Set II

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 1 of 35
SECOND DIVISION
G.R. No. 171993
December 12, 2011
MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners, vs. ALFREDO M. JOSON, Respondent.
DECISION
PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II Marketing, Inc. and
Lucila V. Joson assailed the Decision1 dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No. 76624 for reversing and
setting aside the Resolution2 of the National Labor Relations Commission (NLRC) dated 15 October 2002, thereby affirming the
Labor Arbiters Decision3 dated 1 October 2001 finding herein respondent Alfredo M. Josons dismissal from employment as
illegal. In the questioned Decision, the Court of Appeals upheld the Labor Arbiters jurisdiction over the case on the basis that
respondent was not an officer but a mere employee of petitioner Marc II Marketing, Inc., thus, totally disregarding the latters
allegation of intra-corporate controversy. Nonetheless, the Court of Appeals remanded the case to the NLRC for further
proceedings to determine the proper amount of monetary awards that should be given to respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March 2006 denying their Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing under and by virtue of the
laws of the Philippines. It is primarily engaged in buying, marketing, selling and distributing in retail or wholesale for export or
import household appliances and products and other items. 5 It took over the business operations of Marc Marketing, Inc. which
was made non-operational following its incorporation and registration with the Securities and Exchange Commission (SEC).
Petitioner Lucila V. Joson (Lucila) is the President and majority stockholder of petitioner corporation. She was also the former
President and majority stockholder of the defunct Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator, director and stockholder of
petitioner corporation.
The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated, 6 respondent has already been engaged by petitioner Lucila, in her
capacity as President of Marc Marketing, Inc., to work as the General Manager of petitioner corporation. It was formalized
through the execution of a Management Contract 7 dated 16 January 1994 under the letterhead of Marc Marketing, Inc. 8 as
petitioner corporation is yet to be incorporated at the time of its execution. It was explicitly provided therein that respondent
shall be entitled to 30% of its net income for his work as General Manager. Respondent will also be granted 30% of its net
profit to compensate for the possible loss of opportunity to work overseas.9
Pending incorporation of petitioner corporation, respondent was designated as the General Manager of Marc Marketing, Inc.,
which was then in the process of winding up its business. For occupying the said position, respondent was among its corporate
officers by the express provision of Section 1, Article IV10 of its by-laws.11
On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC. Accordingly, Marc
Marketing, Inc. was made non-operational. Respondent continued to discharge his duties as General Manager but this time
under petitioner corporation.
Pursuant to Section 1, Article IV12 of petitioner corporations by-laws,13 its corporate officers are as follows: Chairman,
President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors, however, may, from time to time,
appoint such other officers as it may determine to be necessary or proper.
Per an undated Secretarys Certificate, 14 petitioner corporations Board of Directors conducted a meeting on 29 August 1994
where respondent was appointed as one of its corporate officers with the designation or title of General Manager to function as
a managing director with other duties and responsibilities that the Board of Directors may provide and authorized. 15
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as evidenced by an Affidavit of
Non-Operation16 dated 31 August 1998, due to poor sales collection aggravated by the inefficient management of its affairs. On
the same date, it formally informed respondent of the cessation of its business operation. Concomitantly, respondent was
apprised of the termination of his services as General Manager since his services as such would no longer be necessary for
the winding up of its affairs.17
Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners before the Labor
Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99.
In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with petitioner corporation due
to the feeling of hatred she harbored towards his family. The same was rooted in the filing by petitioner Lucilas estranged
husband, who happened to be respondents brother, of a Petition for Declaration of Nullity of their Marriage.18
For the parties failure to settle the case amicably, the Labor Arbiter required them to submit their respective position papers.
Respondent complied but petitioners opted to file a Motion to Dismiss grounded on the Labor Arbiters lack of jurisdiction as the
case involved an intra-corporate controversy, which jurisdiction belongs to the SEC [now with the Regional Trial Court
(RTC)].19 Petitioners similarly raised therein the ground of prescription of respondents monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order 20 deferring the resolution of petitioners Motion to Dismiss until the
final determination of the case. The Labor Arbiter also reiterated his directive for petitioners to submit position paper. Still,
petitioners did not comply. Insisting that the Labor Arbiter has no jurisdiction over the case, they instead filed an Urgent Motion
to Resolve the Motion to Dismiss and the Motion to Suspend Filing of Position Paper.
In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and declared final the Order dated 5 September
2000. The Labor Arbiter then gave petitioners a period of five days from receipt thereof within which to file position paper,
otherwise, their Motion to Dismiss will be treated as their position paper and the case will be considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the requested extension, petitioners
still failed to submit the same. Accordingly, the case was submitted for resolution.
stockholder and officer of a corporation is not a simple labor problem. Such matter comes within the ambit of corporate affairs
and management and is an intra-corporate controversy in contemplation of the Corporation Code.24
On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal portion reads as follows:
When respondents Motion for Reconsideration was denied in another Resolution 25 dated 23 January 2003, he filed a Petition
for Certiorari with the Court of Appeals ascribing grave abuse of discretion on the part of the NLRC.
WHEREFORE, premises considered, judgment is hereby rendered declaring [respondents] dismissal from employment illegal.
Accordingly, [petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent position without loss of seniority rights, benefits, and
privileges;
2. Jointly and severally liable to pay [respondents] unpaid wages in the amount of P450,000.00 per month from [26
March 1996] up to time of dismissal in the total amount of P6,300,000.00;
3. Jointly and severally liable to pay [respondents] full backwages in the amount of P450,000.00 per month from
date of dismissal until actual reinstatement which at the time of promulgation amounted toP21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of P100,000.00 and attorneys fees in the amount
of 5% of the total monetary award.22 [Emphasis supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners Motion to Dismiss by finding the ground of lack of
jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners failed to adduce evidence to prove that the present
case involved an intra-corporate controversy. Also, respondents money claim did not arise from his being a director or
stockholder of petitioner corporation but from his position as being its General Manager. The Labor Arbiter likewise held that
respondent was not a corporate officer under petitioner corporations by-laws. As such, respondents complaint clearly arose
from an employer-employee relationship, thus, subject to the Labor Arbiters jurisdiction.
The Labor Arbiter then declared respondents dismissal from employment as illegal. Respondent, being a regular employee of
petitioner corporation, may only be dismissed for a valid cause and upon proper compliance with the requirements of due
process. The records, though, revealed that petitioners failed to present any evidence to justify respondents dismissal.
Aggrieved, petitioners appealed the aforesaid Labor Arbiters Decision to the NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor Arbiter has jurisdiction over
the present controversy. It upheld the finding of the Labor Arbiter that respondent was a mere employee of petitioner
corporation, who has been illegally dismissed from employment without valid cause and without due process. Nevertheless, it
ordered the records of the case remanded to the NLRC for the determination of the appropriate amount of monetary awards to
be given to respondent. The Court of Appeals, thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have jurisdiction over the
controversy. The records are REMANDED to the NLRC for further proceedings to determine the appropriate amount of
monetary awards to be adjudged in favor of [respondent]. Costs against the [petitioners] in solidum.26
Petitioners moved for its reconsideration but to no avail.27
Petitioners are now before this Court with the following assignment of errors:
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING THAT THE
NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER WHICH IS
COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL THE COURT
OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYER-EMPLOYEE
RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING, INC.
[PETITIONER CORPORATION].
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE COURT OF
APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION
IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED ON THE PURPORTED
GROSS INCOME OF [PETITIONER CORPORATION].
In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to the Secretarys
Certificate, which evidenced petitioner corporations Board of Directors meeting in which a resolution was approved appointing
respondent as its corporate officer with designation as General Manager. Therefrom, the NLRC reversed and set aside the
Labor Arbiters Decision dated 1 October 2001 and dismissed respondents Complaint for want of jurisdiction. 23
THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN NOT
MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD SOLIDARILY
LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.28
The NLRC enunciated that the validity of respondents appointment and termination from the position of General Manager was
made subject to the approval of petitioner corporations Board of Directors. Had respondent been an ordinary employee, such
board action would not have been required. As such, it is clear that respondent was a corporate officer whose dismissal
involved a purely intra-corporate controversy. The NLRC went further by stating that respondents claim for 30% of the net
profit of the corporation can only emanate from his right of ownership therein as stockholder, director and/or corporate officer.
Dividends or profits are paid only to stockholders or directors of a corporation and not to any ordinary employee in the absence
of any profit sharing scheme. In addition, the question of remuneration of a person who is not a mere employee but a
Petitioners fault the Court of Appeals for having sustained the Labor Arbiters finding that respondent was not a corporate
officer under petitioner corporations by-laws. They insist that there is no need to amend the corporate by-laws to specify who
its corporate officers are. The resolution issued by petitioner corporations Board of Directors appointing respondent as General
Manager, coupled with his assumption of the said position, positively made him its corporate officer. More so, respondents
position, being a creation of petitioner corporations Board of Directors pursuant to its by-laws, is a corporate office sanctioned
by the Corporation Code and the doctrines previously laid down by this Court. Thus, respondents removal as petitioner
corporations General Manager involved a purely intra-corporate controversy over which the RTC has jurisdiction.

Petitioners further contend that respondents claim for 30% of the net profit of petitioner corporation was anchored on the
purported Management Contract dated 16 January 1994. It should be noted, however, that said Management Contract was
executed at the time petitioner corporation was still nonexistent and had no juridical personality yet. Such being the case,
respondent cannot invoke any legal right therefrom as it has no legal and binding effect on petitioner corporation. Moreover, it
is clear from the Articles of Incorporation of petitioner corporation that respondent was its director and stockholder. Indubitably,
respondents claim for his share in the profit of petitioner corporation was based on his capacity as such and not by virtue of
any employer-employee relationship.
Petitioners further avow that even if the present case does not pose an intra-corporate controversy, still, the Labor Arbiters
multi-million peso awards in favor of respondent were erroneous. The same was merely based on the latters self-serving
computations without any supporting documents.
Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling provision is not enough to make a
position a corporate office. [In] Guerrea v. Lezama [citation omitted] the first ruling on the matter, held that the only officers of a
corporation were those given that character either by the Corporation Code or by the [b]y-[l]aws; the rest of the corporate
officers could be considered only as employees or subordinate officials. Thus, it was held in Easycall Communications Phils.,
Inc. v. King [citation omitted]:
An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other
hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid to such employee.
xxxx
Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner corporation. There was neither
allegation nor iota of evidence presented to show that she acted with malice and bad faith in her dealings with respondent.
Moreover, the Labor Arbiter, in his Decision, simply concluded that petitioner Lucila was jointly and severally liable with
petitioner corporation without making any findings thereon. It was, therefore, an error for the Court of Appeals to hold petitioner
Lucila solidarily liable with petitioner corporation.
This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that the corporate
officers are the President, Secretary, Treasurer and such other officers as may be provided for in the [b]y-[l]aws. Accordingly,
the corporate officers in the context of PD No. 902-A are exclusively those who are given that character either by the
Corporation Code or by the corporations [b]y[l]aws.
From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has jurisdiction over
respondents dismissal as General Manager of petitioner corporation. Its resolution necessarily entails the determination of
whether respondent as General Manager of petitioner corporation is a corporate officer or a mere employee of the latter.
A different interpretation can easily leave the way open for the Board of Directors to circumvent the constitutionally guaranteed
security of tenure of the employee by the expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.
While Article 217(a)229 of the Labor Code, as amended, provides that it is the Labor Arbiter who has the original and exclusive
jurisdiction over cases involving termination or dismissal of workers when the person dismissed or terminated is a corporate
officer, the case automatically falls within the province of the RTC. The dismissal of a corporate officer is always regarded as a
corporate act and/or an intra-corporate controversy.30
It is relevant to state in this connection that the SEC, the primary agency administering the Corporation Code, adopted a similar
interpretation of Section 25 of the Corporation Code in its Opinion dated November 25, 1993 [citation omitted], to wit:
Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies are those controversies arising out of intracorporate or partnership relations, between and among stockholders, members or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as
such entity. It also includes controversies in the election or appointments of directors, trustees, officers or managers of
such corporations, partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the controversy, the status or relationship of
the parties and the nature of the question that is the subject of their controversy must be taken into consideration. 33
In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential Decree No. 902-A, corporate
officers are those officers of a corporation who are given that character either by the Corporation Code or by the corporations
by-laws. Section 2534 of the Corporation Code specifically enumerated who are these corporate officers, to wit: (1) president;
(2) secretary; (3) treasurer; and (4) such other officers as may be provided for in the by-laws. 35
The aforesaid Section 25 of the Corporation Code, particularly the phrase "such other officers as may be provided for in the bylaws," has been clarified and elaborated in this Courts recent pronouncement in Matling Industrial and Commercial
Corporation v. Coros, where it held, thus:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate officers enumerated in
the by-laws are the exclusive Officers of the corporation and the Board has no power to create other Offices without amending
first the corporate [b]y-laws. However, the Board may create appointive positions other than the positions of corporate
Officers, but the persons occupying such positions are not considered as corporate officers within the meaning of
Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate Officers, except those
functions lawfully delegated to them. Their functions and duties are to be determined by the Board of
Directors/Trustees.36 [Emphasis supplied.]
A careful perusal of petitioner corporations by-laws, particularly paragraph 1, Section 1, Article IV,37 would explicitly reveal that
its corporate officers are composed only of: (1) Chairman; (2) President; (3) one or more Vice-President; (4) Treasurer; and (5)
Secretary.38 The position of General Manager was not among those enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporations by-laws, empowered its Board of Directors to appoint such other
officers as it may determine necessary or proper.39 It is by virtue of this enabling provision that petitioner corporations Board of
Directors allegedly approved a resolution to make the position of General Manager a corporate office, and, thereafter,
appointed respondent thereto making him one of its corporate officers. All of these acts were done without first amending its
by-laws so as to include the General Manager in its roster of corporate officers.
With the given circumstances and in conformity with Matling Industrial and Commercial Corporation v. Coros, this Court rules
that respondent was not a corporate officer of petitioner corporation because his position as General Manager was not

specifically mentioned in the roster of corporate officers in its corporate by-laws. The enabling clause in petitioner corporations
by-laws empowering its Board of Directors to create additional officers, i.e., General Manager, and the alleged subsequent
passage of a board resolution to that effect cannot make such position a corporate office. Matling clearly enunciated that the
board of directors has no power to create other corporate offices without first amending the corporate by-laws so as to include
therein the newly created corporate office. Though the board of directors may create appointive positions other than the
positions of corporate officers, the persons occupying such positions cannot be viewed as corporate officers under Section 25
of the Corporation Code.40 In view thereof, this Court holds that unless and until petitioner corporations by-laws is amended for
the inclusion of General Manager in the list of its corporate officers, such position cannot be considered as a corporate office
within the realm of Section 25 of the Corporation Code.
This Court considers that the interpretation of Section 25 of the Corporation Code laid down in Matling safeguards the
constitutionally enshrined right of every employee to security of tenure. To allow the creation of a corporate officer position by a
simple inclusion in the corporate by-laws of an enabling clause empowering the board of directors to do so can result in the
circumvention of that constitutionally well-protected right.41
It is also of no moment that respondent, being petitioner corporations General Manager, was given the functions of a
managing director by its Board of Directors. As held in Matling, the only officers of a corporation are those given that character
either by the Corporation Code or by the corporate by-laws. It follows then that the corporate officers enumerated in the bylaws are the exclusive officers of the corporation while the rest could only be regarded as mere employees or subordinate
officials.42 Respondent, in this case, though occupying a high ranking and vital position in petitioner corporation but which
position was not specifically enumerated or mentioned in the latters by-laws, can only be regarded as its employee or
subordinate official. Noticeably, respondents compensation as petitioner corporations General Manager was set, fixed and
determined not by the latters Board of Directors but simply by its President, petitioner Lucila. The same was not subject to the
approval of petitioner corporations Board of Directors. This is an indication that respondent was an employee and not a
corporate officer.
To prove that respondent was petitioner corporations corporate officer, petitioners presented before the NLRC an undated
Secretarys Certificate showing that corporations Board of Directors approved a resolution making respondents position of
General Manager a corporate office. The submission, however, of the said undated Secretarys Certificate will not change the
fact that respondent was an employee. The certification does not amount to an amendment of the by-laws which is needed to
make the position of General Manager a corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in that undated Secretarys
Certificate and the latter itself were obvious fabrications, a mere afterthought. Here we quote with conformity the Court of
Appeals findings on this matter stated in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August 1994], why did not [herein
petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August 1999], when it could have been the best evidence that
[herein respondent] was a corporate officer? Secondly, why did they report the [respondent] instead as [herein petitioner
corporations] employee to the Social Security System [(SSS)] on [11 October 1994] or a later date than their [29 August 1994]
board resolution? Thirdly, why is there no indication that the [respondent], the person concerned himself, and the [SEC] were
furnished with copies of said board resolution? And, lastly, why is the corporate [S]ecretarys [C]ertificate not notarized in
keeping with the customary procedure? That is why we called it manipulative evidence as it was a shameless sham meant to
be thrown in as a wild card to muddle up the [D]ecision of the Labor Arbiter to the end that it be overturned as the latter had
firmly pointed out that [respondent] is not a corporate officer under [petitioner corporations by-laws]. Regrettably, the [NLRC]
swallowed the bait hook-line-and sinker. It failed to see through its nature as a belatedly manufactured evidence. And even on
the assumption that it were an authentic board resolution, it did not make [respondent] a corporate officer as the board did not
first and properly create the position of a [G]eneral [M]anager by amending its by-laws.
(2) The scope of the term "officer" in the phrase "and such other officers as may be provided for in the by-laws["]
(Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of the corporation. (SEC Opinion, [4
December 1991.]) If the by-laws enumerate the officers to be elected by the board, the provision is conclusive, and
the board is without power to create new offices without amending the by-laws. (SEC Opinion, [19 October 1971.])
(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be classified as an
employee although he has always been considered as one of the principal officers of a corporation [citing De Leon,
H. S., The Corporation Code of the Philippines Annotated, 1993 Ed., p. 215.]43 [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner corporation will not automatically make the case fall within
the ambit of intra-corporate controversy and be subjected to RTCs jurisdiction. To reiterate, not all conflicts between the
stockholders and the corporation are classified as intra-corporate. Other factors such as the status or relationship of the parties
and the nature of the question that is the subject of the controversy 44 must be considered in determining whether the dispute
involves corporate matters so as to regard them as intra-corporate controversies. 45 As previously discussed, respondent was
not a corporate officer of petitioner corporation but a mere employee thereof so there was no intra-corporate relationship
between them. With regard to the subject of the controversy or issue involved herein, i.e., respondents dismissal as petitioner
corporations General Manager, the same did not present or relate to an intra-corporate dispute. To note, there was no
evidence submitted to show that respondents removal as petitioner corporations General Manager carried with it his removal
as its director and stockholder. Also, petitioners allegation that respondents claim of 30% share of petitioner corporations net
profit was by reason of his being its director and stockholder was without basis, thus, self-serving. Such an allegation was
tantamount to a mere speculation for petitioners failure to substantiate the same.
In addition, it was not shown by petitioners that the position of General Manager was offered to respondent on account of his
being petitioner corporations director and stockholder. Also, in contrast to NLRCs findings, neither petitioner corporations bylaws nor the Management Contract stated that respondents appointment and termination from the position of General
Manager was subject to the approval of petitioner corporations Board of Directors. If, indeed, respondent was a corporate
officer whose termination was subject to the approval of its Board of Directors, why is it that his termination was effected only
by petitioner Lucila, President of petitioner corporation? The records are bereft of any evidence to show that respondents
dismissal was done with the conformity of petitioner corporations Board of Directors or that the latter had a hand on
respondents dismissal. No board resolution whatsoever was ever presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the General Manager position,
was not a corporate officer of petitioner corporation rather he was merely its employee occupying a high-ranking position.
Accordingly, respondents dismissal as petitioner corporations General Manager did not amount to an intra-corporate
controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the RTC.
Having established that respondent was not petitioner corporations corporate officer but merely its employee, and that,
consequently, jurisdiction belongs to the Labor Arbiter, this Court will now determine if respondents dismissal from employment
is illegal.

It was not disputed that respondent worked as petitioner corporations General Manager from its incorporation on 15 August
1994 until he was dismissed on 30 June 1997. The cause of his dismissal was petitioner corporations cessation of business
operations due to poor sales collection aggravated by the inefficient management of its affairs.
In termination cases, the burden of proving just and valid cause for dismissing an employee from his employment rests upon
the employer. The latter's failure to discharge that burden would necessarily result in a finding that the dismissal is unjustified. 46
Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the employment of an employee
is the closing or cessation of operation of the establishment or undertaking. Article 283 of the Labor Code, as amended, reads,
thus:
ART. 283. Closure of establishment and reduction of personnel. The employer may also terminate the employment of any
employee due to the installation of labor saving-devices, redundancy, retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions
of this Title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month
before the intended date thereof. x x x In case of retrenchment to prevent losses and in cases of closures or cessation of
operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be
equivalent to one (1) month pay or to at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction
of at least six (6) months shall be considered one (1) whole year. [Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of operations of establishment or undertaking may either be due to
serious business losses or financial reverses or otherwise. If the closure or cessation was due to serious business losses or
financial reverses, it is incumbent upon the employer to sufficiently and convincingly prove the same. If it is otherwise, the
employer can lawfully close shop anytime as long as it was bona fide in character and not impelled by a motive to defeat or
circumvent the tenurial rights of employees and as long as the terminated employees were paid in the amount corresponding
to their length of service.47
Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid cessation of business
operations: (a) service of a written notice to the employees and to the Department of Labor and Employment (DOLE) at least
one month before the intended date thereof; (b) the cessation of business must be bona fide in character; and (c) payment to
the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service,
whichever is higher.
In this case, it is obvious that petitioner corporations cessation of business operations was not due to serious business losses.
Mere poor sales collection, coupled with mismanagement of its affairs does not amount to serious business losses.
Nonetheless, petitioner corporation can still validly cease or close its business operations because such right is legally allowed,
so long as it was not done for the purpose of circumventing the provisions on termination of employment embodied in the
Labor Code.48 As has been stressed by this Court in Industrial Timber Corporation v. Ababon, thus:
in doing so, petitioner corporation failed to comply with the one-month prior written notice rule. The records disclosed that
respondent, being petitioner corporations employee, and the DOLE were not given a written notice at least one month before
petitioner corporation ceased its business operations. Moreover, the records clearly show that respondents dismissal was
effected on the same date that petitioner corporation decided to stop and cease its operation. Similarly, respondent was not
paid separation pay upon termination of his employment.
As respondents dismissal was not due to serious business losses, respondent is entitled to payment of separation pay
equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. The rationale for this
was laid down in Reahs Corporation v. National Labor Relations Commission, 50 thus:
The grant of separation pay, as an incidence of termination of employment under Article 283, is a statutory obligation on the
part of the employer and a demandable right on the part of the employee, except only where the closure or cessation of
operations was due to serious business losses or financial reverses and there is sufficient proof of this fact or condition. In the
absence of such proof of serious business losses or financial reverses, the employer closing his business is obligated to pay
his employees and workers their separation pay.
The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the employer, the
affected employee is entitled to separation pay. This is consistent with the state policy of treating labor as a primary social
economic force, affording full protection to its rights as well as its welfare. The exception is when the closure of business or
cessation of operations is due to serious business losses or financial reverses duly proved, in which case, the right of affected
employees to separation pay is lost for obvious reasons.51[Emphasis supplied.]
As previously discussed, respondents dismissal was due to an authorized cause, however, petitioner corporation failed to
observe procedural due process in effecting such dismissal. In Culili v. Eastern Telecommunications Philippines, Inc., 52 this
Court made the following pronouncements, thus:
x x x there are two aspects which characterize the concept of due process under the Labor Code: one is substantive
whether the termination of employment was based on the provision of the Labor Code or in accordance with the prevailing
jurisprudence; the other is procedural the manner in which the dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:
(d) In all cases of termination of employment, the following standards of due process shall be substantially observed:
xxxx
Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It would be stretching the
intent and spirit of the law if a court interferes with management's prerogative to close or cease its business operations just
because the business is not suffering from any loss or because of the desire to provide the workers continued employment. 49
For termination of employment as defined in Article 283 of the Labor Code, the requirement of due process shall be deemed
complied with upon service of a written notice to the employee and the appropriate Regional Office of the Department of Labor
and Employment at least thirty days before effectivity of the termination, specifying the ground or grounds for termination.
A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased business operations
beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-Operation dated 31 August 1998. There was also
no showing that the cessation of its business operations was done in bad faith or to circumvent the Labor Code. Nevertheless,
In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the employees to look for another
employment and therefore ease the impact of the loss of their jobs and the corresponding income, but more importantly, to give
the Department of Labor and Employment (DOLE) the opportunity to ascertain the verity of the alleged authorized cause of
termination.53 [Emphasis supplied].
The records of this case disclosed that there was absolutely no written notice given by petitioner corporation to the respondent
and to the DOLE prior to the cessation of its business operations. This is evident from the fact that petitioner corporation
effected respondents dismissal on the same date that it decided to stop and cease its business operations. The necessary
consequence of such failure to comply with the one-month prior written notice rule, which constitutes a violation of an
employees right to statutory due process, is the payment of indemnity in the form of nominal damages. 54 In Culili v. Eastern
Telecommunications Philippines, Inc., this Court further held:
In Serrano v. National Labor Relations Commission [citation omitted], we noted that "a job is more than the salary that it
carries." There is a psychological effect or a stigma in immediately finding ones self laid off from work. This is exactly why our
labor laws have provided for mandating procedural due process clauses. Our laws, while recognizing the right of employers to
terminate employees it cannot sustain, also recognize the employees right to be properly informed of the impending severance
of his ties with the company he is working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon employers who fail to
comply with the procedural due process requirements in terminating its employees. In Agabon v. National Labor Relations
Commission [citation omitted], this Court reverted back to the doctrine in Wenphil Corporation v. National Labor Relations
Commission [citation omitted] and held that where the dismissal is due to a just or authorized cause, but without observance of
the due process requirements, the dismissal may be upheld but the employer must pay an indemnity to the employee. The
sanctions to be imposed however, must be stiffer than those imposed in Wenphil to achieve a result fair to both the employers
and the employees.
Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences
to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members
and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.
[Emphasis supplied.]
Logically, there is no corporation to speak of prior to an entitys incorporation. And no contract entered into before incorporation
can bind the corporation.
As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed between respondent and
petitioner Lucila months before petitioner corporations incorporation on 15 August 1994. Similarly, it was done when petitioner
Lucila was still the President of Marc Marketing, Inc. Undeniably, it cannot have any binding and legal effect on petitioner
corporation. Also, there was no evidence presented to prove that petitioner corporation adopted, ratified or confirmed the
Management Contract. It is for the same reason that petitioner corporation cannot be considered estopped from questioning its
binding effect now that respondent was invoking the same against it. In no way, then, can it be enforced against petitioner
corporation, much less, its provisions fixing respondents compensation as General Manager to 30% of petitioner corporations
net profit. Consequently, such percentage cannot be the basis for the computation of respondents separation pay. This finding,
however, will not affect the undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from its
incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to conduct further proceedings for
the sole purpose of determining the compensation that respondent was actually receiving during the period that he was the
General Manager of petitioner corporation, this, for the proper computation of his separation pay.
As regards petitioner Lucilas solidary liability, this Court affirms the same.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon, held that since there is a
clear-cut distinction between a dismissal due to a just cause and a dismissal due to an authorized cause, the legal implications
for employers who fail to comply with the notice requirements must also be treated differently:
Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but the employer failed to
comply with the notice requirement, the sanction to be imposed upon him should be tempered because the dismissal process
was, in effect, initiated by an act imputable to the employee; and (2) if the dismissal is based on an authorized cause under
Article 283 but the employer failed to comply with the notice requirement, the sanction should be stiffer because the dismissal
process was initiated by the employer's exercise of his management prerogative.55 [Emphasis supplied.]
Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In conformity with this Courts
ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka
Food Processing Corporation v. Pacot,56 this Court fixed the amount of nominal damages to P50,000.00.
With respect to petitioners contention that the Management Contract executed between respondent and petitioner Lucila has
no binding effect on petitioner corporation for having been executed way before its incorporation, this Court finds the same
meritorious.
Section 19 of the Corporation Code expressly provides:
As a rule, corporation has a personality separate and distinct from its officers, stockholders and members such that corporate
officers are not personally liable for their official acts unless it is shown that they have exceeded their authority. However, this
corporate veil can be pierced when the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a
vehicle for the evasion of an existing obligation, and to confuse legitimate issues. Under the Labor Code, for instance, when a
corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of
the corporation.57
Based on the prevailing circumstances in this case, petitioner Lucila, being the President of petitioner corporation, acted in bad
faith and with malice in effecting respondents dismissal from employment. Although petitioner corporation has a valid cause for
dismissing respondent due to cessation of business operations, however, the latters dismissal therefrom was done abruptly by
its President, petitioner Lucila. Respondent was not given the required one-month prior written notice that petitioner corporation
will already cease its business operations. As can be gleaned from the records, respondent was dismissed outright by
petitioner Lucila on the same day that petitioner corporation decided to stop and cease its business operations. Worse,
respondent was not given separation pay considering that petitioner corporations cessation of business was not due to
business losses or financial reverses.
WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March 2006, respectively, of the
Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the MODIFICATION finding respondents dismissal
from employment legal but without proper observance of due process. Accordingly, petitioner corporation, jointly and solidarily

liable with petitioner Lucila, is hereby ordered to pay respondent the following; (1) separation pay equivalent to one month pay
or at least one-half month pay for every year of service, whichever is higher, to be computed from the commencement of
employment until termination; and (2) nominal damages in the amount of P50,000.00.
This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further proceedings for the sole
purpose of determining the compensation that respondent was actually receiving during the period that he was the General
Manager of petitioner corporation for the proper computation of his separation pay.Costs against petitioners.SO ORDERED.
Case Digest
FACTS: Respondent Alfredo Joson was the General Manager, incorporator, director and stockholder of Marc II Marketing
(petitioner corporation). Before petitioner corporation was officially incorporated, respondent has already been engaged by
petitioner Lucila Joson, in her capacity as President of Marc Marketing Inc., to work as the General Manager of petitioner
corporation through a management contract.
However, petitioner corporation decided to stop and cease its operation wherein respondent's services were then terminated.
Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners before the
Labor Arbiter which ruled in favor of respondent. The National Labor and Relations Commission (NLRC) reversed said
decision. The Court of Appeals (CA) however, upheld the ruling of the Labor Arbiter. Hence, this petition.
ISSUE: Whether or nor the Labor Arbiter has jurisdiction over the controversy at bar
RULING: Yes. While Article 217(a) 229 of the Labor Code, as amended, provides that it is the Labor Arbiter who has the
original and exclusive jurisdiction over cases involving termination or dismissal of workers when the person dismissed or
terminated is a corporate officer, the case automatically falls within the province of the Regional Trial Court (RTC). The
dismissal of a corporate officer is always regarded as a corporate act and/or an intra-corporate controversy.
In conformity with Section 25 of the Corporation Code, whoever are the corporate officers enumerated in the by-laws are the
exclusive officers of the corporation and the Board has no power to create other officers without amending first the corporate
by-laws. However, the Board may create appointive positions other than the positions of the corporate officers, but the persons
occupying such positions are not considered as corporate officers within the meaning of Section 25 of the Corporation Code
and are not empowered to exercise the functions of the corporate officers, except those functions lawfully delegated to them.
Their functioning and duties are to be determined by the Board of Directors/Trustees.
In the case at bar, the respondent was not a corporate officer of petitioner corporation because his position as General
Manager was not specifically mentioned in the roster of corporate officers in its corporate by-laws. Thus respondent, can only
be regarded as its employee or subordinate official. Accordingly, respondent's dismissal as petitioner corporation's General
Manager did not amount to an intra-corporate controversy. Jurisdiction therefore properly belongs with the Labor Arbiter and
not with the RTC.
EN BANC
G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO., INC., vs.TEODORO SANDIKO,
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of Aparri, Province of
Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of Cagayan, a copy of which is in evidence as
Exhibit 1. To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of
the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the
same bank was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan amounting
to P7,000. A third mortgage on the same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These mortgages were registered and annotations thereof appear at the back of transfer
certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by
virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation,
in consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and, to
the condition that the certificate of title to said lands shall not be transferred to the name of the plaintiff company until the latter
has fully and completely paid Tabora's indebtedness to the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on October 22, 1930 (Exhibit 2).
A year later, on October 28, 1931, the board of directors of said company adopted a resolution (Exhibit G) authorizing its
president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were
thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff
sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land described in
transfer certificate in turn obligated himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory
note for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a
deed of mortgage executed before a notary public in accordance with which the four parcels of land were given a security for
the payment of the promissory note, Exhibit C. All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934, brought this action in
the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum of P25,300, with
interest at legal rate from the date of the filing of the complaint, and the costs of the suits. After trial, the court below, on
December 18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion
for new trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year. After due
exception and notice, plaintiff has appealed to this court and makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below, reached the conclusion that Exhibit B is invalid because of
vice in consent and repugnancy to law. While we do not agree with this conclusion, we have however voted to affirm the
judgment appealed from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930
(Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the
transfer was made almost five months before the incorporation of the company. Unquestionably, a duly organized corporation
has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit and
for this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But
before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires
the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all the requirements of
law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it can not be denied that the
plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as
"una sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being in legal existence then, it
did not possess juridical capacity to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner prescribed by law. As has
already been stated, general law authorizing the formation of corporations are general offers to any persons who
may bring themselves within their provisions; and if conditions precedent are prescribed in the statute, or certain acts
are required to be done, they are terms of the offer, and must be complied with substantially before legal corporate
existence can be acquired. (14 C. J., sec. 111, p. 118.)
not having been complied with by the Cagayan Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114,
Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that
the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the time it was affected
the corporation was non-existent, we deem it unnecessary to discuss this point.lawphil.netThe decision of the lower court is
accordingly affirmed, with costs against the appellant. So Ordered.
That a corporation should have a full and complete organization and existence as an entity before it can enter into
any kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has
no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter there is not a corporation nor does it possess franchise or faculties for it or others
to exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance
Company, 107 Ill., 652, 658.)
CASe Diegst
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent
corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these
promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying
that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently
organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but
under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would
result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs. Hapgood, 150 Mass.,
248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel vs. Massachusetts Brick Co., 192
Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed
that Manuel Tabora was the registered owner of the four parcels of land, which he succeeded in mortgaging to the Philippine
National Bank so that he might have the necessary funds with which to convert and develop them into fishery. He appeared to
have met with financial reverses. He formed a corporation composed of himself, his wife, and a few others. From the articles of
incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock subscribed, P45,000 was subscribed by
Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription,
P42,100 is made to appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and the latter was
treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name. The defendant always regarded Tabora as
the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff corporation, intervened only to sign
the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of land,
always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought
against Tabora in the Court of First Instance of Manila and in both cases a writ of attachment against the four parcels of land
was issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko
and succeeded in the making him sign Exhibits B, C, and D and in making him, among other things, assume the payment of
Tabora's indebtedness to the Philippine National Bank. The promisory note, Exhibit C, was made payable to the plaintiff
company so that it may not attached by Tabora's creditors, two of whom had obtained writs of attachment against the four
parcels of land.
Facts: Manuel Tabora is the registered owner of four parcels of land. To guarantee the payment of two loans, Manuel Tabora,
executed in favor of PNB two mortgages over the four parcels of land between August, 1929, and April 1930. Later, a third
mortgage on the same lands was executed also on April, 1930 in favor of Severina Buzon to whom Tabora was indebted.
On May, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by
virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation.
The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry only on October, 1930 (Exhibit
2).
A year later, the board of directors of said company adopted a resolution authorizing its president to sell the four parcels of
lands in question to Teodoro Sandiko. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale
where the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land.
Exhibit C is a promissory note drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof.
Exhibit D is a deed of mortgage executed where the four parcels of land were given a security for the payment of the
promissory note, Exhibit C.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in the Court of First
Instance of Manila praying that judgment be rendered against the defendant for the sum stated in the promissory note. After
trial, the court rendered judgment absolving the defendant. Plaintiff presented a motion for new trial, which motion was denied
by the trial court. After due exception and notice, plaintiff has appealed to this court and makes an assignment of
various errors.
Issue: Whether Exhibit B, the deed of sale executed in favor of Teodoro Sandiko, was valid.
Held: No, it was not.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930
(Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the
transfer was made almost five months before the incorporation of the company.
Unquestionably, a duly organized corporation has the power to purchase and hold such real property as the purposes for which
such corporation was formed may permit and for this purpose may enter into such contracts as may be necessary. But before a
corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing
of articlesof incorporation.
In the case before us it can not be denied that the plaintiff was not yet incorporated when it entered into a contract of sale,
Exhibit A. Not being in legal existence then, it did not possess juridical capacity to enter into the contract.
If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess
any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent
corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a corporations on the other hand.
Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the Cagayan Fishing
Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a condition precedent (condicion
suspensiva), namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank, and that this condition
For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which
no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties.

This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and
when subsequently organized.
There are, of course, exceptions, but under the peculiar facts andcircumstances of the present case we decline to extend
the doctrineof ratification which would result in the commission of injustice or fraud to the candid and unwary.
FIRST DIVISION
related it was upon the request of defendants Barretto and Garcia that plaintiff handled the preparation of the project
study which project study was presented to defendant Caram so the latter was convinced to invest in the proposed
airlines. The project study was revised for purposes of presentation to financiers and the banks. It was on the basis
of this study that defendant corporation was actually organized and rendered operational. Defendants Garcia and
Caram, and Barretto became members of the Board and/or officers of defendant corporation. Thus, not only the
defendant corporation but all the other defendants who were involved in the preparatory stages of the incorporation,
who caused the preparation and/or benefited from the project study and the technical services of plaintiff must be
liable. 4
June 30, 1987

G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners vs. THE HONORABLE COURT OF APPEALS and
ALBERTO V. ARELLANO, respondents.
CRUZ, J.:
We gave limited due course to this petition on the question of the solidary liability of the petitioners with their co-defendants in
the lower court 1 because of the challenge to the following paragraph in the dispositive portion of the decision of the respondent
court: *
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of P50,000.00 for the
preparation of the project study and his technical services that led to the organization of the defendant corporation,
plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact and law because they had no contract whatsoever with the private
respondent regarding the above-mentioned services. Their position is that as mere subsequent investors in the corporation that
was later created, they should not be held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with
Barretto and Garcia, their co-defendants in the lower court, ** who were the ones who requested the said services from the
private respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not appealed the decision of the respondent court
and may, for this reason, be presumed to have accepted the same. For purposes of resolving this case before us, it is not
necessary to determine whether it is the promoters of the proposed corporation, or the corporation itself after its organization,
that shall be responsible for the expenses incurred in connection with such organization.
The only question we have to decide now is whether or not the petitioners themselves are also and personallyliable for such
expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in this wise:
As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the preparation of the project
study and the pre-organizational services in the amount of P50,000.00, not only the defendant corporation but the
other defendants including defendants Caram should be jointly and severally liable for this amount. As we above
It would appear from the above justification that the petitioners were not really involved in the initial steps that finally led to the
incorporation of the Filipinas Orient Airways. Elsewhere in the decision, Barretto was described as "the moving spirit." The
finding of the respondent court is that the project study was undertaken by the private respondent at the request of Barretto
and Garcia who, upon its completion, presented it to the petitioners to induce them to invest in the proposed airline. The study
could have been presented to other prospective investors. At any rate, the airline was eventually organized on the basis of the
project study with the petitioners as major stockholders and, together with Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-organization work of defendant corporation based on his
experience and expertise, hence he was logically compensated in the amount of P200,000.00 shares of stock not as
industrial partner but more for his technical services that brought to fruition the defendant corporation. By the same
token, We find no reason why the plaintiff should not be similarly compensated not only for having actively
participated in the preparation of the project study for several months and its subsequent revision but also in his
having been involved in the pre-organization of the defendant corporation, in the preparation of the franchise, in
inviting the interest of the financiers and in the training and screening of personnel. We agree that for these special
services of the plaintiff the amount of P50,000.00 as compensation is reasonable. 5
The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the organization of the
airline, which were being directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to
speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on
the strength of the project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate
juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona
fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and
directors.
In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the compensation claimed
by the private respondent for the services performed by him in the organization of the corporation. To repeat, the petitioners did
not contract such services. It was only the results of such services that Barretto and Garcia presented to them and which
persuaded them to invest in the proposed airline. The most that can be said is that they benefited from such services, but that
surely is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation,
including those who came in later, and regardless of the amount of their share holdings, would be equally and personally liable
also with the petitioners for the claims of the private respondent.

The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our impression is that it is opposed to the
imposition of solidary responsibility upon the Carams but seems to be willing, in a vague, unexpressed offer of compromise, to
accept joint liability. While it is true that it does here and there disclaim total liability, the thrust of the petition seems to be
against the imposition of solidary liability only rather than against any liability at all, which is what it should have categorically
argued.
P184,878.84 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P50,000.00 for each of the two Cervanteses.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and severally, under the first paragraph of
the dispositive portion of the challenged decision. So holding, we find it unnecessary to examine at this time the rules on
solidary obligations, which the parties-needlessly, as it turns out have belabored unto death.WHEREFORE, the petition is
granted. The petitioners are declared not liable under the challenged decision, which is hereby modified accordingly. It is so
ordered.
xxx xxx xxx
THIRD DIVISION
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M.
MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner, vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA,respondents.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which
modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in
G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's
decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another P20,000.00 to
Constancio B. Maglana as attorney's fees.
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the
Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the defendants
Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the amount of P4,379.21, per
year from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as attorney's fees and
costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The fact that the
properties of the Bormaheco and the Cervanteses were attached and that they were required to file a counterbond in
order to dissolve the attachment, is not an act of bad faith. When a man tries to protect his rights, he should not be
saddled with moral or exemplary damages. Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only secured the
attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for damages in performing an
act which is clearly within its power and which is the reason for its being, then nobody would engage in the insurance
business. No further claim or counter-claim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197,
pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern Air
Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit
A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price
of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965
while the other aircraft, arrived in Manila on July 18,1965.
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the amount of
P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of the amount awarded to
plaintiff as attorney's fees from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed and
issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts
and spare parts.
It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside from
Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross party plaintiff,
Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with interest from the
filing of the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to
expand his airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer,
one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity

agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold
and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and
expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond/note
and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and nature.
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability under the
surety bond in favor of JDA and subsequently collected the proceeds of such reinsurance in the sum of P295,000.00.
Defendants' alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of
the amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to
institute the instant action as it does not stand to be benefited or injured by the judgment.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel
mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to
the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City of
Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law
(Republic Act No. 776), respectively.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants, hence, it
instituted the action is utterly devoid of merit. Plaintiff did not even present any evidence that it is the attorney-in-fact
of the reinsurance company, authorized to institute an action for and in behalf of the latter. To qualify a person to be a
real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of
the right sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held
that the real party in interest is the party who would be benefited or injured by the judgment or the party entitled to
the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a
present substantial interest as distinguished from a mere expectancy or a future, contingent, subordinate or
consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III,
414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a
total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City. The
Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against
Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not privies
to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for recovery
of the sums of money they advanced to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against
all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants
was dismissed. In all other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF
PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER
TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL
COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already
been paid by the reinsurer the sum of P295,000.00 the bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the former was
able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing the total amount of
P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the
reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover
from defendants the amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already
been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the expense
of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by its reinsurer
in the aforesaid amount, as this matter has never been raised by any of the parties herein both in their answers in the court
below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its
reinsurer, still none of the respondents had any interest in the matter since the reinsurance is strictly between the petitioner and
the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled
to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering
that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as has been
paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against defendants,
considering the amount it has realized from the sale of the mortgaged properties? (Record on Appeal, p. 359, Annex
B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA, collected
the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount the bulk of its alleged
liability to JDA under the said surety bond, it is plain that on this score it no longer has any right to collect to the
extent of the said amount.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in similar cases
where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in general applicable to actions or contracts of
reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount paid to
it by the reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer says: The reinsurers opted
instead that the Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance &
Surety Corporation is representing the reinsurers to recover the amount.' In other words, insofar as the amount paid
to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957])
which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals(154 SCRA 650 [1987]):
But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorney-in- fact of
the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right to institute and maintain in its
own name an action for the benefit of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in
his own name instead of that of the principal will not prosper, and this is so even where the name of the principal is
disclosed in the complaint.
Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article
that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by
the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the
deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity
paid is the insurer and not the insured. (Emphasis supplied).
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name
of the real party in interest.' This provision is mandatory. The real party in interest is the party who would
be benefitted or injured by the judgment or is the party entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no
law permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep.
484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R.
No. L- 22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from
the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or
P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized from the sale of the mortgaged chattels
are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record
on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted
payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the reinsurance contract as this is strictly between the petitioner
as insured and the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the
respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of
action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed on the
premise that the evidence on record shows that it is entitled to recover from the counter indemnitors. It does not, however, cite
any grounds except its allegation that respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to
back up its contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the
counter-indemnitors are not liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the execution of
the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the bond
provided that the same would be mortgaged to it, but this was not possible because the planes were still in Japan

and could not be mortgaged here in the Philippines. As soon as the aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have impaired and rendered insufficient the
security under the chattel mortgage and there is thus no other sufficient security for the claim sought to be
enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security for the claim
sought to be enforced by this action, which necessarily means that the indemnity agreement had ceased
to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare
parts, no longer has any further action against the defendants as indemnitors to recover any unpaid
balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure of the
chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the right of
Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any
further action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety
having made of the payments to JDA, the alternative remedies open to Pioneer were as provided in Article
1484 of the New Civil Code, known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and
the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall have no
further action against the purchaser to recover any unpaid balance and any agreement to the contrary is
void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 7956.
The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is
not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor,
having subrogated it in such rights. Nor may the application of the provision be validly opposed on the
ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et al.
v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged these
defendants from any liability as alleged indemnitors. The change of the maturity dates of the obligations of
Lim, or SAL extinguish the original obligations thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three months interval installments,
the first of which shall be due and payable 25 August 1965, the remainder of which ... shall be
due and payable on the 26th day x x x of each succeeding three months and the last of which
shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three month interval installments the
first of which shall be due and payable 4 September 1965, the remainder of which ... shall be
due and payable on the 4th day ... of each succeeding months and the last of which shall be due
and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different
from that fixed in the aforesaid memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the last
installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected twice, were done without
the knowledge, much less, would have it believed that these defendants Maglana (sic). Pioneer's official
Numeriano Carbonel would have it believed that these defendants and defendant Maglana knew of and
consented to the modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this was the extinguishment of the
obligations and of the surety bond secured by the indemnity agreement which was thereby also
extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar
Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension time referred
to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al.
(C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently,
Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors, what it
has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from
liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his codebtors if such payment is made after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by
reason of the filing of the instant case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was to do business through the
corporate vehicle but who failed to incorporate the entity in which they had chosen to invest? How are the losses to
be treated in situations where their contributions to the intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental questions which we believe were resolved erroneously by
the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses
Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as
a consequence of such relationship all must share in the losses and/or gains of the venture in proportion to their contribution.
The petitioner, therefore, questions the appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of
P184,878.74 as correctly found by the trial court, with interest from the filing of the cross-complaints until the amount
is fully paid. Defendant Lim should pay one-half of the said amount to Bormaheco and the Cervanteses and the other
one-half to defendant Maglana. It is established in the records that defendant Lim had duly received the amount of
Pl51,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses,
hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter and the laws of the state relating thereto and not by the
rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held
that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus,
where persons associate themselves together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corporation within the statute, they become in legal effect
partners inter se, and their rights as members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So,
where certain persons associated themselves as a corporation for the development of land for irrigation purposes,
and each conveyed land to the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the corporation, it was treated as a
trustee for the associates in an action between them for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is
that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.
688), and it should be implied only when necessary to do justice between the parties; thus, one who takes no part
except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner
with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied
in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial
despite notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit 58, that the petitioner
received the amount of P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner
Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his
representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and
lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged
on their agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline
business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of public convenience
and necessity as well as the required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in accordance with their agreement and proceeded to acquire the planes
on his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses to set up the
corporation or return the money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party
complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two airplanes and
spare parts from Japan which the latter considered as their lawful contribution and participation in the proposed
corporation to be known as SAL. Arrangements and negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants, defendant Lim in connivance with the plaintiff, signed and
executed the alleged chattel mortgage and surety bond agreement in his personal capacity as the alleged proprietor
of the SAL. The answering defendants learned for the first time of this trickery and misrepresentation of the other,

Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them
to file an adverse claim in the form of third party claim. Notwithstanding repeated oral demands made by defendants
Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by
a statement of accounts, the latter ignored, omitted and refused to comply with them. (Record on Appeal, pp. 341342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created
among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation.
The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting
the sale of the airplanes and spare parts.WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.SO ORDERED
CASE DIGEST
RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE COMMISSION, respondents.
---------------------------G.R. No. L-21221
September 28, 1968
RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO., INC., respondents.
ZALDIVAR, J.:
These two cases, being interrelated, are decided together.
FACTS:
1965: Jacob S. Lim is an owner-operator of Southern Airlines (SAL), a single proprietorship
May 17 1965: Japan Domestic Airlines (JDA) and Lim entered into a sales contract regarding:
2 DC-#A type aircrafts
1 set of necessary spare parts
Total: $ 190,000 in installments
May 22 1965: Pioneer Insurance and Surety Corp. as surety executed its surety bond in favor of JDA on behalf of its
principal Lim
Border Machinery and Heacy Equipment Co, Inc. Francisco and Modesto Cervantes and Constancio Maglana
contributed funds for the transaction based on the misrepresentation of Lim that they will form a new corp.. to expand his
business
Jun 10 1965: Lim as SAL executed in favor of Pioneer a deed of chattel mortgage as security
Restructuring of obligation to change the maturity was done 2x w/o the knowledge of other defendants
made the surety of JDA prescribed so not entitled to reimbursement
Upon default on the 2/8 payments, Pioneer paid for him and filed a petition for the foreclosure of chattel
mortgage as security
CA affirmed Trial of Merits: Only Lim is liable to pay

ISSUE: W/N failure of respondents to incorporate = de facto partnership.
HELD: NO. CA affirmed.
Partnership inter se does NOT necessarily exist, for ordinarily CANNOT be made to assume the relation of partners
as bet. themselves, when their purpose is that no partnership shall exists
Should be implied only when necessary to do justice bet. the parties (i.e. only pretend to make others liable)
Lim never intended to form a corp.
EN BANC
G.R. No. L-20993
September 28, 1968
Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review and set aside the orders of respondent Public
Service Commission, 1 dated August 20, 1962, and February 15, 1963, in PSC Case No. 39716, cancelling and revoking the
certificate of public convenience and necessity and forfeiting the franchise of said petitioner. In the same petition, the petitioner
prayed for the issuance of a writ of preliminary injunction ex partesuspending the effectivity of said orders and/or enjoining
respondents Commission and/or Municipality of Morong, Rizal, from enforcing in any way the cancellation and revocation of
petitioner's franchise and certificate of public convenience during the pendency of this appeal. By resolution of March 12, 1963,
this Court denied the petition for injunction, for lack of merit.
Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review and set aside the decision of the
Commission dated March 13, 1963 in PSC Case No. 62-5143 granting a certificate of public convenience and necessity to
respondent Morong Electric Co., Inc. 2 to operate an electric light, heat and power service in the municipality of Morong, Rizal.
In the petition Rizal Light & Ice Co., Inc. also prayed for the issuance of a writ of preliminary injunction ex parte suspending the
effectivity of said decision. Per resolution of this Court, dated May 6, 1963, said petition for injunction was denied.
The facts, as they appear in the records of both cases, are as follows:
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business address at Morong, Rizal. On August 15, 1949, it
was granted by the Commission a certificate of public convenience and necessity for the installation, operation and
maintenance of an electric light, heat and power service in the municipality of Morong, Rizal.
In an order dated December 19, 1956, the Commission required the petitioner to appear before it on February 18, 1957 to
show cause why it should not be penalized for violation of the conditions of its certificate of public convenience and the
regulations of the Commission, and for failure to comply with the directives to raise its service voltage and maintain them within
the limits prescribed in the Revised Order No. 1 of the Commission, and to acquire and install a kilowattmeter to indcate the
load in kilowatts at any particular time of the generating unit. 3
For failure of the petitioner to appear at the hearing on February 18, 1957, the Commission ordered the cancellation and
revocation of petitioner's certificate of public convenience and necessity and the forfeiture of its franchise. Petitioner moved for
reconsideration of said order on the ground that its manager, Juan D. Francisco, was not aware of said hearing. Respondent

municipality opposed the motion alleging that petitioner has not rendered efficient and satisfactory service and has not
complied with the requirements of the Commission for the improvement of its service. The motion was set for hearing and Mr.
Pedro S. Talavera, Chief, Industrial Division of the Commission, was authorized to conduct the hearing for the reception of the
evidence of the parties. 4
Finding that the failure of the petitioner to appear at the hearing set for February 18, 1957 the sole basis of the revocation of
petitioner's certificate was really due to the illness of its manager, Juan D. Francisco, the Commission set aside its order of
revocation. Respondent municipality moved for reconsideration of this order of reinstatement of the certificate, but the motion
was denied.
In a petition dated June 25, 1958, filed in the same case, respondent municipality formally asked the Commission to revoke
petitioner's certificate of public convenience and to forfeit its franchise on the ground, among other things, that it failed to
comply with the conditions of said certificate and franchise. Said petition was set for hearing jointly with the order to show
cause. The hearings had been postponed several times.
Meanwhile, inspections had been made of petitioner's electric plant and installations by the engineers of the Commission, as
follows: April 15, 1958 by Engineer Antonio M. Alli; September 18, 1959, July 12-13, 1960, and June 21-24, 1961, by Engineer
Meliton S. Martinez. The inspection on June 21-24, 1961 was made upon the request of the petitioner who manifested during
the hearing on December 15, 1960 that improvements have been made on its service since the inspection on July 12-13, 1960,
and that, on the basis of the inspection report to be submitted, it would agree to the submission of the case for decision without
further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to appear. Respondent municipality was then allowed to
present its documentary evidence, and thereafter the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that it had not been furnished with a copy of the
report of the June 21-24, 1961 inspection for it to reply as previously agreed. In an order dated August 25, 1961, petitioner was
granted a period of ten (10) days within which to submit its written reply to said inspection report, on condition that should it fail
to do so within the said period the case would be considered submitted for decision. Petitioner failed to file the reply. In
consonance with the order of August 25, 1961, therefore, the Commission proceeded to decide the case. On July 29, 1962
petitioner's electric plant was burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the inspection reports of its aforenamed engineers,
found that the petitioner had failed to comply with the directives contained in its letters dated May 21, 1954 and September 4,
1954, and had violated the conditions of its certificate of public convenience as well as the rules and regulations of the
Commission. The Commission concluded that the petitioner "cannot render the efficient, adequate and satisfactory electric
service required by its certificate and that it is against public interest to allow it to continue its operation." Accordingly, it ordered
the cancellation and revocation of petitioner's certificate of public convenience and the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision, alleging that before its electric plant was burned
on July 29, 1962, its service was greatly improved and that it had still existing investment which the Commission should
protect. But eight days before said motion for reconsideration was filed, or on September 10, 1962, Morong Electric, having
been granted a municipal franchise on May 6, 1962 by respondent municipality to install, operate and maintain an electric heat,
light and power service in said municipality approved by the Provincial Board of Rizal on August 31, 1962 filed with the
Commission an application for a certificate of public convenience and necessity for said service. Said application was entitled
"Morong Electric Co., Inc., Applicant", and docketed as Case No. 62-5143.
Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is a holder of a certificate of
public convenience to operate an electric light, heat and power service in the same municipality of Morong, Rizal, and that the
approval of said application would not promote public convenience, but would only cause ruinous and wasteful competition.
Although the opposition is dated October 6, 1962, it was actually received by the Commission on November 8, 1962, or twenty
four days after the order of general default was issued in open court when the application was first called for hearing on
October 15, 1962. On November 12, 1962, however, the petitioner filed a motion to lift said order of default. But before said
motion could be resolved, petitioner filed another motion, dated January 4, 1963, this time asking for the dismissal of the
application upon the ground that applicant Morong Electric had no legal personality when it filed its application on September
10, 1962, because its certificate of incorporation was issued by the Securities and Exchange Commission only on October 17,
1962. This motion to dismiss was denied by the Commission in a formal order issued on January 17, 1963 on the premise that
applicant Morong Electric was a de facto corporation. Consequently, the case was heard on the merits and both parties
presented their respective evidence. On the basis of the evidence adduced, the Commission, in its decision dated March 13,
1963, found that there was an absence of electric service in the municipality of Morong and that applicant Morong Electric, a
Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the financial capacity to maintain
said service. These circumstances, considered together with the denial of the motion for reconsideration filed by petitioner in
Case No. 39715 on February, 15, 1963, such that as far as the Commission was concerned the certificate of the petitioner was
already declared revoked and cancelled, the Commission approved the application of Morong Electric and ordered the
issuance in its favor of the corresponding certificate of public convenience and necessity.1awphl.nt
On March 8, 1963, petitioner filed with this Court a petition to review the decision in Case No. 39715 (now G. R. No. L-20993).
Then on April 26, 1963, petitioner also filed a petition to review the decision in Case No. 62-5143 (now G. R. No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner contends: (1) that the Commission acted without
or in excess of its jurisdiction when it delegated the hearing of the case and the reception of evidence to Mr. Pedro S. Talavera
who is not allowed by law to hear the same; (2) that the cancellation of petitioner's certificate of public convenience was
unwarranted because no sufficient evidence was adduced against the petitioner and that petitioner was not able to present
evidence in its defense; (3) that the Commission failed to give protection to petitioner's investment; and (4) that the
Commission erred in imposing the extreme penalty of revocation of the certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the Commission erred in denying petitioner's
motion to dismiss and proceeding with the hearing of the application of the Morong Electric; (2) that the Commission erred in
granting Morong Electric a certificate of public convenience and necessity since it is not financially capable to render the
service; (3) that the Commission erred when it made findings of facts that are not supported by the evidence adduced by the
parties at the trial; and (4) that the Commission erred when it did not give to petitioner protection to its investment a
reiteration of the third assignment of error in the other case.1awphl.nt
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr. Pedro S. Talavera, who conducted the hearings of the
case below, is a division chief, he is not a lawyer. As such, under Section 32 of Commonwealth Act No. 146, as amended, the
Commission should not have delegated to him the authority to conduct the hearings for the reception of evidence of the parties.
We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of Section 32 of Commonwealth Act No. 146, as
amended, 6 the Commission can only authorize a division chief to hear and investigate a case filed before it if he is a lawyer.

However, the petitioner is raising this question for the first time in this appeal. The record discloses that petitioner never made
any objection to the authority of Mr. Talavera to hear the case and to receive the evidence of the parties. On the contrary, we
find that petitioner had appeared and submitted evidence at the hearings conducted by Mr. Talavera, particularly the hearings
relative to the motion for reconsideration of the order of February 18, 1957 cancelling and revoking its certificate. We also find
that, through counsel, petitioner had entered into agreements with Mr. Talavera, as hearing officer, and the counsel for
respondent municipality, regarding procedure in order to abbreviate the proceedings. 7 It is only after the decision in the case
turned out to be adverse to it that petitioner questioned the proceedings held before Mr. Talavera.
This Court in several cases has ruled that objection to the delegation of authority to hear a case filed before the Commission
and to receive the evidence in connection therewith is a procedural, not a jurisdictional point, and is waived by failure to
interpose timely the objection and the case had been decided by the Commission. 8 Since petitioner has never raised any
objection to the authority of Mr. Talavera before the Commission, it should be deemed to have waived such procedural defect,
and consonant with the precedents on the matter, petitioner's claim that the Commission acted without or in excess of
jurisdiction in so authorizing Mr. Talavera should be dismissed. 9
2. Anent the second assigned error, the gist of petitioner's contention is that the evidence consisting of inspection reports
upon which the Commission based its decision is insufficient and untrustworthy in that (1) the authors of said reports had not
been put to test by way of cross-examination; (2) the reports constitute only one side of the picture as petitioner was not able to
present evidence in its defense; (3) judicial notice was not taken of the testimony of Mr. Harry B. Bernardino, former mayor of
respondent municipality, in PSC Case No. 625143 (the other case, G. R. No. L-21221) to the effect that the petitioner had
improved its service before its electric power plant was burned on July 29, 1962 which testimony contradicts the inspection
reports; and (4) the Commission acted both as prosecutor and judge passing judgment over the very same evidence
presented by it as prosecutor a situation "not conducive to the arrival at just and equitable decisions."
Settled is the rule that in reviewing the decision of the Public Service Commission this Court is not required to examine the
proof de novo and determine for itself whether or not the preponderance of evidence really justifies the decision. The only
function of this Court is to determine whether or not there is evidence before the Commission upon which its decision might
reasonably be based. This Court will not substitute its discretion for that of the Commission on questions of fact and will not
interfere in the latter's decision unless it clearly appears that there is no evidence to support it. 10 Inasmuch as the only function
of this Court in reviewing the decision of the Commission is to determine whether there is sufficient evidence before the
Commission upon which its decision can reasonably be based, as it is not required to examine the proof de novo, the evidence
that should be made the basis of this Court's determination should be only those presented in this case before the
Commission. What then was the evidence presented before the Commission and made the basis of its decision subject of the
present appeal? As stated earlier, the Commission based its decision on the inspection reports submitted by its engineers who
conducted the inspection of petitioner's electric service upon orders of the Commission. 11 Said inspection reports specify in
detail the deficiencies incurred, and violations committed, by the petitioner resulting in the inadequacy of its service. We
consider that said reports are sufficient to serve reasonably as bases of the decision in question. It should be emphasized, in
this connection that said reports, are not mere documentary proofs presented for the consideration of the Commission, but are
the results of the Commission's own observations and investigations which it can rightfully take into consideration, 12 particularly
in this case where the petitioner had not presented any evidence in its defense, and speaking of petitioner's failure to present
evidence, as well as its failure to cross-examine the authors of the inspection reports, petitioner should not complain because it
had waived not only its right to cross-examine but also its right to present evidence. Quoted hereunder are the pertinent
portions of the transcripts of the proceedings where the petitioner, through counsel, manifested in clear language said waiver
and its decision to abide by the last inspection report of Engineer Martinez:
Proceedings of December 15, 1960
COMMISSION:
It appears at the last hearing of this case on September 23, 1960, that an engineer of this Commission has been ordered to
make an inspection of all electric services in the province of Rizal and on that date the engineer of this Commission is still
undertaking that inspection and it appears that the said engineer had actually made that inspection on July 12 and 13, 1960.
The engineer has submitted his report on November 18, 1960 which is attached to the records of this case.
ATTY. LUQUE (Councel for Petitioner):
... (W)e respectfully state that while the report is, as I see it attached to the records, clear and very thorough, it was made
sometime July of this year and I understand from the respondent that there is some improvement since this report was made ...
we respectfully request that an up-to-date inspection be made ... . An inspector of this Commission can be sent to the plant and
considering that the engineer of this Commission, Engineer Meliton Martinez, is very acquainted to the points involved we pray
that his report will be used by us for the reason that he is a technical man and he knows well as he has done a good job and I
think our proposition would expedite the matter. We sincerely believe that the inspection report will be the best evidence to
decide this matter.
xxx
xxx
xxx
ATTY. LUQUE:
... This is a very important matter and to show the good faith of respondent in this case we will not even cross-examine the
engineer when he makes a new report. We will agree to the findings and, your honor please, considering as we have
manifested before that Engineer Martinez is an experienced engineer of this Commission and the points reported by Engineer
Martinez on the situation of the plant now will prevent the necessity of having a hearing, of us bringing new evidence and
complainant bringing new evidence. ... .
xxx
xxx
xxx
COMMISSION (to Atty. Luque):

Q
Does the Commission understand from the counsel for applicant that if the motion is granted he will submit
this order to show cause for decision without any further hearing and the decision will be based on the report of the
engineer of this Commission?
A
We respectfully reply in this manner that we be allowed or be given an opportunity just to read the report and
99%, we will agree that the report will be the basis of that decision. We just want to find out the contents of the
report, however, we request that we be furnished with a copy of the report before the hearing so that we will just
make a manifestation that we will agree.
COMMISSION (to Atty. Luque):

Q
In order to prevent the delay of the disposition of this case the Commission will allow counsel for the
applicant to submit his written reply to the report that the engineer of this Commission. Will he submit this case
without further hearing upon the receipt of that written reply?
A
Yes, your honor.
Proceedings of August 25, 1961

ATTY. LUQUE (Counsel for petitioner):
In order to avoid any delay in the consideration of this case we are respectfully move (sic) that instead of our witnesses
testifying under oath that we will submit a written reply under oath together with the memorandum within fifteen (15) days and
we will furnish a copy and upon our submission of said written reply under oath and memorandum we consider this case
submitted. This suggestion is to abbreviate the necessity of presenting witnesses here which may prolong the resolution of this
case.
ATTY. OLIVAS (Counsel for respondent municipality):
I object on the ground that there is no resolution by this Commission on the action to reopen the case and second this case
has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for opposition we respectfully submit to this Commission our motion to submit a
written reply together with a memorandum. Also as stated to expedite the case and to avoid further hearing we will just submit
our written reply. According to our records we are furnished with a copy of the report of July 17, 1961. We submit your honor.
xxx
xxx
Regarding the contention of petitioner that the Commission had acted both as prosecutor and judge, it should be considered
that there are two matters that had to be decided in this case, namely, the order to show cause dated December 19, 1956, and
the petition or complaint by respondent municipality dated June 25, 1958. Both matters were heard jointly, and the record
shows that respondent municipality had been allowed to present its evidence to substantiate its complaint. It can not be said,
therefore, that in this case the Commission had acted as prosecutor and judge. But even assuming, for the sake of argument,
that there was a commingling of the prosecuting and investigating functions, this exercise of dual function is authorized by
Section 17(a) of Commonwealth Act No. 146, as amended, under which the Commission has power "to investigate, upon its
own initiative or upon complaint in writing, any matter concerning any public service as regards matters under its jurisdiction;
to, require any public service to furnish safe, adequate, and proper service as the public interest may require and warrant; to
enforce compliance with any standard, rule, regulation, order or other requirement of this Act or of the Commission ... ." Thus,
in the case of Collector of Internal Revenue vs. Estate of F. P. Buan, L-11438, July 31, 1958, this Court held that the power of
the Commission to cancel and revoke a certificate of public convenience and necessity may be exercised by it even without a
formal charge filed by any interested party, with the only limitation that the holder of the certificate should be given his day in
court.
It may not be amiss to add that when prosecuting and investigating duties are delegated by statute to an administrative body,
as in the case of the Public Service Commission, said body may take steps it believes appropriate for the proper exercise of
said duties, particularly in the manner of informing itself whether there is probable violation of the law and/or its rules and
regulations. It may initiate an investigation, file a complaint, and then try the charge as preferred. So long as the respondent is
given a day in court, there can be no denial of due process, and objections to said procedure cannot be sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-investment rule" enunciated by this Court in Batangas
Transportation Co. vs. Orlanes 16 in this wise:
The Government having taken over the control and supervision of all public utilities, so long as an operator under a
prior license complies with the terms and conditions of his license and reasonable rules and regulations for its
operation and meets the reasonable demands of the public, it is the duty of the Commission to protect rather than to
destroy his investment by the granting of the second license to another person for the same thing over the same
route of travel. The granting of such a license does not serve its convenience or promote the interests of the public.
xxx
COMMISSION:
To give applicant a chance to have a day in court the Commission grants the request of applicant that it be given 10 days within
which to submit a written reply on the report of the engineer of the Commission who inspected the electric service, in the
municipality of Morong, Rizal, and after the submission of the said written reply within 10 days from today this case will be
considered submitted for decision.
The above-quoted manifestation of counsel for the petitioner, specifically the statement referring to the inspection report of
Engineer Martinez as the "best evidence to decide this matter," can serve as an argument against petitioner's claim that the
Commision should have taken into consideration the testimony of Mr. Bernardino. But the primary reasons why the
Commission could not have taken judicial cognizance of said testimony are: first, it is not a proper subject of judicial notice, as
it is not a "known" fact that is, well established and authoritatively settled, without qualification and contention; 13 second, it
was given in a subsequent and distinct case after the petitioner's motion for reconsideration was heard by the Commission en
banc and submitted for decision, 14 and third, it was not brought to the attention of the Commission in this case through an
appropriate pleading. 15
The above-quoted rule, however, is not absolute, for nobody has exclusive right to secure a franchise or a certificate of public
convenience. 17 Where, as in the present case, it has been shown by ample evidence that the petitioner, despite ample time
and opportunity given to it by the Commission, had failed to render adequate, sufficient and satisfactory service and had
violated the important conditions of its certificate as well as the directives and the rules and regulations of the Commission, the
rule cannot apply. To apply that rule unqualifiedly is to encourage violation or disregard of the terms and conditions of the
certificate and the Commission's directives and regulations, and would close the door to other applicants who could establish,
operate and provide adequate, efficient and satisfactory service for the benefit and convenience of the inhabitants. It should be
emphasized that the paramount consideration should always be the public interest and public convenience. The duty of the
Commission to protect investment of a public utility operator refers only to operators of good standing those who comply
with the laws, rules and regulations and not to operators who are unconcerned with the public interest and whose
investments have failed or deteriorated because of their own fault. 18
4. The last assignment of error assails the propriety of the penalty imposed by the Commission on the petitioner that is, the
revocation of the certificate and the forfeiture of the franchise. Petitioner contends that the imposition of a fine would have been
sufficient, as had been done by the Commission in cases of a similar nature.

It should be observed that Section 16(n) of Commonwealth Act No. 146, as amended, confers upon the Commission ample
power and discretion to order the cancellation and revocation of any certificate of public convenience issued to an operator
who has violated, or has willfully and contumaciously refused to comply with, any order, rule or regulation of the Commission or
any provision of law. What matters is that there is evidence to support the action of the Commission. In the instant case, as
shown by the evidence, the contumacious refusal of the petitioner since 1954 to comply with the directives, rules and
regulations of the Commission, its violation of the conditions of its certificate and its incapability to comply with its commitment
as shown by its inadequate service, were the circumstances that warranted the action of the Commission in not merely
imposing a fine but in revoking altogether petitioner's certificate. To allow petitioner to continue its operation would be to
sacrifice public interest and convenience in favor of private interest.
A grant of a certificate of public convenience confers no property rights but is a mere license or privilege, and such
privilege is forfeited when the grantee fails to comply with his commitments behind which lies the paramount interest
of the public, for public necessity cannot be made to wait, nor sacrificed for private convenience. (Collector of
Internal Revenue v. Estate of F. P. Buan, et al., L-11438 and Santiago Sambrano, et al. v. PSC, et al., L-11439 & L11542-46, July 31, 1958)
(T)he Public Service Commission, ... has the power to specify and define the terms and conditions upon which the
public utility shall be operated, and to make reasonable rules and regulations for its operation and the compensation
which the utility shall receive for its services to the public, and for any failure to comply with such rules and
regulations or the violation of any of the terms and conditions for which the license was granted, the Commission has
ample power to enforce the provisions of the license or even to revoke it, for any failure or neglect to comply with
any of its terms and provisions. (Batangas Trans. Co. v. Orlanes, 52 Phil. 455, 460; emphasis supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146, as amended, which provides that a public
utility operator violating or failing to comply with the terms and conditions of any certificate, or any orders, decisions or
regulations of the Commission, shall be subject to a fine and that the Commission is authorized and empowered to impose
such fine, after due notice and hearing. It should be noted, however, that the last sentence of said section states that the
remedy provided therein "shall not be a bar to, or affect any other remedy provided in this Act but shall be cumulative and
additional to such remedy or remedies." In other words, the imposition of a fine may only be one of the remedies which the
Commission may resort to, in its discretion. But that remedy is not exclusive of, or has preference over, the other remedies.
And this Court will not substitute its discretion for that of the Commission, as long as there is evidence to support the exercise
of that discretion by the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any certificate may be granted, authorizing the operation
of a public service, three requisites must be complied with, namely: (1) the applicant must be a citizen of the Philippines or of
the United States, or a corporation or co-partnership, association or joint-stock company constituted and organized under the
laws of the Philippines, sixty per centum at least of the stock or paid-up capital of which belongs entirely to citizens of the
Philippines or of the United States; 19 (2) the applicant must be financially capable of undertaking the proposed service and
meeting the responsibilities incident to its operation; 20 and (3) the applicant must prove that the operation of the public service
proposed and the authorization to do business will promote the public interest in a proper and suitable manner. 21
As stated earlier, in the decision appealed from, the Commission found that Morong Electric is a corporation duly organized
and existing under the laws of the Philippines, the stockholders of which are Filipino citizens, that it is financially capable of
operating an electric light, heat and power service, and that at the time the decision was rendered there was absence of
electric service in Morong, Rizal. While the petitioner does not dispute the need of an electric service in Morong, Rizal, 22 it
claims, in effect, that Morong Electric should not have been granted the certificate of public convenience and necessity
because (1) it did not have a corporate personality at the time it was granted a franchise and when it applied for said certificate;
(2) it is not financially capable of undertaking an electric service, and (3) petitioner was rendering efficient service before its
electric plant was burned, and therefore, being a prior operator its investment should be protected and no new party should be
granted a franchise and certificate of public convenience and necessity to operate an electric service in the same locality.
1. The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a
franchise is a contract, 23 at least two competent parties are necessary to the execution thereof, and parties are not competent
except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the
issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract
as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only
from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise
granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the
Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that
it was a de factocorporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any
contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise
granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission.
Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was
granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when
its certificate of incorporation was issued by the SEC. 24 Before that date, or pending the issuance of said certificate of
incorporation, the incorporators cannot be considered as de facto corporation. 25But the fact that Morong Electric had no
corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and
conditions thereof. This view is sustained by eminent American authorities. Thus, McQuiuin says:
The fact that a company is not completely incorporated at the time the grant is made to it by a municipality to use the
streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the
corporation is organized. And in Illinois it has been decided that the ordinance granting the franchise may be
presented before the corporation grantee is fully organized, where the organization is completed before the passage
and acceptance. (McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be
applied for before the company is fully organized.
A grant of a street franchise is valid although the corporation is not created until afterwards. (Fletcher, Cyclopedia
Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are numerous in support of the proposition that an
ordinance granting a privilege to a corporation is not void because the beneficiary of the ordinance is not fully
organized at the time of the introduction of the ordinance. It is enough that organization is complete prior to the

passage and acceptance of the ordinance. The reason is that a privilege of this character is a mere license to the
corporation until it accepts the grant and complies with its terms and conditions. (Thompson on Corporations, Vol. 4,
3rd Ed., Sec. 2929) 26
For purposes of appeal, what is decisive is that said testimonial evidence provides reasonable support for the Public
Service Commission's findings of financial capacity on the part of applicants, rendering such findings beyond our
power to disturb. (Del Pilar Transit vs. Silva, L-21547, July 15, 1966)
The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown by its action in
prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contract between
the respondent municipality and Morong Electric but also cured the deficiency pointed out by the petitioner in the application of
Morong EIectric. Thus, the Commission did not err in denying petitioner's motion to dismiss said application and in proceeding
to hear the same. The efficacy of the franchise, however, arose only upon its approval by the Commission on March 13, 1963.
The reason is that
It may be worthwhile to mention in this connection that per inspection report dated January 20, 1964 29 of Mr. Meliton Martinez
of the Commission, who inspected the electric service of Morong on January 15-16, 1964, Morong Electric "is serving electric
service to the entire area covered by its approved plan and has constructed its line in accordance with the plans and
specifications approved by the Commission." By reason thereof, it was recommended that the requests of Morong Electric (1)
for the withdrawal of its deposit in the amount of P1,000.00 with the Treasurer of the Philippines, and (2) for the approval of
Resolution No. 160 of the Municipal Council of Morong, Rizal, exempting the operator from making the additional P9,000.00
deposit mentioned in its petition, dated September 16, 1963, be granted. This report removes any doubt as to the financial
capability of Morong Electric to operate and maintain an electric light, heat and power service.
Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to grant electric franchises,
subject to the approval of the provincial board and the President. However, under Section 16(b) of Commonwealth
Act No. 146, as amended, the Public Service Commission is empowered "to approve, subject to constitutional
limitations any franchise or privilege granted under the provisions of Act No. 667, as amended by Act No. 1022, by
any political subdivision of the Philippines when, in the judgment of the Commission, such franchise or privilege will
properly conserve the public interests and the Commission shall in so approving impose such conditions as to
construction, equipment, maintenance, service, or operation as the public interests and convenience may reasonably
require, and to issue certificates of public convenience and necessity when such is required or provided by any law
or franchise." Thus, the efficacy of a municipal electric franchise arises, therefore, only after the approval of the
Public Service Commission. (Almendras vs. Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible with the
holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko 27upon which the petitioner leans heavily
in support of its position. In said case this Court held that a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or transact any business. It should be pointed out,
however, that this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of
promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are
exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its
behalf may be adopted, accepted or ratified by the corporation when organized. 28
2. The validity of the franchise and the corporate personality of Morong Electric to accept the same having been shown, the
next question to be resolved is whether said company has the financial qualification to operate an electric light, heat and power
service. Petitioner challenges the financial capability of Morong Electric, by pointing out the inconsistencies in the testimony of
Mr. Jose P. Ingal, president of said company, regarding its assets and the amount of its initial investment for the electric plant.
In this connection it should be stated that on the basis of the evidence presented on the matter, the Commission has found the
Morong Electric to be "financially qualified to install, maintain and operate the proposed electric light, heat and power service."
This is essentially a factual determination which, in a number of cases, this Court has said it will not disturb unless patently
unsupported by evidence. An examination of the record of this case readily shows that the testimony of Mr. Ingal and the
documents he presented to establish the financial capability of Morong Electric provide reasonable grounds for the above
finding of the Commission.
It is now a very well-settled rule in this jurisdiction that the findings and conclusions of fact made by the Public
Service Commission, after weighing the evidence adduced by the parties in a public service case, will not be
disturbed by the Supreme Court unless those findings and conclusions appear not to be reasonably supported by
evidence. (La Mallorca and Pampanga Bus Co. vs. Mercado, L-19120, November 29, 1965)
3. With the financial qualification of Morong Electric beyond doubt, the remaining question to be resolved is whether, or not, the
findings of fact of the Commission regarding petitioner's service are supported by evidence. It is the contention of the petitioner
that the Commission made some findings of fact prejudicial to its position but which do not find support from the evidence
presented in this case. Specifically, petitioner refers to the statements or findings that its service had "turned from bad to
worse," that it miserably failed to comply with the oft-repeated promises to bring about the needed improvement, that its
equipment is unserviceable, and that it has no longer any plant site and, therefore, has discredited itself. Petitioner further
states that such statements are not only devoid of evidentiary support but contrary to the testimony of its witness, Mr. Harry
Bernardino, who testified that petitioner was rendering efficient and satisfactory service before its electric plant was burned on
July 29, 1962.
On the face of the decision appealed from, it is obvious that the Commission in describing the kind of service petitioner was
rendering before its certificate was ordered revoked and cancelled, took judicial notice of the records of the previous case
(PSC Case No. 39715) where the quality of petitioner's service had been squarely put in issue. It will be noted that the findings
of the Commission were made notwithstanding the fact that the aforementioned testimony of Mr. Bernardino had been
emphasized and pointed out in petitioner's Memorandum to the Commission. 30 The implication is simple: that as between the
testimony of Mr. Bernardino and the inspection reports of the engineers of the Commission, which served as the basis of the
revocation order, the Commission gave credence to the latter. Naturally, whatever conclusion or finding of fact that the
Commission arrived at regarding the quality of petitioner's service are not borne out by the evidence presented in this case but
by evidence in the previous case. 31 In this connection, we repeat, the conclusion, arrived at by the Commission after weighing
the conflicting evidence in the two related cases, is a conclusion of fact which this Court will not disturb.
And it has been held time and again that where the Commission has reached a conclusion of fact after weighing the
conflicting evidence, that conclusion must be respected, and the Supreme Court will not interfere unless it clearly
appears that there is no evidence to support the decision of the Commission. (La Mallorca and Pampanga Bus Co.,
Inc. vs. Mercado, L-19120, November 29, 1965 citing Pangasinan Trans. Co., Inc. vs. Dela Cruz, 96 Phil. 278)
For that matter, petitioner's pretension that it has a prior right to the operation of an electric service in Morong, Rizal, is not
tenable; and its plea for protection of its investment, as in the previous case, cannot be entertained.
WHEREFORE, the two decisions of the Public Service Commission, appealed from, should be, as they are hereby affirmed,
with costs in the two cases against petitioner Rizal Light & Ice Co., Inc. It is so ordered.
EN BANC

G.R. No. 218787, December 08, 2015
LEO Y. QUERUBIN, MARIA CORAZON M. AKOL, AND AUGUSTO C. LAGMAN, Petitioners, v. COMMISSION ON
ELECTIONS EN BANC, REPRESENTED BY CHAIRPERSON J. ANDRES D. BAUTISTA, AND JOINT VENTURE OF
SMARTMATIC-TIM CORPORATION, TOTAL INFORMATION MANAGEMENT CORPORATION, SMARTMATIC
INTERNATIONAL HOLDING B.V. AND JARLTECH INTERNATIONAL CORPORATION, REPRESENTED BY PARTNER
WITH BIGGEST EQUITY SHARE, SMARTMATIC-TIM CORPORATION, ITS GENERAL MANAGER ALASTAIR JOSEPH
JAMES WELLS, SMARTMATIC CHAIRMAN LORD MALLOCH-BROWN, SMARTMATIC-ASIA PACIFIC PRESIDENT
CESAR FLORES, AND ANY OR ALL PERSONS ACTING FOR AND ON BEHALF OF THE JOINT VENTURE, Respondent.
DECISION
VELASCO JR., J.:
Nature of the Case
Before the Court is a petition for certiorari or prohibition under Rule 64 of the Rules of Court, with prayer for injunctive relief,
assailing the validity and seeking to restrain the implementation of the Commission of Elections (COMELEC) en banc's June
29, 2015 Decision1 for allegedly being repugnant to the provisions of Batas Pambansa Blg. 68 (BP 68), otherwise known as
the Corporation Code of the Philippines, and Republic Act No. 9184 (RA 9184) or the Government Procurement Reform Act.
The Facts
On October 27, 2014, the COMELEC en banc, through its Resolution No. 14-0715, released the bidding documents for the
"Two-Stage Competitive Bidding for the Lease of Election Management System (EMS) and Precinct-Based Optical Mark
Reader (OMR) or Optical Scan (OP-SCAN) System."2 Specified in the published Invitation to Bid3 are the details for the lease
with option to purchase, through competitive public bidding, of twenty-three thousand (23,000) new units of precinct-based
OMRs or OP-SCAN Systems, with a total Approved Budget for Contract of P2,503,518,000,4 to be used in the 2016 National
and Local Elections.5 The COMELEC Bids and Awards Committee (BAC) set the deadline for the submission by interested
parties of their eligibility requirements and initial technical proposal on December 4, 2014. 6
The joint venture of Smartmatic-TIM Corporation (SMTC), Smartmatic International Holding B.V., and Jarltech International
Corporation (collectively referred to as "Smartmatic JV") responded to the call and submitted bid for the project on the
scheduled date. Indra Sistemas, S.A. (Indra) and MIRU Systems Co. Ltd. likewise signified their interest in the project, but only
Indra, aside from Smartmatic JV, submitted its bid.7
During the opening of the bids, Smartmatic JV, in a sworn certification, informed the BAC tha't one of its partner corporations,
SMTC, has a pending application with the Securities and Exchange Commission (SEC) to amend its Articles of Incorporation
(AOI), attaching therein all pending documents.8 The amendments adopted as early as November 12, 2014 were approved by
the SEC on December 10, 2014.9 On even date, Smartmatic JV and Indra participated in the end-to-end testing of their initial
technical proposals for the procurement project before the BAC.
Upon evaluation of the submittals, the BAC, through its Resolution No. 1 dated December 15, 2014, declared Smartmatic JV
and Indra eligible to participate in the second stage of the bidding process.10 The BAC then issued a Notice requiring them to
submit their Final Revised Technical Tenders and Price proposals on February 25, 2015, to which the eligible participants
complied. Finding that the joint venture satisfied the requirements in the published Invitation to Bid, Smartmatic JV, on March
26, 2015, was declared to have tendered a complete and responsive Overall Summary of the Financial Proposal. 11 Meanwhile,
Indra was disqualified for submitting a non-responsive bid.12
Subsequently, for purposes of post-qualification evaluation, the BAC required Smartmatic JV to submit additional documents
and a prototype sample of its OMR.13 The prototype was subjected to testing to gauge its compliance with the requirements
outlined in the project's Terms of Reference (TOR).14
After the conduct of post-qualification, the BAC, through Resolution No. 9 dated May 5, 2015, disqualified Smartmatic JV on
two grounds, viz:15
1.
Failure to submit valid AOI; and
2.
The demo unit failed to meet the technical requirement that the system shall be capable of writing all data/files, audit
log, statistics and ballot images simultaneously in at least two (2) data storages.
The ruling prompted Smartmatic JV to move for reconsideration.16 In denying the motion, the BAC, through Resolution No.
1017 dated May 15, 2015, declared that Smartmatic JV complied with the requirements of Sec. 23.1(b) of the Revised
Implementing Rules and Regulations of RA 9184 (GPRA IRR), including the submission of a valid AOI, but was nevertheless
disqualified as it still failed to comply with the technical requirements of the project.18
Aggrieved, Smartmatic JV filed a Protest,19 seeking permission to conduct another technical demonstration of its SAES 1800
plus OMR (OMR+), the OMR Smartmatic JV presented during the public bidding before the COMELEC en banc.20Accordingly,
on June 19, 2015, Smartmatic JV was allowed to prove compliance with the technical specifications for the second time, but
this time before the electoral tribunal's Technical Evaluation Committee (TEC). 21 This was followed, on June 23, 2015, by
another technical demonstration before the Commission en banc at the Advanced Science and Technology Institute (ASTI) at
the University of the Philippines, Diliman, Quezon City.22
Ruling of the COMELEC en banc
Though initially finding that the OMR+'s ability to simultaneously write data in two storage devices could not conclusively be
established,23 the TEC, upon the use of a Digital Storage Oscilloscope (DSO) during the second demonstration, 24determined
that the OMR+ complied with the requirements specified in the TOR.25 Adopting the findings of the TEC as embodied in its
Final Report, the COMELEC en banc, on June 29, 2015, promulgated the assailed Decision granting Smartmatic JV's protest.
The dispositive portion of the Decision reads:26
WHEREFORE, the instant Protest is hereby GRANTED. Accordingly, the Commission hereby declares the Joint Venture of
Smartmatic-TIM Corporation, Total Information Management Corporation, Smartmatic International Holding B.V., and Jarltech
International Corporation, as the bidder with the lowest calculated responsive bid in connection with the public bidding for the
lease with option to purchase of 23,000 new units of precinct-based Optical Mark Reader or Optical Scan System for use in the
May 9, 2016 national and local elections. Corollarily, the scheduled opening of financial proposal and eligibility documents for
the Second Round of Bidding is hereby CANCELLED, with specific instruction for the Bids and Awards Committee
to RETURN to the prospective bidders their respective payments made for the purchase of Bidding Documents pertaining to
the Second Round of Bidding.
Let the Bids and Awards Committee implement this Decision.
SO ORDERED.
The seven-man commission was unanimous in holding that Smartmatic JV's OMR+ sufficiently satisfied the technical
requirements itemized in the TOR, reproducing in the assailed Decision, verbatim and with approbation, the entirety of the
TEC's Final Report, thusly:27
This is to report on the result of the public test conducted on 23 June of the claim of Smartmatic TIM (SMTT) that their
proposed SAES 1800 (PCOS+) has the capability to write ballot images, audit logs, and elections results on two separate
storage (devices) simultaneously.
Technical discussion, demonstrations, and design reviews were conducted over two day period before the actual
demonstration to the Comelec En Banc. These reviews were conducted between SMTT engineers and a team of embedded
electronics design engineers from the Advanced Science and Technology Institute of the Department of Science and
Technology.
Though these reviews are important to validate the behavior and functionality of the PCOS+, the best way to validate the claim
of SMTT is to use a specialized test instrument connected to the actual electrical inputs of both storage cards.
To visualize the electrical signals being sent to the memory cards, an Agilent DSO7054A Digital Storage Oscilloscope (DSO)
from ASTI connected to the same data input line on two SD card adapters with a micro SD card inside. This was done to
simulate an actual SC card and to make the DSO probe connections accessible and secure without modifying anything in the
PCOS+ hardware or software. x x x

During normal operation such as on Election day, when the PCOS+ is accepting ballots from voters, the PCOS+ is designated
to write data on both SD cards after the ballots has been determined to be valid and the voter choices have been shown to the
voter for verification.
The data being written on the storage devices consist mainly of the scanned ballots image of the front and back of the ballot at
200 dots per inch in both the horizontal and vertical dimension with each dot encoded into a 4 bit value corresponding to 16
shades of gray. The other data saved on the storage device consists of the vote interpretation and updates to the audit log.
Each time that data is. written on the two storage device, the date is encrypted and a verification step is done to check that
identical data is written on both devices. The entire write process lasts a few seconds for each ballot.
In challenging the June 29, 2015 Decision, petitioners; filing as taxpayers, alleged that the COMELEC en banc acted with
grave abuse of discretion amounting to lack or excess of jurisdiction in declaring Smartmatic JV as the bidder with the lowest
calculated responsive bid.30 According to petitioners, Smartmatic JV cannot be declared eligible, even more so as the bidder
with the lowest calculated responsive bid, because one of its proponents, SMTC, holding 46.5% of the shares of Smartmatic
JV, no longer has a valid corporate purpose as required under Sec. 14 of BP 68, which pertinently reads:
Section 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities
and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special
law:chanRoblesvirtualLawlibrary
xxxx
xxxx
The DSO display the time dimension on the horizontal axis and the electrical voltage in the vertical axis, the display is
generated left to right over time (earlier events are on the left). The yellow line on top shows the electrical signal on the Data 2
pin of the main storage card and the green line shows the electrical signal on the Data 2 pin of the backup storage card. The
orange dashed horizontal and vertical lines are used for measuring the differences in time and voltage.
2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than
one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary
purpose or purposes: Provided, That a nonstock corporation may not include a purpose which would change or contradict its
nature as such x x x.
As proof, petitioners cite the primary purpose of SMTC as stated in the company's AOI, which was submitted to the COMELEC
on December 4, 2014 as part of the joint venture's eligibility documents. To quote SMTC's primary purpose therein: 31
To do, perform and comply with all the obligations and responsibilities of, and accord legal personality to, the joint venture of
Total Information Management Corporation ("TIM") and Smartmatic International Corporation ("Smartmatic") arising under the
Request for Proposal and the Notice of Award issued by the Commission on Elections ("COMELEC") for the automation of
the 2010 national and local elections ("Project"), including the leasing, selling, importing and/or assembling of automated
voting machines, computer software and other computer services and/or otherwise deal in all kinds of services to be used,
offered or provided to the COMELEC for the preparations and the conduct of the Project including project management
services. (emphasis added)
In concurrence with Commissioner Guia's opinion, petitioners argue that the foregoing paragraph readily evinces that SMTC
was created solely for the automation of the 2010 National and Local Elections, not for any other election. 32Having already
served its purpose, SMTC no longer has authority to engage in business, so petitioners claim. To allow SMTC then to have a
hand in the succeeding elections would be tolerating its performance of an ultra vires act.
The vertical dashed line on the left marks the start of the data being written on the main and backup storage card and the
vertical dashed line on the right marks the ends of the writing operation for one ballot. The time difference in this case is about
2.616 seconds as shown near the bottom left corner of the display.
The yellow and green vertical lines in between the two vertical dashed lines represent the digital ones and zeros being written
on both storage cards. The yellow and green traces are not exactly identical because the main car also contains the operating
system of the PCOS+ and additional data operations are being performed on it. Because the time scale is the same on both
probes, we conclude that the PCOS+ is writing on both cards simultaneously during this time interval.
Notwithstanding Smartmatic JV's compliance with the technical requirements in the TOR, Commissioner Luie Tito F. Guia
(Guia) would nonetheless dissent in part, questioning the sufficiency of the documents submitted by the Smartmatic
JV.28 Taking their cue from Commissioner Guia's dissent, petitioners now assail the June 29, 2015 Decision of the COMELEC
through the instant recourse.
The Issues
Petitioners framed the issues in the extant case in the following wise: 29
A. Procedural Issues
I.
WHETHER OR NOT THE PETITION IS THE PROPER REMEDIAL VEHICLE TO ASSAIL THE SUBJECT DECISION
OF THE COMELEC EN BANC;
II.
WHETHER OR NOT THE SUPREME COURT HAS THE RIGHT AND DUTY TO ENTERTAIN THIS PETITION;
III.
WHETHER OR NOT A JUSTICIABLE CASE OR CONTROVERSY EXISTS;
IV.
WHETHER OR NOT THE CASE OR CONTROVERSY IS RIPE FOR JUDICIAL ADJUDICATION;
V.
WHETHER OR NOT UNDER THE CIRCUMSTANCES, THE RULE ON "HIERARCHY OF COURTS" MAY BE
DISPENSED WITH;
VI.
WHETHER OR NOT THE PETITIONERS POSSESS LOCUS STANDI;
B. Substantive Issues
VII.
VIII.
WHETHER OR NOT THE COMELEC EN BANC ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION IN GRANTING THE PROTEST AS WELL AS IN DECLARING THE JOINT
VENTURE OF SMARTMATIC-TIM CORPORATION, TOTAL INFORMATION MANAGEMENT CORPORATION,
SMARTMATIC INTERNATIONAL HOLDING B.V. AND JARLTECH INTERNATIONAL CORPORATION AS THE
BIDDER WITH THE LOWEST CALCULATED RESPONSIVE BID IN CONNECTION WITH THE PUBLIC BIDDING
FOR THE LEASE WITH OPTION TO PURCHASE OF 23,000 NEW UNITS OF PRECINCT-BASED OPTICAL MARK
READER OR OPTICAL SCAN SYSTEM FOR USE IN THE MAY 9, 2016 NATIONAL AND LOCAL ELECTIONS
WHETHER OR NOT A WRIT OF PRELIMINARY INJUNCTION OR TEMPORARY RESTRAINING ORDER SHOULD
ISSUE
Petitioners hasten to add that without a valid purpose, the company could not have submitted a valid AOI, a procurement
eligibility requirement under Sec. 23.1 (b) of the IRR of RA 9184. For them, the SEC's subsequent approval, on December 10,
2014, of the amendments to SMTC's AOI cannot cure the partner corporation's ineligibility because eligibility is determined at
the time of the opening of the bids, which, in this case, was conducted on December 4, 2014.33
Finally, petitioners contend that SMTC misrepresented itself by leading the BAC to believe that it may cany out the project
despite its limited corporate purpose, and by claiming that it is a Philippine corporation when it is, allegedly, 100% foreignowned.34 They add that misrepresentation is a ground for the procuring agency to consider a bidder ineligible and disqualify it
from obtaining an award or contract.35
In its Comment,36 public respondent COMELEC, through the Office of the Solicitor General (OSG), refuted the arguments of
petitioners on the main postulation that the sole issue raised before the COMELEC en banc was limited to the technical aspect
of the project.37 According to the OSG, the sufficiency of the documents submitted was already decided by the BAC on May 15,
2015 when it partially granted Smartmatic JV's motion for reconsideration through BAC Resolution No. 10. Anent the
procedural issues, the OSG, in its bid to have the case dismissed outright, questioned petitioners' locus standi and failure to
observe the hierarchy of courts.38
Meanwhile, private respondents, in their Comment/Opposition,39 countered that the BAC has thoroughly explained and laid
down the factual and legal basis behind its finding on Smartmatic JV's legal capacity to participate as bidder in the project
procurement; that the issue on SMTC's AOI has been rendered moot by the SEC's subsequent approval on December 10,
2014 of the AOFs amendment broadening the companyjs primary purpose; 40 that SMTC's primary purpose, as amended, now
reads:41
To sell, supply, lease, import, export, develop, assemble, repair and deal with automated voting machines, canvassing
equipment, computer software, computer equipment and all other goods and supplies, and/or to provide, render and deal in all
kinds of services, including project management services for the conduct of elections, whether regular or special, in the

Philippine(s) and to provide Information and Communication Technology (ICT) goods and services to private and government
entities in the Philippines.
that the alleged defect in SMTC's AOI is of no moment since neither the law nor the bidding documents require a bidder to
submit its AOI;42 that even assuming for the sake of argument that SMTC's primary purpose precludes it from further
contracting for the automation of the Philippine elections beyond 2010, its secondary purposes43 and Sec. 42 of BP
6844 authorize the company to do so;45 and that the COMELEC, in fact, has already dealt with SMTC numerous times after the
2010 elections.46
Private respondents would likewise debunk petitioners' allegation that SMTC misrepresented its nationality. They argue that
based on its General Information Sheet (GIS), SMTC is a Filipino corporation, not a foreign one as petitioners alleged.
Moreover, what is only required under RA 9184 is that the nationality of the joint venture be Filipino, and not necessarily that of
its individual proponents.47 In any event, so private respondents claim, the COMELEC, under the law, is not prohibited from
acquiring election equipment from foreign sources, rendering SMTC and even Smartmatic JV's nationality immaterial. 48
Lastly, private respondents pray for the petition's outright dismissal, following petitioner Akol and Lagman's alleged failure to
comply with the rules on verifications, on the submission of certifications against forum-shopping, and on the efficient use of
paper.49
The Court's Ruling
The petition lacks merit.
Rule 64 is not applicable in assailing the COMELEC en banc's Decision granting Smartmatic JV's protest
In arguing for the propriety of the remedial vehicle chosen, petitioners claim that under Rule 64, Sec. 2 of the Rules of Court,
"[a] judgment or final order or resolution of the Commission on Elections x x x may be brought by the aggrieved party
to the Supreme Court on certiorari under Rule 65."50 They postulate that the June 29, 2015 Decision of the COMELEC en
banc declaring Smartmatic JV as the eligible bidder with the lowest calculated responsive bid is a "judgment" within the
contemplation of the rule, and is, therefore, a proper subject of a Rule 64 petition.
The argument fails to persuade.
a. Rule 64 does not cover rulings of the COMELEC in the exercise of its administrative powers
The rule cited by petitioners is an application of the constitutional mandate requiring that, unless otherwise provided by law, the
rulings of the constitutional commissions shall be subject to review only by the Supreme Court on certiorari. A reproduction of
Article IX-A, Section 7 of the 1987 Constitution is in order:
Section 7. Each Commission shall decide by a majority vote of all its Members, any case or matter brought before it within sixty
days from the date of its submission for decision or resolution. A case or matter is deemed submitted for decision or resolution
upon the filing of the last pleading, brief, or memorandum required by the rules of the Commission or by the Commission
itself. Unless otherwise provided by this Constitution or by law, any decision, order, or ruling of each Commission may
be brought to the Supreme Court on certiorari by the aggrieved party within thirty days from receipt of a copy thereof.
(emphasis added)
Though the provision appears unambiguous and unequivocal, the Court has consistently held that the phrase "decision, order,
or ruling" of constitutional commissions, the COMELEC included, that may be brought directly to the Supreme Court on
certiorari is not all-encompassing, and that it only relates to those rendered in the commissions' exercise ofadjudicatory or
quasi-judicial powers.51 In the case of the COMELEC, this would limit the provision's coverage to the decisions, orders, or
rulings issued pursuant to its authority to be the sole judge of generally all controversies and contests relating to the elections,
returns, and qualifications of elective offices.52
Consequently, Rule 64, which complemented the procedural requirement under Article IX-A, Section 7, should likewise be read
in the same sensethat of excluding from its coverage decisions, rulings, and orders rendered by the COMELEC in the
exercise of its administrative functions. In such instances, a Rule 65 petition for certiorari is the proper remedy. As held
in Macabago v. COMELEC:53
[A] judgment or final order or resolution of the COMELEC may be brought by the aggrieved party to this Court on certiorari
under Rule 65, as amended, except as therein provided. We ruled in Elpidio M. Salva, et al. vs. Hon. Roberto L. Makalintal, et
al. (340 SCRA 506 (2000) that Rule 64 of the Rules applies only to judgments or final orders of the COMELEC in the exercise
of its quasi-judicial functions. The rule does not apply to interlocutory orders of the COMELEC in the exercise of its quasijudicial functions or to its administrative orders. In this case, the assailed order of the COMELEC declaring private respondents
petition to be one for annulment of the elections or for a declaration of a failure of elections in the municipality and ordering the
production of the original copies of the VRRs for the technical examination is administrative in nature. Rule 64, a procedural
device for the review of final orders, resolutions or decision of the COMELEC, does not foreclose recourse to this Court under
Rule 65 from administrative orders of said Commission issued in the exercise of its administrative function.
As applied herein, recall that the instant petition revolves around the issue on whether or not Smartmatic JV is eligible to
participate in the bidding process for the COMELEC's procurement of 23,000 units of optical mark readers. The case does not
stem from an election controversy involving the election, qualification, or the returns of an elective office. Rather, it pertains to
the propriety of ihe polling commission's conduct of the procurement process, and its initial finding that Smartmatic JV is
eligible to participate therein. It springs from the COMELEC's compliance with the Constitutional directive to enforce and
administer all laws and regulations relative to the conduct of an election.54 Specifically, it arose from the electoral commission's
exercise of Sec. 12 of RA 8436, otherwise known as the Automated Elections Law, as amended by RA 9369,55 which
authorized the COMELEC "to procure, in accordance with existing laws, by purchase, lease, rent or other forms of
acquisition, supplies, equipment, materials, software, facilities, and other services, from local or foreign sources free
from taxes and import duties, subject to accounting and auditing rules and regulation."
The subject matter of Smartmatic JV's protest, therefore, does not qualify as one necessitating the COMELEC's exercise of its
adjudicatory or quasi-judicial powers that could properly be the subject of a Rule 64 petition, but is, in fact, administrative in
nature. Petitioners should then have sought redress via a petition for the issuance of the extraordinary writ of certiorari under
Rule 65 to assail the COMELEC en banc's June 29, 2015 Decision granting the protest. As a caveat, however, the writ will only
lie upon showing that the COMELEC acted capriciously or whimsically, with grave abuse of discretion amounting to lack or
excess of jurisdiction in issuing the Decision, such as where the power is exercised in an arbitrary or despotic manner by
reason of passion or personal hostility. The abuse of discretion must be so patent and gross as to amount to an evasion of
positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law.56 Mere abuse of
discretion will not suffice.
It goes without saying that petitioners' action, having been lodged through an improper petition, is susceptible to outright
dismissal. As the Court held in Pates v. COMELEC,57 a Rule 64 petition cannot simply be equated to Rule 65 even if it
expressly refers to the latter rule.58 The clear distinction between the instant, petition and Pates, however, is that in Pates,
therein petitioner failed to present an exceptional circumstance or any compelling reason that would have warranted the liberal
application of the Rules of Court. In stark contrast, herein petitioners, as will later on be discussed, were able to establish a
meritorious case for the relaxation of the rules, relieving them from the rigid application of procedural requirements. We
therefore treat the instant recourse as one filed not merely in relation to, but under Rule 65.
This brings us now to the question on where the petition ought to have been filed.
b. Jurisdiction of the RTC over rulings of the head of the procuring entity relating to procurement protests
Guilty of reiteration, the COMELEC en banc was not resolving an election controversy when it resolved the protest, but was
merely performing its function to procure the necessary election paraphernalia for the conduct of the 2016 National and Local
Elections. This power finds statutory basis in Sec. 12 of RA 8436,59 as amended, which reads:
SEC. 12. Procurement of Equipment and Materials. - To achieve the purpose of this Act, the Commission is authorized to
procure, in accordance with existing laws, by purchase, lease, rent or other forms of acquisition, supplies, equipment,
materials, software, facilities, and other service, from local or foreign sources free from taxes and import duties, subject
to accounting and auditing rules and regulation. With respect to the May 10, 2010 election and succeeding electoral exercises,
the system procured must have demonstrated capability and been successfully used in a prior electoral exercise here or board.
Participation in the 2007 pilot exercise shall not be conclusive of the system's fitness.
In determining the amount of any bid from a technology, software or equipment supplier, the cost to the government of its
deployment and implementation shall be added to the bid price as integral thereto. The value of any alternative use to which
such technology, software or equipment can be put for public use shall not be deducted from the original face value of the said
bid. (emphasis added)

In Pabillo v. COMELEC,60 the Court held that the "existing laws" adverted to in the provision is none other than RA 9184. The
law is designed to govern all cases of procurement of the national government, its departments, bureaus, offices and agencies,
including state universities and colleges, government-owned and/or-controlled corporations, government financial institutions
and local government units.61 It mandates that as a general rule, all government procurement must undergo competitive
bidding62 and for purposes of conducting the bidding process, the procuring entity convenes a BAC.
The BAC is tasked to oversee the entire procuring process, from advertisement of the project to its eventual award. 63 It is the
first to rule on objections or complaints relating to the conduct of the bidding process, subject to review by the head of the
procuring entity via protest. As outlined in RA 9184, the protest mechanism in procurement processes is as follows:
ARTICLE XVII
PROTEST MECHANISM
Section 55. Protests on Decisions of the BAC. - Decisions of the BAC in all stages of procurement may beprotested to the
head of the procuring entity and shall be in writing. Decisions of the BAC may be protested by filing, a verified position paper
and paying a non-refundable protest fee. The amount of the protest fee and the periods during which the protests may be filed
and resolved shall be specified in the IRR.
Section 56. Resolution of Protests. - The protest shall be resolved strictly on the basis of records of the, BAC. Up to a certain
amount to be specified in the IRR, the decisions of the Head of the Procuring Entity shall be final.
Section 57. Non-interruption of the Bidding Process. - In no case shall any protest taken from any decision treated in this
Article stay or delay the bidding process. Protests must first be resolved before any award is made.
Section 58. Resort to Regular Courts; Certiorari. - Court action may be resorted to only after the protests contemplated in this
Article shall have been completed. Cases that are filed in violation of the process specified in this Article shall be
dismissed for lack of jurisdiction. The regional trial court shall have jurisdiction over final decision of the head of the
procuring entity. Court actions shall be governed by Rule 65 of the 1997 Rules of Civil Procedure.
This provision is without prejudice to any law conferring on the Supreme court the sole jurisdiction to issue temporary
restraining orders and injunctions relating to Infrastructure Projects of Government. (emphasis added)
Thus, under Sec. 58, the proper remedy to question the ruling of the head of the procuring entity is through a Rule 65 petition
for certiorari with the Regional Trial Court (RTC). The term "procuring entity" is defined under the RA 9184 as "any branch,
department, office, agency, or instrumentality of the government, including state universities and colleges,
government-owned and/or -controlled corporations, government financial institutions, and local government units
procuring Goods, Consulting Services and Infrastructure Projects."64 This statutory definition makes no distinction as to
whether or not the procuring entity is a constitutional commission under Article IX of the Constitution. It is broad enough to
include the COMELEC within the contemplation of the term. Hence, under the law, grievances relating to the COMELEC
rulings in protests over the conduct of its project procurement should then be addressed to the RTC.
The mandatory recourse to the RTC in the appeal process applicable to COMELEC procurement project is not a novel
development introduced by RA 9184. Even prior to the advent of the government procurement law, the requirement already
finds jurisprudential support in Filipinas Engineering and Machine Shop v. Ferrer,65 wherein the Court expounded this way:
[I]t has been consistently held that it is the Supreme Court, not the Court of First Instance, which has exclusive jurisdiction to
review on certiorari final decisions, orders or rulings of the COMELEC relative to the conduct of elections and enforcement of
election laws.
We are however, far from convince[d] that an order of the COMELEC awarding a contract to a private party, as a result of its
choice among various proposals submitted in response to its invitation to bid comes within the purview of a "final order" which
is exclusively and directly appealable to this court on certiorari. What is contemplated by the term "final orders, rulings and
decisions" of the COMELEC reviewable by certiorari by the Supreme Court as provided by law are those rendered in actions or
proceedings before the COMELEC and taken cognizance of by the said body in the exercise of its adjudicatory or quasi-judicial
powers.
xxxx
[T]he order of the Commission granting the award to a bidder is not an order rendered in a legal contrpversy before it wherein
the parties filed their respective pleadings and presented evidence after which the questioned order was issued; and that this
order of the commission was issued pursuant to its authority to enter into contracts in relation to election purposes. In
short, the COMELEC resolution awarding the contract in favor of Acme was not issued pursuant to its quasi-judicial
functions but merely as an incident of its inherent administrative functions over the conduct of elections, and hence,
the said resolution may not be deemed as a "final order" reviewable by certiorari by the Supreme Court. Being nonjudicial in character, no contempt may be imposed by the COMELEC from said order, and no direct and exclusive appeal by
certiorari to this Tribunal lie from such order. Any question arising from said order may be well taken in an ordinary civil
action before the trial courts. (emphasis added)
Additionally, even if the Court treats the protest proceeding as part of the procuring agency's adjudicatory function, the Court
notes that Sec. 58 of RA 9184 would nevertheless apply, and the RTC would still have jurisdiction, pursuant to the proviso
"unless otherwise provided by law" as appearing in Article IX-A, Section 7 of the Constitution. In this case, the pertinent law
provides that insofar as rulings of the COMELEC in procurement protests are concerned, said rulings can be challenged
through a Rule 65 certiorari with the RTC.
c. The protest mechanism under RA 9184 can only be availed of by a losing bidder
Nevertheless, the application of Sec. 58 of RA 9184 has to be qualified. It cannot, in all instances, be the proper remedy to
question the rulings of the heads of procuring entities in procurement protests. As in the prior case of Roque v.
COMELEC,66 which similarly dealt with COMELEC procurement of OMRs the Court held that only a losing bidder would be
aggrieved by, and ergo would have the personality to challenge, the head of the procuring entity's ruling in the protest. This is
bolstered by the GPRA IRR, which fleshed out the provisions of RA 9184 thusly:
RULE XVII - PROTEST MECHANISM
Section 55. Protests on Decisions of the BAC
55.1. Decisions of the BAC at any stage of the procurement process may be questioned by filing a request for reconsideration
within the three (3) calendar days upon receipt of written notice or upon verbal notification. The BAC shall decide on the
request for reconsideration within seven (7) calendar days from receipt thereof.
If a failed bidder signifies his intent to file a request for reconsideration, the BAC shall keep the bid envelopes of the said
failed bidder unopened and/or duly sealed until such time that the request for reconsideration has been resolved.
55.2. In the event that the request for reconsideration is denied, decisions of the BAC may be protested in writing to the Head
of the Procuring Entity: Provided, however, That a prior request for reconsideration should have been filed by the party
concerned in accordance with the preceding Section, and the same has been resolved.
55.3. The protest must be filed within seven (7) calendar days from receipt by the party concerned of the resolution of
the BAC denying its request for reconsideration. A protest may be made by filing a verified position paper with the Head of the
Procuring Entity concerned, accompanied by the payment of a non-refundable protest fee. The non-refundable protest fee shall
be in an amount equivalent to no less than one percent (1%) of the ABC.
55.4. The verified position paper shall contain the following information:chanRoblesvirtualLawlibrary
a) The name of bidder;
b) The office address of the bidder;
c) The name of project/contract;
d) The implementing office/agency or procuring entity;
e) A brief statement of facts;
f) The issue to be resolved; and
g) Such other matters and information pertinent and relevant to the proper resolution of the protest.
The position paper is verified by an affidavit that the affiant has read and understood the contents thereof and that the
allegations therein are true and correct of his personal knowledge or based on authentic records. An unverified position paper
shall be considered unsigned, produces no legal effect, and results to the outright dismissal of the protest.

important reasons clearly and especially set out in the petition that would justify the same. 75
xxxx
Section 58. Resort to Regular Courts; Certiorari
58.1. Court action may be resorted to only after the protests contemplated in this Rule shall have been completed, i.e.,
resolved by the Head of the Procuring Entity with finality. The regional trial court shall have jurisdiction over final decisions of
the Head of the Procuring Entity. Court actions shall be governed by Rule 65 of the 1997 Rules of Civil Procedure. (emphasis
added)
Evidently, the remedy of certiorari filed before the RTC under Sec. 58 of RA 9184 is intended as a continuation of the motion for
reconsideration filed before the BAC, and of the subsequent protest filed with the head of the procuring entity. This is confirmed
by the condition sine qua non completion of the process under Rule XVII, Secs. 55-57 of the GPRA IRR before recourse to the
trial courts become available.
It is obvious under Sec. 55.1 of Rule XVII that only a failed bidder can turn the cogs of the protest mechanism by first moving
for reconsideration of the assailed BAC ruling. The party concerned, the bidder adversely affected by the resolution of the
motion, shall then have seven (7) days to file a protest with the head of the procuring entity. The prerequisite that a protestant
should likewise be a bidder is emphasized by Sec. 55.4 which requires that the "name of the bidder" and the "office address
of the bidder" be indicated in its position paper. Accordingly, only the bidder against whom the head of the procuring
entity ruled, if it would challenge the ruling any further, is required to resort to filing a petition for certiorari before the
trial courts under Sec. 58. Ego, there is neither rhyme nor reason for petitioners herein, who are non-participants in the
procurement project, to comply with the rules on protest under RA 9184, part and parcel of which is the exclusivity of the
jurisdiction of the RTC under Sec. 58 thereof. Stated in the alternative, there is no legislative enactment requiring petitioners to
seek recourse first with the RTC to question the COMELEC en banc's June 29, 2015 Decision. Thus, if circumstances so
warrant, direct resort to the Court will be allowed.
d. Hierarchy of courts and the exceptions to the doctrine
The expanded concept of judicial power under Article VIII, Section 1 of the Constitution 67 includes the duty of the judiciary not
only "to settle actual controversies involving rights which are legally demandable and enforceable" but also, as an instrument of
checks and balances, "to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the Government." 68 Under Rule 65 of the Rules of Court, the special
civil actions for certiorari and prohibition are the available remedies for determining and correcting such grave abuses of
discretion.
The power is wielded not by the Court alone, but concurrently with the Court of Appeals and the Regional Trial Courts, as
provided by law. With respect to the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the appellate
court original jurisdiction to issue, among others, a writ of certiorari, whether or not in aid of its appellate jurisdiction. For the
RTCs, the power to issue a writ of certiorari, in the exercise of their original jurisdiction, is provided under Section 21 of BP
129.69 Additionally, the Court has already held that the CTA, by constitutional mandate, is likewise vested with jurisdiction to
issue writs of certiorari.70 So too has the Sandiganbayan been vested with certiorari powers in aid of its appellate jurisdiction. 71
Notwithstanding the non-exclusivity of the original jurisdiction over applications for the issuance of writs of certiorari, however,
the doctrine of hierarchy of courts dictates that recourse must first be made to the lower-ranked court exercising concurrent
jurisdiction with a higher court.72 The rationale behind the principle is explained in Baez, Jr. v. Conception73 in the following
wise:
The Court must enjoin the observance of the policy on the hierarchy of courts, and now affirms that the policy is not to be
ignored without serious consequences. The strictness of the policy is designed to shield the Court from having to deal with
causes that are also well within the competence of the lower courts, and thus leave time to the Court to deal with the more
fundamental and more essential tasks that the Constitution has assigned to it. The Court may act on petitions for the
extraordinary writs of certiorari, prohibition and mandamus only when absolutely necessary or when serious and important
reasons exist to justify an exception to the policy.
Petitioners do not have the absolute and unrestrained freedom of choice of the court to which an application for certiorari will
be directed.74 Indeed, referral to the Supreme Court as the court of last resort will simply be empty rhetoric if party-litigants are
able to flout judicial hierarchy at will. The Court reserves the direct invocation of its jurisdiction only when there are special and
In the leading case of The Diocese of Bacolod v. Comelec,76 the Court enumerated the specific instances when direct resort to
this Court is allowed, to wit:
(a)
When there are genuine issues of constitutionality that must be addressed at the most immediate time;
(b)When the issues involved are of transcendental importance;
(c) Cases of first impression;
(d) When the constitutional issues raised are best decided by this Court;
(e) When the time element presented in this case cannot be ignored;
(f) When the petition reviews the act of a constitutional organ;
(g) When there is no other plain, speedy, and adequate remedy in the ordinary course of law;
(h) When public welfare and the advancement of public policy so dictates, or when demanded by the broader interest
of justice;
(i) When the orders complained of are patent nullities; and
(j) When appeal is considered as clearly an inappropriate remedy.
(b)
The Court finds the second and fifth, and sixth grounds applicable in the case at bar. Much has already been said of the
"compelling significance and the transcending public importance" of the primordial issue underpinning petitions that assail
election automation contracts: the success and the far-reaching grim implications of the failureof the nationwide automation
project.77 So it is that the Court, in the growing number of cases concerning government procurement of election paraphernalia
and services, has consistently exhibited leniency and dispensed of procedural requirements for petitioners to successfully
lodge certiorari petitions.78 Technicalities should not stand in the way of resolving the substantive issues petitioners raised
herein. On this same ground of transcendental importance, the Court may opt to treat the instant petition as one for certiorari
under, not merely in relation to, Rule 65.
As regards the fifth ground, the time element, it is sufficient to state that with the 2016 polls visible in the horizon, the posthaste resolution of this case becomes all the more imperative. It would be the height of absurdity to require petitioners to
undergo scrutiny through the lens of the RTC first, considering that the acquisition of 23,000 OMRs would, at the minimum,
affect the clustering of precincts. Without the finalized list of clustered precincts, the polling place for the registered voters could
not yet be ascertained. Needless to state, this would impede the preparations for the conduct of the polls and its unmitigated
effects could very well lead to mass disenfranchisement of voters.
Lastly, the sixth ground is indubitably applicable. The rulings of the COMELEC, as a constitutional body, can immediately be
reviewed by the Court on proper petition. As quoted in The Diocese of Bacolod v. COMELEC,79 citing Albano v. Arranz,80 "it is
easy to realize the chaos that would ensue if the Court of First Instance of each and every province were [to] arrogate
itself the power to disregard, suspend, or contradict any order of the Commission on Elections: that constitutional
body would be speedily reduced to impotence."
In sum, there exist ample compelling reasons to justify the direct resort to the Court as a departure from the doctrine of
hierarchy of courts not in relation to but under Rule 65 of the Rules of Court on certiorari and prohibition, and to brush aside the
procedural issues in this case to focus on the substantive issues surrounding the procurement of the 23,000 additional OMRs
for the 2016 elections.
The submission of an AOI is not an eligibility criterion
It bears stressing on the outset that no issue has been brought forth questioning the technical capability of Smartmatic JV's
0MR+. Instead, the pivotal point to be resolved herein is whether or not the COMELEC acted with grave abuse of discretion in
declaring Smartmatic JV eligible in spite of the alleged nullity of, or defect in, SMTC's AOI.
Petitioner would first insist that the submission of an AOI is an eligibility requirement that Smartmatic JV cannot be deemed to
have complied with. In addressing this assertion, a discussion of the qualification process is apropos.
a. The submission of an AOI was not a pre-qualification requirement

It is a basic tenet that except only in cases in which alternative methods of procurement are allowed, all government
procurement shall be done by competitive bidding. This is initiated by the BAC, which publishes an Invitation to Bid for
contracts under competitive bidding in order to ensure the widest possible dissemination thereof.81
Answering the invitation, interested participants submit their bids using the forms specified in the bidding documents in two (2)
separate sealed bid envelopes submitted simultaneously. The first contains the technical component of the bid, including the
eligibility requirements under Section 23.1 of GPRA IRR, while the second contains the financial component of the bid. 82
The BAC then sets out to determine the eligibility of the prospective bidders based on their compliance with the eligibility
requirements set forth in the Invitation to Bid and their submission of the legal, technical and financial documents required
under RA 9184 and the GPRA IRR.83 The first screening is done via the pre-qualification stage as governed by Sec. 30.1 of RA
9184's IRR, which pertinently reads:
Section 30. Preliminary Examination of Bids
30.1. The BAC shall open the first bid envelopes of prospective bidders in public to determine each bidder's compliance with
the documents required to be submitted for eligibility and for the technical requirements, as prescribed in this IRR. For this
purpose, the BAC shall check the submitted documents of each bidder against a checklist of required documents to
ascertain if they are all present, using a nondiscretionary "pass/fail" criterion, as stated in the Instructions to Bidders. If a
bidder submits the required document, it shall be rated "passed" for that particular requirement. In this regard, bids that fail to
include any requirement or are incomplete or patently insufficient shall be considered as "failed". Otherwise, the BAC shall rate
the said first bid envelope as "passed." (emphasis added)
For the procurement of highly technical goods wherein the two-stage bidding process is employed, such as the subject of
procurement in this case, the same procedure for pre-qualification outlined above is followed in the first stage, except that the
technical specifications are only in the form of performance criteria, and that the technical proposals will not yet include price
tenders.84
Based on the rule, the BAC's function in determining the eligibility of a bidder during pre-qualification is ministerial in the sense
that it only needs to countercheck the completeness and sufficiency of the documents submitted by a bidder against a checklist
of requirements. It cannot, therefore, declare a bidder ineligible for failure to submit a document which, in the first place, is not
even required in the bid documents.
Citing Sec. 23.1 (b) of the GPRA IRR, petitioners contend that an AOI is one of such mandatory documentary requirements
and that the failure of a bidder to furnish the BAG a valid one would automatically render the bidder ineligible.
We are not convinced.
Sec. 23 of the adverted GPRA IRR reads:
Section 23. Eligibility Requirements for the Procurement of Goods and Infrastructure Projects
23.1. For purposes of determining the eligibility of bidders using the criteria stated in Section 23.5 of this IRR, only the following
documents shall be required by the BAC, using the forms prescribed in the Bidding Documents:chanRoblesvirtualLawlibrary
iv) Statement of the prospective bidder of all its ongoing government and private contracts, including contracts awarded but not
yet started, if any, whether similar or not similar in nature and complexity to the contract to be bid; and Statement identifying the
bidder's single largest completed contract similar to the contract to be bid, except under conditions provided for in Section
23.5.1.3 of this IRR, within the relevant period as provided in the Bidding Documents in the case of goods. All of the above
statements shall include all information required in the PBDs prescribed by the GPPB.
v) In the case of procurement of infrastructure projects, a valid Philippine Contractors Accreditation Board (PCAB) license and
registration for the type and cost of the contract to be bid.
Financial Documents
vi) The prospective bidder's audited financial statements, showing, among others, the prospective bidder's total and current
assets and liabilities, stamped "received" by the BIR or its duly accredited and authorized institutions, for the preceding
calendar year which should not be earlier than two (2) years from the date of bid submission.
vii) The prospective bidder's computation for its Net Financial Contracting Capacity (NFCC).
b) Class "B" Document
Valid joint venture agreement (JVA), in case the joint venture is already in existence. In the absence of a JVA, duly
notarized statements from all the potential joint venture partners stating that they will enter into and abide by the
provisions of the JVA in the instance that the bid is successful shall be included in the bid. Failure to enter into, a joint
venture in the event of a contract award shall be ground for the forfeiture of the bid security. Each partner of the joint venture
shall submit the legal eligibility documents. The submission of technical and financial eligibility documents by any of the
joint venture partners constitutes compliance. (emphasis added)
Clearly, the quoted provisions, as couched, do not require the submission of an AOI in order for a bidder to be declared eligible.
The requirement that bears the most resemblance is the submission by each partner to the venture of a registration certificate
issued by the Securities and Exchange Commission, but compliance therewith was never disputed by the petitioners.
Moreover, it was never alleged that Smartmatic JV was remiss in submitting a copy of its joint venture agreement pursuant to
Sec. 23.1(b), which petitioners specifically invoked.
It may be that the procuring entity has the option to additionally require the submission of the bidders' respective AOIs in order
to substantiate the latter's claim of due registration with the government entities concerned. However, a perusal of the bidding
documents would readily reveal that the procuring entity, the COMELEC in this case, did not impose such a requirement. As
can be gleaned in the Instruction to Bidders,85 only the following documents were required for purposes of determining a
bidder's eligibility:
12. Documents Comprising the Bid: Eligibility and Technical Components
12.1. Unless otherwise indicated in the BDS, the first envelope shall contain the following eligibility and technical
documents:chanRoblesvirtualLawlibrary
(a) Eligibility Documents -
a) Class "A" Documents

Class "A" Documents:
Legal Documents
(i)
Registration certificate from the Securities and Exchange Commission (SEC), Department of Trade and Industry (DTI) for
sole proprietorships, and Cooperative Development Authority (CDA) for cooperatives, or any proof of such registration as
stated in the BDS;
(ii)
Mayor's permit issued by the city or municipality where the principal place of business of the prospective bidder is
located;
i) Registration certificate from SEC, Department of Trade and Industry (DTI) for sole proprietorship, or CDA for
cooperatives, or any proof of such registration as stated in the Bidding Documents.
ii) Mayor's permit issued by the city or municipality where the principal place of business of the prospective bidder is located.
iii) Tax clearance per Executive Order 398, Series of 2005, as finally reviewed and approved by the BIR.
Technical Documents

(iii)
Statement of all its ongoing and completed government and private contracts within the period stated in the BDS,
including contracts awarded but not yet started, if any. The statement shall include, for each contract, the following:
The non-requirement of an AOI is further made evident by the Bid Data Sheet (BDS)86 which provides a "complete list"87 of
eligibility proposal documents to be submitted during the first stage of the bidding process. As outlined in the BDS: 88
TAB
(111.1) name of the contract;
CLASS "A" DOCUMENTS
I. LEGAL DOCUMENTS:
(In case of a Joint Venture, each member of the JV shall submit the required Documents mentioned in Tabs "A", "B", "C" and
"I").
(111.2) date of the contract;
A.
Registration Certificate Form

Securities and Exchange Commission from the Securities and Exchange Commission (SEC) for Corporation or
Partnership; or its equivalent documents in case of foreign bidder.
(111.3) kinds of Goods;
Department of Trade and Industry (DTI) for sole proprietorship; or its equivalent documents in case of foreign bidder.
Cooperative Development Authority, for Cooperatives or its equivalent documents in case of foreign bidder.
(111.4) amount of contract and value of outstanding contracts;
(111.5) date of delivery; and
B.
Mayor's Permit issued by the city or municipality where the principal place of business of the prospective bidder is
located or its equivalent document in case of a foreign corporation.
C.
Tax Clearance per Executive Order 398, Series of 2005, as finally reviewed and approved by the BIR.
II. TECHNICAL DOCUMENTS
(iv)
(v)
(vi)
(111.6) end user's acceptance or official receipt(s) issued for the contract, if completed.
D.
Audited financial statements, stamped "received" by the Bureau of Internal Revenue (BIR) or its duly accredited and
authorized institutions, for the preceding calendar year, which should not be earlier than two (2) years from the bid
submission;
E.
Statement of at least one similar completed largest contract within six (6) years from the date of the opening bids
equivalent to at least 50% of the ABC, using the prescribed form. Please refer to Section VIII. Bidding Forms.
F.
Bid security in the form, amount and validity in accordance with ITB Clause 18.
NFCC computation or CLC in accordance with ITB Clause 5.5; and
(vii)
III. FINANCIAL DOCUMENTS

G.
Audited financial statements, stamped received by the Bureau of Internal Revenue (BIR) or its duly accredited and
authorized institutions, for the preceding calendar year, which should not be earlier than two (2) years from bid
submission; or equivalent documents in case of foreign bidder, provided that the same is in accordance with
International Financial Reporting Standards.
H.
NFCC Computation in accordance with ITB clause 5.
TAB
CLASS "B" ELIGIBILITY REQUIREMENTS
I.
Valid Joint Venture Agreement (JVA), in case the Joint
Tax clearance per Executive Order 398, Series of 2005, as finally reviewed and approved by the BIR. (Updated pursuant
to GPPB Resolution No. 21-2013 dated July 30, 2013)
Class "B" Document:

If applicable, the JVA in case the joint venture is already in existence, or duly notarized statements from all the
potential joint venture partners stating that they will enter into and abide by the provisions of the JVA in the instance
that the bid is successful;
(viii)
Social Security Clearance (SSS);
(ix)
Department of Labor and Employment Clearance (DOLE);
(x)
Court Clearance (Regional Trial Court) (emphasis omitted)
Statement of all ongoing and completed government and private contracts, within the last six (6) years from the date
of submission and receipt of bids, including contracts awarded but not yet started, if any, using the prescribed form.
Please refer to Section VIII. Bidding Forms.
Venture is already in existence at the time of the submission and opening of bids, OR duly notarized statements from
all potential joint venture partners stating that they will enter into and abide by the provisions of the JVA if the bid is
successful;
IV. OTHER DOCUMENTS
J.
Conformity with the Schedule of Requirements and Initial Technical Proposal (approved TOR), as enumerated and
specified in Sections VI and VII of the Bidding Documents, using the prescribed form.
K.
Certification from the Election Authority or Election Management Body that the system has demonstrated capability
and has been successfully used in a prior electoral exercise here or abroad.

L.
Omnibus Sworn Statement using the prescribed form in Section VIII.
Even the furnished Schedule of Requirements89 does not mandate the submission of an AOI:90
REQUIREMENTS
CORPORATION/ SP/PARTNERSHIP
PASSED
xxx
ELIGIBILITY DOCUMENTS
1. LEGAL DOCUMENTS
I. Class "A" Documents
a. Original/Certified true copy of Registration Certificate
from the Securities and Exchange Commission (SEC),
Department of Trade and Industry (DTI) for sole
proprietorship, or Cooperative Development Authority
(CDA) for Cooperatives or any proof of such registration as
stated in the BDS; (In case of a JV, this requirement must
be complied with by all the JV partners)
FAILED
JOINT VENTURE
PASSED
FAILED
h. NFCC computation which shall be based only on the

current assets and current liabilities submitted to the BIR,
through Electronic Filing and Payment System (EFPS)
4. OTHERS
i. Conformity with Section VI: Schedule of Requirements of
the Bidding Documents
j. Conformity with Section VII. Technical Specifications of
the Bidding Documents. If proposal is the same with the
initial technical requirements, just put "COMPLY"
k. Certification from the Election Authority or Election
management Body that the system' has demonstrated
capability and has been successfully used in a prior
electoral exercise here or abroad.
l. OMNIBUS AFFIDAVIT in accordance with Section 25.2(a)
(iv) of the IRR of RA 9184 and using the form prescribed in
Section VIII of the Philippine bidding Documents. Shall
include: x x x
b. Original/Certified true copy of valid and current

Mayor's/Business Permit/License issued by the city or
municipality where the principal place of business of the
prospective bidder is located; (In case of a JV, this
requirement must be complied with by all the JV partners)
Verily, based on Sec. 23.1 (b) of the GPRA IRR, the Instruction to Bidders, the BDS, and the Checklist of Requirements, the
non-submission of an AOI is not fatal to a bidder's eligibility to contract the project at hand. Thus, it cannot be considered as a
ground for declaring private respondents ineligible to participate in the bidding process. To hold otherwise would mean allowing
the BAC to consider documents beyond the checklist of requirements, in contravention of their non-discretionary duty under
Sec. 30(l) of the GPRA IRR.
c. Original/Certified true copy of valid Tax Clearance per

Executive Order 398, Series of 2005 (In case of a JV, this
requirement must be complied with by ail the JV partners)
b. Neither is the API a post-qualification requirement
2. TECHNICAL DOCUMENTS
d. Sworn Statement of all its on-going and completed
government and private contracts within the last six (6)
years prior to the deadline for the submission and opening
of bids, including contracts awarded but not yet started, if
any. The statement shall include, for each of the contract,
the following: x x x
e. Sworn Statement of the bidder's single largest contract
completed within six (6) YEARS prior to the deadline for the
submission and opening of bids, with a value of FIFTY
(50%) per cent of the ABC.
f. The bid security (Payable to COMELEC) shall be ' in the
following amount: x x x
3. FINANCIAL DOCUMENTS
g. Audited Financial Statements (AFS), stamped "received"
by the Bureau of Internal Revenue (BIR) or its duly
accredited and authorized institutions, for the preceding
calendar year x x x
After the preliminary examination stage, the BAC opens, examines, evaluates and ranks all bids and prepares the Abstract of
Bids which contains, among others, the names of the bidders and their corresponding calculated bid prices arranged from
lowest to highest. The objective of the bid evaluation is to identify the bid with the lowest calculated price or the Lowest
Calculated Bid. The Lowest Calculated Bid shall then be subject to post-qualification to determine its responsiveness to the
eligibility and bid requirements.91
During post-qualification, the procuring entity verifies, validates, and ascertains all statements made and documents submitted
by the bidder with the lowest calculated or highest rated bid using a non-discretionary criteria as stated in the bidding
documents.92 If, after post-qualification, the Lowest Calculated Bid is determined to be post-qualified, it shall be considered the
Lowest Calculated Responsive Bid and the contract shall be awarded to the bidder.93
To recall, the BAC, on December 15, 2014, declared that only Smartmatic JV and Indra were eligible to participate in the
second stage of the bidding process. Of the two, only Smartmatic JV submitted a complete and responsive Overall Summary
of the Financial Proposal and was thus subjected to post-qualification evaluation. Initially, the BAC post-disqualified Smartmatic
JV for allegedly failing to submit a valid AOL It is this preliminary finding that petitioners want reinstated.
We disagree.
Even on post-qualification, the submission of an AOI was not included as an added requirement. The Instruction to Bidders
pertinently provides:94
29. Post-Qualification
29.1. The Procuring Entity shall determine to its satisfaction whether the Bidder that is evaluated as having submitted the
Lowest Calculated Bid (LCB) complies with and is responsive to all the requirements and conditions specified in ITB Clauses 5,
12 and 13.

xxxx
29.3. The determination shall be based upon an examination of the documentary evidence of the Bidder's qualifications
submitted pursuant to ITB Clauses 12 and 13, as well as other information as the Procuring Entity deems necessary
and appropriate, using a non-discretionary "pass/fail" criterion. (emphasis added)
Clauses 12 and 13 of the Instruction to Bidders pertain to the eligibility documents, technical documents, and the financial
component of a participant's bid.95 Meanwhile, the Clause 5 adverted to is an enumeration of persons or entities who may
participate in the bidding.96 Nowhere in these clauses does it appear that an AOI is a mandatory requirement even for postqualification. Even the BAC's March 27, 2015 Notice addressed to Smartmatic JV supports this finding: 97
x x x [F]or purposes of post-qualification proceedings, please submit copies of the following documents to the Bid and Awards
Committee (BAC), through the BAC Secretariat, as stated in Clause 29.2 (a) of Section III, Bid Data Sheet of the Bidding
Documents, within three (3) calendar days from receipt of this Notice:chanRoblesvirtualLawlibrary
a)
Latest Income and Business Tax Returns. x x x
b)
Certificate of PhilGEPS Registration.
c)
ISO 9001:2008 Certification of the Optical Mark/reader or Optical Scan manufacturer for OMR.
While it is true that SMTC's AOI made specific mention of the automation of the 2010 National and Local Elections as its
primary purpose, it is erroneous to interpret this as meaning that the corporation's authority to transact business will cease
thereafter. Indeed, the contractual relation between SMTC and the COMELEC has been the subject of prior controversies that
haVe reached the Court, and We have on these occasions held that even beyond the 2010 election schedule, the parties
remain to have subsisting rights and obligations relative to the products and services supplied by SMTC to the COMELEC for
the conduct of the 2010 polls.
For instance, the Court, in the landmark case of Capalla v. COMELEC (Capalla),98 upheld the validity of the March 30, 2012
Deed of Sale by and between SMTC and COMELEC when the latter exercised the option to purchase (OTP) clause embodied
in their 2009 Automated Election System Contract (AES Contract). Even though the original deadline for the option was only
until December 31, 2010, We ruled that the parties to the AES Contract, pursuant to Art. 19 thereof,99can still validly extend the
same by mutual agreement. The Court ratiocinated that Art. 19 of the AES Contract may still be invoked even after December
31, 2010, for the agreement subsisted in view of the COMELEC's failure to return SMTC's performance security, a condition for
the contract's termination. As provided under Art. 2 of the AES Contract:100
Article 2
EFFECTIVITY
2.1. This Contract shall take effect upon the fulfillment of all of the following conditions:chanRoblesvirtualLawlibrary
(a) Submission by the PROVIDER of the Performance Security;
(b) Signing of this Contract in seven (7) copies by the parties; and
(c) Receipt by the PROVIDER of the Notice to Proceed.
In addition, the following certifications must be submitted:chanRoblesvirtualLawlibrary

a)
That all system requirements for customization as stated in the Terms of Reference and RA 9369 shall be fully
complied with, subject to the application of applicable penalties for non-compliance; and
b)
That it shall not demand for additional payment from COMELEC to procure additional OMR system requirements
during Project Implementation for items that it may have overlooked in its Bid Proposal.
The bidder is also required to submit the machines, including the software and hardware, back-up power supply and other
equipment and peripherals necessary for the conduct of the testing during post-qualification, including the prototype sample of
the ballot box based on what is required in the Terms of Reference (TOR) for the OMR on April 6, 2015 as per instruction from
the Technical Working Group (TWG).
From the foregoing, the inescapable result is that mere failure to file an AOI cannot automatically result in the bidder concerned
being declared ineligible, contrary to petitioners' claim.
Smartmatic JV may validly undertake the project sought to be procured
a. SMTC still has the authority to conduct business even after the conduct of the 2010 national and local elections
A thorough reading of petitioners' contention, however, would show that it is not only assailing Smartmatic JV's ineligibility
based on the alleged incompleteness of its documentary requirements i.e. for non-submission of a valid AOI, but also because
they considered the subject of the procurement beyond the ambit of SMTCs corporate purpose. Petitioners postulate that
SMTC's authority to conduct business ceased upon fulfillment of its primary purpose stated in its AOI-that of automating the
2010 National and Local Elections, and this allegedly rendered SMTC's subsequent involvement in the subject procurement
project an ultra vires act.
Petitioners' myopic interpretation of SMTC's purpose is incorrect.
2.2. The Term of this Contract begins from the date of effectivity until the release of the Performance Security,vithout
prejudice to the surviving provisions of this Contract, including the warranty provision as prescribed in Article 8.3 and the
period of the option to purchase. (Emphasis supplied)
Based on Our ruling in Capalla, the cessation of SMTC's business cannot be assumed just because the May 10, 2010 polls
have already concluded. For clearly, SMTC's purposethe "automation of the 2010 national and local elections"is not limited
to the conduct of the election proper, but extends further to the fulfillment of SMTC's contractual obligations that spring forth
from the AES Contract during the lifetime of the agreement (i.e. until the release of the performance security), and even
thereafter insofar as the surviving provisions of the contract are concerned. In other words, regardless of whether or not
SMTC's performance security has already been released, establishing even just one surviving provision of the AES Contract
would be sufficient to prove that SMTC has not yet completed its purpose under its AOI, toppling petitioners' argument like a
house of cards.
Unfortunately for petitioners, one such surviving provision has already been duly noted by the Court in the recent case
of Pabillo v. COMELEC (Pabillo).101 In Pabillo, the Court cited Art. 8.8 of the AES Contract, which significantly reads:
8.8 If COMELEC opts to purchase the PCOS and Consolidation and Canvassing System (CCS), the following warranty
provisions indicated in the RFP shall form part of the purchase contract:chanRoblesvirtualLawlibrary
1) For PCOS, SMARTMATIC shall warrant the availability of parts, labor and technical support and maintenance to
COMELEC for ten (10) years, if purchased (Item 18, Part V of the RFP), beginning May 10, 2010. Any purchase of parts,
labor and technical support and maintenance not covered under Article 4.3 above shall be subject to the prevailing market
prices at the time and at such terms and conditions as may be agreed upon. (emphasis added)
Pertinently, We have interpreted the foregoing contractual provision in Pabillo in the following wise:102
Smartmatic-TIM warrants that its parts, labor and technical support and maintenance will be available to the
COMELEC, if it so decides to purchase such parts, labor and technical support and maintenance services, within the
warranty period stated, i.e., ten (10) years for the PCOS, reckoned from May 10, 2010, or until May 10, 2020. Article 8.8
skews from the ordinary concept of warranty since it is a mere warranty on availability, which entails a subsequent purchase
contract, founded upon a new consideration, the costs of which (unlike in the first warranty) are still to be paid. With Article 8.8
in place, the COMELEC is assured that it would always have access to a capable parts/service provider in SmartmaticTIM, during the 10-year warranty period therefor, on account of the peculiar nature of the purchased goods. (emphasis
added)

Indubitably, the vinculum juris between COMELEC and SMTC remains solid and unsevered despite the 2010 elections'
inevitable conclusion. Several contractual provisions contained in the 2009 AES Contract, as observed in a review of our
jurisprudence, continue to subsist and remain enforceable up to this date. Pabillo, in effect, at least guaranteed that SMTC's
purpose under its AOI will not be fulfilled until May 10, 2020. Therefore, petitioners' theorythat SMTC no longer has a valid
purposeis flawed. Otherwise, there would be no way of enforcing the subsisting provisions of the contract and of holding
SMTC to its warranties after the conduct of the. May 10, 2010 elections.
Having resolved the continuity of SMTC's business, We now proceed to determine whether its participation in the bidding
process is an authorized or an ultra vires act.
b. The issue is mooted by the subsequent approval of the amendment to SMTC's AOI
Commissioner Guia, in his dissent, opines that a bidder should be authorized to participate in the bidding as early as the time
the pre-qualification was conducted, which in this case was held on December 4, 2014. Thus, the December 10, 2014 approval
of SMTC's amended AOI, to Commissioner Guia's mind, cannot cure the alleged vice attending SMTC's submission of its bid,
as a partner in Smartmatic JV, for a project that it was, at that time, unauthorized to undertake.
The argument fails to persuade.
As earlier discussed, the function of the BAC, in making an initial assessment as to the eligibility of the bidders during prequalification, is ministerial and nondiscretionary. It merely counterchecks the documents submitted by the bidder against the
checklist of requirements included in the bid documents disseminated by the procuring agency. It cannot consider documents
not listed in the checklist for purposes of ascertaining a bidder's eligibility during pre-qualification.
The only time the procuring agency can go beyond the checklist is during post-qualification wherein it is allowed to check to its
satisfaction the veracity of the information submitted to it by the bidder. To recall, Sec. 29.3 of the Invitation to Bid provides that
on post-qualification, the procuring entity may utilize any "other information as [it] may deem necessary and appropriate"
in order to test the accuracy of the information provided in the bidder's eligibility documents and bid proposal. In the end,
notwithstanding the dispensability of the AOI insofar as compliance with documentary requirements is concerned, the procuring
entity may nevertheless consider the same in ultimately determining a bidder's eligibility.
Stated in the alternative, the procuring entity, for purposes of post-qualification, cannot be faulted for, as it is not precluded
from, considering information volunteered by the bidder with the highest bid. Bearing in mind the non-discretionary function of
the BAC during pre-qualification, it is then understandable that it is only on post-qualification, when it is allowed to consider
other documents, during which an extensive inquiry will be made to detect any defect in the bidder's capacity to contract.
Hence, even though the submission of an AOI was not required for either pre or post-qualification purposes, the COMELEC
and BAC, on post-qualification, may still consider the same in determining whether or not the project is in line with the bidder's
corporate purpose, and, ultimately, in ascertaining the bidder's eligibility.
In the case at bar, We take note that during the opening of the bids on December 4, 2014, Smartmatic JV already informed the
BAC that SMTC was already in the process of amending its AOI. The contents of the AOI, at that time, were immaterial since
the AOI is not an eligibility requirement that can be considered by the BAC on pre-qualification. By post-qualification, however,
the time the BAC can validly consider extraneous documents, SMTC's AOI has already been duly amended, and the
amendments approved by the SEC on December 10, 2014, for its updated primary purpose to read:103
To sell, supply, lease, import, export, develop, assemble, repair and deal with automated voting machines, canvassing
equipment, computer software, computer equipment and all other goods and supplies, and/or to provide, render and deal in all
kinds of services, including project management services for the conduct of elections, whether regular or special, in the
Philippine(s) and to provide Information and Communication Technology (ICT) goods and services to private and government
entities in the Philippines.
Hence, any doubt on SMTC's authorization to continue its business has already been dispelled by December 10, 2014. It
matters not that the amendments to the AOI took effect only on that day104 for as long as it preceded post-qualification.
c. SMTC's participation in the bidding is not an ultra vires act but one that is incidental to its corporate purpose
In any event, there is merit in private respondents' argument that SMTC's participation in the bidding is not beyond its declared
corporate purpose; that, in the first place, there was no impediment in SMTC's AOI that could have prevented Smartmatic JV
from participating in the project.
To elucidate, an ultra vires act is defined under BP 68 in the following wise:
Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers
except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred. (emphasis added)
The language of the Code appears to confine the term ultra vires to an act outside or beyond express, implied and incidental
corporate powers. Nevertheless, the concept can also include those acts that may ostensibly be within such powers but are, by
general or special laws, either proscribed or declared illegal.105Ultra vires acts or acts which are clearly beyond the scope of
one's authority are null and void and cannot be given any effect.106
In determining whether or not a coiporation may perform an act, one considers the logical and necessary relation between the
act assailed and the corporate purpose expressed by the law or in the charter, for if the act were one which is lawful in itself or
not otherwise prohibited and done for the purpose of serving corporate ends or reasonably contributes to the promotion of
those ends in a substantial and not merely in a remote and fanciful sense, it may be fairly considered within corporate
powers.107The test to be applied is whether the act in question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not.108
In the case at bar, notwithstanding the specific mention of the 2010 National and Local Elections in SMTC's primary purpose, it
is not, as earlier discussed, precluded from entering into contracts over succeeding ones. Here, SMTC cannot be deemed to
be overstepping its limits by participating in the bidding for the 23,000 new optical mark readers for the 2016 polls since
upgrading the machines that the company supplied the COMELEC for the automation of the 2010 elections and offering them
for subsequent elections is but a logical consequence of SMTC's course of business, and should, therefore, be considered
included in, if not incidental to, its corporate purpose. A restricted interpretation of its purpose would mean limiting SMTC's
activity to that of waiting for the expiration of its warranties in 2020. How then can the company be expected to subsist and
sustain itself until then if it cannot engage in any other project, even in those similar to what the company already performed?
In the final analysis, We see no defect in the AOI that needed to be cured before SMTC could have participated in the bidding
as a partner in Smartmatic JV, the automation of the 2016 National and Local Elections being a logical inclusion of SMTC's
corporate purpose.
Smartmatic JV cannot be declared ineligible for SMTC's nationality
In a desperate last ditch effort to have Smartmatic JV declared ineligible to participate in the procurement project, petitioners
question the nationality of SMTC. They direct the Court's attention to the 2013 Annual Report and Consolidated Financial
Statements109 of Smartmatic Limited to prove that SMTC is 100% foreign owned. They then contend that SMTC is the biggest
shareholder in the bidding joint venture at 46.5% share, making the joint venture less than 60% Filipino-owned and, hence,
ineligible.
The argument is specious.
Clause 5 of the Instruction to Bidders provides that the following may participate in the bidding process: 110
5.1. Unless otherwise provided in the BDS, the following persons shall be eligible to participate in the
bidding:chanRoblesvirtualLawlibrary
xxxx
(e) Unless otherwise provided in the BDS, persons/entities forming themselves into a JV, i.e., group of two (2) or more
persons/entities that intend to be jointly and severally responsible or liable for a peculiar contract: Provided, however, that
Filipino ownership or interest of the joint venture concerned shall be at least sixty percent (60%).
While petitioners are correct in asserting that Smartmatic JV ought to be at least 60% Filipino-owned to qualify, they did not
adduce sufficient evidence to prove that the joint venture did not meet the requirement. Petitioners, having alleged noncompliance, have the correlative burden of proving that Smartmatic JV did not meet the requirement, but aside from their bare

allegation that SMTC is 100% foreign-owned, they did not offer any relevant evidence to substantiate their claim. Even the
2013 financial statements submitted to Court fail to impress for they pertain to the financial standing of Smartmatic
Limited,111 which is a distinct and separate entity from SMTC. It goes without saying that Smarmatic Limited's nationality is
irrelevant herein for it is not even a party to this case, and even to the joint venture.
Aside from the sheer weakness of petitioners' claim, SMTC satisfactorily refuted the challenge to its nationality and established
that it is, indeed, a Filipino corporation as defined under our laws. As provided in Republic Act No. 7042 (RA 7042), otherwise
known as the Foreign Investments Act, a Philippine corporation is defined in the following wise:
Section 3. Definitions. - As used in this Act:chanRoblesvirtualLawlibrary
a) The term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned
by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee
of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and its nonFilipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of
the Philippines, in order that the corporations shall be considered a Philippine national.
In Narra Nickel Mining and Development, Corp. v. Redmont Consolidated Mines, Corp.,112 the Court held that the "control test"
is the prevailing mode of determining whether or not a corporation is Filipino. Under the "control test," shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality.113 It is only when based on the attendant facts and circumstances of the case, there is, in the mind of the
Court, doubt in the 60-40 Filipino-equity ownership in the corporation, that it may apply the "grandfather rule." 114
Jacinto R. Perez, Jr.

Filipino
NAME NATIONALITY AND CURRENT

RESIDENTIAL ADDRESS
1920 Business Inc.
Filipino
SHARES SUBSCRIBED
TYPE
NUMBER
AMOUNT
Common
135,599,997
135,599,997.00
Manila
Alastair Joseph James Wells
British
60%
Smartmatic International, Corp.

Barbadian
TOTAL
135,599,997
135,599,997.00
Common
90,399,998
90,399,998.00
"B"
40%
4 Stafford House, Garisson St.,

Michael, Barbados
Juan C. Villa, Jr.
TOTAL
90,399,998
90,399,998.00
Common
1.00
Filipino
TOTAL
1.00
1.00
Common
1.00
1405 Spanish Bay, Bonifacio
1.00
1.00
0%
st
Ridge, 1 Avenue, Bonifacio

Global City, Taguig
Marian Ivy F. Reyes-Fajardo
Filipino
TOTAL
1.00
Common
1.00
"A"
Subdivision, Marikina
Filipino
Total
1.00
Common
1.00
"A"
1.00
0%
2250 P. Burgos, Pasay City

Total
1.00
0%
71-B Tindalo St., MonteVista,
1.00
Applying the control test, 60% of SMTC's 226,000,000 shares, that is 135,600,000 shares, must be Filipino-owned. From the
above-table, it is clear that SMTC reached this threshold amount to qualify as a Filipino-owned corporation. To demonstrate,
the following are SMTC's Filipino investors:
TYPE OF SHARE
NUMBER OF SHARES
1920 Business Inc.
Common "A"
135,599,997
Juan C. Villa, Jr.
Common "B"
Jacinto R. Perez, Jr.
Common "A"
Marian Ivy F. Reyes-Fajardo
Common "A"
Salvador P. Aque
Common "A"
1
TOTAL
0%
No. 74, Jalan Setiabakti,

Damansara Heights, Kuala Lumpur
451,999,998.00
TOTAL
1.00
"B"
AMOUNT PAID
677,999,997.00
1.00
1211 Consuelo St., Singalong,
NAME OF SHAREHOLDER
"A"
King's Court 2, 2129 Don Chino

Roces Ave., Makati, Metro Manila
% OF
OWNERSHIP
"A"
Salvador P. Aque
Perusing SMTC's GIS115 proves useful in applying the control test. Upon examination, SMTC's GIS reveals that it has an
authorized capital stock of P226,000,000.00, compromised of 226,000,000 common stocks116 at P1.00 par value, of which
100% is subscribed and paid.117 The GIS further provides information on the stcok holders as follows:118
Common
135,600,001
Indeed, the application of the control test would yield the result that SMTC is a Filipino corporation. There is then no truth to
petitioners' claim that SMTC is 100% foreign-owned. Consequently, it becomes unnecessary to confirm this finding through the
grandfather rule119 since the test is only employed when the 60% Filipino ownership in the corporation is in doubt. 120 In this
case, not even the slightest doubt is cast since the petition is severely wanting in facts and circumstances that raise legitimate
challenges to SMTC's 60-40 Filipino ownership. The petition rested solely on petitioners' vague assertions and baseless
claims. On the other hand, SMTC countered by furnishing the Court a copy of its GIS providing its shareholders' stock
ownership details, and by submitting a copy of its AOI, which reserved all of SMTC's 135,600,000 class A common shares to
Filipinos121 in a bid to guarantee that when all of its shares are outstanding, foreign ownership will not exceed 40%.

Anent the nationality of the other joint venture partners, the Court defers to the findings of the COMELEC and the BAC, and
finds sufficient their declaration that Smartmatic JV is, indeed, eligible to participate in the bidding process, and is in fact the
bidder with the lowest calculated responsive bid.122 If petitioners would insist otherwise by reason of Smartmatic JV's
nationality, it becomes incumbent upon them to prove that the aggregate Filipino equity of the joint venture partnersSMTC,
Total Information Management Corporation, Smartmatic International Holding B.V., and Jarltech International Corporation
does not comply with the 60% Filipino equity requirement, following the oft-cited doctrine that he who alleges must
prove.123 Regrettably, one fatal flaw in petitioners' posture is that they challenged the nationality of SMTC alone, which, after
utilizing the control test, turned out to be a Philippine corporation as defined under RA 7042. There was no iota of evidence
presented or, at the very least, even a claim advanced that the remaining partners are foreign-owned. There are, in fact, no
other submissions whence - this Court can inquire as to the nationalities of the other joint venture partners. Hence, there is no
other alternative for this Court other than to adopt the findings of the COMELEC and the BAC upholding Smartmatic JV's
eligibility to participate in the bidding process, subsumed in which is the joint venture and its individual partners' compliance
with the nationality requirement.
WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED for lack of merit. The June 29, 2015 Decision of the
COMELEC en banc is hereby AFFIRMED.SO ORDERED.
SECOND DIVISION
G.R. No. 131394
March 28, 2005
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, Petitioner, vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN
O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL, INC., Respondents.
DECISION
TINGA, J.:
Presented in the case at bar is the apparently straight-forward but complicated question: What should be the basis of quorum
for a stockholders meetingthe outstanding capital stock as indicated in the articles of incorporation or that contained in the
companys stock and transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 414731 promulgated on 18 August 1997, affirming
the SEC Order dated 20 June 1996, and the Resolution2 of the Court of Appeals dated 31 October 1997 which denied
petitioners motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700) founders shares
and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles of incorporation. However,
private respondents and their predecessors who were in control of PMMSI registered the companys stock and transfer book
for the first time in 1978, recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI.
Sometime in 1979, a special stockholders meeting was called and held on the basis of what was considered as a quorum of
twenty-seven (27) common shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and Exchange
Commission (SEC) for the registration of their property rights over one hundred (120) founders shares and twelve (12)
common shares owned by their father. The SEC hearing officer held that the heirs of Acayan were entitled to the claimed
shares and called for a special stockholders meeting to elect a new set of officers. 3 The SEC En Banc affirmed the decision. As
a result, the shares of Acayan were recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a new set of directors. Private respondents thereafter filed
a petition with the SEC questioning the validity of the 06 May 1992 stockholders meeting, alleging that the quorum for the said
meeting should not be based on the 165 issued and outstanding shares as per the stock and transfer book, but on the initial
subscribed capital stock of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. The
petition was dismissed.4 Appeal was made to the SEC En Banc, which granted said appeal, holding that the shares of the
deceased incorporators should be duly represented by their respective administrators or heirs concerned. The SEC directed
the parties to call for a stockholders meeting on the basis of the stockholdings reflected in the articles of incorporation for the
purpose of electing a new set of officers for the corporation.5
Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals. 6 Rebecca Acayan, Jayne O.
Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed another petition for review of
the same SEC En Bancs orders. The petitions were thereafter consolidated. 7 The consolidated petitions essentially raised the
following issues, viz: (a) whether the basis the outstanding capital stock and accordingly also for determining the quorum at
stockholders meetings it should be the 1978 stock and transfer book or if it should be the 1952 articles of incorporation; and (b)
whether the Court of Appeals "gravely erred in applying the Espejo Decision to the benefit of respondents." 8 The "Espejo
Decision" is the decision of the SEC en banc in SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan
in the stock and transfer book.
The Court of Appeals held that for purposes of transacting business, the quorum should be based on the outstanding capital
stock as found in the articles of incorporation. 9 As to the second issue, the Court of Appeals held that the ruling in
the Acayan case would ipso facto benefit the private respondents, since to require a separate judicial declaration to recognize
the shares of the original incorporators would entail unnecessary delay and expense. Besides, the Court of Appeals added, the
incorporators have already proved their stockholdings through the provisions of the articles of incorporation. 10
In the instant petition, petitioners claim that the 1992 stockholders meeting was valid and legal. They submit that reliance on
the 1952 articles of incorporation for determining the quorum negates the existence and validity of the stock and transfer book
which private respondents themselves prepared. In addition, they posit that private respondents cannot avail of the benefits
secured by the heirs of Acayan, as private respondents must show and prove entitlement to the founders and common shares
in a separate and independent action/proceeding.
In private respondents Memorandum11 dated 08 March 2000, they point out that the instant petition raises the same facts and
issues as those raised in G.R. No. 131315 12, which was denied by the First Division of this Court on 18 January 1999 for failure
to show that the Court of Appeals committed any reversible error. They add that as a logical consequence, the instant petition
should be dismissed on the ground of res judicata. Furthermore, private respondents claim that in view of the applicability of
the rule on res judicata, petitioners counsel should be cited for contempt for violating the rule against forum-shopping. 13
For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue that the instant
petition is separate and distinct from G.R. No. 131315, there being no identity of parties, and more importantly, the parties in
the two petitions have their own distinct rights and interests in relation to the subject matter in litigation. For the same reasons,
they claim that counsel for petitioners cannot be found guilty of forum-shopping.14

In their Manifestation and Motion15 dated 22 September 2004, private respondents moved for the dismissal of the instant
petition in view of the dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of theEntry of
Judgment16 issued by the First Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it fails to impute
reversible error to the challenged Court of Appeals Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by judgment. 17 The
doctrine of res judicata provides that a final judgment, on the merits rendered by a court of competent jurisdiction is conclusive
as to the rights of the parties and their privies and constitutes an absolute bar to subsequent actions involving the same claim,
demand, or cause of action.18 The elements of res judicata are (a) identity of parties or at least such as representing the same
interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same facts; and (c)
the identity in the two (2) particulars is such that any judgment which may be rendered in the other action will, regardless of
which party is successful, amount to res judicata in the action under consideration.19
There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of including the still
unproven shares of respondents for purposes of determining the quorum. Petitioners, however, deny that there is identity of
parties and causes of actions between the two petitions.
The test often used in determining whether causes of action are identical is to ascertain whether the same facts or evidence
would support and establish the former and present causes of action. 20 More significantly, there is identity of causes of action
when the judgment sought will be inconsistent with the prior judgment. 21 In both petitions, petitioners assert that the Court of
Appeals Decision effectively negates the existence and validity of the stock and transfer book, as well as automatically grants
private respondents shares of stocks which they do not own, or the ownership of which remains to be unproved. Petitioners in
the two petitions rely on the entries in the stock and transfer book as the proper basis for computing the quorum, and
consequently determine the degree of control one has over the company. Essentially, the affirmance of the SEC Order had the
effect of diminishing their control and interests in the company, as it allowed the participation of the individual private
respondents in the election of officers of the corporation.
Absolute identity of parties is not a condition sine qua non for res judicata to applya shared identity of interest is sufficient to
invoke the coverage of the principle.22 However, there is no identity of parties between the two cases. The parties in the two
petitions have their own rights and interests in relation to the subject matter in litigation. As stated by petitioners in their Reply
to Respondents Memorandum,23 there are no two separate actions filed, but rather, two separate petitions for review
on certiorari filed by two distinct parties with the Court and represented by their own counsels, arising from an adverse
consolidated decision promulgated by the Court of Appeals in one action or proceeding. 24 As such, res judicata is not present in
the instant case.
Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forum-shopping. In
the Verification/Certification25 portion of the petition, petitioners clearly stated that there was then a pending motion for
reconsideration of the 18 August 1997 Decision of the Court of Appeals in the consolidated cases (CA-G.R. SP No. 41473 and
CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for clarification. Moreover, the records indicate that petitioners
filed their Manifestation26 dated 20 January 1998, informing the Court of their receipt of the petition in G.R. No. 131315 in
compliance with their duty to inform the Court of the pendency of another similar petition. The Court finds that petitioners
substantially complied with the rules against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues and arguments as those in G.R. No.
131315 which the First Division has long denied with finality. The First Division found the petition before it inadequate in failing
to raise any reversible error on the part of the Court of Appeals. We reach a similar conclusion as regards the present petition.
The crucial issue in this case is whether it is the companys stock and transfer book, or its 1952 Articles of Incorporation, which
determines stockholders shareholdings, and provides the basis for computing the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the charter of the corporation and the contractual
relationships between the State and the corporation, the stockholders and the State, and between the corporation and its
stockholders.27 When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise known as "The Corporation
Law." Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines, may form a
private corporation for any lawful purpose or purposes by filing with the Securities and Exchange Commission
articles of incorporation duly executed and acknowledged before a notary public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the number of
shares into which it is divided, and if such stock be in whole or in part without par value then such fact shall be
stated; Provided, however, That as to stock without par value the articles of incorporation need only state the number
of shares into which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually subscribed,
the amount or number of shares of no-par stock subscribed by each and the sum paid by each on his subscription. . .
.28
A review of PMMSIs articles of incorporation29 shows that the corporation complied with the requirements laid down by Act No.
1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into two
classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00

TOTAL ---------------------1,700 shares----------------------------P 90,000.00
SUBSCRIBER
....
SUBSCRIBED
AMOUNT SUBSCR
No. of Shares
8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE THOUSAND SIX
HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the number of shares and amount
of capital stock set out after their respective names:
SUBSCRIBER
Crispulo J. Onrubia
SUBSCRIBED
Crispulo J. Onrubia
AMOUNT SUBSCRIBED
Juan H. Acayan
Par
12 Common
P 1,2
12 "
1,2
No. of Shares
Martin P. Sagarbarria
8"
120 Founders
Mauricio G. Gallaga
8"
8"
12 "
1,2
Juan H. Acayan
120 "
Luis Renteria
Martin P. Sagarbarria
100 "
Faustina M. de Onrubia
Mauricio G. Gallaga
50 "
Mrs. Ramon Araneta
8"
Luis Renteria
50 "
Carlos M. Onrubia
8"
Faustina M. de Onrubia
140 "
76
P7,60
Mrs. Ramon Araneta
40 "
Carlos M. Onrubia
80 "
700
There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation, but also on its
shareholders. In the instant case, the articles of incorporation indicate that at the time of incorporation, the incorporators
were bona fide stockholders of seven hundred (700) founders shares and seventy-six (76) common shares. Hence, at that
time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records the names and addresses of all stockholders arranged
alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom made; and such
other entries as may be prescribed by law.31 A stock and transfer book is necessary as a measure of precaution, expediency
and convenience since it provides the only certain and accurate method of establishing the various corporate acts and
transactions and of showing the ownership of stock and like matters. 32 However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which

ordinarily are or should be written therein. 33 In fact, it is generally held that the records and minutes of a corporation are not
conclusive even against the corporation but are prima facie evidence only,34 and may be impeached or even contradicted by
other competent evidence.35 Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities,
or to contradict such records.36
In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines" supplanted Act No. 1459. BP
Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there must be present, either in
person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist
of the stockholders representing a majority of the outstanding capital stock or majority of the members in the case of
non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term "outstanding capital stock" as used in this code, means the
total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is
binding subscription agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders shares or
common shares.37 In the instant case, two figures are being pitted against each other those contained in the articles of
incorporation, and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely
disregarding the issued and outstanding shares as indicated in the articles of incorporation would work injustice to the owners
and/or successors in interest of the said shares. This case is one instance where resort to documents other than the stock and
transfer books is necessary. The stock and transfer book of PMMSI cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation
show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book.
As aptly stated by the SEC in itsOrder dated 15 July 1996:38
It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock and
Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the company of its
own shares, in which it becomes treasury shares, would not affect the total number of shares in the Stock and
Transfer Book. All that will change are the entries as to the owners of the shares but not as to the amount of shares
already subscribed.
This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the shares, which
were not recorded in the Stock and Transfer Book, but were recorded in the Articles of Iincorporation just vanish into
thin air? . . . .39
As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six (776) issued and
outstanding shares as reflected in the articles of incorporation. No proof was adduced as to any transaction effected on these
shares from the time PMMSI was incorporated up to the time the instant petition was filed, except for the thirty-three (33)
shares which were recorded in the stock and transfer book in 1978, and the additional one hundred thirty-two (132) in 1982.
But obviously, the shares so ordered recorded in the stock and transfer book are among the shares reflected in the articles of
incorporation as the shares subscribed to by the incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers
failed to keep its records accurately.40 A corporations records are not the only evidence of the ownership of stock in a
corporation.41 In an American case,42 persons claiming shareholders status in a professional corporation were listed as
stockholders in the amendment to the articles of incorporation. On that basis, they were in all respects treated as shareholders.
In fact, the acts and conduct of the parties may even constitute sufficient evidence of ones status as a shareholder or
member.43 In the instant case, no less than the articles of incorporation declare the incorporators to have in their name the
founders and several common shares. Thus, to disregard the contents of the articles of incorporation would be to pretend that
the basic document which legally triggered the creation of the corporation does not exist and accordingly to allow great
injustice to be caused to the incorporators and their heirs.
Petitioners argue that the Court of Appeals "gravely erred in applying the Espejo decision to the benefit of respondents." The
Court believes that the more precise statement of the issue is whether in its assailed Decision, the Court of Appeals can
declare private respondents as the heirs of the incorporators, and consequently register the founders shares in their name.
However, this issue as recast is not actually determinative of the present controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI as recorded in
the stock and transfer book and instantly created inexistent shares in favor of private respondents. We do not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the original incorporators
would entail unnecessary delay and expense on the part of the litigants, considering that the incorporators had already proved
ownership of such shares as shown in the articles of incorporation. 44 There was no declaration of who the individual owners of
these shares were on the date of the promulgation of the Decision. As properly stated by the SEC in its Order dated 20 June
1996, to which the appellate courts Decision should be related, "if at all, the ownership of these shares should only be
subjected to the proper judicial (probate) or extrajudicial proceedings in order to determine the respective shares of the legal
heirs of the deceased incorporators."45
WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.SO ORDERED.

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Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 1 of 35

December 12, 2011

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 2 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 3 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 4 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 5 of 35

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 6 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 7 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 8 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 9 of 35

June 30, 1987

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 10 of 35

xxx xxx xxx

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 11 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 12 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 13 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 14 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 15 of 35

RIZAL LIGHT & ICE CO., INC., petitioner,

September 28, 1968

RIZAL LIGHT & ICE CO., INC., petitioner,

1965: Jacob S. Lim is an owner-operator of Southern Airlines (SAL), a single proprietorship

2 DC-#A type aircrafts

1 set of necessary spare parts

Total: $ 190,000 in installments

made the surety of JDA prescribed so not entitled to reimbursement

CA affirmed Trial of Merits: Only Lim is liable to pay

Lim never intended to form a corp.

September 28, 1968

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 16 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 17 of 35

COMMISSION (to Atty. Luque):

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 18 of 35

Yes, your honor.

Proceedings of August 25, 1961

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 19 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 20 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 21 of 35

Failure to submit valid AOI; and

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 22 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 23 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 24 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 25 of 35

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 26 of 35

a) Class "A" Documents

Set II Corporation Code * March II v Joson to Lanuza v Ca*Page 27 of 35

(111.1) name of the contract;

CLASS "A" DOCUMENTS

(111.2) date of the contract;

Registration Certificate Form

(111.3) kinds of Goods;

(111.4) amount of contract and value of outstanding contracts;

(111.5) date of delivery; and

II. TECHNICAL DOCUMENTS

NFCC computation or CLC in accordance with ITB Clause 5.5; and

III. FINANCIAL DOCUMENTS

NFCC Computation in accordance with ITB clause 5.

CLASS "B" ELIGIBILITY REQUIREMENTS

Valid Joint Venture Agreement (JVA), in case the Joint

Class "B" Document:

Social Security Clearance (SSS);

Department of Labor and Employment Clearance (DOLE);

Court Clearance (Regional Trial Court) (emphasis omitted)