage whatsoever; (2) the corporation sole is
only the administratorand not the owner of the temporalities located
in the territory comprised by said corporation sole; (3) such temporalities
are administered for and on behalf of the faithful residing in the diocese
or territory of the corporation sole; and (4) the latter, as such, has no
nationality and the citizenship of the incumbent Ordinary has nothing to
do with the operation, management or administration of thecorporation
sole, nor affects the citizenship of the faithful connected with their
respective diocese or corporation sole.
In view of these peculiarities of the corporation sole, it would
seem obvious that when the specific provision of the Constitution
invoked by respondent Commissioner (section 1, Art. XIII), was under
consideration, the framers of the same did not have in mind or
overlooked this particular form of corporation. If this were so, as the facts
and circumstances already indicated tend to prove it to be so,
then the inescapable conclusion would be that this requirement of at
least 60 per cent of Filipino capital was never intended to apply to
corporations sole, and the existence or not of a vested right becomes
unquestionably immaterial.
But let us assume that the questioned proviso is material, yet We
might say that a reading of said Section 1 will show that it does not refer
to any actual acquisition of land but to the right, qualification or power to
acquire and hold private real
property. The population of the Philippines, Catholic to a high
percentage, is ever increasing. In the practice of religion of their

faithful thecorporation sole may be in need of more temples where to

pray, more schools where the children of the congregation could be
taught in the principles of their religion, more hospitals where their sick
could be treated, more hallow or consecrated grounds or cemeteries
where Catholics could be buried, many more than those actually existing
at the time of the enactment of our Constitution. This being the case,
could it be logically maintained that because the corporation sole which,
by express provision of law, has the power to hold and acquire real
estate and personal property for its churches, charitable benevolent, or
educational purposes (section 159, Corporation Law) it has to stop its
growth and restrain its necessities just because the corporation sole is a
non-stock corporation composedof only one person who in his unity does
not admit of any percentage, especially when that person is
not the owner but merely
an administrator of the temporalities of the corporation sole? The writer
leaves the answer to whoever may read and consider this
portion of the decision.
Anyway, as stated before, this question is not a decisive factor in
disposing this case, for even if We were to disregard such saving
clause of the Constitution, which reads: subject to any existing right,
grant, etc., at the time of the inauguration of the Government established
under this Constitution, yet We would have, under the evidence on
record, sufficient grounds to uphold petitioner's contention on this matter.
In this case of the Register of Deeds of Rizal vs. Ung Sui Si
Temple, * G. R. No. L-6776, promulgated May 21, 1955, wherein this
question was considered from a different angle, this Court, through Mr.
Justice J. B. L. Reyes, said:
"The fact that the appellant religious organization has no
capital stock does not suffice to escape the Constitutional
inhibition, since it is admitted that its members are of foreign
nationality.The purpose of the sixty per centum requirement is
obviously to ensure that corporation or associations allowed to
acquired agricultural land or to exploit natural resources shall be
controlled by Filipinos; and the spirit of the Constitution demands
that in the absence of capital stock, the controlling membership
should be composed of Filipino citizens."

In that case respondent-appellant Ung Siu Si Temple was not a

corporation sole but a corporation aggregate, i.e., an unregistered
organization operating through 3 trustees, all of Chinese nationality, and
that is why this Court laid down the doctrine just quoted. With regard to
petitioner, the Roman Catholic Administrator of Davao, Inc., which
likewise is a non-stock corporation, the case is different, because it is a
registered corporation sole, evidently of no nationality and registered

mainly to administer the temporalities and manage the properties

belonging to the faithful of said church residing in Davao. But even if we
were to go over the record to inquire into the composing membership to
determine whether the citizenship requirement is satisfied or not, we
would find undeniable proof
that the members of the Roman Catholic Apostolic faith
within the territory of Davao are predominantly Filipino citizens. As
indicated before, petitioner has presented evidence to establish
thatthe clergy and lay members of this religion fully
covers the percentage of Filipino citizens required by the Constitution.
These facts are not controverted by respondents and our conclusion in
this point is sensibly obvious.
Dissenting Opinion Discussed. After having developed our
theory in this case and arrived at the findings and conclusions already
expressed in this decision. We now deem it proper to analyze and delve
into the basic foundation on which the dissenting opinion stands up.
Being aware of the transcendental and far-reaching effects that Our
ruling on the matter might have, this case was thoroughly considered
from all points of view, the Court sparing no effort to solve the delicate
problems involved herein.
At the deliberations had to attain this end, two ways were open
to a prompt dispatch of the case: (1) the reversal of the doctrine We laid
down in the celebrated Krivenko case by excluding urban lots and
properties from the grasp of the term "private agricultural lands" used in
section 5, Article XIII of the Constitution; and (2) by driving Our reasons
to a point that might indirectly cause theappointment of Filipino bishops
or Ordinary to head the corporations sole created to
administer the temporalities of the Roman Catholic Church
in the Philippines. With regard to the first way, a great
majority of the members of this Court were not yet prepared nor
agreeable to follow that course, for reasons that are obvious. As
to the second way, it seems to be misleading
because the nationality ofthe head of a diocese constituted as a
corporation sole has no material bearing on the functions of the latter,
which are limited
to the administration of the temporalities of the Roman Catholic Apostolic
Church in the Philippines.
Upon going over the grounds on which the dissenting opinion is
based, it may be noticed that its author lingered
on the outskirts of the issues, thus throwing the main points in
controversy out offocus. Of course We fully agree, as stated by
Professor Aruego, that the framers of our Constitution had at heart to
insure the conservation of the natural resources of Our motherland for

Filipino posterity; to serve them as an instrument of national defense,

helping prevent the extension into the country of foreign control through
peaceful economic penetration; and to prevent making thePhilippines a
source of international conflicts with the consequent danger to its internal
security and independence. But all these precautions adopted
by the Delegates to Our Constitutional Assembly could not have been
intended for or directed against cases like the one at bar. The emphasis
and wanderings on the statement that once the capacity of a corporation
sole to acquire private agricultural lands is admitted there will be no limit
to the areas that it may hold and that this will pave the way
for the "revival or revitalization of religious landholdings that proved so
troublesome in our past", cannot even furnish the "penumbra" of a threat
to the future of the Filipino people. In the first place, the right of Filipino
citizens, including those of foreign extraction, and Philippine
corporations, to acquireprivate lands is not subject to any restriction or
limit as to quantity or area, and We certainly do not see any wrong in
that. The right of Filipino citizens and corporations to
acquire public agricultural lands is already limited by law. In the second
place, corporations sole cannot be considered as aliens because they
have no nationality at all. Corporations sole are, under the law, mere
administrators of thetemporalities of the Roman Catholic Church
in the Philippines. In the third place, every corporation, be it aggregate or
sole, is only entitled to purchase, convey, sell, lease, let, mortgage,
encumber and otherwise deal with real properties when it is pursuant to
or in consonance with the purposes for which the corporation was
formed, and when the transactions of the lawful
business of the corporation reasonably and necessarily require such
dealing section 13-(5) of the Corporation Law, Public Act No. 1459
and considering these provisions in conjunction with Section
159 of the same law which provides that a corporation sole
may only "purchase and hold real estate and personal properties for its
church, charitable, benevolent or educational purposes", the above
mentioned fear ofrevitalization of religious landholdings in the Philippines
is absolutely dispelled. The fact that the law
thus expressly authorizes the corporations sole to receive bequests or
gifts of real properties (which were the main source that the friars had to
acquire their big haciendas during the Spanish regime), is a clear
indication that the requisite that bequests or gifts of real estate be for
charitable, benevolent, or educational purposes, was,
in the opinion of the legislators, considered sufficient and adequate
protection against the revitalization of religious landholdings.

Finally, and as previously stated, We have reason to believe that

when the Delegates to the Constitutional Convention drafted and

approved Article XIII of the Constitution, they did not have in

mind the corporation sole. We come to this finding
because the Constitutional Assembly, composed as it was by a great
number of eminent lawyers and jurists, was like any other legislative
body empowered to enact either the Constitution of the country or any
public statute, presumed to know the conditions existing as to particular
subject matter when it enacted a statute (Board of Com'rs ofOrange
County vs. Bain, 92 S. E. 176; 173 N. C. 377).
"Immemorial customs are presumed to have been
always in the mind of the Legislature in enacting legislation." (In
re Kruger's Estate, 121 A. 109; 277 Pa. 326).
"The Legislative
is
presumed
to
have
a
knowledge of the state of the law on the subjects upon which it
legislates." (Clover Valley Land & Stock Co. vs. Lamb et al., 187,
p. 723, 726.)
"The Court in construing a statute, will assume
that the legislators acted with full knowledge of the prior
legislation on the subject and its construction by the courts."
(Johns vs. Town ofSheridan, 89 N. E. 899, 44 Ind. App. 620.)
"The Legislature is presumed to have been familiar
with the subject with which it was dealing . . . ."
(Landers vs. Commonwealth, 101 S. E. 778, 781.)
"The Legislature
is
presumed
to
know
principles of statutory construction " (People vs. Lowell, 230 N.
W. 202, 250 Mich. 349, followed in P. vs. Woodworth, 230 N. W.
211, 250 Mich. 436.)
"It is not to be presumed that a provision was inserted in
a constitution or statute without reason, or that a result was
intended
inconsistent
with the judgment of men of common
sense guided by reason." (Mitchell vs. Lawden, 123 N. E. 566,
288 Ill. 326.) See City of Decatur vs. German, 142 N. E. 252, 310
Ill. 591, and many other authorities that can be cited in support
hereof.

Consequently, the Constitutional Assembly must have known:

1. That a corporation sole is organized by and
composed of a single individual, the head of any religious society
or church operating within the zone, area or jurisdiction covered
by said corporation sole (Article 155, Public Act No. 1459);
2. That a corporation sole is a non-stock corporation;

3. That the Ordinary (the corporation sole proper) does

not own the temporalities which he merely administers;
4. That under the law the nationality of said Ordinary
or of any administrator has
absolutely
no
bearing
on the nationality of the person desiring to acquire real property
in the Philippines by purchase or other lawful means other than
by hereditary succession, who, according to the Constitution
must be a Filipino (sections 1 and 5, Article XIII);
5. That
section
159 of the Corporation
Law expressly authorized the corporation sole to purchase and
hold real estate for its church, charitable, benevolent or
educational purposes, and to receive bequests or gifts for such
purposes;
6. That in approving our Magna Carta the Delegates
to the Constitutional
Convention,
almost
all of whom
were Roman Catholics, could not have intended to curtail
all the propagation ofthe Roman Catholic faith
or the expansion of the activities of their church, knowing pretty
well
that
with the growth of our
population
more
places of worship, more schools where our youth could be taught
and trained; more hallow grounds where to bury our dead would
be needed in the course of time.

Long before the enactment of our Constitution the law

authorized the corporations sole even to receive bequests or gifts of real
estates send this Court could not, without any clear and specific
provision of the Constitution, declare that any real property donated, let
us say this year, could no longer be registered
in the name of the corporation sole to which it was conveyed. That would
be an absurdity that should not receive our sanction on the pretext that
corporations sole which have no nationality and are non-stock
corporations composed of only one person
in the capacity ofadministrator, have to establish first that at least sixty
per centum of their capital belong to Filipino citizens. The new Civil Code
even provides:
"ART. 10. In case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body
intended right and justice to prevail."

Moreover,
under the laws of the Philippines, the administrator of the properties of a
Filipino can acquire, in the name of the latter, private lands without any
limitation whatsoever, and that is so because the properties thus
acquired are not for and would not belong to the administrator but
to the Filipino whom he represents. But the dissenting Justice inquires:

If the Ordinary is only theadministrator, for whom does he administer?

And who can alter or overrule his acts? We will forthwith proceed to
answer these questions. The corporations sole by reason of their
peculiar constitution and form of operation have no designed owner of its
temporalities, although by the terms of the law it can be safely implied
that the Ordinary holds them in
trust for the benefit of the Roman Catholicfaithful of their respective
locality or diocese. Borrowing the very words of the law, We may say
that the temporalities of every corporation sole are held in
trust for the use, purpose, behoof and benefitof the religious society,
or order so incorporated or of the church to which the diocese, synod, or
district organization is an organized and constituent part (section
163 of the Corporation Law).
In connection with the powers of the Ordinary
over the temporalities of the corporation sole, let us see now what
is the meaning and scope of the word "control". According
to the Merriam-Webster's New International Dictionary, 2nd ed., p. 580,
one of the acceptations of the word "control" is:
"4. To exercise restraining or directing influence over; to
dominate; regulate; hence, to hold from action; to curb; subject,
also, Obs. to overpower.
"SYN: restrain, rule, govern, guide, direct; check,
subdue."

It is true that under section 159 of the Corporation

Law, the intervention of the courts is not necessary,
to mortgage or sell real property held by the corporation sole
where the rules, regulations and discipline of the religious denomination,
society or church concerned represented by such corporation sole
regulate the methods of acquiring, holding, selling and mortgaging real
estate, and that theRoman Catholic faithful residing
in the jurisdiction of the corporation sole has no say either
in the manner of acquiring or of selling real property. It may be also
admitted that the faithful of the diocese cannot govern or
overrule the acts of the Ordinary, but all this does not mean that the latter
can administer the temporalities of the corporation sole without check or
restraint. We must not forget that when a corporation sole is incorporated
under Philippine laws, the head and only member thereof subjects
himself to the jurisdiction of the Philippine courts of justice and these
tribunals can thus entertain grievances arising out of or with respect
to the temporalities of the church which came
into the possession of the corporation sole as administrator. It may be
alleged that the courts cannot intervene as to the matters of doctrine or
teachings of the Roman Catholic Church. That is correct, but the courts

may step in, at the instance of the faithful for whom the temporalities are
being held in trust, to check undue exercise by the corporation sole of its
powers as administrator to insure that they are used for the purpose or
purposes for which the corporation sole was created.
American authorities have these to say:
It has been held that the courts have jurisdiction over an
action brought by persons claiming to be members of a church,
who allege a wrongful and fraudulent diversion of the church
property to uses foreign to the purposes of the church, since no
ecclesiastical question is involved and equity will protect from
wrongful diversion of the property (Hendryx vs. Peoples United
Church, 42 Wash. 336, 4 L.R.A. n.s.-1154).
The courts of the State have no general jurisdiction and
control over the officers of such corporations in respect
to the performance of their official duties; but as in respect
to the property which they hold for the corporation, they stand in
position of TRUSTEES and the courts may exercise the same
supervision as in other cases of trust (Ramsey vs. Hicks, 174 Ind.
428, 91 N. E. 344, 92 N. E. 164, 30 L.R.A. n.s.-665;
Hendryx vs. Peoples United Church, supra.)
Courts of the state
do
not
interfere
with the administration of church rules or discipline unless civil
rights become involved and which must be protected (Morris St.,
Baptist Church vs. Dart, 67 S. C. 338, 45 S. E. 753, and others).
(All cited in Vol. II, Cooley's Constitutional Limitations, p. 960964.)

If the Constitutional Assembly was aware of all the facts above

enumerated and of the provisions of law relative to existing conditions as
to management and operation of corporations sole in thePhilippines, and
if, on the other hand, almost all of the Delegates thereto
embraced the Roman Catholic faith, can it be imagined even for an
instant that when Article XIII of the Constitution was approvedthe framers
thereof intended to prevent or curtail from then on the acquisition by
corporations sole, either by purchase or donation, of real properties that
they might need for the propagation of thefaith and for other religious and
Christian activities such as the moral education of the youth, the care,
attention and treatment of the sick
and the burial of the dead of the Roman Catholic faithful residing
in the jurisdiction of the respective corporations sole? The mere
indulgence in said thought would impress upon Us a
feeling of apprehension and absurdity. And that is precisely the leit
motivthat permeates the whole fabric of the dissenting opinion.

It seems from the foregoing that the main problem We are

confronted With in this appeal, hinges around the necessity of a proper
and adequate interpretation of sections 1 and 5 of Article
XIII ofthe Constitution. Let Us then be guided
by the principles of statutory construction laid down by the authorities
on the matter:

"The most
important
single
factor
in
determining the intention of the people
from
whom the constitution emanated is the language in which it is
expressed. The words employed are to be taken in their natural
sense, except that legal or technical terms are to be given their
technical meaning. The imperfections of language as a vehicle
for conveying meanings result in ambiguities that must be
resolved
by
resort
to
extraneous
aids
for
discovering the intent of the framers.
Among the more
important of these are a consideration of the history of the times
when the provision was adopted and of the purposes aimed at in
its
adoption. The debates of constitutional
conventions,
contemporaneous construction, and practical construction
by the legislative and executive departments, especially if long
continued, may be resorted to to resolve, but not to create,
ambiguities. . . . . Consideration of the consequences flowing
from alternative constructions of doubtful provisions constitutes
an
important
interpretative
device.
.
.
. The purposes of many of the broadly phrased constitutional
limitations were the promotion of policies that do not lend
themselves to definite and specific formulation. The courts have
had to define those policies and have often drawn on natural law
and
natural
rights
theories
in
doing
so. The interpretation of constitutions tends to respond to
changing conceptions of political and social values. The extent to
which
these
extraneous
aids
affect the judicial
construction of constitutions cannot be formulated in precise
rules,
but
their
influence
cannot
be
ignored
in
describing the essentials of the process"
(Rottschaeffer
on
Constitutional Law, 1939 ed., p. 18-19).
"There
are
times
when
even the literal
expression of legislation may be inconsistent with the general
objectives of policy behind it, and on the basis of the equity or
spirit of the statute thecourts
rationalize
a
restricted
meaning of the latter. A restricted interpretation is usually applied
where the effect of a literal interpretation will make for injustice
and absurdity or, in the words ofone court, the language must be
so unreasonable 'as to shock general common sense'". (Vol. 3,
Sutherland on Statutory Construction, 3rd ed., 150.)

"A constitution is not intended to be a limitation

on the development of a country nor an obstruction to its
progress and foreign relations" (Moscow Fire Inc. Co. of Moscow,
Russia vs. Bank ofNew York & Trust Co., 294 N. Y. S. 648; 56 N.
E. 2d 745, 293 N. Y. 749).
"Although the meaning or principles of a constitution
remain fixed and unchanged from the time of its adoption, a
constitution must be construed as if intended to stand for a great
length oftime, and it is progressive and not static. Accordingly, it
should not receive too narrow or literal an interpretation but
rather the meaning given it should be applied in such manner as
to meet new or changed conditions as they arise"
(U.S. vs. Classic, 313 U.S. 299, 85 L. Ed., 1368).
"Effect should be given to the purpose indicated by a fair
interpretation of the language used and that construction which
effectuates, rather than that which destroys a plain intent or
purpose of a constitutional provision, is not only favored but will
be adopted" (State ex rel. Randolph Country vs. Walden, 206 S.
W. 2d 979).
"It is quite generally held that in arriving at the intent and
purpose the Construction should be broad or liberal or equitable,
as the better method of ascertaining that intent, rather than
technical" (Great Southern Life Ins. Co. vs. City of Austin, 243
S.W. 778).

All these authorities uphold our conviction

that the framers of the constitution had not in mind the corporations sole,
nor intended to apply them the provisions of sections 1 and 5 of said
Article XIII when they passed and approved the same. And if it were so
as We think it is, herein
petitioner, the Roman Catholic Apostolic Administrator of Davao, Inc.,
could not be deprived of the right to acquire by purchase or donation real
properties for charitable, benevolent and educational purposes,
nor of the right to register the same in its name
with the Register of Deeds of Davao, an indispensable requisite
prescribed by the Land Registration Act for lands covered by the Torrens
system.
We leave as the last theme for discussion the much debated
question above referred to as "the vested right saving clause" contained
in section 1, Article XIII of the Constitution. The dissenting Justice hurls
upon the personal opinion expressed on the matter
by the writer of the decision the most pointed darts of his severe
criticism. We think, however, that this strong dissent should have been
spared, because as clearly indicated before, some members of this
Court either did not agree with the theory of the writer or were not ready

to take a definite stand on that particular point, so that there being no

majority opinion thereon there was no need of any dissension therefrom.
But as the criticism has been made the writer deems it necessary to say
a few words of explanation.
The writer fully agrees with the dissenting Justice that ordinarily
"a capacity to acquire (property) in futuro, is not in itself a vested or
existing property right that the Constitution protects from impairment. For
a property right to be vested (or acquired) there must be a transition
from the potential or contingent to the actual, and the proprietary interest
must have attached to a thing; it must have become 'fixed and
established'" (Balboa vs. Farrales, 51 Phil. 498). But the case at bar has
to be considered as an exception to the rule because among the rights
granted by section 159 of theCorporation Law was the right to receive
bequests or gifts of real properties for charitable, benevolent and
educational purposes. And this right to receive such bequests or gifts
(which implies donationsin futuro), is not a mere potentiality that could be
impaired without any specific provision in the Constitution to that effect,
especially when the impairment would disturbingly
affect the propagation ofthe religious faith of the immense
majority of the Filipino people and the curtailment of the activities of their
Church. That is why the writer gave as a basis of his contention what
Professor Aruego said in his book "The Framing of the Philippine
Constitution" and the enlightening opinion of Mr. Justice Jose P. Laurel,
another Delegate to the Constitutional Convention, in his concurring
opinion in the case ofGoldcreek Mining Company vs. Eulogio Rodriguez
et al., 66 Phil. 269. Anyway the majority of the Court did not deem
necessary to pass upon said "vested right saving clause" for the final
determinationof this case.
JUDGMENT
Wherefore, the Resolution of the respondent Land Registration
Commission of September 21, 1954, holding that in
view of the provisions of sections 1 and 5 of Article XIII of the Philippine
Constitution the vendee (petitioner) is not qualified to acquire lands
in the Philippines in the absence of proof that at least 60 per
centum of the capital, properties or
assets of the Roman CatholicApostolic Administrator of Davao, Inc., is
actually owned or controlled by Filipino citizens, and
denying the registration of the deed of sale
in the absence of proof of compliance with such requisite, is hereby
reversed. Consequently, the respondent
Register of Deeds of the City of Davao is ordered to
register the deed of sale executed by Mateo L. Rodis in
favor of the Roman Catholic ApostolicAdministrator of Davao, Inc., which

is the subject of the present litigation. No pronouncement is made as to

costs. It is so ordered.
Bautista Angelo and Endencia, JJ., concur.
Paras, C. J., and Bengzon, J., concur in the result.

Separate Opinions
LABRADOR, J., concurring:
The case at bar squarely presents this important legal question:
Has the bishop or ordinary of the Roman Catholic Church who is not a
Filipino citizen, as corporation sole, the right to register land, belonging
to the Church over which he presides, in view of the Krivenko decision?
Mr. Justice Felix sustains the affirmative view while Mr. Justice J. B. L.
Reyes, the negative. As the undersigned understands it, the reason
given for this last view is that the constitutional provision prohibiting land
ownership by foreigners also extends to control because this lies
within the scope and purpose of theprohibition.
To our way of thinking, the question at issue depends for its
resolution upon another, namely, who is the owner of the land or
property of the Church sought to be registered? Under the Canon
Lawthe parish and the diocese have the right to acquire and own
property.
"SEC. 1. La Iglesia catolica y la Sede Apostolica, libre e
independientemente de la potestad civil, tiene derecho innato de
adquirir, retener y administrar bienes temporales para el logro de
sus propios fines.
"SEC. 2. Tambien las iglesias particulares y demas
personas morales erigidas por la autoridad eclesiastica en
persona juridica, tienen derecho, a tenor de los sagrados
canones, de adquirir, retener y administrar bienes temporales."
(Canon 1495) (Codigo de Derecho Canonico por MiguelezAlonso-Cabreros, 4a ed., p. 562.)

The Canon Law further states that Church property belongs

to the non-collegiate moral person called the parish, or to the diocese.
"In canon law the ownership of ecclesiastical goods
belongs to each separate juridical person in the Church (C.
1499). The property of St. John's Church does not belong
to the Pope, thebishop, the pastor,
or
even
to the people of the parish. It belongs to the non- collegiate moral

person called the parish, which has been lawfully erected. It is

not like a stock company. The civil law does not recognize this
canonical principle; it insists on an act of civil incorporation or
some other legal device." (Ready Answers in Canon Law by Rev.
P. J. Lydon, DD., 3rd ed., 1948, p. 576.)
"Parish. 3. A portion or subdivision of a diocese
committed to the spiritual jurisdiction or care of a priest or
minister, called rector or pastor. In the Protestant Episcopal
Church, it is a territorial division usually following civil bounds, as
those of a town. In the Roman Catholic Church, it is usually
territorial, but whenever, as in some parts of the United States
there are different rites and languages, the boundaries and
jurisdiction are determined by rite or language; as, a Ruthenian
or a Polish parish.

"5. The inhabitants or members of a parish, collectively."

"Diocese. 3. Eccl. The circuit or extent of a bishop's
jurisdiction; the district in which a bishop has authority."
(Webster's New International Dictionary.)

We are aware of the fact that some writers believe that

ownership of ecclesiastical properties resides
in the Roman Catholic Pontiff as Head of the Universal Church,
but the better opinion seems to be that they do belong to the parishes
and dioceses as above indicated.
"Canonists entertain different opinions as to the person
in whom the ownership of the ecclesiastical properties is vested,
with respect to which we shall, for our purpose, confine ourselves
to stating with Donoso that, while many doctors cited by Fagnano
believe
that
it
resides
in the Roman Pontiff
as
Head of the Universal Church, it is more probable that ownership,
strictly speaking, does not reside in the latter and, consequently,
ecclesiastical properties are owned by the churches, institutions
and canonically established private corporations to which said
properties have been donated." (3 Campos y Pulido, Legislacion
y
Jurisprudencia
Canonica,
P.
420,
cited
in
Trinidad vs. Roman Catholic Archbishop of Manila, 63 Phil., 881,
888- 889.)

The property in question, therefore, appears to belong

to the parish or the diocese of Davao.
But the Roman Catholics of Davao are not organized as a juridical
person, either under the Canon Law or under the Civil Law. Neither is
there any provision in either for their organization as a juridical person.

Registration of the property

in the name of the Roman Catholics of Davao is, therefore, impossible.
As under the Civil Law, however, the organization of parishes
and dioceses as juridical persons is not expressly provided
for, the corporation law has set up the fiction known as the "corporation
sole."
"It tolerates the corporation sole wherever and as long
as the state
law
does
not
permit the legal
incorporation of the parish or diocese. The bishop officially
is the legal owner." (Ready Answers in Canon Law, supra, p.
577.)

and authorizes it to purchase and hold real estate for the Church.
"SEC. 159. Any corporation sole may purchase and hold
real estate and personal property for its church, charitable,
benevolent, or educational purposes, and may receive bequests
or gifts for such purposes. Such corporation may mortgage or sell
real property held by it upon obtaining an order for that purpose
from the Court of First
Instance of the province
in
which theproperty is situated; but before making the order proof
must
be
made
to the satisfaction of the court
that
notice of the application for leave to mortgage or sell has been
given by publication or otherwise in such manner and for such
time as said court or the judge thereof may have directed, and
that it is to the interest of the corporation that leave to mortgage
or sell should be granted.The application for leave to mortgage or
sell must be made by petition, duly verified by the bishop, chief
priest, or presiding elder, acting as corporation sole, and may be
opposed by any memberof the religious denomination, society, or
church
represented
by the corporation
sole: Provided,
however, That in cases when the rules, regulations and
discipline of the religious denomination, society or church
concerned
represented
by
such
corporation
sole
regulate the methods of acquiring,
holding,
selling,
and
mortgaging real estate and personal property, such rules,
regulations,
and
discipline
shall
control
and the intervention of the courts shall not be necessary."
(The Corporation Law.)

And in accordance with the above

section, the temporalities of the Church or of a parish or diocese are
allowed to be registered in the name of the corporation sole for
purposes of administration and in trust for the real owners.

other property does not make the latter the real owner thereof, as his
tenure of Church property is merely for the purposes of administration.
As stated above, the bishop is only the legal (technical) owner or
trustee, the parish or diocese being the beneficial owner, or cestui que
trust.
Having arrived at the conclusion that the property in question
belongs actually either to the parish or the diocese of Davao, the next
question that possess for solution is, In case of said property, whose
nationality must be considered
for the purpose of determining the applicability of the constitutional
provision limiting ownership of land to Filipinos, that of the bishop or chief
priest who registers as corporation sole, or
that of the constituents of the parish or diocese who are the beneficial
owners of the land? We believe that that of the latter must be
considered, and not that of the priest clothed with the corporate fiction
and denominated as the corporation sole. The corporation sole is a mere
contrivance to enable a church to acquire, own and manage properties
belonging to the church. It is only a means to an end. The constitutional
provision could not have been meant to apply to the means through
which and by which property may be owned or acquired, but
to the ultimate owner of theproperty. Hence, the citizenship of the priest
forming the corporation sole should be no impediment if the parish or
diocese which owns the property is qualified to own and
possess the property.
We can take judicial notice of the fact that a great
majority of the constituents of the parish or
diocese of Davao are Roman Catholics. The affidavit demanded is,
therefore, a mere formality.
The dissenting opinion sustains the proposition that control, not
actual ownership, is the factor that determines whether the constitutional
prohibition against alien ownership of lands should or should not apply.
We may assume the correctness of the proposition that the Holy See
exercises control over Church properties everywhere, but the control
cannot be real and actual but merely theoretical. In any
case, the constitutional prohibition is limited by its terms to ownership
and ownership alone. And should the corporation sole abuse its powers
and authority in relation to theadministration or disposal of the property
contrary to the wishes of the constituents of the parish
or the diocese, the act may always be questioned as ultra vires.
We agree, therefore, with the reversal of the order.

The mere fact that the Corporation

Law authorizes the corporation sole to acquire and hold real estate or

Montemayor and Reyes, A., JJ., concur.

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

I regret not being able to assent to the opinion of Mr. Justice
Felix. The decision of the Supreme Court in this case will be of far
reaching results, for once the capacity of corporations sole to acquire
public and private agricultural lands is admitted, there will be no limit
to the areas they may hold until the Legislature implements section
3 of Article XII of the Constitution, empowering it to set a limit
tothe size of private agricultural land that may be held; and even then it
can only be done without prejudice to rights acquired prior
to the enactment of such law. In other words, even if a limitative law is
adopted, it will not affect the landholdings acquired before the law
become effective, no matter how vast the estate should be.
The Constitutional restrictions to the acquisition of agricultural
land are well known:
"SECTION 1. All agricultural, timber, and mineral
lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, and other
natural resources of the Philippines belong to the State, and their
disposition, exploitation, development, or utilization shall be
limited to citizens of the Philippines, or to corporations or
associations at least sixty per centum of the capital of which is
owned by such citizens, subject to any existing right, grant, lease,
or concession at the time of the inauguration of the Government
established under this Constitution. Natural resources,
with the exception of public agricultural land, shall not be
alienates,
and
no
license,
concession,
or
lease
for the exploitation,
development,
or
utilization of anyof the natural resources shall be granted for a
period exceeding twenty-five years, renewable for another
twenty-five years, except as to water rights for irrigation, water
supply
fisheries,
or
industrial
uses
other
than the development of water power, in which cases beneficial
use may be the measure and the limit of the grant." (Article XII,
Constitution of the Phil.)
"SEC. 5. Save in cases of hereditary succession, no
private agricultural land shall be transferred or assigned except to
individuals, corporations, or associations qualified to acquire or
hold lands of the public domain in the Philippines." (Art. XII,
Constitution of the Phil.)

In requiring corporations or associations to have sixty per cent

(60%) of their capital owned by Filipino citizens, the constitute on
manifestly disregarded the corporate fiction, i.e., the juridical
personality of such corporations or associations. It went
behind the corporate entity and looked at the natural persons that

composed it, and demanded that a clear majority in interest (60%)

should be Filipino. To me this was done to ensure that the control of its
properties (not merely the beneficial ownership thereof) remained in
Filipino hands. (Aruego, Framing of the Constitution, Vol. 2. pp. 604,
606.)
"The nationalization of the natural
resources of the country was intended (1) to insure their
conservation for Filipino posterity; (2) to serve as an
instrument of national defense, helping prevent the extension
into the country of foreign control through peaceful economic
penetration; and (3) to prevent making the Philippines a
source of international conflicts with the consequent danger to its
internal security and independence. . . ."
"The Convention permitted aliens to acquire an interest
in the natural resources of the country and in private agricultural
lands
as
component
elements of corporations
or
associations. Themaximum limit of interest that they could hold in
a corporation or association would be only forty per
centum of the capital. Accordingly the control of the corporation
or association would remain in Filipino hands.

In its report the committee on nationalization and

preservation of lands and other natural resources recommended
that the maximum limit of interest that aliens could hold in a
corporation or association should be only twenty-five per
centum of the capital. The purpose of the committee
was
to
enable Filipino-controlled corporations
or
associations,
if
necessary, to interest aliens to join their, technical or managerial
staff by giving them a part interest in the same. The subcommittee of seven embodied this recommendation in the first
draft of the Constitution; but in therevised article on General
Provisions, it raised the amount to forty per centum." (emphasis
supplied.)

It was in recognition of this basic rule that we held in

Register of Deeds vs. Ung Siu Si Temple, 51 Off. Gaz. p. 2866, that
if the association had no capital, its controlling membership must be
composed of Filipinos. Because ownership divorced from control is not
true ownership.
From these premises it can be deduced that the preliminary
question to be decided by the court is the following: what and who
exercises the power of control in the corporation sole known as
"The Roman Catholic Apostolic Administrator of Davao, Inc."?

Under section 155 of the Corporation Law, the bishop, or other

religious head, as corporation sole, is "charged
with the administration of the temporalities of his church." It becomes
then pertinent to inquire: if he is only an administrator, for whom does he
administer? And who can alter or overrule his acts?
If his acts as administrator can not be overridden, or altered,
except by himself, then obviously the control of the corporation and its
temporalities is in the bishop himself, and he must be a Filipino citizen. If,
on the other hand, the final say as to management, exploitation,
encumbrance or disposition of the temporalities resides in another
individual or body of individuals, then the control resides there. To
possess constitutional capacity to acquire agricultural land or other
natural resources, that body making the final decision for the corporation
must have at least 60 per cent Filipino membership.
By this test, the body of members professing the Catholic faith
in the diocese of Davao does not constitute the controlling membership.
For under the rules of the Roman Catholic Church thefaithful can not
control the acts of the Ordinary; they can not override his decision, just
as they do not elect or remove him. Only his hierarchical superiors can
do that; the control is from above, not from below. Hence, the fact that 90
per cent (or even 100 per cent) of the faithful in the diocese should be
composed of Filipino citizens is totally devoid of significance
from the standpoint of the constitutional restrictions in question Codex,
Canons 1518 and 1530, paragraph 1, No. 3).
Moreover, I do not think that the body of Catholic faithful
in the Davao diocese can be taken, for the purpose here under
consideration, as the Church represented by the Ordinary of Davao. That
body does not constitute an entity or unit separate and apart
from the rest of the faithful throughout the world that
compose the Roman Catholic Church that has always claimed
ecumenical (universal) character. There is
no Catholic Church of Davao district and
independent of the Catholic Church of Manila, Lipa or Rome. All those
professing Catholic faith are members of only one single church or
religious group. Thus the Iglesia Filipina Independiente is not
part of the Catholic Church, precisely because of its independence.
If, then, the Catholic Church of Davao is part and
parcel of the universal Catholic Church, it can not be considered
separate and apart from it in this case. And if considered with it,
obviously thecondition of 60 per cent Filipino membership is not satisfied
when all the Catholic faithful in the world are taken into account.

The unity and singleness of the various dioceses of the church

appears expressly recognized in section 163 of the Corporation Law,
which provides that the corporation (sole) shall hold, thetemporalities, not
for the diocese; but for the benefit "of the church of which the diocese
is an organized or constituent part."
"SEC. 163. The right to administer all temporalities and
all property held or owned by a religious order or society, or
by the diocese, synod, or district organization of any religious
denomination or church shall, on its incorporation, pass
to the corporation and shall be held in trust for the use, purpose,
behoof, and benefit of the religious society or order so
incorporated orof the church of which the diocese, synod, or
district organization is an organized and constituent part."

So that, even from the standpoint of beneficial

ownership, the diocese of Davao can not be viewed as a group legally
isolated from the Catholic Church as a whole.
Nor does court control over the acts of the corporation sole
constitute a guarantee of Filipino control that would
satisfy the purposes of the constitution, for the reason that under section
159 (last proviso) of the Corporation law, the court intervention
is dispensed with where the rules and discipline of the church already
regulate the acquisition and disposition of real estate and personal
property.
"Provided however, That in cases where the rules, regulations
and discipline of the religious denomination, society, or church
concerned
represented
by
such
corporation
sole
regulate themethods of acquiring,
holding,
selling,
and
mortgaging real estate and personal property, such rules,
regulations,
and
discipline
shall
control
and the intervention of the courts
shall
not
be
necessary." (emphasis supplied.)

It is argued that a distinction must be drawn between the lands to

be devoted to purely religious purposes and the lands held in ordinary
ownership. But where in the Constitution is such a distinction drawn?
Under it, capacity to acquire agricultural land for the erection of a church
is capacity to acquire agricultural land for any lawful purpose, whether it
be for convents or schools or seminaries or haciendas for their support
or land to be held solely for enjoyment of the revenue. Once the capacity
to acquire is granted, the way is paved for the revitalization of religious
landholdings that proved so troublesome in our past. I can not conceive
that the Constitution intended to revive them.

It is also argued that, before the Constitution was

adopted, the corporations sole had, by express statute, the right to
acquire agricultural land; and that the Constitution was not intended to
destroy such "acquired property rights." If followed, the arguments
destroys the constitutional restrictions. All aliens had a capacity to
acquire agricultural land before the Constitution came into effect because
no prohibition existed previously. Must their right to acquire and hold
agricultural land be conceded in spite of the Constitution?
That the law should have expressly conferred capacity to acquire
land upon corporations sole was not due to any special predilection for
them; it was exclusively due to the principle that corporation, as artificial
entities, have no inherent rights, but only those granted by the sovereign.
Unless conferred, the corporate right would not exist.
Furthermore, a capacity to acquire in futuro, is not in itself a
vested or existing property right that the Constitution protects from
impairment. For a property right to be vested (or acquired) there must be
a transition from the potential, or contingent, to the actual,
and the proprietary interest must has attached to a thing; it must have
become "fixed or established" (Balboa vs. Farrales, 51 Phil. 498). If mere
potentialities can not be impaired, then the law would become
unchangeable, for every variation in it will reduce some one's legal ability
to do or not to do. Already in Benguet Consolidatedvs. Pineda, * 52 Off.
Gaz. 1961, we have ruled that no one has a vested right in statutory
privileges or exemptions. And in his concurring opinion in Gold Creek
Mining Corp. vs. Rodriguez, 66 Phil. 259 (cited by Justice Felix), Mr.
Justice Laurel squarely declared that "contingency or expectation is
neither property nor property right." (cas. cit., p. 269.)
Finally, the point is also made that the Ordinary, as religious
corporation sole, has no citizenship, and is not an alien. The answer is
that under the Constitution of the Republic, it is not enough
thatthe acquirer of agricultural land be not an alien; he must be a Filipino
or controlled by Filipinos.
Wherefore, I am constrained to conclude:
(1) That the capacity of religious corporations sole to acquire
agricultural land depends upon 60 per cent Filipino
membership of the group or body exercising control of the corporation;
(2) That if control of any such corporation should be vested in a
single person, then such person must be a Filipino citizen;

(3) That in the absence of evidence on these points, the order

appealed from, denying registration of the conveyance, should be
affirmed.
Concepcion, J., concur.
(Roman Catholic Apostolic Administrator of Davao, Inc. v. Land Registration
Commission, G.R. No. L-8451, [December 20, 1957], 102 PHIL 596-641)
|||

FIRST DIVISION

Petition was granted and the assailed decision of the Court of Appeals was
reversed and set aside.

[G.R. No. 124293. November 20, 2000.]

SYLLABUS
JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF
APPEALS, COMMITTEE ON PRIVATIZATION, its
Chairman and Members, ASSET PRIVATIZATION
TRUST and PHILYARDSHOLDINGS, INC., respondents.
Romulo Mabanta Buenaventura Sayoc & Delos Angeles for petitioner.
Sycip Salazar Hernandez & Gatmaitan for private respondent.
SYNOPSIS
Kawasaki Heavy Industries, Ltd., a Japanese corporation, entered into a joint
venture with the government's National Investment and Development
Corporation (NIDC) for the construction, operation and management of a
public utility, the Subic National Shipyard, Inc, now Philippine Shipyard and
Engineering Corporation (PHILSECO), with the parties given the right of first
refusal. The government's share in PHILSECO was increased to 97.41%
leaving Kawasaki's share to 2.59%. The APT, as trustee for the government,
offered for sale its 87.67% share in PHILSECO giving KAWASAKI the right to
top by 5% the highest bid in "exchange" for its right of first refusal and can
designate a company which could exercise said right. The consortium,
composed of petitioner and two other foreign corporations, was declared the
highest bidder at P2.03 billion. Nonetheless, KAWASAKI's designated
company, PHI consortium, paid the purchase price and a stock purchase
agreement thereafter issued in its favor. Petitioner challenged the same by a
petition for mandamus with the Court of Appeals. The appellate court, in
ruling that the right of first refusal and the right to top are prima facie legal
and that petitioner is in estoppel, dismissed the petition. Hence, this recourse
of petitioner.
Under the Constitution, the operation of shipbuilding and ship repair industry
is a public utility which may be granted only to Filipino citizens or
associations organized under Philippine laws at least 60% of whose capital is
owned by such citizens. The participation of foreign investors is limited to
their proportionate maximum share of 40%. Allowing a foreign corporation to
participate in a public bidding in the sale of a public utility beyond its
authorized share is unconstitutional.
A party cannot be estopped from assailing the unconstitutional provision of
any rule.

1. REMEDIAL LAW; ACTIONS; PARTIES; A CORPORATION MAY

REPRESENT ALL MEMBERS OF THE CONSORTIUM; ALL MEMBERS
NEED NOT BE IMPLEADED. While it is true that Rule 3, Section 2 of the
Rules of Court provides that "(a)ll persons having an interest in the subject of
the action and in obtaining the relief demanded shall be joined as plaintiffs,"
petitioner may file the petition alone. In the first place, Sembawang and
Jurong are not indispensable parties, such that their non-joinder as
petitioners will not necessarily result in a failure to arrive at a final
determination of the case. They may be necessary parties as they were
members of the consortium that won the public bidding prior to the exercise
of the right to top by private respondent, but the petition may be resolved
even without their active participation. Secondly, there is a doubt as to
whether or not said foreign corporations are "subject to the jurisdiction of the
court as to both service of process and venue." Thirdly, petitioner may be
deemed to represent Sembawang and Jurong. The admission of petitioner's
counsel that said foreign corporations are underwriting his and the other
counsel's fees reflects this fact. By the nexus that binds the members of the
consortium, in the event that petitioner succeeds in pursuing this case, it is
bound to respect the existence of the consortium and the corresponding
responsibilities arising therefrom.
HAaDTI

2. ID.; ID.; ID.; WINNING BIDDER HAS PERSONALITY TO INITIATE

PROCEEDINGS TO PREVENT SETTING AT NAUGHT HIS RIGHT.
Public respondents also contend that petitioner has no standing to question
the legality of a provision of the JVA in which it is not a party. However, as
this Court held in Kilosbayan v. Morato, there is a difference between the rule
on real-party-in-interest and the rule on standing, as the latter has
constitutional underpinnings. In the case at bar, petitioner has sufficiently
alleged constitutional ramifications in the questioned public bidding of the
PHILSECO that merit the attention of the Court. Moreover, the prospect of
financial gains arising from the award of the sale of PHILSECO is enough
personal stake in the outcome of the controversy to vest upon petitioner
the locus standi to file the petition for mandamus. Besides, without KawasakiPHI's right to top the highest bid, petitioner would have been awarded the
sale as the highest bidder. A winning bidder has personality to initiate
proceedings to prevent setting at naught his right; otherwise, his right to due
process would be violated. As such winning bidder, petitioner has "a present
substantial interest," or such interest in the subject matter of action as will
entitle it, under substantive law, to recover if the evidence is sufficient.

3. ID.; SPECIAL CIVIL ACTIONS; MANDAMUS; DOES NOT LIE TO

COMPEL AWARD OF CONTRACT SUBJECT OF BIDDING TO
UNSUCCESSFUL BIDDER. With respect to the propriety of the remedy
availed by petitioner, the Court of Appeals correctly held that the special civil
action of mandamus is not the proper remedy to question the legality of the
exercise of the right to top by private respondent. It does not lie to compel the
award of a contract subject of bidding to an unsuccessful
bidder. Mandamus applies as a remedy only where petitioner's right is
founded clearly in law and not when it is doubtful. The Court of Appeals
cannot declare petitioner as the winning bidder in this case and direct the
COP/APT to award the sale to it without first determining the validity of the
right to top stipulated in the ASBR. Moreover, the sale of government share
in PHILSECO is a fait accompli, in view of the execution of the Stock
Purchase Agreement between APT and PHI.
4. ID.; ID.; ID.; MAY NOT BE AVAILED TO DIRECT EXERCISE OF
JUDGMENT. Mandamus may not be availed to direct the exercise of
judgment or discretion in a particular way or to retract or reverse an action
already taken in the exercise of either.
5. ID.; ACTIONS; CAUSE OF ACTION; DETERMINED BY ALLEGATIONS
IN PLEADING; FAILURE TO INCLUDE CERTIORARI IN CAPTION
SHOULD NOT NEGATE FACT THAT PETITIONER CHARGED PUBLIC
RESPONDENT WITH GRAVE ABUSE OF DISCRETION. Petitioner's
failure to include certiorari in its caption should not negate the fact that the
petition charged public respondent with grave abuse of discretion in awarding
the sale to private respondent. Well-settled is the rule that it is not the caption
of the pleading but the allegations therein that determine the nature of the
action and the Court shall grant relief warranted by the allegations and the
proof even if no such relief is prayed for.
6. CONSTITUTIONAL LAW; STATUTES; WHEN A LAW EXPRESSLY
REPEALS A PRIOR LAW WHICH IS ITSELF REPEALED, THE LAW FIRST
REPEALED IS NOT REVIVED UNLESS EXPRESSLY SO PROVIDED.
Indeed, P.D. No. 666 dated March 5, 1975 explicitly stated that a "shipyard"
was not a "public utility." However, Section 1 of P.D. No. 666 was expressly
repealed by Section 20 of Batas Pambansa Blg. 391, the Investment
Incentive Policy Act of 1983. Subsequently, Executive Order No. 226,
the Omnibus Investments Code of 1987, was issued and Section 85 thereof
expressly repealed B.P. Blg. 391. The express repeal of B.P. Blg.
391 by E.O. No. 226 did not revive Section 1 of P.D. No. 666, declassifying
the shipbuilding and ship repair industry as a public utility, as said executive
order did not provide otherwise. When a law which expressly repeals a prior
law is itself repealed, the law first repealed shall not be thereby revived
unless expressly so provided. Consequently, when the APT drafted the
ASBR sometime in 1993, P.D. No. 666 no longer existed in our statute

books. While it is true that the repeal of a statute does not operate to impair
rights that have become vested or accrued while the statute was in force,
there are no vested rights of the parties that should be protected in the case
at bar. The reason is simple: said decree was already inexistent when the
ASBR was issued.
7. CIVIL LAW; OBLIGATIONS AND CONTRACTS; JOINT VENTURE;
DEFINED. A joint venture is an association of persons or companies
jointly undertaking some commercial enterprise with all of them generally
contributing assets and sharing risks. It requires a community of interest in
the performance of the subject matter, a right to direct and govern the policy
in connection therewith, and duty, which may be altered by agreement to
share both in profit and losses. Persons and business enterprises usually
enter into a joint venture because it is exempt from corporate income tax.
Considered more of a partnership, a joint venture is governed by the laws on
contracts and on partnership. The joint venture created between NIDC and
Kawasaki falls within the purview of an "association" pursuant to Section 5 of
Article XIV of the 1973 Constitution and Section 11 of Article XII of the
1987 Constitution. Consequently, a joint venture that would engage in the
business of operating a public utility, such as a shipyard, must observe the
proportion of 60%-40% Filipino-foreign capitalization.
8. ID.; ID.; ID.; FOREIGN CORPORATION'S RIGHT OF FIRST REFUSAL;
LIMITED TO A MAXIMUM 40% SHARE. Notably, paragraph 1.4 of the
JVA accorded the parties the right of first refusal "under the same terms."
This phrase implies that when either party exercises the right of first refusal
under paragraph 1.4, they can only do so to the extent allowed them by
paragraphs 1.2 and 1.3 of the JVA or under the proportion of 60%-40% of the
shares of stock. Thus, should the NIDC opt to sell its shares of stock to a
third party, Kawasaki could only exercise its right of first refusal to the extent
that its total shares of stock would not exceed 40% of the entire shares of
stock of SNS or PHILSECO. The NIDC, on the other hand, may purchase
even beyond 60% of the total shares. As a government corporation and
necessarily a 100% Filipino-owned corporation, there is nothing to prevent its
purchase of stocks even beyond 60% of the capitalization as
the Constitution clearly limits only foreign capitalization. Kawasaki was bound
by its contractual obligation under the JVA that limits its right of first refusal to
40% of the total capitalization of PHILSECO. Thus, Kawasaki cannot
purchase beyond 40% of the capitalization of the joint venture on account of
both constitutional and contractual proscriptions.

9. REMEDIAL LAW; COURTS; ROLE. It is well settled that the role of

courts is to ascertain whether a branch or instrumentality of Government has
transgressed its constitutional or statutory boundaries. The courts, must

examine those boundaries in the light of provisions of the law. Otherwise, it

would stray into the realm of policy decision-making.
10. CONSTITUTIONAL LAW; LEGISLATIVE DEPARTMENT; DELEGATION
OF LEGISLATIVE AUTHORITY; RULES AND REGULATIONS ADOPTED
MUST RESPECT CONSTITUTIONAL PROVISIONS. Implicitly written in
any delegated legislative authority, such as that provided for in Proclamation
No. 50, is the requisite that the rules and regulations which an administrative
body adopts must respect pertinent provisions of the Constitution and the
law. Article XII, Section 11 of the Constitution providing for a 60% Filipino
capitalization in order that public utilities may be granted a franchise should
thus be deemed a paramount consideration in drafting the ASBR.
11. ID.; NATIONAL ECONOMY AND PATRIMONY; PUBLIC UTILITIES;
RULE ALLOWING FOREIGN CORPORATION TO ENGAGE IN
OPERATION OF PUBLIC UTILITY FOR UNLIMITED TIME, DIRECTLY AND
OPENLY REPUGNANT TO CONSTITUTION. In this regard, worth noting
is paragraph 15.0 of the ASBR, which provides that: "In the event that the
winning bidder is a 100% foreign-owned corporation, it may name its
nominee corporation to whom the NG shares shall be conveyed, provided it
owns 40% equity in the nominee corporation, so as not to affect PHILSECO's
qualification to own real estate properties in the Philippines." This rule is
fraught with dangerous implications. It allows a completely foreign
corporation to participate in the public bidding of more than 60% of the total
shares of a public utility corporation without setting a period within which the
foreign bidder should name its nominee. As it is, the rule allows a totally
foreign investor to engage in the business of operating a public utility for an
unlimited period of time in total disregard of the constitutional proscription on
the percentage of Filipino ownership of corporations engaged therein.
Paragraph 15.0 of the ASBR is thus directly and openly repugnant to
the Constitution considering that it allows foreign corporations to operate a
public utility for an unlimited period of time.
12. ADMINISTRATIVE LAW; DISPOSAL OF PUBLIC PROPERTY; PUBLIC
BIDDING; ACCORDING A PARTY RIGHT TO TOP BID VIOLATES RULE
ON COMPETITIVE BIDDING. In carrying out its objective of disposing of
government property, the APT should take into account the pertinent laws.
Since the method of disposing the PHILSECO that the APT had adopted was
through public bidding, it was duty-bound to follow the rules and regulations
on competitive public bidding, in order to uphold the elementary rule on
fairness in such disposition. In according the KHI/PHI the right to top, the
APT violated the rule on competitive public bidding, under which the highest
bidder is declared the winner entitled to the award of the subject of the
auction sale. In effect, the grant to KHI/PHI of the right to top can be likened
to a second bidding, which, however, is allowed only if there is a failure of
bidding, such as when there is only one bidder or none at all. By placing

KHI/PHI in the advantageous position of topping the highest bidder, the APT
set aside the basic rule in public bidding that there be an opportunity for
competition. While it may be argued that the right to top was aimed at giving
the best financial advantage to the government, the manner by which that
right was conceived and arrived at in this case manifested bias in favor of
KHI, thereby clearly brushing aside the rule on fair competition. More
importantly, the ASBR provision on the right to top the highest bidder
completely disregarded the stipulation in the JVA between NIDC and KHI to
comply with the 60%-40% capitalization arrangement whereby KHI, the
foreign investor, would be able to exercise its right of first refusal to the
extent of only 40% of the total capitalization of the PHILSECO. Thus, KHI,
whose investment exposure was already diminished to only 2.59% of the
total PHILSECO shares, was given the privilege, through its nominee PHI, of
exercising the right to top the highest bid to 87.67% of those shares or
definitely over and above its 40% contractual right to PHILSECO shares
under the JVA. Consequently, the APT rendered nugatory the constitutional
and contractual proscriptions clearly to favor a foreign investor.
13. ID.; ID.; ID.; RIGHT OF FIRST REFUSAL CANNOT BAR ANOTHER
BIDDER FROM SUBMITTING A BID. While the right of first refusal
entitled KHI to priority in the award of the contract, that right cannot bar
another bidder from submitting a bid because, precisely, the law requires
public bidding in government contracts. Thus, by engrafting in the provisions
of the ASBR the right to top, which was only an offshoot of the right of first
refusal, the APT effectively did away with public bidding insofar as KHI/PHI
was concerned. To be sure, the right to top is different from the right to
match. In the latter, a qualified bidder is given the privilege of offering the
same bid as that of the highest bidder. In the former, as provided for by the
ASBR, a non-bidder is accorded the right to top the highest bid. There is
reason, therefore, for the petitioner to complain that the APT made a show of
a public bidding in order to elicit the highest bid, only to award the sale to a
non-bidder. The unfair manner by which the purported public bidding was
conducted by the APT is even made more blatant by the fact that after the
"public bidding," KHI exercised the right to top through its nominee, private
respondent PHI, which has among its stockholders some losing bidders.
TaCSAD

14. CIVIL LAW; ESTOPPEL; PARTY CANNOT BE ESTOPPED IN

ASSAILING
CONSTITUTIONALITY
OF
BIDDING
RULES
AND
PROCEDURE. It was thus error for the Court of Appeals to conclude that
petitioner was estopped from contesting the validity of the ASBR and the
bidding procedure conducted pursuant to it. It is clear from the provisions of
the ASBR itself that the basic rules on fair competition in public biddings
have been disregarded. Although petitioner had the opportunity to examine
the ASBR before it participated in the bidding, it cannot be estopped from
questioning the unconstitutional, illegal and inequitable provisions thereof.

Estoppel is unavailing in this case; otherwise, it would stamp validity to an act

that is prohibited by law or against public policy.
DECISION
YNARES-SANTIAGO, J :
p

On January 27, 1977, the National Investment and Development Corporation

(NIDC), a government corporation, entered into a Joint Venture Agreement
(JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (Kawasaki) for
the construction, operation, and management of the Subic National Shipyard,
Inc. (SNS), which subsequently became the Philippine Shipyard and
Engineering Corporation (PHILSECO). Under the JVA, NIDC and Kawasaki
would maintain a shareholding proportion of 60% - 40%, respectively. One of
the provisions of the JVA accorded the parties the right of first refusal should
either party sell, assign or transfer its interest in the joint venture. Thus,
paragraph 1.4 of the JVA states:
"Neither party shall sell, transfer or assign all or any part of its
interest in SNS to any third party without giving the other under
the same terms the right of first refusal. This provision shall not
apply if the transferee is a corporation owned or controlled by the
GOVERNMENT or by a KAWASAKI affiliate." (Italics
supplied.) ESTCDA

On November 25, 1986, NIDC transferred all its rights, title and interest in
PHILSECO to the Philippine National Bank (PNB). More than two months
later or on February 3, 1987, by virtue of Administrative Order No. 14, PNB's
interest in PHILSECO was transferred to the National Government.
Meanwhile, on December 8, 1986, President Corazon C. Aquino
issued Proclamation No. 50 establishing the Committee on Privatization
(COP) and the Asset Privatization Trust (APT) to take title to and possession
of, conserve, manage and dispose of non-performing assets of the National
Government. On February 27, 1987, a trust agreement was entered into
between the National Government and the APT by virtue of which the latter
was named the trustee of the National Government's share in PHILSECO. In
1989, as a result of a quasi-reorganization of PHILSECO to settle its huge
obligations to PNB, the National Government's shareholdings in PHILSECO
increased to 97.41% thereby reducing Kawasaki's shareholdings to 2.59%.
Exercising their discretion, the COP and the APT deemed it in the best
interest of the national economy and the government to privatize PHILSECO
by selling 87.67% of its total outstanding capital stock to private entities. After
a series of negotiations between the APT and Kasawaki, they agreed that the
latter's right of first refusal under the JVA be "exchanged" for the right to top
by five percent (5%) the highest bid for said shares. They further agreed that

Kawasaki would be entitled to name a company in which it was a

stockholder, which could exercise the right to top. On September 7, 1990,
Kawasaki informed APT that Philyards Holdings, Inc. (PHI) would exercise its
right to top by 5%.
At the pre-bidding conference held on September 28, 1993, interested
bidders were given copies of the JVA between NIDC and Kawasaki, and of
the Asset Specific Bidding Rules (ASBR) drafted for the 87.67% equity
(sic) 1 in PHILSECO of the National Government. Salient provisions of the
ASBR state:
"1.0. The subject of this Asset Privatization Trust (APT) sale
through public bidding is the National Government's equity in
PHILSECO consisting of 896,869,942 shares of stock
(representing 87.67% of PHILSECO's outstanding capital stock),
which will be sold as a whole block in accordance with the rules
herein enumerated.
xxx xxx xxx

3.0. This public bidding shall be on an Indicative Price Bidding

basis. The Indicative price set for the National Government's
87.67% equity in PHILSECO is PESOS: ONE BILLION THREE
HUNDRED MILLION (P1,300,000,000.00).
xxx xxx xxx
12.0. The bidder shall be solely responsible for examining with
appropriate care these rules, the official bid forms, including any
addenda or amendments thereto issued during the bidding
period. The bidder shall likewise be responsible for informing
itself with respect to any and all conditions concerning the
PHILSECO Shares which may, in any manner, affect the bidder's
proposal. Failure on the part of the bidder to so examine and
inform itself shall be its sole risk and no relief for error or
omission will be given by APT or COP. . . ."

The provisions of the ASBR were explained to the interested bidders who
were notified that bidding would be held on December 2, 1993.
At the public bidding on said date, the consortium composed of
petitioner JG Summit Holdings, Inc., Sembawang Shipyard Ltd. of Singapore
(Sembawang), and Jurong Shipyard Limited of Malaysia (Jurong), was
declared the highest bidder at P2.03 billion. The following day, December 3,
1993, the COP approved the sale of 87.67% National Government shares of
stock in PHILSECO to said consortium. It notified petitioner of said approval

"subject to the right of Kawasaki Heavy Industries, Inc./Philyards Holdings,

Inc. to top JGSMI's (petitioner's) bid by 5% as specified in the bidding rules."
On December 29, 1993, petitioner informed the APT that it was protesting
the offer of PHI to top its bid on the grounds that: (a) the Kawasaki/PHI
consortium composed of Kawasaki, Philyards, Mitsui, Keppel, SM Group,
ICTSI and Insular Life violated the ASBR because the last four (4)
companies were the losing bidders (for P1.528 billion) thereby circumventing
the law and prejudicing the weak winning bidder; (b) only Kawasaki could
exercise the right to top; (c) giving the same option to top to PHI constituted
unwarranted benefit to a third party; (d) no right of first refusal can be
exercised
in
a
public
bidding
or
auction
sale,
and
(e)
the JG Summit Consortium was not estopped from questioning the
proceedings.
IaESCH

On February 2, 1994, petitioner was notified that PHI had fully paid the
balance of the purchase price of the subject bidding. On February 7, 1994,
the APT notified petitioner that PHI had exercised its option to top the highest
bid and that the COP had approved the same on January 6, 1994. On
February 24, 1994, the APT and PHI executed a Stock Purchase Agreement.
Consequently,
petitioner
filed
with
this
Court
a
petition
for mandamus under G.R. No. 114057. On May 11, 1994, said petition was
referred to the Court of Appeals
". . . for proper determination and disposition, pursuant to Section
9, paragraph 1 of B.P. 129, granting the Court of Appeals 'original
jurisdiction to issue writs of mandamus . . . and auxiliary writs or
processes, whether or not in aid of its appellate jurisdiction,'
which jurisdiction is concurrent with this Court, there being no
special and important reason for this Court to assume jurisdiction
over the case in the first instance." 2

On July 18, 1995, the Court of Appeals "denied" for lack of merit the petition
for mandamus. Citing Guanio v. Fernandez, 3 it held that mandamus is not
the proper remedy to "compel the undoing of an act already done or the
correction of a wrong already perpetuated, even though the action taken was
clearly illegal." It was further ruled that it was not the proper forum for a
"mere petition for mandamus" that aimed to question the constitutionality or
legality of the right of first refusal and the right to top that was exercised by
Kawasaki/PHI and that the matter must be brought "by the proper party in the
proper forum at the proper time and threshed out in a full blown trial."
After ruling that the right of first refusal and the right to top are prima
facie legal, the Court of Appeals found petitioner to be in estoppel for the
following reasons:

"5. If petitioner found the right to top to be illegal, it should not

have participated in the public bidding; or it should have
questioned the legality of the rules before the courts or filed a
petition for declaratory relief (Rule 64, Rules of Court) before the
public bidding could have taken place.
By participating in the public bidding, with full knowledge of the
right to top granted to Kawasaki/Philyards, petitioner is estopped
from questioning the validity of the award given to Philyards after
the latter exercised the right to top and had paid in full the
purchase price of the subject shares, pursuant to the ASBR.
6. The fact that the losing bidder, Keppel Consortium (composed
of Keppel, SM Group, Insular Life Assurance, Mitsui and ICTSI)
appears to have joined Philyards in the latter's effort to raise
P2.131 billion necessary in exercising the right to top by 5% is a
valid activity in free enterprise that is not contrary to law, public
policy or public morals. It should not be a cause of grievance for
petitioner as it is the very essence of free competition in the
business world. Astute businessmen involved in the public
bidding in question knew what they were up against. And when
they participated in the public bidding with prior knowledge of the
right to top, they did so, with full knowledge of the eventuality that
the highest bidder may still be topped by Kawasaki/Philyards by
5%. It is admitted by petitioner that it likewise represents a
consortium composed of JG Summit, Sembawang Singapore
and Jurong of Malaysia. Why should petitioner then expect
Philyards to limit itself to its own resources when the latter can
enter into agreements with other entities to help it raise the
money it needed to pay the full purchase price as in fact it had
already paid the National Government in the amount of P2.131
billion as required under the ASBR?" 4

Petitioner filed a motion for the reconsideration of said Decision which was
denied on March 15, 1996. Petitioner thus filed the instant petition for review
on certiorari, raising the following arguments:
I.
THE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING THAT PETITIONER JG SUMMIT IS LEGALLY
ESTOPPED FROM CHALLENGING THE LEGALITY OF THE
RIGHT TO TOP, INSERTED IN THE BIDDING RULES, AS
WELL AS THE RIGHT OF FIRST REFUSAL FROM WHICH THE
RIGHT TO TOP WAS ADMITTEDLY SOURCED, BY SIMPLY
STATING THAT THOSE RIGHTS ARE VALID AND
ENFORCEABLE WITHOUT RULING ON ANY OF THE
IMPORTANT LEGAL AND CONSTITUTIONAL GROUNDS
RAISED BY THE PETITIONER AS FOLLOWS:

(A) THE RIGHT OF FIRST REFUSAL, GRANTED TO A

JAPANESE CORPORATION AT A TIME WHEN IT
HELD 40% EQUITY IN PHILSECO, A LANDHOLDING
CORPORATION, IS NULL AND VOID FOR BEING
CONTRARY TO THE CONSTITUTION. DCTHaS
(B) THE RIGHT TO TOP WAS GRANTED TO THE
JAPANESE CORPORATION AT A TIME WHEN IT
MERELY HELD 2.6% EQUITY IN PHILSECO.
(C) THE RIGHT OF FIRST REFUSAL GRANTED TO
THE JAPANESE CORPORATION OVER SHARES OF
STOCK IS CONTRARY TO THE CORPORATION
CODE.
(D) THE RIGHT TO TOP IS CONTRARY TO PUBLIC
POLICY AS IT IS ANATHEMA TO COMPETITIVE
PUBLIC
BIDDING
FOR
BEING
UNDULY
RESTRICTIVE THEREOF, AND, MOREOVER, IS
CONTRARY TO DUE PROCESS OF LAW AS IT IS
AGAINST THE BASIC RUDIMENTS OF FAIR PLAY.
(E) THE GRANT OF THE RIGHT TO TOP IS A
CRIMINAL VIOLATION OF THE ANTI-GRAFT LAW AS
IT GIVES A CLEARLY UNWARRANTED BENEFIT IN
FAVOR OF PHILYARDS AS SHOWN BY CLEAR AND
UNDISPUTED DOCUMENTARY EVIDENCE.
II.
THE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING THAT MANDAMUS IS NOT A PROPER REMEDY IN
THIS CASE.
III.
FOLLOWING ITS OWN FINDINGS, THE COURT OF APPEALS
GRIEVOUSLY ERRED (A) IN NOT DIRECTING THAT TRIAL BE
HELD ON ALLEGED ISSUES OF FACT AND (B) IN NOT
APPOINTING AN AMICUS CURIAE FROM AMONG THE
LAWYERS IN THE COMMISSION ON AUDIT TO DETERMINE
THE APPLICABILITY OF ITS REQUIREMENTS TO THE
TRANSACTIONS IN THIS CASE. 5

In their comment on the petition, private respondent PHI contends that the
real party in interest which should have filed the petition for mandamus is
the JG Summit Consortium and not solely petitioner JGSummit Holdings, Inc.
which is just a part of that consortium. Since Sembawang and Jurong, the
other members of the consortium, are indispensable parties to the

petition, 6 petitioner's failure to implead them as co-petitioners warranted the

dismissal of the petition.
Public respondents' contention must fail. While it is true that Rule 3, Section
2 of the Rules of Court provides that "(a)ll persons having an interest in the
subject of the action and in obtaining the relief demanded shall be joined as
plaintiffs," petitioner may file the petition alone. In the first place, Sembawang
and Jurong are not indispensable parties, such that their non-joinder as
petitioners will not necessarily result in a failure to arrive at a final
determination of the case. 7 They may be necessary parties as they were
members of the consortium that won the public bidding prior to the exercise
of the right to top by private respondent, but the petition may be resolved
even without their active participation. Secondly, there is a doubt as to
whether or not said foreign corporations are "subject to the jurisdiction of the
court as to both service of process and venue." 8 Thirdly, petitioner may be
deemed to represent Sembawang and Jurong. The admission of petitioner's
counsel that said foreign corporations are underwriting his and the other
counsel's fees reflects this fact. 9 By the nexus that binds the members of the
consortium, in the event that petitioner succeeds in pursuing this case, it is
bound to respect the existence of the consortium and the corresponding
responsibilities arising therefrom.
Public respondents also contend that petitioner has no standing to question
the legality of a provision of the JVA in which it is not a party. 10 However, as
this Court held in Kilosbayan v. Morato, 11 there is a difference between the
rule on real-party-in-interest and the rule on standing, as the latter has
constitutional underpinnings. In the case at bar, petitioner has sufficiently
alleged constitutional ramifications in the questioned public bidding of the
PHILSECO that merit the attention of the Court. Moreover, the prospect of
financial gains arising from the award of the sale of PHILSECO is enough
personal stake in the outcome of the controversy to vest upon petitioner
the locus standi to file the petition for mandamus. Besides, without KawasakiPHI's right to top the highest bid, petitioner would have been awarded the
sale as the highest bidder. A winning bidder has personality to initiate
proceedings to prevent setting at naught his right; otherwise, his right to due
process would be violated. 12 As such winning bidder, petitioner has "a
present substantial interest," or such interest in the subject matter of action
as will entitle it, under substantive law, to recover if the evidence is
sufficient. 13

With respect to the propriety of the remedy availed by petitioner, the Court of
Appeals correctly held that the special civil action of mandamus is not the
proper remedy to question the legality of the exercise of the right to top by
private respondent. It does not lie to compel the award of a contract subject

of bidding to an unsuccessful bidder. 14 Mandamus applies as a remedy only

where petitioner's right is founded clearly in law and not when it is
doubtful. 15 Thus:
aCcSDT

"In order that a writ of mandamus may issue, it is essential that

the person petitioning for the same has a clear legal right to the
thing demanded and that it is the imperative duty of the
respondent to perform the act required. It neither confers powers
nor imposes duties and is never issued in doubtful cases. It is
simply a command to exercise a power already possessed and to
perform a duty already imposed." 16

The Court of Appeals cannot declare petitioner as the winning bidder in this
case and direct the COP/APT to award the sale to it without first determining
the validity of the right to top stipulated in the ASBR. Moreover, the sale of
government share in PHILSECO is a fait accompli, in view of the execution of
the Stock Purchase Agreement between APT and PHI. Mandamus may not
be availed to direct the exercise of judgment or discretion in a particular way
or to retract or reverse an action already taken in the exercise of either. 17
Be that as it may, the Court of Appeals erred when it dismissed the petition
on the sole ground of the impropriety of the special civil action of mandamus.
It must be stressed that the petition was also one for certiorari, seeking to
nullify the award of the sale to private respondent of the PHILSECO shares.
Verily, the petition alleges that "respondents COP and APT have committed
such a grave abuse of discretion tantamount to lack or excess of their
jurisdiction in insisting on awarding the bid to Philyards, for the various
reasons stated herein, particularly since the right of first refusal and the right
to top the bid are unconstitutional, contrary to law and public
policy." 18 Petitioner's failure to include certiorari in its caption should not
negate the fact that the petition charged public respondent with grave abuse
of discretion in awarding the sale to private respondent. Well-settled is the
rule that it is not the caption of the pleading but the allegations therein that
determine the nature of the action and the Court shall grant relief warranted
by the allegations and the proof even if no such relief is prayed for. 19
Petitioner's main contention is that PHILSECO, as a shipyard, is a public
utility and, hence, could be operated only by a corporation at least 60% of
whose capital is owned by Filipino citizens, in accordance with Article XII,
Section 10 of the Constitution. Petitioner asserts that a shipyard is a public
utility pursuant to Section 13 (b) of Commonwealth Act No.
146. 20 Respondents, on the other hand, contend that shipyards are no longer
public utilities by express provision of Presidential Decree No. 666, which
provided incentives to the shipbuilding and ship repair industry.
Indeed, P.D. No. 666 dated March 5, 1975 explicitly stated that a "shipyard"
was not a "public utility." Section 1 thereof provide as follows:

"d) Registration required but not as Public Utility. The business

of constructing and repairing vessels or parts thereof shall not be
considered a public utility and no Certificate of Public
Convenience shall be required therefor. However, no shipyard,
graving dock, marine railway or marine repair shop and no
person or enterprise shall engage in the construction and/or
repair of any vessel, or any phase or part thereof, without a valid
Certificate of Registration and license for this purpose from the
Maritime Industry Authority, except those owned or operated by
the Armed Forces of the Philippines or by foreign governments
pursuant to a treaty or agreement." (Italics supplied.)

However, Section 1 of P.D. No. 666 was expressly repealed by Section 20

of Batas Pambansa Blg. 391, the Investment Incentive Policy Act of
1983. 21 Subsequently, Executive Order No. 226, the Omnibus Investments
Code of 1987, was issued and Section 85 thereof expressly repealed B.P.
Blg. 391. 22
The express repeal of B.P. Blg. 391 by E.O. No. 226 did not revive Section 1
of P.D. No. 666, declassifying the shipbuilding and ship repair industry as a
public utility, as said executive order did not provide otherwise. When a law
which expressly repeals a prior law is itself repealed, the law first repealed
shall not be thereby revived unless expressly so provided. 23 Consequently,
when the APT drafted the ASBR sometime in 1993, P.D. No. 666 no longer
existed in our statute books. While it is true that the repeal of a statute does
not operate to impair rights that have become vested or accrued while the
statute was in force, there are no vested rights of the parties that should be
protected in the case at bar. The reason is simple: said decree was already
inexistent when the ASBR was issued.
IAcDET

A shipyard such as PHILSECO being a public utility as provided by law, the

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

The progenitor of this constitutional provision, Article XIV, Section 5 of the

1973 Constitution, required the same proportion of 60% - 40% capitalization.
The JVA between NIDC and Kawasaki entered into on January 27, 1977
manifests the intention of the parties to abide by the constitutional mandate
on capitalization of public utilities. 24 Paragraph 1.3 of the JVA, as amended
by Addendum No. 2 dated December 28, 1983, 25 provides:
"The authorized capital stock of PHILSECO shall be P330 million.
The parties shall thereafter increase their subscription in
PHILSECO as may be necessary and as called by the Board of
Directors,maintaining a proportion of 60% - 40% for NIDC and
KAWASAKI, respectively, up to a total subscribed and paid-up
capital stock of P312 million." (Italics supplied.)

A joint venture is an association of persons or companies jointly undertaking

some commercial enterprise with all of them generally contributing assets
and sharing risks. It requires a community of interest in the performance of
the subject matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement to share both in
profit and losses. 26 Persons and business enterprises usually enter into a
joint venture because it is exempt from corporate income tax. 27 Considered
more of a partnership, 28 a joint venture is governed by the laws on contracts
and on partnership. The joint venture created between NIDC and Kawasaki
falls within the purview of an "association" pursuant to Section 5 of Article
XIV of the 1973 Constitution and Section 11 of Article XII of the
1987 Constitution. Consequently, a joint venture that would engage in the
business of operating a public utility, such as a shipyard, must observe the
proportion of 60%-40% Filipino-foreign capitalization.
Notably, paragraph 1.4 of the JVA accorded the parties the right of first
refusal "under the same terms." This phrase implies that when either party
exercises the right of first refusal under paragraph 1.4, they can only do so to
the extent allowed them by paragraphs 1.2 and 1.3 of the JVA or under the
proportion of 60%-40% of the shares of stock. Thus, should the NIDC opt to
sell its shares of stock to a third party, Kawasaki could only exercise its right
of first refusal to the extent that its total shares of stock would not exceed
40% of the entire shares of stock of SNS or PHILSECO. The NIDC, on the
other hand, may purchase even beyond 60% of the total shares. As a
government corporation and necessarily a 100% Filipino-owned corporation,
there is nothing to prevent its purchase of stocks even beyond 60% of the
capitalization as the Constitution clearly limits only foreign capitalization.
Parenthetically, the Maritime Industry Authority (MARINA) which has been
tasked to regulate the operation of shipbuilding and ship repair
yards, 29 abides by the Filipino capitalization requirement as far as
corporations and partnerships are concerned. However, Section 2.3.1 (a) of
its Memorandum Circular No. 95, Series of 1994, 30 setting out the Revised

Implementing Guidelines on the Licensing of Shipbuilders, Ship Repairers,

Afloat Repairers, Boatbuilders and Shipbreakers, seems to exempt joint
ventures registered with the SEC, the BOI and the EPZA from the 60%
requirement of Filipino ownership. 31 The said provision states:
"The applicant must be a Filipino citizen or a
corporation/partnership at least 60% of the authorized capital
stock of which is owned by Filipino citizens except for joint
ventures which are registered with the Securities and Exchange
Commission, the Board of Investments and/or Export Processing
Zone Authorities." 32

The constitutionality of said MARINA guideline, however, is not in issue here.

Kawasaki was bound by its contractual obligation under the JVA that limits its
right of first refusal to 40% of the total capitalization of PHILSECO.
Thus, Kawasaki cannot purchase beyond 40% of the capitalization of the
joint venture on account of both constitutional and contractual
proscriptions.
aDICET

From the facts on record, it appears that at the outset, the APT and
Kawasaki respected the 60%-40% capitalization proportion in PHILSECO.
However, APT subsequently encouraged Kawasaki to participate in the
public bidding of the National Government's shareholdings of 87.67% of the
total PHILSECO shares, definitely over and above the 40% limit of its
shareholdings. In so doing, the APT went beyond the ambit of its authority.
It is well settled that the role of courts is to ascertain whether a branch or
instrumentality of Government has transgressed its constitutional or statutory
boundaries. The courts, must examine those boundaries in the light of
provisions of the law. Otherwise, it would stray into the realm of policy
decision-making. 33
Proclamation No. 50, creating the COP and the APT, was issued by
President Corazon C. Aquino pursuant to her legislative powers under the
Provisional Constitution of 1986. Section 12 of said Proclamation vested the
APT with the following powers:
(1) To formulate and, after approval by the Committee,
implement a program for the disposition of assets transferred to it
under this Proclamation, such program to be completed within a
period of five years from the date of the issuance of this
Proclamation;
(2) Subject to its having received the prior written approval of the
Committee to sell such asset at a price and on terms of payment
and to a party disclosed to the Committee, to sell each asset

referred to it by the Committee to such party and on such terms

as in its discretion are in the best interest of the National
Government, and for such purpose to execute and deliver, on
behalf and in the name of the National Government, such deeds
of sale, contracts and other instruments as may be necessary or
appropriate to convey title to such assets;

In carrying out its objective of disposing of government property, the APT

should take into account the pertinent laws. Since the method of disposing
the PHILSECO that the APT had adopted was through public bidding, it was
duty-bound to follow the rules and regulations on competitive public bidding,
in order to uphold the elementary rule on fairness in such disposition. As this
Court once said:
TAECaD

xxx xxx xxx

(7) To adopt its internal rules and regulations, to adopt, alter and
use a seal which shall be judicially noticed; to enter into
contracts; to sue and be sued;
xxx xxx xxx

Pursuant to these provisions, the APT drafted the ASBR. Since the APT's
rule-making authority is merely delegated, the ASBR should be measured by
the standard set by said proclamation. 34 Notably, the discretion granted by
the proclamation to the APT for the sale of government property is
circumscribed only by the "best interest of the National Government."
Implicitly written in any delegated legislative authority, such as that provided
for in Proclamation No. 50, is the requisite that the rules and regulations
which an administrative body adopts must respect pertinent provisions of
the Constitution and
the
law. 35 Article
XII,
Section
11
of
the Constitution providing for a 60% Filipino capitalization in order that public
utilities may be granted a franchise should thus be deemed a paramount
consideration in drafting the ASBR. In this regard, worth noting is paragraph
15.0 of the ASBR, which provides that:
"In the event that the winning bidder is a 100% foreign-owned
corporation, it may name its nominee corporation to whom the
NG shares shall be conveyed, provided it owns 40% equity in the
nominee corporation, so as not to affect PHILSECO's
qualification to own real estate properties in the Philippines."

This rule is fraught with dangerous implications. It allows a completely foreign

corporation to participate in the public bidding of more than 60% of the total
shares of a public utility corporation without setting a period within which the
foreign bidder should name its nominee. As it is, the rule allows a totally
foreign investor to engage in the business of operating a public utility for an
unlimited period of time in total disregard of the constitutional proscription on
the percentage of Filipino ownership of corporations engaged therein.
Paragraph 15.0 of the ASBR is thus directly and openly repugnant to
theConstitution considering that it allows foreign corporations to operate a
public utility for an unlimited period of time.

". . . . A competitive public bidding aims to protect the public

interest by giving the public the best possible advantages through
open competition. It is a mechanism that enables the government
agency to avoid or preclude anomalies in the execution of public
contracts." 36

The word "bidding" in its comprehensive sense means making an offer 37 or

an invitation to prospective contractors whereby the government manifests its
intention to make proposals 38 for the purchase of supplies, materials and
equipment for official business or public use, 39 or for public works or repair.
The three principles in public bidding are: the offer to the public; an
opportunity for competition; and a basis for exact comparison of bids. The
distinctive character of the system is destroyed and the purpose of its
adoption is thwarted when a regulation thereon excludes any of these
principles. 40 Public bidding of government contracts and for the disposition of
government assets should have the same principles and objectives. Their
only difference, if at all, is that in the public bidding for public contracts, the
award is generally given to the lowest bidder while in the disposition of
government assets, the award is to the highest bidder. 41 The term "public
bidding" imports a sale to the highest bidder with absolute freedom for
competitive bidding. 42
Under Section 504 of the Government Auditing Rules and Regulations, a
public auction, which is the mode of divestment or disposal of government
property, shall adhere to established mechanics and procedures in public
bidding. 43 In such public auction sales, the presence of a Commission on
Audit (COA) representative who shall see to the proper observance of
auditing rules is imperative. 44 In this case, there is no record that a COA
representative witnessed the public auction on December 2, 1993. Neither is
there a showing that the APT observed the requirement of COA Circular No.
89-296, to the effect that a government entity that is disposing of government
property shall furnish the COA with the disposal procedure adopted.
Likewise, nowhere in the record is it stated that the APT heeded the
suggestion of Secretary of Finance and COP Chairman Jayme that its
decision to grant Kawasaki the right to top the highest bid be made "known to
the Commission on Audit." What appears on record is that the COA did not
approve the ASBR, specifically the provision on the right to top the highest
bidder. Thus, then COA Chairman Pascasio S. Banaria, replying to the query
of petitioner's counsel on whether or not the COA had approved the right to
top the highest bid by 5%, stated:

"Per information received from our Auditor at APT, no prior

approval was issued by their Office regarding said preferential
option. We have instructed our Auditor thereat to advise this
Office of the result of the review of the Corporation's procedures
for the sale of the assets including the review of the bidding
documents pertaining to the subject public bidding pursuant to
the provisions of the Commission on Audit Circular No. 89-296
dated January 27, 1989. 45

In according the KHI/PHI the right to top, the APT violated the rule on
competitive public bidding, under which the highest bidder is declared the
winner entitled to the award of the subject of the auction sale. In effect, the
grant to KHI/PHI of the right to top can be likened to a second bidding, which,
however, is allowed only if there is a failure of bidding, such as when there is
only one bidder or none at all. 46By placing KHI/PHI in the advantageous
position of topping the highest bidder, the APT set aside the basic rule in
public bidding that there be an opportunity for competition.
While it may be argued that the right to top was aimed at giving the best
financial advantage to the government, the manner by which that right was
conceived and arrived at in this case manifested bias in favor of KHI, thereby
clearly brushing aside the rule on fair competition. More importantly, the
ASBR provision on the right to top the highest bidder completely disregarded
the stipulation in the JVA between NIDC and KHI to comply with the 60%40% capitalization arrangement whereby KHI, the foreign investor, would be
able to exercise its right of first refusal to the extent of only 40% of the total
capitalization of the PHILSECO. Thus, KHI, whose investment exposure was
already diminished to only 2.59% of the total PHILSECO shares, was given
the privilege, through its nominee PHI, of exercising the right to top the
highest bid to 87.67% of those shares or definitely over and above its 40%
contractual right to PHILSECO shares under the JVA. Consequently, the
APT rendered nugatory the constitutional and contractual proscriptions
clearly to favor a foreign investor.
Furthermore, while the right of first refusal entitled KHI to priority in the award
of the contract, that right cannot bar another bidder from submitting a bid
because, precisely, the law requires public bidding in government
contracts. 47 Thus, by engrafting in the provisions of the ASBR the right to
top, which was only an offshoot of the right of first refusal, the APT effectively
did away with public bidding insofar as KHI/PHI was concerned. To be sure,
the right to top is different from the right to match. In the latter, a
qualified bidder is given the privilege of offering the same bid as that of the
highest bidder. 48 In the former, as provided for by the ASBR, a non-bidder is
accorded the right to top the highest bid. There is reason, therefore, for the
petitioner to complain that the APT made a show of a public bidding in order
to elicit the highest bid, only to award the sale to a non-bidder. The unfair
manner by which the purported public bidding was conducted by the APT is

even made more blatant by the fact that after the "public bidding," KHI
exercised the right to top through its nominee, private respondent PHI, which
has among its stockholders some losing bidders.
DSTCIa

In drafting the ASBR, the APT should have noted the fact that foreign
investors were competing in the bidding. While it is true that foreign
investment should be encouraged in this country, however, the ASBR
provision on the right to top is unfair to all competitors, be they foreign or
local, in the public auction of 87.67% of PHILSECO shares as it provided for
a method that would set at naught the entire public bidding.
It was thus error for the Court of Appeals to conclude that petitioner was
estopped from contesting the validity of the ASBR and the bidding procedure
conducted pursuant to it. It is clear from the provisions of the ASBR itself that
the basic rules on fair competition in public biddings have been disregarded.
Although petitioner had the opportunity to examine the ASBR before it
participated in the bidding, it cannot be estopped from questioning the
unconstitutional, illegal and inequitable provisions thereof. Estoppel is
unavailing in this case; otherwise, it would stamp validity to an act that is
prohibited by law or against public policy. 49
WHEREFORE, the instant petition for review on certiorari is GRANTED. The
assailed Decision and Resolution of the Court of Appeals are REVERSED
and SET ASIDE. Petitioner is ordered to pay to APT its bid price of Two
Billion Thirty Million Pesos (P2,030,000,000.00), less its bid deposit plus
interests upon the finality of this Decision. In turn, APT is ordered to:
(a) accept said amount of P2,030,000,000.00 less bid
deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the
certificates of stocks representing 87.67% of
PHILSECO's total capitalization;
(d) return to private respondent PHI the amount of Two
Billion One Hundred Thirty One Million Five
Hundred Thousand Pesos (P2,131,500,000.00);
and
(e) cause the cancellation of the stock certificates issued
to PHI.
SO ORDERED.

Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur.

(JG Summit Holdings, Inc. v. Court of Appeals, G.R. No. 124293,
[November 20, 2000], 398 PHIL 955-985)
|||

SPECIAL FIRST DIVISION

[G.R. No. 124293. September 24, 2003.]
JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF
APPEALS, COMMITTEE ON PRIVATIZATION, its
Chairman and Members; ASSET PRIVATIZATION
TRUST and PHILYARDSHOLDINGS, INC., respondents.
Romulo Mabanta Buenaventura Sayoc & Delos Angeles for petitioner.
Sycip Salazar Hernandez & Galmailan for PHILYARDS HOLDINGS, Inc.
Raid B. Villanueva and Dinah Bal for Privatization & Management Office.
SYNOPSIS
Petitioner JG Summit Holdings, Inc. (JGSMI) was declared the highest bidder
of the National Government's share in Philippine Shipyard Engineering
Corporation (PHILSECO). The Committee on Privatization (COP) approved
the sale subject to the right of government's business partner Kawasaki
Heavy Industries, Ltd. or its assignee, Philyards Holdings, Inc. (PHI) to top
JGSMI's bid by 5% as specified in the bidding rules. PHI exercised its option
to top the highest bid. Petitioner filed a petition for mandamus to the Court of
Appeals but was dismissed by the latter on the grounds, among others, that
the right of first refusal and the right to top are prima facie legal and that
petitioner, by participating in the public bidding, with full knowledge of the
right to top granted to KAWASAKI/ Philyards is estopped from questioning
the validity of the award given to Philyards. Thus, petitioner raised the issue
to this Court. The Court reversed the decision of the Court of Appeals. It
ruled, among others, that a shipyard like PHILSECO is a public utility whose
capitalization must be sixty percent (60%) Filipino owned. Consequently, the
right to top granted to KAWASAKI under Asset Specific Bidding Rules
(ASBR) drafted for the sale of the 87.67% equity of the National Government
in PHILSECO was illegal - not only because it violates the rules on
competitive bidding but more so, because it allows foreign corporations to
own more than 40% equity in the shipyard. Hence, in the motions for
reconsideration, respondents questioned (a) whether a shipyard is a public
utility; and (2) whether the right to top granted to KAWASAKI violates the
principles of competitive bidding.
TAHcCI

In granting the motions, the Court ruled that a shipyard is not a public utility.
Its nature dictates that it serves but a limited clientele whom it may choose to
serve at its discretion. While it offers its facilities to whoever may wish to avail
of its services, a shipyard is not legally obliged to render its services
indiscriminately to the public. It has no legal obligation to render the services
sought by each and every client. The fact that it publicly offers its services
does not give the public a legal right to demand that such services be
rendered. Thus, the theory that KAWASAKI can acquire, as a maximum, only
40% of PHILSECO's shares is correct only if a shipyard is a public utility. But
then PHILSECO is not a public utility and no other restriction is present that
would limit the right of KAWASAKI to purchase the Government's share to
40% of Philseco's total capitalization.
Moreover, the obvious consideration for the exchange of the right of first
refusal with the right to top is that KAWASAKI can name a nominee, which is
a shareholder, to exercise the right to top. This is a valid contractual
stipulation; the right to top is an assignable right and both parties are aware
of the full legal consequences of its exercise. As aforesaid, all bidders were
aware of the existence of the right to top, and its possible effects on the
result of the public bidding was fully disclosed to them. The petitioner, thus,
cannot feign ignorance nor can it be allowed to repudiate its acts and
question the proceedings it had fully adhered to.
SYLLABUS
1. MERCANTILE LAW; CORPORATION LAW; PUBLIC UTILITY;
ELUCIDATED. A "public utility" is "a business or service engaged in
regularly supplying the public with some commodity or service of public
consequence such as electricity, gas, water, transportation, telephone or
telegraph service." To constitute a public utility, the facility must be
necessary for the maintenance of life and occupation of the residents.
However, the fact that a business offers services or goods that promote
public good and serve the interest of the public does not automatically make
it a public utility. Public' use is not synonymous with public interest. As its
name indicates, the term "public utility" implies public use and service to the
public. The principal determinative characteristic of a public utility is that of
service to, or readiness to serve, an indefinite public or portion of the public
as such which has a legal right to demand and receive its services or
commodities. Stated otherwise, the owner or person in control of a public
utility must have devoted it to such use that the public generally or that part
of the public which has been served and has accepted the service, has the
right to demand that use or service so long as it is continued, with reasonable
efficiency and under proper charges. Unlike a private enterprise which
independently determines whom it will serve, a "public utility holds out
generally and may not refuse legitimate demand for service."

2. ID.; ID.; ID.; PUBLIC USE; DEFINED. Thus, in Iloilo Ice and Cold
Storage Co. vs. Public Utility Board, this Court defined "public
use," viz: "Public use" means the same as "use by the public." The essential
feature of the public use is that it is not confined to privileged individuals, but
is open to the indefinite public. It is this indefinite or unrestricted quality that
gives it its public character. In determining whether a use is public, we must
look not only to the character of the business to be done, but also to the
proposed mode of doing it. If the use is merely optional with the owners, or
the public benefit is merely incidental, it is not a public use, authorizing the
exercise of jurisdiction of the public utility commission. There must be, in
general, a right which the law compels the owner to give to the general
public. It is not enough that the general prosperity of the public is promoted.
Public use is not synonymous with public interest. The true criterion by which
to judge the character of the use is whether the public may enjoy it by right or
only by permission.
3. ID.; ID.; SHIPYARD; NOT A PUBLIC UTILITY. [I]t is crystal clear that a
shipyard cannot be considered a public utility. A "shipyard" is "a place or
enclosure where ships are built or repaired." Its nature dictates that it serves
but a limited clientele whom it may choose to serve at its discretion. While it
offers its facilities to whoever may wish to avail of its services, a shipyard is
not legally obliged to render its services indiscriminately to the public. It has
no legal obligation to render the services sought by each and every client.
The fact that it publicly offers its services does not give the public a legal right
to demand that such services be rendered.
4. ID.; ID.; ID.; REGULATION FOR PUBLIC GOOD CANNOT JUSTIFY THE
CLASSIFICATION OF A PURELY PRIVATE ENTERPRISE AS A PUBLIC
UTILITY. There can be no disagreement that the shipbuilding and ship
repair industry is imbued with public interest as it involves the maintenance of
the seaworthiness of vessels dedicated to the transportation of either
persons or goods. Nevertheless, the fact that a business is affected with
public interest does not imply that it is under a duty to serve the public. While
the business may be regulated for public good, the regulation cannot justify
the classification of a purely private enterprise as a public utility. The
legislature cannot, by its mere declaration, make something a public utility
which is not in fact such; and a private business operated under private
contracts with selected customers and not devoted to public use cannot, by
legislative fiat or by order of a public service commission, be declared a
public utility, since that would be taking private property for public use without
just compensation, which cannot be done consistently with the due process
clause. It is worthy to note that automobile and aircraft manufacturers, which
are of similar nature to shipyards, are not considered public utilities despite
the fact that their operations greatly impact on land and air transportation.
The reason is simple. Unlike commodities or services traditionally regarded
as public utilities such as electricity, gas, water, transportation, telephone or

telegraph service, automobile and aircraft manufacturing - and for that matter
ship building and ship repair- serve the public only incidentally.
5. ID.; ID.; ID.; CANNOT BE CLASSIFIED AS PUBLIC UTILITY BASED ON
A REPEALED STATUTE. We rule that the express repeal of Batas
Pambansa Blg. 391 by E.O. No. 226 did not revive Section I ofP.D. No. 666.
But more importantly, it also put a period to the existence of Sections 13 (b)
and 15 of C.A. No. 146. It bears emphasis that Sections 13 (b) and 15
of C.A. No. 146, as originally written, owed their continued existence to Batas
Pambansa Big. 391. Had the latter not repealed P.D. No. 666, the former
should have been modified accordingly and shipyards effectively removed
from the list of public utilities. Ergo, with the express repeal of Batas
Pambansa Blg. 391 by E.O. No. 226, the revival of Sections 13 (b) and 15
of C.A. No. 146 had no more leg to stand on. A law that has been expressly
repealed ceases to exist and becomes inoperative from the moment the
repealing law becomes effective. Hence, there is simply no basis in the
conclusion that shipyards remain to be a public utility. A repealed statute
cannot be the basis for classifying shipyards as public utilities. In view of the
foregoing, there can be no other conclusion than to hold that a shipyard is
not a public utility. A shipyard has been considered a public utility merely by
legislative declaration. Absent this declaration, there is no more reason why it
should continuously be regarded as such. The fact that the legislature did not
clearly and unambiguously express its intention to include shipyards in the
list of public utilities indicates that that it did not intend to do so. Thus, a
shipyard reverts back to its status as nonpublic utility prior to the enactment
of the Public Service Law.

6. ID.; ID.; ID.; PART OF THE MANUFACTURING SECTOR This

interpretation is in accord with the uniform interpretation placed upon it by the
Board of Investments (B01), which was entrusted by the legislature with the
preparation of annual Investment Priorities Plan (IPPs). The BOI has
consistently classified shipyards as part of the manufacturing sector and not
of the public utilities sector. The enactment of Batas Pambansa Blg. 391 did
not alter the treatment of the BOl on shipyards. It has been, as at present,
classified as part of the manufacturing and not of the public utilities sector.
7. ID.; ID.; ID.; ITS OPERATION DOES NOT NEED A FRANCHISE.
Furthermore, of the 441 Ship Building and Ship Repair (SBSR) entities
registered with the MARINA, none appears to have an existing franchise. If
we continue to hold that a shipyard is a public utility, it is a necessary
consequence that all these entities should have obtained a franchise as was
the rule prior to the enactment of P.D. No. 666. But MARINA remains without
authority, pursuant to P.D. No. 474 to issue franchises for the operation of
shipyards. Surely, the legislature did not intend to create a vacuum by

continuously treating a shipyard as a public utility without giving MARINA the

power to issue a Certificate of Public Convenience (CPC) or a Certificate of
Public Convenience and Necessity (CPCN) as required by Section 15 of C.A.
No. 146.
8. CIVIL LAW; PARTNERSHIP; 60%-40% PROPORTION DOES NOT BIND
THE PARTIES TO MAINTAIN THE SHARING SCHEME ALL
THROUGHOUT THE EXISTENCE THEREOF; CASE AT BAR. Under
Section 1.3, the parties agreed to the amount of P330 million as the total
capitalization of their joint venture. There was no mention of the amount of
their initial subscription. What is clear is that they are to infuse the needed
capital from time to time until the total subscribed and paid-up capital
reaches P312 million. The phrase "maintaining a proportion of 60%-40%"
refers to their respective share of the burden each time the Board of
Directors decides to increase the subscription to reach the target paid-up
capital of P312 million. It does not bind the parties to maintain the sharing
scheme all throughout the existence of their partnership.
9. ID.; ID.; RIGHT OF FIRST REFUSAL; BASED ON DELECTUS
PERSONAE; CASE AT BAR. The parties likewise agreed to arm
themselves with protective mechanisms to preserve their respective interests
in the partnership in the event that (a) one party decides to sell its shares to
third parties; and (b) new Philseco shares are issued. Anent the first
situation, the nonselling party is given the right of first refusal under Section
1.4 to have a preferential right to buy or to refuse the selling party's shares.
The right of first refusal is meant to protect the original or remaining joint
venturer(s) or shareholder(s) from the entry of third persons who are not
acceptable to it as coventurer(s) or co-shareholder(s). The joint venture
between the Philippine Government and KAWASAKI is in the nature of a
partnership which, unlike an ordinary corporation, is based on delectus
personae. No one can become a member of the partnership association
without the consent of all the other associates. The right of first refusal thus
ensures that the parties are given control over who may become a new
partner in substitution of or in addition to the original partners. Should the
selling partner decide to dispose all its shares, the nonselling partner may
acquire all these shares and terminate the partnership.
10. ID.; ID.; ID.; THE LIMITATION OF 40% AS MAXIMUM SHARE OF
FOREIGN CORPORATION IS CORRECT ONLY IF THE SHIPYARD IS A
PUBLIC UTILITY. No person or corporation can be compelled to remain
or to continue the partnership. Of course, this presupposes that there are no
other restrictions in the maximum allowable share that the non-selling partner
may acquire such as the constitutional restriction on foreign ownership in
public utility. The theory that KAWASAKI can acquire, as a maximum, only
40% of PHILSECO's shares is correct only if a shipyard is a public utility. In
such instance, the non-selling partner who is an alien can acquire only a

maximum of 40% of the total capitalization of a public utility despite the grant
of first refusal. The partners cannot, by mere agreement, avoid the
constitutional proscription. But as afore discussed, PHILSECO is not a public
utility and no other restriction is present that would limit the right of
KAWASAKI to purchase the Government's share to 40% of Philseco's total
capitalization.
11. ID.; ID.; ID.; "UNDER THE SAME TERMS" IN THE JOINT VENTURE
AGREEMENT, CONSTRUED. [T]hephrase "under the same terms" in
Section 1.4 cannot be given an interpretation that would limit the right of
KAWASAKI to purchase PHILSECO shares only to the extent of its original
proportionate contribution of 40% to the total capitalization of the PHILSECO.
Taken together with the whole of Section 1.4, the phrase "under the same
terms" means that a partner to the joint venture that decides to sell its shares
to a third party shall make a similar offer to the non-selling partner. The
selling partner cannot make a different or a more onerous offer to the nonselling partner.
12. ID.; ID.; ID.; DOES NOT DEPRIVE THE OTHER PARTNER THE RIGHT
TO SELL ITS SHARES TO THIRD PERSONS IF, UNDER THE SAME
OFFER, IT DOES NOT BUY THE SHARES. The exercise of first refusal
presupposes that the non-selling partner is aware of the terms of the
conditions attendant to the sale for it to have a guided choice. While the right
of first refusal protects the non-selling partner from the entry of third persons,
it cannot also deprive the other partner the right to sell its shares to third
persons if, under the same offer, it does not buy the shares.
13. ID.; ID.; PREEMPTIVE RIGHT; GIVES A PARTNER PREFERENTIAL
RIGHT OVER THE NEWLY ISSUED SHARES ONLY TO THE EXTENT
THAT IT RETAINS ITS ORIGINAL PROPORTIONATE SHARE IN THE
JOINT VENTURE. Apart from the right of first refusal, the parties also
have preemptive rights under Section 1.5 in the unissued shares of Philseco.
Unlike the former, this situation does not contemplate transfer of a partner's
shares to third parties but the issuance of new Philseco shares. The grant of
preemptive rights preserves the proportionate shares of the original partners
so as not to dilute their respective interests with the issuance of the new
shares. Unlike the right of first refusal, a preemptive right gives a partner a
preferential right over the newly issued shares only to the extent that it
retains its original proportionate share in the joint venture.
14. POLITICAL LAW; ADMINISTRATIVE LAW; PUBLIC BIDDING;
ELUCIDATED. The word "bidding" in its comprehensive sense means
making an offer or an invitation to prospective contractors whereby the
government manifests its intention to make proposals for the purpose of
supplies, materials and equipment for official business or public use, or for
public works or repair. The three principles of public bidding are: (1) the offer

to the public; (2) an opportunity for competition; and (3) a basis for
comparison of bids.
15. ID.; ID.; ID.; NOT NECESSARY THAT THE HIGHEST BIDDER BE
AUTOMATICALLY ACCEPTED. As long as these three principles are
complied with, the public bidding can be' considered valid and legal. It is not
necessary that the highest bid be automatically accepted. The bidding rules
may specify other conditions or the bidding process be subjected to certain
reservation or qualification such as when the owner reserves to himself
openly at the time of the sale the right to bid upon the property, or openly
announces a price below which the property will not be sold. Hence, where
the seller reserves the right to refuse to accept any bid made, a binding sale
is not consummated between the seller and the bidder until the seller accepts
the bid. Furthermore, where a right is reserved in the seller to reject any and
all bids received, the owner may exercise the right even after the auctioneer
has accepted a bid, and this applies to the auction of public as well as private
property. Thus: It is a settled rule that where the invitation to bid contains a
reservation for the Government to reject any or all bids, the lowest or the
highest bidder, as the case may be, is not entitled to an award as a matter of
right for it does not become a ministerial duty of the Government to make
such an award. Thus, it has been held that where the right to reject is so
reserved, the lowest bid or any bid for that matter may be rejected on a mere
technicality, that all bids may be rejected, even if arbitrarily and unwisely, or
under a mistake, and that in the exercise of a sound discretion, the award
may be made to another than the lowest bidder. And so, where the
Government as advertiser, availing itself of that right, makes its choice in
rejecting any or all bids, the losing bidder has no cause to complain nor right
to dispute that choice, unless an unfairness or injustice is shown.
Accordingly, he has no ground of action to compel the Government to award
the contract in his favor, nor compel it to accept his bid.
16. ID.; ID.; ID.; BIDDERS ARE PLACED ON EQUAL FOOTING; PRESENT
IN CASE AT BAR. The essence of competition in public bidding is that the
bidders are placed on equal footing. This means that all qualified bidders
have an equal chance of winning the auction through their bids. In the case
at bar, all of the bidders were exposed to the same risk and were subjected
to the same condition, i, e., the existence of KAWASAKI's right to top. Under
the ASBR, the Government expressly reserved the right to reject any or all
bids, and manifested its intention not to accept the highest bid should
KAWASAKI decide to exercise its right to top under the ABSR. This
reservation or qualification was made known to the bidders in a pre-bidding
conference held on September 28, 1993. They all expressly accepted this
condition in writing without any qualification. Furthermore, when the
Committee on Privatization notified petitioner of the approval of the sale of
the National Government shares of stock in PHILSECO, it specifically stated
that such approval was subject to the right of KAWASAKI Heavy Industries,

Inc./Philyards Holdings, Inc. to top JGSMI's bid by 5% as specified in the

bidding rules. Clearly, the approval of the sale was a conditional one. Since
Philyards eventually exercised its right to top petitioner's bid by 5%, the sale
was not consummated. Parenthetically, it cannot be argued that the
existence of the right to top "set for naught the entire public bidding." Had
Philyards Holdings, Inc. failed or refused to exercise its right to top, the sale
between the petitioner and the National Government would have been
consummated.

17. ID.; ID.; ID.; EXISTENCE OF THE RIGHT TO TOP CANNOT BE

LIKENED TO A SECOND BIDDING. In like manner, the existence of the
right to top cannot be likened to a second bidding, which is countenanced,
except when there is failure to bid as when there is only one bidder or none
at all. A prohibited second bidding presupposes that based on the terms and
conditions of the sale, there is already a highest bidder with the right to
demand that the seller accept its bid. In the instant case, the highest bidder
was well aware that the acceptance of its bid was conditioned upon the nonexercise of the right to top. To be sure, respondents did not circumvent the
requirements for bidding by granting KAWASAKI, a non-bidder, the right to
top the highest bidder. The fact that KAWASAKI's nominee to exercise the
right to top has among its stockholders some losing bidders cannot also be
deemed "unfair."
18. CIVIL LAW; PARTNERSHIP; RIGHT OF FIRST REFUSAL; THE BASIS
FOR THE RIGHT TO TOP. It must be emphasized that none of the parties
questions the existence of KAWASAKI's right of first refusal, which is
concededly the basis for the grant of the right to top. Under KAWASAKI's
right of first refusal, the National Government is under the obligation to give
preferential right to KAWASAKI in the event it decides to sell its shares in
PHILSECO. It has to offer to KAWASAKI the shares and give it the option to
buy or refuse under the same terms for which it is willing to sell the said
shares to third parties. KAWASAKI is not a mere non-bidder. It is a partner in
the joint venture; the incidents of which are governed by the law on contracts
and on partnership.
19. ID.; ID.: ID.; PUBLIC BIDDING IS AN ESSENTIAL FIRST STEP IN THE
EXERCISE THEREOF CONCERNING THE PROPERTIES OF THE
GOVERNMENT. It is true that properties of the National Government, as a
rule, may be sold only after a public bidding is held. Public bidding is the
accepted method in arriving at a fair and reasonable price and ensures that
overpricing, favoritism and other anomalous practices are eliminated or
minimized. But the requirement for public bidding does not negate the
exercise of the right of first 'refusal. In fact, public bidding is an essential first
step in the exercise of the right of first refusal because it is only after the

public bidding that the terms upon which the Government may be said to be
willing to sell its shares to third parties may be known. It is only after the
public bidding that the Government will have a basis with which to offer
KAWASAKI the option to buy or forego the shares.
20. ID.; ID.; RIGHT TO TOP; NATIONAL GOVERNMENT WAS BENEFITED.
Assuming that the parties did not swap KAWASAKI's right of first refusal
with the right to top, KAWASAKI would have been able to buy the National
Government's shares in PHILSECO under the same terms as offered by the
highest bidder. Stated otherwise, by exercising its right of first refusal,
KAWASAKI could have bought the shares for only P2.03 billion and not the
higher amount of P2.1315 billion. There is, thus, no basis in the submission
that the right to top unfairly favored KAWASAKI. In fact, with the right to top,
KAWASAKI stands to pay higher than it should had it settled with its right of
first refusal. The obvious beneficiary of the scheme is the National
Government.
21. ID.; ID.; ID.; AN ASSIGNABLE RIGHT. If at all, the obvious
consideration for the exchange of the right of first refusal with the right to top
is that KAWASAKI can name a nominee, which it is a shareholder, to
exercise the right to top. This is a valid contractual stipulation; the right to top
is an assign able right and both parties are aware of the full legal
consequences of its exercise. As aforesaid, all bidders were aware of the
existence of the right to top, and its possible effects on the result of the public
bidding was fully disclosed to them. The petitioner, thus, cannot feign
ignorance nor can it be allowed to repudiate its acts and question the
proceedings it had fully adhered to.
22. ID.; ID.; ID.; NOT CONTRARY TO LAW, PUBLIC POLICY OR PUBLIC
MORALS FOR THE LOSING BIDDERS TO JOIN A PARTICULAR
CORPORATION IN THE EXERCISE THEREOF. The fact that the losing
bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life
Assurance, Mitsui and ICTSI), has joined Philyards in the latter's effort to
raise P2.131 billion necessary in exercising the right to top is not contrary to
law, public policy or public morals. There is nothing in the ASBR that bars the
losing bidders from joining either the winning bidder (should the right to top is
not exercised) or KAWASAKI/PHI (should it exercise its right to top as it did),
to raise the purchase price. The petitioner did not allege, nor was it shown by
competent evidence, that the participation of the losing bidders in the public
bidding was done with fraudulent intent. Absent any proof of fraud, the
formation by Philyards of a consortium is legitimate in a free enterprise
system. The appellate court is thus correct in holding the petitioner estopped
from questioning the validity of the transfer of the National Government's
shares in PHILSECO to respondent.

23. REMEDIAL LAW; EVIDENCE; PRESUMPTIONS; REGULARITY IN THE

PERFORMANCE OF OFFICIAL DUTIES IS PRESUMED. Finally, no
factual basis exists to support the view that the drafting of the ASBR was
illegal because no prior approval was given by the COA for it, specifically the
provision on the right to top the highest bidder and that the public auction on
December 2, 1993 was not witnessed by a COA representative. No evidence
was proffered to prove these allegations and the Court cannot make legal
conclusions out of mere allegations. Regularity in the performance of official
duties is presumed and in the absence of competent evidence to rebut this
presumption, this Court is duty bound to uphold this presumption.
TINGA, J., separate opinion:
1. MERCANTILE LAW; CORPORATION LAW; SHIPYARD; NOT A PUBLIC
UTILITY WHETHER BY LEGISLATIVE DECLARATION OR EXECUTIVE
FIAT.- Since the enactment of Commonwealth Act No. 454 on June 8, 1939,
shipyards have never been considered public utilities, whether by legislative
declaration or executive fiat, or even in administrative practice. . . . The test,
therefore, in determining if a service is a public utility, is whether the public
may enjoy it by right or only by permission. A shipyard fails this test. As
Justice Puno points out, a shipyard is not, by nature or tradition, a public
utility in much the same way as automobile or airplane manufacturers are not
public utilities. x x x Still on the legislative side, to the best of my knowledge,
no person or firm has secured a legislative franchise to operate a shipyard or
even applied for one. On the administrative side, as noted by Mr. Justice
Puno, the Maritime Industry Authority (MARINA) has not been empowered to
issue franchise for shipyard operation. It is authorized under Executive
Orders No. 124 and No. 125-A, effective as of January 10 and April 13, 1987,
respectively, to issue certificates of public convenience to domestic and
water carriers. But the presidential issuances have no similar provision with
respect to shipyard operation.
2. ID.; ID.; PUBLIC SERVICE DIFFERENTIATED FROM PUBLIC UTILITY.
True, "shipyard" is mentioned along with other business operations in the
course of the definition by enumeration of "public service" in the Public
Service Act. The terms "public service" and "public utility," however, do not
have the same legal meaning. at least since the enactment of C.A. No. 454.
The terms are related though. The definition of "public service" in the Public
Service Act, as last amended by Republic Act No. 2677, includes every
person who owns, operates, manages or controls, for hire or compensation,
and done for general business purposes, any common carrier, railroad, street
railway, traction railway, sub-way motor vehicle, either for freight of
passenger, or both with or without fixed route and whatever may be its
classification, freight or carrier service of any class, express service,
steamboat, or steamship line, pontines, ferries, and water craft, engaged in
the transportation of passengers or freight, or both, shipyard, marine railway,

marine repair shop, wharf or dock, ice plant, ice-refrigeration plant, canal,
irrigation system, gas, electric light, heat and power, water supply and power,
petroleum, sewerage system, wire or wireless communications system,
broadcasting stations and other similar public services. A "public utility," on
the other hand, is a business or service engaged in regularly supplying the
public with some commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or telegraph service. Simply
stated, a public utility provides a service or facility needed for present day
living which cannot be denied to anyone who is willing to pay for it. . . .
Another dissimilarity is that a public utility requires a franchise, aside from a
certificate of public necessity and convenience, for its operation, while a
public service which is not a public utility requires only a certificate of public
convenience. The dichotomy in requirements flows from the enforced
indeterminacy of the market for the service provided by a public utility. Thus,
it may be pointed out that all public utilities are public services but the
converse is not true. This is so because the term "public utility"
connotes public use andservice to the public.
3. ID.; ID.; CATEGORIZATION OF BUSINESS OR SERVICE AS PUBLIC
UTILITY OR OTHERWISE IS A JUDICIAL PREROGATIVE. A legislative
declaration such as the definition by enumeration in the Public Service
Act does not ipso facto render a business or service a public utility. For, as
this Court held in North Negros Sugar Co. v. Hidalgo, whether or not one is a
public utility is a matter of judicial, not legislative determination. " . . Whether
or not a given business, industry, or service is a public utility does not
depend upon legislative definition, but upon the nature of the business or
service rendered, and an attempt to declare a company or enterprise to be a
public utility, where it is inherently not such, is, by virtue of the guaranties of
the federal constitution, void whenever it interferes with private rights of
property or contract. So a legislature cannot by mere fiat or regulatory order
convert a private business or enterprise into a public utility, and the question
whether or not a particular company or service is a public utility is a judicial
one, and must be determined as such by a court of competent jurisdiction; . .
." (51 C.J., Sec. 3, p.5) Paraphrasing a decision of the United States
Supreme Court, a private enterprise doing business under private contracts
with customers of its choice and therefore not devoted to public use cannot
by legislative enactment or administrative order be converted into a public
utility, for that would constitute taking of private property for public use
without just compensation in derogation of the Constitution. Again, the
categorization of a business or service as a public utility or otherwise is a
judicial prerogative. Hence, this Court held in a significant number of cases
that the businesses or services involved were not public utilities despite
contradicting legislative classifications.

RESOLUTION
PUNO, J :
p

The core issue posed by the Motions for Reconsideration is whether a

shipyard is a public utility whose capitalization must be sixty percent (60%)
owned by Filipinos. Our resolution of this issue will determine the fate of the
shipbuilding and ship repair industry. It can either spell the industry's demise
or breathe new life to the struggling but potentially healthy partner in the
country's bid for economic growth. It can either kill an initiative yet in its
infancy, or harness creativity in the productive disposition of government
assets.
aIAHcE

The facts are undisputed and can be summarized briefly as follows:

On January 27, 1977, the National Investment and Development Corporation
(NIDC), a government corporation, entered into a Joint Venture Agreement
(JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for
the construction, operation and management of the Subic National Shipyard,
Inc. (SNS) which subsequently became the Philippine Shipyard and
Engineering Corporation (PHILSECO). Under the JVA, the NIDC and
KAWASAKI will contribute P330 million for the capitalization of PHILSECO in
the proportion of 60%-40% respectively. 1 One of its salient features is the
grant to the parties of theright of first refusal should either of them decide to
sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its
interest in SNS [PHILSECO] to any third party without giving the
other under the same terms the right of first refusal. This
provision shall not apply if the transferee is a corporation owned
or controlled by the GOVERNMENT or by a KAWASAKI
affiliate. 2

On November 25, 1986, NIDC transferred all its rights, title and interest in
PHILSECO to the Philippine National Bank (PNB). Such interests were
subsequently transferred to the National Government pursuant
to Administrative Order No. 14. On December 8, 1986, President Corazon C.
Aquino issued Proclamation No. 50 establishing the Committee on
Privatization (COP) and the Asset Privatization Trust (APT) to take title to,
and possession of, conserve, manage and dispose of non-performing assets
of the National Government. Thereafter, on February 27, 1987, a trust
agreement was entered into between the National Government and the APT
wherein the latter was named the trustee of the National Government's share
in PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to
settle its huge obligations to PNB, the National Government's shareholdings
in PHILSECO increased to 97.41% thereby reducing KAWASAKI's
shareholdings to 2.59%. 3

In the interest of the national economy and the government, the COP and the
APT deemed it best to sell the National Government's share in PHILSECO to
private entities. After a series of negotiations between the APT and
KAWASAKI, they agreed that the latter's right of first refusal under the JVA
be "exchanged" for the right to top by five percent (5%) the highest bid for the
said shares. They further agreed that KAWASAKI would be entitled to name
a company in which it was a stockholder, which could exercise the right to
top. On September 7, 1990, KAWASAKI informed APT that
Philyards Holdings, Inc. (PHI) would exercise its right to top. 4
At the pre-bidding conference held on September 18, 1993, interested
bidders were given copies of the JVA between NIDC and KAWASAKI, and of
the Asset Specific Bidding Rules (ASBR) drafted for the National
Government's 87.6% equity share in PHILSECO. 5 The provisions of the
ASBR were explained to the interested bidders who were notified that the
bidding would be held on December 2, 1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale
through public bidding is the National Government's equity in
PHILSECO consisting of 896,869,942 shares of stock
(representing 87.67% of PHILSECO's outstanding capital stock),
which will be sold as a whole block in accordance with the rules
herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the
final approval of both the APT Board of Trustees and the
Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject
any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding
basis. The Indicative price set for the National Government's
87.67% equity in PHILSECO is PESOS: ONE BILLION THREE
HUNDRED MILLION (P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board
of Trustees at its regular meeting following the bidding, for the
purpose of determining whether or not it should be endorsed by
the APT Board of Trustees to the COP, and the latter approves
the same. The APT shall advise Kawasaki Heavy Industries, Inc.
and/or its nominee, Philyards Holdings, Inc., that the highest bid
is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or Philyards Holdings, Inc. shall then have a
period of thirty (30) calendar days from the date of receipt of such

advice from APT within which to exercise their "Option to Top the
Highest Bid" by offering a bid equivalent to the highest bid plus
five (5%) percent thereof.
6.1 Should
Kawasaki
Heavy
Industries,
Inc.
and/or
Philyards Holdings, Inc. exercise their "Option to Top the Highest
Bid," they shall so notify the APT about such exercise of their
option and deposit with APT the amount equivalent to ten percent
(10%) of the highest bid plus five percent (5%) thereof within the
thirty (30)-day period mentioned in paragraph 6.0 above. APT will
then serve notice upon Kawasaki Heavy Industries, Inc. and/or
Philyards Holdings, Inc. declaring them as the preferred bidder
and they shall have a period of ninety (90) days from the receipt
of the APT's notice within which to pay the balance of their bid
price.
6.2 Should
Kawasaki
Heavy
Industries,
Inc.
and/or
Philyards Holdings, Inc. fail to exercise their "Option to Top the
Highest Bid" within the thirty (30)-day period, APT will declare the
highest bidder as the winning bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with
appropriate care these rules, the official bid forms, including any
addenda or amendments thereto issued during the bidding
period. The bidder shall likewise be responsible for informing
itself with respect to any and all conditions concerning the
PHILSECO Shares which may, in any manner, affect the bidder's
proposal. Failure on the part of the bidder to so examine and
inform itself shall be its sole risk and no relief for error or
omission will be given by APT or COP. . . . 6

At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc.
submitted a bid of Two Billion and Thirty Million Pesos (P2,030,000,000.00)
with an acknowledgment of KAWASAKI/Philyards' right to top, viz:
DEHaTC

4. I/We understand that the Committee on Privatization (COP)

has up to thirty (30) days to act on APT's recommendation based
on the result of this bidding. Should the COP approve the highest
bid, APT shall advise Kawasaki Heavy Industries, Inc. and/or its
nominee, Philyards Holdings, Inc. that the highest bid is
acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or Philyards Holdings, Inc. shall then have a
period of thirty (30) calendar days from the date of receipt of such
advice from APT within which to exercise their "Option to Top the
Highest Bid" by offering a bid equivalent to the highest bid plus
five (5%) percent thereof. 7

As petitioner was declared the highest bidder, the COP approved the sale on
December 3, 1993 "subject to the right of Kawasaki Heavy Industries,
Inc./Philyards Holdings, Inc. to top JGSMI's bid by 5% as specified in the
bidding rules." 8
On December 29, 1993, petitioner informed APT that it was protesting the
offer of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI
consortium composed of Kawasaki, Philyards, Mitsui, Keppel, SM Group,
ICTSI and Insular Life violated the ASBR because the last four (4)
companies were the losing bidders thereby circumventing the law and
prejudicing the weak winning bidder; (b) only KAWASAKI could exercise the
right to top; (c) giving the same option to top to PHI constituted unwarranted
benefit to a third party; (d) no right of first refusal can be exercised in a public
bidding or auction sale; and (e) the JG Summit consortium was not estopped
from questioning the proceedings. 9
On February 2, 1994, petitioner was notified that PHI had fully paid the
balance of the purchase price of the subject bidding. On February 7, 1994,
the APT notified petitioner that PHI had exercised its option to top the highest
bid and that the COP had approved the same on January 6, 1994. On
February 24, 1994, the APT and PHI executed a Stock Purchase
Agreement. 10 Consequently, petitioner filed with this Court a Petition for
Mandamus under G.R. No. 114057. On May 11, 1994, said petition was
referred to the Court of Appeals. On July 18, 1995, the Court of Appeals
denied the same for lack of merit. It ruled that the petition for mandamus was
not the proper remedy to question the constitutionality or legality of the right
of first refusal and the right to top that was exercised by KAWASAKI/PHI, and
that the matter must be brought "by the proper party in the proper forum at
the proper time and threshed out in a full blown trial." The Court of Appeals
further ruled that the right of first refusal and the right to top are prima
facie legal and that the petitioner, "by participating in the public bidding, with
full knowledge of the right to top granted to KAWASAKI/Philyards is . . .
estopped from questioning the validity of the award given to Philyards after
the latter exercised the right to top and had paid in full the purchase price of
the subject shares, pursuant to the ASBR." Petitioner filed a Motion for
Reconsideration of said Decision which was denied on March 15, 1996.
Petitioner thus filed a Petition for Certiorari with this Court alleging grave
abuse of discretion on the part of the appellate court. 11

On November 20, 2000, this Court rendered the now assailed Decision ruling
among others that the Court of Appeals erred when it dismissed the petition
on the sole ground of the impropriety of the special civil action of mandamus
because the petition was also one of certiorari. 12 It further ruled that a
shipyard like PHILSECO is a public utility whose capitalization must be sixty

percent (60%) Filipino-owned. 13 Consequently, the right to top granted to

KAWASAKI under the Asset Specific Bidding Rules (ASBR) drafted for the
sale of the 87.67% equity of the National Government in PHILSECO is illegal
not only because it violates the rules on competitive bidding but more
so, because it allows foreign corporations to own more than 40% equity in
the shipyard. 14 It also held that "although the petitioner had the opportunity to
examine the ASBR before it participated in the bidding, it cannot be estopped
from questioning the unconstitutional, illegal and inequitable provisions
thereof." 15 Thus, this Court voided the transfer of the national government's
87.67% share in PHILSECO to Philyard Holdings, Inc., and upheld the right
of JG Summit, as the highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is
GRANTED. The assailed Decision and Resolution of the Court of
Appeals are REVERSED and SET ASIDE. Petitioner is ordered
to pay to APT its bid price of Two Billion Thirty Million Pesos
(P2,030,000,000.00), less its bid deposit plus interests upon the
finality of this Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less
bid deposit and interests from petitioner;
(b) execute a Stock
petitioner;

Purchase

Agreement

with

(c) cause the issuance in favor of petitioner of the

certificates of stocks representing 87.6% of
PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of
Two Billion One Hundred Thirty-One Million
Five
Hundred
Thousand
Pesos
(P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates
issued to PHI.
SO ORDERED. 16

In separate Motions for Reconsideration, 17 respondents submit three basic

issues for our resolution: (1) Whether PHILSECO is a public utility; (2)
Whether under the 1977 JVA, KAWASAKI can exercise its right of first
refusal only up to 40% of the total capitalization of PHILSECO; and (3)
Whether the right to top granted to KAWASAKI violates the principles of
competitive bidding.
I.

Whether PHILSECO is a Public Utility.

After carefully reviewing the applicable laws and jurisprudence, we hold that
PHILSECO is not a public utility for the following reasons:
First. By nature, a shipyard is not a public utility.
A "public utility" is "a business or service engaged in regularly supplying the
public with some commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or telegraph service." 18 To
constitute a public utility, the facility must be necessary for the maintenance
of life and occupation of the residents. However, the fact that a business
offers services or goods that promote public good and serve the interest of
the public does not automatically make it a public utility. Public use is not
synonymous with public interest. As its name indicates, the term "public
utility"
implies public
use and service
to
the
public.
The
principal determinative characteristic of a public utility is that of service to, or
readiness to serve, an indefinite public or portion of the public as such which
has a legal right to demand and receive its services or commodities. Stated
otherwise, the owner or person in control of a public utility must have devoted
it to such use that the public generally or that part of the public which has
been served and has accepted the service, has the right to demand that use
or service so long as it is continued, with reasonable efficiency and under
proper charges. 19 Unlike a private enterprise which independently determines
whom it will serve, a "public utility holds out generally and may not refuse
legitimate demand for service." 20 Thus, in Iloilo Ice and Cold Storage Co. vs.
Public Utility Board, 21 this Court defined "public use," viz:
"Public use" means the same as "use by the public." The
essential feature of the public use is that it is not confined to
privileged individuals, but is open to the indefinite public. It is this
indefinite or unrestricted quality that gives it its public character.
In determining whether a use is public, we must look not only to
the character of the business to be done, but also to the
proposed mode of doing it. If the use is merely optional with the
owners, or the public benefit is merely incidental, it is not a public
use, authorizing the exercise of jurisdiction of the public utility
commission. There must be, in general, a right which the law
compels the owner to give to the general public. It is not enough
that the general prosperity of the public is promoted. Public use is
not synonymous with public interest. The true criterion by which
to judge the character of the use is whether the public may enjoy
it by right or only by permission. 22 (emphasis supplied)

Applying the criterion laid down in Iloilo to the case at bar, it is crystal clear
that a shipyard cannot be considered a public utility.

A "shipyard" is "a place or enclosure where ships are built or repaired." 23 Its
nature dictates that it serves but a limited clientele whom it may choose to
serve at its discretion. While it offers its facilities to whoever may wish to avail
of its services, a shipyard is not legally obliged to render its services
indiscriminately to the public. It has no legal obligation to render the services
sought by each and every client. The fact that it publicly offers its services
does not give the public a legal right to demand that such services be
rendered.
SDAcaT

There can be no disagreement that the shipbuilding and ship repair industry
is imbued with public interest as it involves the maintenance of the
seaworthiness of vessels dedicated to the transportation of either persons or
goods. Nevertheless, the fact that a business is affected with public interest
does not imply that it is under a duty to serve the public. While the business
may be regulated for public good, the regulation cannot justify the
classification of a purely private enterprise as a public utility. The legislature
cannot, by its mere declaration, make something a public utility which is not
in fact such; and a private business operated under private contracts with
selected customers and not devoted to public use cannot, by legislative fiat
or by order of a public service commission, be declared a public utility, since
that would be taking private property for public use without just
compensation, which cannot be done consistently with the due process
clause. 24
It is worthy to note that automobile and aircraft manufacturers, which are of
similar nature to shipyards, are not considered public utilities despite the fact
that their operations greatly impact on land and air transportation. The
reason is simple. Unlike commodities or services traditionally regarded as
public utilities such as electricity, gas, water, transportation, telephone or
telegraph service, automobile and aircraft manufacturing and for that
matter ship building and ship repair serve the public only incidentally.
Second. There is no law declaring a shipyard as a public utility.
History provides us hindsight and hindsight ought to give us a better view of
the intent of any law. The succession of laws affecting the status of shipyards
ought not to obliterate, but rather, give us full picture of the intent of the
legislature. The totality of the circumstances, including the contemporaneous
interpretation accorded by the administrative bodies tasked with the
enforcement of the law all lead to a singular conclusion: that shipyards are
not public utilities.
Since the enactment of Act No. 2307 which created the Public Utility
Commission (PUC) until its repeal by Commonwealth Act No. 146,
establishing the Public Service Commission (PSC), a shipyard, by legislative
declaration, has been considered a public utility. 25 A Certificate of Public

Convenience (CPC) from the PSC to the effect that the operation of the said
service and the authorization to do business will promote the public interests
in a proper and suitable manner is required before any person or corporation
may operate a shipyard. 26 In addition, such persons or corporations should
abide by the citizenship requirement provided in Article XIII, section 8 of the
1935 Constitution, 27 viz:
Sec. 8. No franchise, certificate, or any other form or
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or other
entities organized under the laws of the Philippines, sixty per
centum of the capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate or authorization
be exclusive in character or for a longer period than fifty years.
No franchise or right shall be granted to any individual, firm or
corporation, except under the condition that it shall be subject to
amendment, alteration, or repeal by the National Assembly when
the public interest so requires. (emphasis supplied)

To accelerate the development of shipbuilding and ship repair industry,

former President Ferdinand E. Marcos issued P.D. No. 666 granting the
following incentives:
SECTION 1. Shipbuilding and ship repair yards duly registered
with the Maritime Industry Authority shall be entitled to the
following incentive benefits:
(a) Exemption from import duties and taxes. The importation
of machinery, equipment and materials for shipbuilding, ship
repair and/or alteration, including indirect import, as well as
replacement and spare parts for the repair and overhaul of
vessels such as steel plates, electrical machinery and electronic
parts, shall be exempt from the payment of customs duty and
compensating tax: Provided, however, That the Maritime Industry
Authority certifies that the item or items imported are not
produced locally in sufficient quantity and acceptable quality at
reasonable prices, and that the importation is directly and
actually needed and will be used exclusively for the construction,
repair, alteration, or overhaul of merchant vessels, and other
watercrafts; Provided, further, That if the above machinery,
equipment, materials and spare parts are sold to non-tax exempt
persons or entities, the corresponding duties and taxes shall be
paid by the original importer; Provided, finally, That local dealers
and/or agents who sell machinery, equipment, materials and
accessories to shipyards for shipbuilding and ship repair are
entitled to tax credits, subject to approval by the total tariff duties
and compensating tax paid for said machinery, equipment,
materials and accessories.

(b) Accelerated depreciation. Industrial plant and equipment

may, at the option of the shipbuilder and ship repairer, be
depreciated for any number of years between five years and
expected economic life.
(c) Exemption from contractor's percentage tax. The gross
receipts derived by shipbuilders and ship repairers from
shipbuilding and ship repairing activities shall be exempt from the
Contractor's Tax provided in Section 91 of the National Internal
Revenue Code during the first ten years from registration with the
Maritime Industry Authority, provided that such registration is
effected not later than the year 1990; Provided, That any and all
amounts which would otherwise have been paid as contractor's
tax shall be set aside as a separate fund, to be known as
"Shipyard Development Fund", by the contractor for the purpose
of expansion, modernization and/or improvement of the
contractor's own shipbuilding or ship repairing facilities; Provided,
That, for this purpose, the contractor shall submit an annual
statement of its receipts to the Maritime Industry Authority; and
Provided, further, That any disbursement from such fund for any
of the purposes hereinabove stated shall be subject to approval
by the Maritime Industry Authority.

In addition, P.D. No. 666 removed the shipbuilding and ship repair industry
from the list of public utilities, thereby freeing the industry from the 60%
citizenship requirement under the Constitution and from the need to obtain
Certificate of Public Convenience pursuant to section 15 of C.A. No.
146. Section 1 (d) of P.D. 666 reads:
(d) Registration required but not as a Public Utility. The
business of constructing and repairing vessels or parts thereof
shall not be considered a public utility and no Certificate of Public
Convenience shall be required therefor. However, no shipyard,
graving dock, marine railway or marine repair shop and no
person or enterprise shall engage in construction and/or repair of
any vessel, or any phase or part thereof, without a valid
Certificate of Registration and license for this purpose from the
Maritime Industry Authority, except those owned or operated by
the Armed Forces of the Philippines or by foreign governments
pursuant to a treaty or agreement. (emphasis supplied)

Any law, decree, executive order, or rules and regulations inconsistent

with P.D. No. 666 were repealed or modified accordingly. 28 Consequently,
sections 13 (b) and 15 of C.A. No. 146 were repealed in so far as the former
law included shipyards in the list of public utilities and required the certificate
of public convenience for their operation. Simply stated, the repeal was due
to irreconcilable inconsistency, and by definition, this kind of repeal falls
under the category of an implied repeal. 29

On April 28, 1983, Batas Pambansa Blg. 391, also known as the "Investment
Incentive Policy Act of 1983," was enacted. It laid down the general policy of
the government to encourage private domestic and foreign investments in
the various sectors of the economy, to wit:
Sec. 2. Declaration of Investment Policy. It is the policy of the
State to encourage private domestic and foreign investments in
industry, agriculture, mining and other sectors of the economy
which shall: provide significant employment opportunities relative
to the amount of the capital being invested; increase productivity
of the land, minerals, forestry, aquatic and other resources of the
country, and improve utilization of the products thereof; improve
technical skills of the people employed in the enterprise; provide
a foundation for the future development of the economy;
accelerate development of less developed regions of the country;
and result in increased volume and value of exports for the
economy.

All other incentive systems which are not in any way affected by
the provisions of this Act may be restructured by the President so
as to render them cost-efficient and to make them conform with
the other policy guidelines in the declaration of policy provided in
Section 2 of this Act. (emphasis supplied)

From the language of the afore-quoted provision, the whole of P.D. No. 666,
section 1 was expressly and categorically repealed. As a consequence, the
provisions of C.A. No. 146, which were impliedly repealed by P.D. No. 666,
section 1 were revived. 30 In other words, with the enactment of Batas
Pambansa Blg. 391, a shipyard reverted back to its status as a public utility
and as such, requires a CPC for its operation.

The fiscal incentives shall be extended to stimulate establishment

and assist initial operations of the enterprise, and shall terminate
after a period of not more than 10 years from registration or startup of operation unless a special period is otherwise stated.

The crux of the present controversy is the effect of the express repeal
of Batas Pambansa Blg. 391 by Executive Order No. 226 issued by former
President Corazon C. Aquino under her emergency powers.

The foregoing declaration shall apply to all investment incentive

schemes and in particular will supersede article 2 of Presidential
Decree No. 1789. (emphases supplied)

regime, Batas

Pambansa

Sec. 20. The following provisions are hereby repealed:

1) Section
53, P.D.
463 (Mineral
Development Decree);

Resources

2) Section 1, P.D. 666 (Shipbuilding and Ship Repair

Industry);
3) Section 6, P.D. 1101 (Radioactive Minerals);

5) The following articles of Presidential Decree 1789: 2,

18, 19, 22, 28, 30, 39, 49 (d), 62, and 77.
Articles 45, 46 and 48 are hereby amended
only with respect to domestic and export
producers.
All other laws, decrees, executive orders, administrative orders,
rules and regulations or parts thereof which are inconsistent with
the provisions of this Act are hereby repealed, amended or
modified accordingly.

It is the policy of the State to extend to projects which will

significantly contribute to the attainment of these objectives, fiscal
incentives without which said projects may not be established in
the locales, number and/or pace required for optimum national
economic development. Fiscal incentive systems shall be
devised to compensate for market imperfections, reward
performance of making contributions to economic development,
cost-efficient and be simple to administer.

With the new investment incentive

391 repealed the following laws, viz:

4) LOI 508 extending P.D. 791 and P.D. 924 (Sugar);

and

Blg.

We rule that the express repeal of Batas Pambansa Blg. 391 by E.O. No.
226 did not revive Section 1 of P.D. No. 666. But more importantly, it also put
a period to the existence of sections 13 (b) and 15 ofC.A. No. 146. It bears
emphasis that sections 13 (b) and 15 of C.A. No. 146, as originally written,
owed their continued existence to Batas Pambansa Blg. 391. Had the latter
not repealed P.D. No. 666, the former should have been modified
accordingly and shipyards effectively removed from the list of public
utilities. Ergo, with the express repeal of Batas Pambansa Blg. 391 by E.O.
No. 226, the revival of sections 13 (b) and 15 of C.A. No. 146 had no more
leg to stand on. A law that has been expressly repealed ceases to exist and
becomes inoperative from the moment the repealing law becomes
effective.31 Hence, there is simply no basis in the conclusion that shipyards
remain to be a public utility. A repealed statute cannot be the basis for
classifying shipyards as public utilities.
In view of the foregoing, there can be no other conclusion than to hold that a
shipyard is not a public utility. A shipyard has been considered a public utility

merely by legislative declaration. Absent this declaration, there is no more

reason why it should continuously be regarded as such. The fact that the
legislature did not clearly and unambiguously express its intention to include
shipyards in the list of public utilities indicates that that it did not intend to do
so. Thus, a shipyard reverts back to its status as non-public utility prior to the
enactment of the Public Service Law.
This interpretation is in accord with the uniform interpretation placed upon it
by the Board of Investments (BOI), which was entrusted by the legislature
with the preparation of annual Investment Priorities Plan (IPPs). The BOI has
consistently classified shipyards as part of the manufacturing sector and not
of the public utilities sector. The enactment of Batas Pambansa Blg. 391 did
not alter the treatment of the BOI on shipyards. It has been, as at present,
classified as part of the manufacturing and not of the public utilities sector. 32
Furthermore, of the 441 Ship Building and Ship Repair (SBSR) entities
registered with the MARINA, 33 none appears to have an existing franchise. If
we continue to hold that a shipyard is a public utility, it is a necessary
consequence that all these entities should have obtained a franchise as was
the rule prior to the enactment of P.D. No. 666. But MARINA remains without
authority, pursuant to P.D. No. 474 34 to issue franchises for the operation of
shipyards. Surely, the legislature did not intend to create a vacuum by
continuously treating a shipyard as a public utility without giving MARINA the
power to issue a Certificate of Public Convenience (CPC) or a Certificate of
Public Convenience and Necessity (CPCN) as required by section 15 of C.A.
No. 146.
II.
Whether under the 1977 Joint Venture Agreement,
KAWASAKI can purchase only a maximum of 40%
of PHILSECO's total capitalization.
A careful reading of the 1977 Joint Venture Agreement reveals that there is
nothing that prevents KAWASAKI from acquiring more than 40% of
PHILSECO's total capitalization. Section 1 of the 1977 JVA states:
1.3 The authorized capital stock of Philseco shall be P330
million. The parties shall thereafter increase their subscription in
Philseco as may be necessary and as called by the Board of
Directors, maintaining a proportion of 60%-40% for NIDC and
KAWASAKI respectively, up to a total subscribed and paid-up
capital stock of P312 million.

1.4 Neither party shall sell, transfer or assign all or any part of its
interest in SNS [renamed PHILSECO] to any third party without
giving the other under the same terms the right of first refusal.
This provision shall not apply if the transferee is a corporation
owned and controlled by the GOVERNMENT [of the Philippines]
or by a Kawasaki affiliate.
1.5 The By-Laws of SNS [PHILSECO] shall grant the parties
preemptive rights to unissued shares of SNS [PHILSECO]. 35

Under section 1.3, the parties agreed to the amount of P330 million as the
total capitalization of their joint venture. There was no mention of the amount
of their initial subscription. What is clear is that they are to infuse the needed
capital from time to time until the total subscribed and paid-up capital
reaches P312 million. The phrase "maintaining a proportion of 60%-40%"
refers to their respective share of the burden each time the Board of
Directors decides to increase the subscription to reach the target paid-up
capital of P312 million. It does not bind the parties to maintain the sharing
scheme all throughout the existence of their partnership.
The parties likewise agreed to arm themselves with protective mechanisms
to preserve their respective interests in the partnership in the event that (a)
one party decides to sell its shares to third parties; and (b) new Philseco
shares are issued. Anent the first situation, the non-selling party is given
the right of first refusal under section 1.4 to have a preferential right to buy or
to refuse the selling party's shares. The right of first refusal is meant to
protect the original or remaining joint venturer(s) or shareholder(s) from the
entry of third persons who are not acceptable to it as co-venturer(s) or coshareholder(s). The joint venture between the Philippine Government and
KAWASAKI is in the nature of a partnership 36 which, unlike an ordinary
corporation, is based on delectus personae. 37 No one can become a member
of the partnership association without the consent of all the other associates.
The right of first refusal thus ensures that the parties are given control over
who may become a new partner in substitution of or in addition to the original
partners. Should the selling partner decide to dispose all its shares, the nonselling partner may acquire all these shares and terminate the partnership.
No person or corporation can be compelled to remain or to continue the
partnership. Of course, this presupposes that there are no other restrictions
in the maximum allowable share that the non-selling partner may acquire
such as the constitutional restriction on foreign ownership in public utility. The
theory that KAWASAKI can acquire, as a maximum, only 40% of
PHILSECO's shares is correct only if a shipyard is a public utility. In such
instance, the non-selling partner who is an alien can acquire only a maximum
of 40% of the total capitalization of a public utility despite the grant of first
refusal. The partners cannot, by mere agreement, avoid the constitutional
proscription. But as afore-discussed, PHILSECO is not a public utility and no

other restriction is present that would limit the right of KAWASAKI to

purchase the Government's share to 40% of Philseco's total capitalization.
Furthermore, the phrase "under the same terms" in section 1.4 cannot be
given an interpretation that would limit the right of KAWASAKI to purchase
PHILSECO shares only to the extent of its original proportionate contribution
of 40% to the total capitalization of the PHILSECO. Taken together with the
whole of section 1.4, the phrase "under the same terms" means that a
partner to the joint venture that decides to sell its shares to a third party shall
make a similar offer to the non-selling partner. The selling partner cannot
make a different or a more onerous offer to the non-selling partner.
The exercise of first refusal presupposes that the non-selling partner is aware
of the terms of the conditions attendant to the sale for it to have a guided
choice. While the right of first refusal protects the non-selling partner from the
entry of third persons, it cannot also deprive the other partner the right to sell
its shares to third persons if, under the same offer, it does not buy the
shares.
Apart from the right of first refusal, the parties also have preemptive
rights under section 1.5 in the unissued shares of Philseco. Unlike the
former, this situation does not contemplate transfer of a partner's shares to
third parties but the issuance of new Philseco shares. The grant of
preemptive rights preserves the proportionate shares of the original partners
so as not to dilute their respective interests with the issuance of the new
shares. Unlike the right of first refusal, a preemptive right gives a partner a
preferential right over the newly issued shares only to the extent that it
retains its original proportionate share in the joint venture.
The case at bar does not concern the issuance of new shares but the
transfer of a partner's share in the joint venture. Verily, the operative
protective mechanism is the right of first refusal which does not impose any
limitation in the maximum shares that the non-selling partner may acquire.
III.
Whether the right to top granted to KAWASAKI
in exchange for its right of first refusal violates
the principles of competitive bidding.
We also hold that the right to top granted to KAWASAKI and exercised by
private respondent did not violate the rules of competitive bidding.
cCESaH

The word "bidding" in its comprehensive sense means making an offer or an

invitation to prospective contractors whereby the government manifests its
intention to make proposals for the purpose of supplies, materials and

equipment for official business or public use, or for public works or

repair. 38 The three principles of public bidding are: (1) the offer to the public;
(2) an opportunity for competition; and (3) a basis for comparison of
bids. 39 As long as these three principles are complied with, the public bidding
can be considered valid and legal. It is not necessary that the highest bid be
automatically accepted. The bidding rules may specify other conditions or the
bidding process be subjected to certain reservation or qualification such as
when the owner reserves to himself openly at the time of the sale the right to
bid upon the property, or openly announces a price below which the property
will not be sold. Hence, where the seller reserves the right to refuse to accept
any bid made, a binding sale is not consummated between the seller and the
bidder until the seller accepts the bid. Furthermore, where a right is reserved
in the seller to reject any and all bids received, the owner may exercise the
right even after the auctioneer has accepted a bid, and this applies to the
auction of public as well as private property. 40 Thus:
It is a settled rule that where the invitation to bid contains a
reservation for the Government to reject any or all bids, the
lowest or the highest bidder, as the case may be, is not entitled
to an award as a matter of right for it does not become a
ministerial duty of the Government to make such an award. Thus,
it has been held that where the right to reject is so reserved, the
lowest bid or any bid for that matter may be rejected on a mere
technicality, that all bids may be rejected, even if arbitrarily and
unwisely, or under a mistake, and that in the exercise of a sound
discretion, the award may be made to another than the lowest
bidder. And so, where the Government as advertiser, availing
itself of that right, makes its choice in rejecting any or all bids, the
losing bidder has no cause to complain nor right to dispute that
choice, unless an unfairness or injustice is shown. Accordingly,
he has no ground of action to compel the Government to award
the contract in his favor, nor compel it to accept his bid. 41

In the instant case, the sale of the Government shares in PHILSECO was
publicly known. All interested bidders were welcomed. The basis for
comparing the bids were laid down. All bids were accepted sealed and were
opened and read in the presence of the COA's official representative and
before all interested bidders. The only question that remains is whether or
not the existence of KAWASAKI's right to top destroys the essence of
competitive bidding so as to say that the bidders did not have an opportunity
for competition. We hold that it does not.
The essence of competition in public bidding is that the bidders are placed on
equal footing. This means that all qualified bidders have an equal chance of
winning the auction through their bids. In the case at bar, all of the bidders
were exposed to the same risk and were subjected to the same
condition, i.e., the existence of KAWASAKI's right to top. Under the ASBR,
the Government expressly reserved the right to reject any or all bids, and

manifested its intention not to accept the highest bid should KAWASAKI
decide to exercise its right to top under the ABSR. This reservation or
qualification was made known to the bidders in a pre-bidding conference held
on September 28, 1993. They all expressly accepted this condition in writing
without any qualification. Furthermore, when the Committee on Privatization
notified petitioner of the approval of the sale of the National Government
shares of stock in PHILSECO, it specifically stated that such approval was
subject to the right of KAWASAKI Heavy Industries, Inc./Philyards Holdings,
Inc. to top JGSMI's bid by 5% as specified in the bidding rules. Clearly, the
approval of the sale was a conditional one. Since Philyards eventually
exercised its right to top petitioner's bid by 5%, the sale was not
consummated. Parenthetically, it cannot be argued that the existence of the
right to top "set for naught the entire public bidding." Had Philyards Holdings,
Inc. failed or refused to exercise its right to top, the sale between the
petitioner and the National Government would have been consummated. In
like manner, the existence of the right to top cannot be likened to a second
bidding, which is countenanced, except when there is failure to bid as when
there is only one bidder or none at all. A prohibited second bidding
presupposes that based on the terms and conditions of the sale, there is
already a highest bidder with the right to demand that the seller accept its
bid. In the instant case, the highest bidder was well aware that the
acceptance of its bid was conditioned upon the non-exercise of the right to
top.

To be sure, respondents did not circumvent the requirements for bidding by

granting KAWASAKI, a non-bidder, the right to top the highest bidder. The
fact that KAWASAKI's nominee to exercise the right to top has among its
stockholders some losing bidders cannot also be deemed "unfair."
It must be emphasized that none of the parties questions the existence of
KAWASAKI's right of first refusal, which is concededly the basis for the grant
of the right to top. Under KAWASAKI's right of first refusal, the National
Government is under the obligation to give preferential right to KAWASAKI in
the event it decides to sell its shares in PHILSECO. It has to offer to
KAWASAKI the shares and give it the option to buy or refuse under the same
terms for which it is willing to sell the said shares to third parties. KAWASAKI
is not a mere non-bidder. It is a partner in the joint venture; the incidents of
which are governed by the law on contracts and on partnership.
It is true that properties of the National Government, as a rule, may be sold
only after a public bidding is held. Public bidding is the accepted method in
arriving at a fair and reasonable price and ensures that overpricing,
favoritism and other anomalous practices are eliminated or minimized. 42 But
the requirement for public bidding does not negate the exercise of the right of

first refusal. In fact, public bidding is an essential first step in the exercise of
the right of first refusal because it is only after the public bidding that the
terms upon which the Government may be said to be willing to sell its shares
to third parties may be known. It is only after the public bidding that the
Government will have a basis with which to offer KAWASAKI the option to
buy or forego the shares.
Assuming that the parties did not swap KAWASAKI's right of first refusal with
the right to top, KAWASAKI would have been able to buy the National
Government's shares in PHILSECO under the same termsas offered by the
highest bidder. Stated otherwise, by exercising its right of first refusal,
KAWASAKI could have bought the shares for only P2.03 billion and not the
higher amount of P2.1315 billion. There is, thus, no basis in the submission
that the right to top unfairly favored KAWASAKI. In fact, with the right to top,
KAWASAKI stands to pay higher than it should had it settled with its right of
first refusal. The obvious beneficiary of the scheme is the National
Government.
HAaScT

If at all, the obvious consideration for the exchange of the right of first refusal
with the right to top is that KAWASAKI can name a nominee, which it is a
shareholder, to exercise the right to top. This is a valid contractual stipulation;
the right to top is an assignable right and both parties are aware of the full
legal consequences of its exercise. As aforesaid, all bidders were aware of
the existence of the right to top, and its possible effects on the result of the
public bidding was fully disclosed to them. The petitioner, thus, cannot feign
ignorance nor can it be allowed to repudiate its acts and question the
proceedings it had fully adhered to. 43
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM
Group, Insular Life Assurance, Mitsui and ICTSI), has joined Philyards in the
latter's effort to raise P2.131 billion necessary in exercising the right to top is
not contrary to law, public policy or public morals. There is nothing in the
ASBR that bars the losing bidders from joining either the winning bidder
(should the right to top is not exercised) or KAWASAKI/PHI (should it
exercise its right to top as it did), to raise the purchase price. The petitioner
did not allege, nor was it shown by competent evidence, that the participation
of the losing bidders in the public bidding was done with fraudulent intent.
Absent any proof of fraud, the formation by Philyards of a consortium is
legitimate in a free enterprise system. The appellate court is thus correct in
holding the petitioner estopped from questioning the validity of the transfer of
the National Government's shares in PHILSECO to respondent.
Finally, no factual basis exists to support the view that the drafting of the
ASBR was illegal because no prior approval was given by the COA for it,
specifically the provision on the right to top the highest bidder and that the
public auction on December 2, 1993 was not witnessed by a COA

representative. No evidence was proffered to prove these allegations and the

Court cannot make legal conclusions out of mere allegations. Regularity in
the performance of official duties is presumed 44 and in the absence of
competent evidence to rebut this presumption, this Court is duty bound to
uphold this presumption.

engaged in regularly supplying the public with some commodity or service of

public consequence such as electricity, gas, water, transportation, telephone
or telegraph service. 4 Simply stated, a public utility provides a service or
facility needed for present day living which cannot be denied to anyone who
is willing to pay for it. 5

IN VIEW OF THE FOREGOING, the Motion for Reconsideration is hereby

GRANTED. The impugned Decision and Resolution of the Court of Appeals
are AFFIRMED.

Formerly, there was a statutory definition of "public utility," but it was

abandoned in C.A. No. 454. 6 The definition was instead solely applied to
"public service" apparently because it did not exactly fit the concept of public
utility. It is significant in this regard that while the 1935 Constitution which
took effect on February 2, 1935 specifically mentioned "public utility," 7 C.A.
No. 454 shifted from "public utility" to "public service" as the sole reference
term in the Public Service Act.

SO ORDERED.
Davide, Jr., C .J ., Ynares-Santiago and Corona, JJ ., concur.

Separate Opinions
TINGA, J.:
Whether a shipyard is a public utility is at the heart of the present
controversy.
Although I take a different route, I reach the same result as Mr. Justice Puno.
Since the enactment of Commonwealth Act No. 454 on June 8, 1939,
shipyards have never been considered public utilities, whether by legislative
declaration or executive fiat, or even in administrative practice.
True, "shipyard" is mentioned along with other business operations in the
course of the definition by enumeration of "public service" in the Public
Service Act. 1 The terms "public service" and "public utility," however, do not
have the same legal meaning, at least since the enactment of C.A. No.
454. 2 The terms are related though.
TEDHaA

The definition of "public service" in the Public Service Act, as last amended
by Republic Act No. 2677, includes every person who owns, operates,
manages or controls, for hire or compensation, and done for general
business purposes, any common carrier, railroad, street railway, traction
railway, sub-way motor vehicle, either for freight or passenger, or both with or
without fixed route and whatever may be its classification, freight or carrier
service of any class, express service, steamboat, or steamship line, pontines,
ferries, and water craft, engaged in the transportation of passengers or
freight or both, shipyard, marine railway, marine repair shop, wharf or dock,
ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric light,
heat and power, water supply and power, petroleum, sewerage system, wire
or wireless communications systems, broadcasting stations and other similar
public services. 3 A "public utility," on the other hand, is a business or service

Another dissimilarity is that a public utility requires a franchise, aside from a

certificate of public necessity and convenience, for its operation, while a
public service which is not a public utility requires only a certificate of public
convenience. 8 The dichotomy in requirements flows from the enforced
indeterminacy of the market for the service provided by a public utility. Thus,
it may be pointed out that all public utilities are public services but the
converse is not true. This is so because the term "public utility"
connotes public use and service to the public. 9
A legislative declaration such as the definition by enumeration in the Public
Service Act 10 does not ipso facto render a business or service a public utility.
For, as this Court held in North Negros Sugar Co. v. Hidalgo, 11 whether or
not one is a public utility is a matter of judicial, not legislative determination.
". . . Whether or not a given business, industry, or service is a
public utility does not depend upon legislative definition, but upon
the nature of the business or service rendered, and an attempt to
declare a company or enterprise to be a public utility, where it is
inherently not such, is, by virtue of the guaranties of the
federal constitution, void whenever it interferes with private rights
of property or contract. So a legislature cannot by mere fiat or
regulatory order convert a private business or enterprise into a
public utility, and the question whether or not a particular
company or service is a public utility is a judicial one, and must
be determined as such by a court of competent jurisdiction; . . . ."
(51 CJ., sec. 3, p. 5) 12 [Emphasis supplied.]

Paraphrasing a decision 13 of the United States Supreme Court, a private

enterprise doing business under private contracts with customers of its
choice and therefore not devoted to public use cannot by legislative
enactment or administrative order be converted into a public utility, for that
would constitute taking of private property for public use without just
compensation in derogation of the Constitution.

Again, the categorization of a business or service as a public utility or

otherwise is a judicial prerogative. Hence, this Court held in a significant
number of cases that the businesses or services involved werenot public
utilities despite contradicting legislative classifications.

In one case, 14 we declared that an oil company is not a public utility,

notwithstanding the law 15 which categorizes petroleum operation, including
refining, as a public utility:
A "public utility" under the Constitution and the Public Service
Law is one organized "for hire or compensation" to serve the
public, which is given the right to demand its service. PETRON is
not engaged in oil refining to process the oil of other parties. 16

In another case, 17 we intimated that a "wharf" or "dock" as contemplated

under the Public Service Act is not necessarily a public utility. 18
An operator of trucks who furnished service under special agreements to
carry particular persons and property was held to be not a public utility as he
did not hold himself out to serve any and all persons.19 So is a mere owner
and lessor of the equipment and facilities needed to operate a rail
system not a public utility since the right to operate a public utility may exist
independently of and separately from the ownership of the facilities thereof. 20
An ice plant, although included in the definition of a public service under Act
No. 2307, 21 is not a public utility if it is organized solely for particular persons
under strictly private contracts, and never was devoted by its owner to public
use. However, it is treated as a public utility if the ice it produces is sold to
the public. 22
The test, therefore, in determining if a service is a public utility, is whether the
public may enjoy it by right or only by permission. 23 A shipyard fails this test.
As Justice Puno points out, a shipyard is not, by nature or tradition, a public
utility in much the same way as automobile or airplane manufacturers are not
public utilities. 24
Apart from shipyards, marine repair shops, wharves or docks, canals,
irrigation systems, petroleum supply and wire or wireless broadcasting
stations, although included in the definition of "public service" in the Public
Service Act, as amended, are clearly not public utilities. Services which were
once included in the definition of "public service" were later on excluded from
the statutory enumeration, 25 indicating the impermanence of "public service"
as a concept in the law on utilities.

Still on the legislative side, to the best of my knowledge, 26 no person or firm

has secured a legislative franchise to operate a shipyard or even applied for
one. On the administrative side, as noted by Mr. Justice Puno, 27 the Maritime
Industry Authority (MARINA) has not been empowered to issue franchise for
shipyard operation. It is authorized under Executive Orders No. 124 and No.
125-A, effective as of January 10 and April 13, 1987, respectively, to issue
certificates of public convenience to domestic and water carriers. 28 But the
presidential issuances have no similar provision with respect to shipyard
operation.
To reiterate, shipyards have never been in legal contemplation considered as
public utilities. The promulgation of P.D. No. 666 in 1975 which required, in
Section 1(d) 29 thereof, the registration of shipyards merely as such, definitely
not as public utilities, served simply to remove any doubt as to their nonpublic utility status. Note in this regard that MARINA was created by P.D. No.
474 30 on June 1, 1974, or prior to the promulgation of P.D. No. 666. And P.D.
No. 474 did not authorize MARINA to issue franchise for shipyard operation,
not unlike E.O. Nos. 125 and 125-A which were promulgated after it.
The repeal of Section 1 of P.D. No. 666 by Batas Pambansa Blg. 391,
enacted in 1983, did not convert shipyards into public utilities. Of course, the
subsequent repeal of Batas Pambansa Blg. 391 by E.O. No. 226 31 in 1987
has effectively laid the issue to rest once and for all.
Except for this divergence, I concur in Mr. Justice Puno's well-reasoned
opinion.
I vote to GRANT respondents' motions for reconsideration.
(JG Summit Holdings v. Court of Appeals, G.R. No. 124293, [September
24, 2003], 458 PHIL 581-625)
|||

EN BANC
[G.R. No. L-6055. June 12, 1953.]
THE PEOPLE OF
THE
PHILIPPINES, plaintiffappellee, vs. WILLIAM H. QUASHA, defendant-appellant.

not constitute criminal falsification if there is no legal obligation on the

part of the narrator to disclose the truth. (U. S. vs. Reyes, 1 Phil., 341; U.
S. vs. Lopez, 15 Phil., 515.) Wrongful intent to injure a third person and
obligation on the part of the narrator to disclose the truth are thus
essential to a conviction for the crime of falsification under articles 171(4)
and 172(1) of the Revised Penal Code.
DECISION

Jose P. Laurel for appellant and William H. Quasha in his own

behalf.
REYES, J :
p

Solicitor General Juan R. Liwag and Assistant Solicitor General

Francisco Carreon for appellee.
SYLLABUS
1. CONSTITUTIONAL
LAW;
CORPORATIONS;
PUBLIC
UTILITIES; MERE FORMATION OF PUBLIC UTILITY CORPORATION
WITHOUT THE REQUISITE FILIPINO CAPITAL NOT PROHIBITED.
The Constitution does not prohibit the mere formation of a public utility
corporation without the required proportion of Filipino capital. What it
does prohibit is the granting of a franchise or other form of authorization
for the operation of a public utility to a corporation already in existence
but without the requisite proportion of Filipino capital (sec. 8, Art. XIV of
the Constitution).
2. ID.; ID.; ID.; DUTY OF REVEALING THE OWNERSHIP OF
THE CAPITAL OF A CORPORATION. If the Constitution does not
prohibit the mere formation of a public utility corporation with alien
capital, then how could the accused be charged with having wrongfully
intended to circumvent that fundamental law by not disclosing in the
articles of incorporation that one of the incorporators, a Filipino, was a
mere trustee of his American co-incorporators and that for that reason
the subscribed capital stock of the corporation was wholly American? For
the mere formation of the corporation such disclosure was not essential,
and the Corporation Law does not require it. The accused was,
therefore, under no obligation to make it. In the absence of such
obligation and of the alleged wrongful intent on the part of the accused,
he cannot legally be convicted of the crime of falsification for having
allegedly perverted the truth in a narration of facts.
3. FALSIFICATION;
FALSE
NARRATION
FOR
NOT
REVEALING A CERTAIN FACT, NOT PUNISHABLE IF THERE IS NO
LEGAL OBLIGATION TO DISCLOSE THE TRUTH. It is essential to
the commission of this crime that the perversion of truth in a narration of
facts must be made with the wrongful intent of injuring a third person and
even if such wrongful intent is proven, still the untruthful statement will

William H. Quasha, a member of the Philippine bar, was charged

in the Court of First Instance of Manila with the crime of falsification of a
public and commercial document in that, having been entrusted with the
preparation and registration of the articles of incorporation of the Pacific
Airways Corporation, a domestic corporation organized for the purpose
of engaging in business as a common carrier, he caused it to appear in
said articles of incorporation that one Arsenio Baylon, a Filipino citizen,
had subscribed to and was the owner of 60.005 per cent of the
subscribed capital stock of the corporation when in reality, as the
accused well knew, such was not the ease, the truth being that the
owners of the portion of the capital stock subscribed to by Baylon and
the money paid thereon were American citizens whose names did not
appear in the articles of incorporation, and that the purpose for making
this false statement was to circumvent the constitutional mandate that no
corporation shall be authorized to operate as a public utility in the
Philippines unless 60 per cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment
and a fine, the accused has appealed to this Court.
The essential facts are not in dispute. On November 4, 1946, the
Pacific Airways Corporation registered its articles of incorporation with
the Securities and Exchange Commission. The articles were prepared
and the registration was effected by the accused, who was in fact the
organizer of the corporation. The articles stated that the primary purpose
of the corporation was to carry on the business of a common carrier by
air, land or water; that its capital stock was P1,000,000, represented by
9,000 preferred and 100,000 common shares, each preferred share
being of the par value of P100 and entitled to 1/3 vote and each common
share, of the par value of P1 and entitled to one vote; that the amount of
capital stock actually subscribed was P200,000, and the names of the
subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert W.
Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha, the
first being a Filipino and the other five all Americans; that Baylon's
subscription was for 1,145 preferred shares, of the total value of

P114,500, and for 6,500 common shares, of the total par value of
P6,500, while the aggregate subscriptions of the American subscribers
were for 200 preferred shares, of the total par value of P20,000, and
59,000 common shares, of the total par value of P59,000; and that
Baylon and the American subscribers had already paid 25 per cent of
their respective subscriptions. Ostensibly the owner of, or subscriber to,
60.005 per cent of the subscribed capital stock of the corporation, Baylon
nevertheless did not have the controlling vote because of the difference
in voting power between the preferred shares and the common shares.
Still, with the capital structure as it was, the articles of incorporation were
accepted for registration and a certificate of incorporation was issued by
the Securities and Exchange Commission.
There is no question that Baylon actually subscribed to 60.005
per cent of the subscribed capital stock of the corporation. But it is
admitted that the money paid on his subscription did not belong to him
but to the American subscribers to the corporate stock. In explanation,
the accused testified, without contradiction, that in the process of
organization Baylon was made a trustee for the American incorporators,
and that the reason for making Baylon such trustee was as follows:
"Q. According to this articles of incorporation Arsenio Baylon
subscribed to 1,135 preferred shares with a total value
of P1,135. Do you know how that came to be?

and I said I consider him my friend.' So they said 'Well make him
our trustee.' 'You can do that', I said. They all knew Arsenio. He
is a very kind man and that was what was done. That is how it
came about."

Defendant is accused under article 172, paragraph 1, in

connection with article 171, paragraph 4, of the Revised Penal Code,
which read:
"ART. 171. Falsification by public officer, employee or
notary or ecclesiastic minister. The penalty of prision
mayor and a fine not to exceed 5,000 pesos shall be imposed
upon any public officer, employee, or notary who, taking
advantage of his official position, shall falsify a document by
committing any of the following acts:
xxx xxx xxx
"4. Making untruthful statements in a narration of facts."
"ART. 172. Falsification by private individuals and use of
falsified documents. The penalty of prision correccional in its
medium and maximum periods and a fine of not more than 5,000
pesos shall be imposed upon:
xxx xxx xxx

"A. Yes.
The people who were desirous of forming the
corporation, whose names are listed on page 7 of this certified
copy came to my house, Messrs. Shannahan, Onstott,
O'Bannon, Caven, Perry and Anastasakas one evening. There
was considerable difficulty to get them all together at one time
because they were pilots. They had difficulty in deciding what
their respective share holdings would be. Onstott had invested a
certain amount of money in airplane surplus property and they
had obtained a considerable amount of money on those planes
and as I recall they were desirous of getting a corporation formed
right away. And they wanted to have their respective share
holdings resolved at a later date. They stated that they could get
together but they feel that they had no time to settle their
respective share holdings. We discussed the matter and finally it
was decided that the best way to handle the thing was not to put
the shares in the name of anyone of the interested parties and to
have someone act as trustee for their respective share holdings.
So we looked around for a trustee. And he said 'Is there anybody
in particular whom you trust?' And I said 'There are a lot
of people whom I trust.' He said, 'Is there someone around whom
we could get right away?' I said, 'There is Arsenio. He was my
boy during the liberation and he cared for me when I was sick

"1. Any private individual who shall commit any of the

falsifications enumerated in the next preceding article in any
public or official document or letter of exchange or any other kind
of commercial document."

Commenting on the above provisions, Justice Albert, in his wellknown work on the Revised Penal Code (new edition, pp. 407-408),
observes, on the authority of U. S. vs. Reyes, (1 Phil., 341), that the
perversion of truth in the narration of fact must be made with the
wrongful intent of injuring a third person; and on the authority of U.
S. vs. Lopez (15 Phil., 515), the same author further maintains that even
if such wrongful intent is proven, still the untruthful statement will not
constitute the crime of falsification if there is no legal obligation on the
part of the narrator to disclose the truth. Wrongful intent to injure a third
person and obligation on the part of the narrator to disclose the truth are
thus essential to a conviction for the crime of falsification under the
above articles of the Revised Penal Code.
Now, as we see it, the falsification imputed to the accused in the
present case consists in not disclosing in the articles of incorporation that
Baylon was a mere trustee (or dummy as the prosecution chooses to call

him) of his American co-incorporators, thus giving the impression that

Baylon was the owner of the shares subscribed to by him which, as
above stated, amount to 60.005 per cent of the subscribed capital stock.
This, in the opinion of the trial court, is a malicious perversion of the truth
made with the wrongful intent of circumventing section 8, Article XIV of
the Constitution, which provides that "no franchise, certificate, or any
other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or other
entities organized under the laws of the Philippines, sixty per centum of
the capital of which is owned by citizens of the Philippines . . . " Plausible
though it may appear at first glance, this opinion loses validity once it is
noted that it is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to prohibit the
mere formation of a public utility corporation without 60 per cent of its
capital being owned by Filipinos, a mistaken belief which has induced the
lower court to conclude that the accused was under obligation to disclose
the whole truth about the nationality of the subscribed capital stock of the
corporation by revealing that Baylon was a mere trustee or dummy of his
American co-incorporators, and that in not making such disclosure
dependant's intention was to circumvent the Constitution to the detriment
of the public interests. Contrary to the lower court's assumption, the
Constitution does not prohibit the mere formation of a public utility
corporation without the required proportion of Filipino capital. What it
does prohibit is the granting of a franchise or other form of authorization
for the operation of a public utility to a corporation already in
existence but without the requisite proportion of Filipino capital. This is
obvious from the context, for the constitutional provision in question
qualifies the terms "franchise", "certificate" or "any other form of
authorization" with the phrase "for the operation of a public utility,"
thereby making it clear that the franchise meant is not the "primary
franchise" that invests a body of men with corporate existence but the
"secondary franchise" or the privilege to operate as a public utility after
the corporation has already come into being.

It is urged, however, that the formation of the corporation with 60

per cent of its subscribed capital stock appearing in the name of Baylon
was an indispensable preparatory step to the subversion of the
constitutional prohibition and the laws implementing the policy expressed
therein. This view is not correct. For a corporation to be entitled to
operate a public utility it is not necessary that it be organized with 60 per
cent of its capital owned by Filipinos from the start. A corporation formed
with capital that is entirely alien may subsequently change the nationality
of its capital through transfer of shares to Filipino citizens. Conversely, a
corporation originally formed with Filipino capital may subsequently
change the national status of said capital thru transfers of shares to
foreigners. What need is there then for a corporation that intends to
operate a public utility to have, at the time of its formation, 60 per cent of
its capital owned by Filipinos alone? That condition may at any time be
attained thru the necessary transfers of stocks. The moment for
determining whether a corporation is entitled to operate as a public utility
is when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can only be done after the
corporation has already come into being and not while it is still being
formed. And at that moment, the corporation must show that it has
complied not only with the requirement of the Constitution as to the
nationality of its capital, but also with the requirements of the Civil
Aviation Law if it is a common carrier by air, the Revised Administrative
Code if it is a common carrier by water, and the Public Service Law if it is
a common carrier by land or other kind of public service.

If the Constitution does not prohibit the mere formation of a

public utility corporation with alien capital, then how could the accused
be charged with having wrongfully intended to circumvent that
fundamental law by not revealing in the articles of incorporation that
Baylon was a mere trustee of his American co-incorporators and that for
that reason the subscribed capital stock of the corporation was wholly
American? For the mere formation of the corporation such revelation was
not essential, and the Corporation Law does not require it. Defendant
was, therefore, under no obligation to make it. In the absence of such
obligation and of the alleged wrongful intent, defendant cannot be legally
convicted of the crime with which he is charged.

The foregoing considerations can not but lead to the conclusion

that the defendant can not be held guilty of the crime charged. The
majority of the court, however, are also of the opinion that, even
supposing that the act imputed to the defendant constituted falsification
at the time it was perpetrated, still with the approval of the Parity
Amendment to the Constitution in March, 1947, which placed Americans
on the same footing as Filipino citizens with respect to the right to
operate public utilities in the Philippines, thus doing away with the
prohibition in section 8, Article XIV of the Constitution in so far as
American citizens are concerned, the said act has ceased to be an
offense within the meaning of the law, so that defendant can no longer
be held criminally liable therefor.

Equally untenable is the suggestion that defendant should at

least be held guilty of an "impossible crime" under article 59 of the
Revised Penal Code. It not being possible to suppose that defendant had
intended to commit a crime for the simple reason that the alleged
constitutional prohibition which he is charged with having tried to
circumvent does not exist, conviction under that article is out of the
question.

In view of the foregoing, the judgment appealed from is reversed

and the defendant William H. Quasha acquitted, with costs de oficio.
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista
Angelo and Labrador, JJ., concur.
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(People v. Quasha, G.R. No. L-6055, [June 12, 1953], 93 PHIL 333-341)