EMCO HOLDINGS, INC., G.R. No. 171815 In the PSE Circular for Brokers No.

G.R. No. 171815 In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated
Petitioner, that as a result of petitioner Cemcos acquisition of BCI and ACCs shares in UCHC,
Present: petitioners total beneficial ownership, direct and indirect, in UCC has increased by 36%
YNARES-SANTIAGO, J., and amounted to at least 53% of the shares of UCC, to wit[4]:
Chairperson,
- versus - AUSTRIA-MARTINEZ, Particulars Percentage
CHICO-NAZARIO, and Existing shares of Cemco in UCHC 9%
NACHURA, JJ. Acquisition by Cemco of BCIs and ACCs shares in 51%
UCHC
NATIONAL LIFE INSURANCE COMPANY OF THE Promulgated: Total stocks of Cemco in UCHC 60%
PHILIPPINES, INC., Percentage of UCHC ownership in UCC 60%
Respondent. August 7, 2007 Indirect ownership of Cemco in UCC 36%
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x Direct ownership of Cemco in UCC 17%
Total ownership of Cemco in UCC 53%

DECISION
As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15
July 2004, inquired as to whether the Tender Offer Rule under Rule 19 of the
CHICO-NAZARIO, J.: Implementing Rules of the Securities Regulation Code is not applicable to the purchase
by petitioner of the majority of shares of UCC.

This Petition for Review under Rule 45 of the Rules of Court seeks to reverse
and set aside the 24 October 2005 Decision[1] and the 6 March 2006 Resolution[2] of
the Court of Appeals in CA-G.R. SP No. 88758 which affirmed the judgment[3] dated 14
February 2005 of the Securities and Exchange Commission (SEC) finding that the
acquisition of petitioner Cemco Holdings, Inc. (Cemco) of the shares of stock
of Bacnotan Consolidated Industries, Inc. (BCI) and Atlas Cement Corporation (ACC) in
Union Cement Holdings Corporation (UCHC) was covered by the Mandatory Offer Rule
under Section 19 of Republic Act No. 8799, otherwise known as the Securities
Regulation Code.
The Facts
Union Cement Corporation (UCC), a publicly-listed company, has two
principal stockholders UCHC, a non-listed company, with shares amounting to 60.51%,
and petitioner Cemco with 17.03%. Majority of UCHCs stocks were owned by BCI with
21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.
In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock
Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell
to Cemco BCIs stocks in UCHC equivalent to 21.31% and ACCs stocks in UCHC
equivalent to 29.69%.
In a letter dated 16 July 2004, Director Justina Callangan of the SECs
Corporate Finance Department responded to the query of the PSE that while it was
the stance of the department that the tender offer rule was not applicable, the matter
must still have to be confirmed by the SEC en banc.
Thereafter, in a subsequent letter dated 27 July 2004,
Director Callangan confirmed that the SEC en banc had resolved that
the Cemco transaction was not covered by the tender offer rule.
On 28 July 2004, feeling aggrieved by the transaction, respondent National
Life Insurance Company of the Philippines, Inc., a minority stockholder of UCC, sent a
letter to Cemco demanding the latter to comply with the rule on mandatory tender
offer. Cemco, however, refused.
On 5 August 2004, a Share Purchase Agreement was executed by ACC and
BCI, as sellers, and Cemco, as buyer.
On 12 August 2004, the transaction was consummated and closed.
On 19 August 2004, respondent National Life Insurance Company of the
Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July
2004 Resolution and to declare the purchase agreement of Cemco void and praying
that the mandatory tender offer rule be applied to its UCC shares. Impleaded in the
complaint were Cemco, UCC, UCHC, BCI and ACC, which were then required by the
SEC to file their respective comment on the complaint. In their comments, they were
uniform in arguing that the tender offer rule applied only to a direct acquisition of the
shares of the listed company and did not extend to an indirect acquisition arising from
the purchase of the shares of a holding company of the listed firm.
In a Decision dated 14 February 2005, the SEC ruled in favor of the
respondent by reversing and setting aside its 27 July 2004 Resolution and directed
petitioner Cemco to make a tender offer for UCC shares to respondent and other
holders of UCC shares similar to the class held by UCHC in accordance with Section
9(E), Rule 19 of the Securities Regulation Code.
Petitioner filed a petition with the Court of Appeals challenging the SECs
jurisdiction to take cognizance of respondents complaint and its authority to
require Cemco to make a tender offer for UCC shares, and arguing that the tender
offer rule does not apply, or that the SECs re-interpretation of the rule could not be
made to retroactively apply to Cemcos purchase of UCHC shares.
The Court of Appeals rendered a decision affirming the ruling of the SEC. It
ruled that the SEC has jurisdiction to render the questioned decision and, in any
event, Cemco was barred by estoppel from questioning the SECs jurisdiction. It,
likewise, held that the tender offer requirement under the Securities Regulation Code
and its Implementing Rules applies to Cemcos purchase of UCHC
stocks.The decretal portion of the said Decision reads:
IN VIEW OF THE FOREGOING, the assailed decision of the
SEC is AFFIRMED, and the preliminary injunction issued by the Court
LIFTED.[5]
Cemco filed a motion for reconsideration which was denied by the Court of
Appeals.
Hence, the instant petition.
In its memorandum, petitioner Cemco raises the following issues:
I.
ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER
NATIONAL LIFES COMPLAINT AND THAT THE SECS RE-
INTERPRETATION OF THE TENDER OFFER RULE IS CORRECT,
WHETHER OR NOT THAT REINTERPRETATION CAN BE APPLIED
RETROACTIVELY TO CEMCOS PREJUDICE.
II.
WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE
DISPUTE BETWEEN THE PARTIES A QUO OR TO RENDER JUDGMENT
REQUIRING CEMCO TO MAKE A TENDER OFFER FOR UCC SHARES.
III.
WHETHER OR NOT CEMCOS PURCHASE OF UCHC SHARES IS
SUBJECT TO THE TENDER OFFER REQUIREMENT.
IV.
WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA
DECISION, IS AN INCOMPLETE JUDGMENT WHICH PRODUCED NO
EFFECT.[6]
Simply stated, the following are the issues:
1. Whether or not the SEC has jurisdiction over
respondents complaint and to require Cemco to make a
tender offer for respondents UCC shares.
2. Whether or not the rule on mandatory tender offer
applies to the indirect acquisition of shares in a listed
company, in this case, the indirect acquisition by Cemco of
36% of UCC, a publicly-listed company, through its
purchase of the shares in UCHC, a non-listed company.
3. Whether or not the questioned ruling of the SEC can be
applied retroactively to Cemcos transaction which was
consummated under the authority of the SECs prior
resolution.
On the first issue, petitioner Cemco contends that while the SEC can take
cognizance of respondents complaint on the alleged violation by petitioner Cemco of
the mandatory tender offer requirement under Section 19 of Republic Act No. 8799,
the same statute does not vest the SEC with jurisdiction to adjudicate and determine
the rights and obligations of the parties since, under the same statute, the SECs
authority is purely administrative. Having been vested with purely administrative
authority, the SEC can only impose administrative sanctions such as the imposition of
administrative fines, the suspension or revocation of registrations with the SEC, and
the like. Petitioner stresses that there is nothing in the statute which authorizes the
SEC to issue orders granting affirmative reliefs. Since the SECs order commanding it to
make a tender offer is an affirmative relief fixing the respective rights and obligations
of parties, such order is void.
Petitioner further contends that in the absence of any specific grant of
jurisdiction by Congress, the SEC cannot, by mere administrative regulation, confer on
itself that jurisdiction.
Petitioners stance fails to persuade.
In taking cognizance of respondents complaint against petitioner and
eventually rendering a judgment which ordered the latter to make a tender offer, the
SEC was acting pursuant to Rule 19(13) of the Amended Implementing Rules and
Regulations of the Securities Regulation Code, to wit:
13. Violation
If there shall be violation of this Rule by pursuing a
purchase of equity shares of a public company at threshold amounts
without the required tender offer, the Commission, upon complaint,
may nullify the said acquisition and direct the holding of a tender
offer. This shall be without prejudice to the imposition of other
sanctions under the Code.
The foregoing rule emanates from the SECs power and authority to regulate,
investigate or supervise the activities of persons to ensure compliance with the
Securities Regulation Code, more specifically the provision on mandatory tender offer
under Section 19 thereof.[7]
Another provision of the statute, which provides the basis of Rule 19(13) of
the Amended Implementing Rules and Regulations of the Securities Regulation Code,
is Section 5.1(n), viz:
[T]he Commission shall have, among others, the following powers
and functions:
xxxx
(n) Exercise such other powers as may be provided by law
as well as those which may be implied from, or which are necessary
or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.
The foregoing provision bestows upon the SEC the general adjudicative
power which is implied from the express powers of the Commission or which is
incidental to, or reasonably necessary to carry out, the performance of the
administrative duties entrusted to it. As a regulatory agency, it has the incidental
power to conduct hearings and render decisions fixing the rights and obligations of
the parties. In fact, to deprive the SEC of this power would render the agency inutile,
because it would become powerless to regulate and implement the law. As correctly
held by the Court of Appeals:
We are nonetheless convinced that the SEC has the
competence to render the particular decision it made in this case. A
definite inference may be drawn from the provisions of the SRC that
the SEC has the authority not only to investigate complaints of
violations of the tender offer rule, but to adjudicate certain rights
and obligations of the contending parties and grant
appropriate reliefs in the exercise of its regulatory functions under
the SRC. Section 5.1 of the SRC allows a general grant of adjudicative
powers to the SEC which may be implied from or are necessary or
incidental to the carrying out of its express powers to achieve the
objectives and purposes of the SRC. We must bear in mind in
interpreting the powers and functions of the SEC that the law has
made the SEC primarily a regulatory body with the incidental power
to conduct administrative hearings and make decisions.A regulatory
body like the SEC may conduct hearings in the exercise of its
regulatory powers, and if the case involves violations or conflicts in
connection with the performance of its regulatory functions, it will
have the duty and authority to resolve the dispute for the best
interests of the public.[8]
For sure, the SEC has the authority to promulgate rules and regulations,
subject to the limitation that the same are consistent with the declared policy of the
Code. Among them is the protection of the investors and the minimization, if not total
elimination, of fraudulent and manipulative devises. Thus, Subsection 5.1(g) of the law
provides:
Prepare, approve, amend or repeal rules, regulations and
orders, and issue opinions and provide guidance on and supervise
compliance with such rules, regulations and orders.
Also, Section 72 of the Securities Regulation Code reads:
 72.1. x x x To effect the provisions and purposes of this
Code, the Commission may issue, amend, and rescind such rules and
regulations and orders necessary or appropriate, x x x.
72.2. The Commission shall promulgate rules and
regulations providing for reporting, disclosure and the prevention of
fraudulent, deceptive or manipulative practices in connection with
the purchase by an issuer, by tender offer or otherwise, of and
equity security of a class issued by it that satisfies the requirements
of Subsection 17.2. Such rules and regulations may require such
issuer to provide holders of equity securities of such dates with such
information relating to the reasons for such purchase, the source of
funds, the number of shares to be purchased, the price to be paid
for such securities, the method of purchase and such additional
information as the Commission deems necessary or appropriate in
the public interest or for the protection of investors, or which the
Commission deems to be material to a determination by holders
whether such security should be sold.
The power conferred upon the SEC to promulgate rules and regulations is a
legislative recognition of the complexity and the constantly-fluctuating nature of the
market and the impossibility of foreseeing all the possible contingencies that cannot
be addressed in advance. As enunciated in Victorias Milling Co., Inc. v. Social Security
Commission[9]:
Rules and regulations when promulgated in pursuance of the
procedure or authority conferred upon the administrative agency
by law, partake of the nature of a statute, and compliance therewith
may be enforced by a penal sanction provided in the law. This is so
because statutes are usually couched in general terms, after
expressing the policy, purposes, objectives, remedies and sanctions
intended by the legislature. The details and the manner of carrying
out the law are often times left to the administrative agency
entrusted with its enforcement. In this sense, it has been said that
rules and regulations are the product of a delegated power to create
new or additional legal provisions that have the effect of law.
Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It
must be pointed out that petitioner had participated in all the proceedings before the
SEC and had prayed for affirmative relief. In fact, petitioner defended the jurisdiction
of the SEC in its Comment dated 15 September 2004, filed with the SEC wherein it
asserted:
This Honorable Commission is a highly specialized body
created for the purpose of administering, overseeing, and managing
the corporate industry, share investment and securities market in
the Philippines. By the very nature of its functions, it dedicated to
the study and administration of the corporate and securities laws
and has necessarily developed an expertise on the subject. Based on
said functions, the Honorable Commission is necessarily tasked to
issue rulings with respect to matters involving corporate matters
and share acquisitions. Verily when this Honorable Commission
rendered the Ruling that the acquisition of Cemco Holdings of the
majority shares of Union Cement Holdings, Inc., a substantial
stockholder of a listed company, Union Cement Corporation, is not
covered by the mandatory tender offer requirement of the SRC Rule
19, it was well within its powers and expertise to do so. Such ruling
shall be respected, unless there has been an abuse or improvident
exercise of authority.[10]
Petitioner did not question the jurisdiction of the SEC when it rendered an
opinion favorable to it, such as the 27 July 2004Resolution, where the SEC opined that
the Cemco transaction was not covered by the mandatory tender offer rule. It was
only when the case was before the Court of Appeals and after the SEC rendered an
unfavorable judgment against it that petitioner challenged the SECs competence. As
articulated in Ceroferr Realty Corporation v. Court of Appeals[11]:
While the lack of jurisdiction of a court may be raised at
any stage of an action, nevertheless, the party raising such question
may be estoppedif he has actively taken part in the very proceedings
which he questions and he only objects to the courts jurisdiction
because the judgment or the order subsequently rendered is
adverse to him.
On the second issue, petitioner asserts that the mandatory tender offer rule
applies only to direct acquisition of shares in the public company.
This contention is not meritorious.
Tender offer is a publicly announced intention by a person acting alone or in
concert with other persons to acquire equity securities of a public company.[12] A
public company is defined as a corporation which is listed on an exchange, or a
corporation with assets exceeding P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not less than 100 shares of such
company.[13] Stated differently, a tender offer is an offer by the acquiring person to
stockholders of a public company for them to tender their shares therein on the terms
specified in the offer.[14] Tender offer is in place to protect minority shareholders
against any scheme that dilutes the share value of their investments. It gives the
minority shareholders the chance to exit the company under reasonable terms, giving
them the opportunity to sell their shares at the same price as those of the majority
shareholders.[15]
Under Section 19 of Republic Act No. 8799, it is stated:
Tender Offers. 19.1. (a) Any person or group of persons
acting in concert who intends to acquire at least fifteen percent
(15%) of any class of any equity security of a listed corporation or of
any class of any equity security of a corporation with assets of at
least Fifty million pesos (P50,000,000.00) and having two hundred
(200) or more stockholders with at least one hundred (100) shares
each or who intends to acquire at least thirty percent (30%) of such
equity over a period of twelve (12) months shall make a tender offer
to stockholders by filing with the Commission a declaration to that
effect; and furnish the issuer, a statement containing such of the
information required in Section 17 of this Code as the Commission
may prescribe. Such person or group of persons shall publish all
requests or invitations for tender, or materials making a tender offer
or requesting or inviting letters of such a security. Copies of any
additional material soliciting or requesting such tender offers
subsequent to the initial solicitation or request shall contain such
information as the Commission may prescribe, and shall be filed
with the Commission and sent to the issuer not later than the time
copies of such materials are first published or sent or given to
security holders.
Under existing SEC Rules,[16] the 15% and 30% threshold acquisition of shares
under the foregoing provision was increased to thirty-five percent (35%). It is further
provided therein that mandatory tender offer is still applicable even if the acquisition
is less than 35% when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company.[17]
The SEC and the Court of Appeals ruled that the indirect acquisition by
petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC shares
is covered by the mandatory tender offer rule.
This interpretation given by the SEC and the Court of Appeals must be
sustained.
The rule in this jurisdiction is that the construction given to a statute by an
administrative agency charged with the interpretation and application of that statute
is entitled to great weight by the courts, unless such construction is clearly shown to
be in sharp contrast with the governing law or statute.[18] The rationale for this rule
relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to accumulation of experience
and growth of specialized capabilities by the administrative agency charged
with implementing a particular statute.[19]
The SEC and the Court of Appeals accurately pointed out that the coverage
of the mandatory tender offer rule covers not only direct acquisition but also indirect
acquisition or any type of acquisition. This is clear from the discussions of the
Bicameral Conference Committee on the Securities Act of 2000, on 17 July 2000.
SEN. S. OSMEA. Eto ang mangyayari diyan, eh. Somebody
controls 67% of the Company. Of course, he will pay a premium for
the first 67%. Control yan, eh.
Eh, kawawa yung mga maiiwan, ang 33% because the
value of the stock market could go down, could go down after that,
because there will (p. 41) be no more market.
Wala nang gustong bumenta.
Wala nang I
mean maraming gustong bumenta, walang gustong bumili kung hin
di yung majority owner.
And they will not buy. They already have 67%. They already
have control.
And this protects the minority. And we have had a case
in Cebu wherein Ayala A who already owned 40% of Ayala B made
an offer for another 40% of Ayala B without offering the
20%. Kawawanaman yung nakahawak ngayon ng 20%. Ang baba ng
share sa market. But we did not have a law protecting them at that
time.
CHAIRMAN ROCO. So what is it that you want to achieve?
SEN. S. OSMEA. That if a certain group achieves a certain
amount of ownership in a corporation, yeah, he is obligated to buy
anybody who wants to sell.
CHAIRMAN ROCO. Pro-rata lang. (p. 42).
xxxx
 REP. TEODORO. As long as it reaches 30, ayan na. Any type
of acquisition just as long as it will result in 30 (p.50) reaches
30, ayan na. Any type of acquisition just as long as it will result in 30,
general tender, pro-rata.[20] (Emphasis supplied.)
Petitioner counters that the legislators reference to any type of acquisition
during the deliberations on the Securities Regulation Code does not indicate that
congress meant to include the indirect acquisition of shares of a public corporation to
be covered by the tender offer rule. Petitioner also avers that it did not directly acquire
the shares in UCC and the incidental benefit of having acquired the control of the said
public company must not be taken against it.
These arguments are not convincing. The legislative intent of Section 19 of
the Code is to regulate activities relating to acquisition of control of the listed company
and for the purpose of protecting the minority stockholders of a listed
corporation. Whatever may be the method by which control of a public company is
obtained, either through the direct purchase of its stocks or through an indirect
means, mandatory tender offer applies. As appropriately held by the Court of Appeals:
The petitioner posits that what it acquired were stocks of UCHC and
not UCC. By happenstance, as a result of the transaction, it became
an indirect owner of UCC. We are constrained, however, to construe
ownership acquisition to mean both direct and indirect. What is
decisive is the determination of the power of control. The legislative
intent behind the tender offer rule makes clear that the type of
activity intended to be regulated is the acquisition of control of the
listed company through the purchase of shares. Control may [be]
effected through a direct and indirect acquisition of stock, and when
this takes place, irrespective of the means, a tender offer must
occur. The bottomline of the law is to give the shareholder of the
listed company the opportunity to decide whether or not to sell in
connection with a transfer of control. x x x.[21]
As to the third issue, petitioner stresses that the ruling on mandatory tender
offer rule by the SEC and the Court of Appeals should not have retroactive effect or be
made to apply to its purchase of the UCHC shares as it relied in good faith on the letter
dated 27 July 2004 of the SEC which opined that the proposed acquisition of the UCHC
shares was not covered by the mandatory offer rule.
The argument is not persuasive.
The action of the SEC on the PSE request for opinion on
the Cemco transaction cannot be construed as passing merits or giving approval to the
questioned transaction. As aptly pointed out by the respondent, the letter dated 27
July 2004 of the SEC was nothing but an approval of the draft letter prepared by
Director Callanga. There was no public hearing where interested parties could have
been heard. Hence, it was not issued upon a definite and concrete controversy
affecting the legal relations of parties thereby making it a judgment conclusive on all
the parties. Said letter was merely advisory. Jurisprudence has it that an advisory
opinion of an agency may be stricken down if it deviates from the provision of the
statute.[22] Since the letter dated 27 July 2004 runs counter to the Securities
Regulation Code, the same may be disregarded as what the SEC has done in its
decision dated 14 February 2005.
Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling,
the same cannot be utilized to determine the rights of the parties. What is to be
applied in the present case is the subsequent ruling of the SEC dated 14 February
2005 abandoning the opinion embodied in the letter dated 27 July 2004. In Serrano v.
National Labor Relations Commission,[23] an argument was raised similar to the case
under consideration. Private respondent therein argued that the new doctrine
pronounced by the Court should only be applied prospectively. Said postulation was
ignored by the Court when it ruled:
While a judicial interpretation becomes a part of the law as
of the date that law was originally passed, this is subject to the
qualification that when a doctrine of this Court is overruled and a
different view is adopted, and more so when there is a reversal
thereof, the new doctrine should be applied prospectively and
should not apply to parties who relied on the old doctrine and acted
in good faith. To hold otherwise would be to deprive the law of its
quality of fairness and justice then, if there is no recognition of what
had transpired prior to such adjudication.
It is apparent that private respondent misconceived the
import of the ruling. The decision in Columbia Pictures does not
mean that if a new rule is laid down in a case, it should not be
applied in that case but that said rule should apply prospectively to
cases arising afterwards. Private respondents view of the principle
of prospective application of new judicial doctrines would turn the
judicial function into a mere academic exercise with the result that
the doctrine laid down would be no more than a dictum and would
deprive the holding in the case of any force.
Indeed, when the Court formulated the Wenphil doctrine,
which we reversed in this case, the Court did not defer application
 of the rule laid down imposing a fine on the employer for failure to
give notice in a case of dismissal for cause. To the contrary, the new
rule was applied right then and there. x x x.

Lastly, petitioner alleges that the decision of the SEC dated 14 February
2005 is incomplete and produces no effect.

This contention is baseless.

The decretal portion of the SEC decision states:

In view of the foregoing, the letter of the Commission,

signed by Director Justina F. Callangan, dated July 27, 2004,
addressed to the Philippine Stock Exchange is hereby REVERSED and
SET ASIDE. Respondent Cemco is hereby directed to make a tender
offer for UCC shares to complainant and other holders of UCC shares
similar to the class held by respondent UCHC, at the highest price it
paid for the beneficial ownership in respondent UCC, strictly in
accordance with SRC Rule 19, Section 9(E).[24]

A reading of the above ruling of the SEC reveals that the same is complete. It
orders the conduct of a mandatory tender offer pursuant to the procedure provided
for under Rule 19(E) of the Amended Implementing Rules and Regulations of the
Securities Regulation Code for the highest price paid for the beneficial ownership of
UCC shares. The price, on the basis of the SEC decision, is determinable.Moreover, the
implementing rules and regulations of the Code are sufficient to inform and guide the
parties on how to proceed with the mandatory tender offer.

WHEREFORE, the Decision and Resolution of the Court of Appeals dated 24

October 2005 and 6 March 2006, respectively, affirming the Decision dated 14
February 2005 of the Securities and Exchange Commission En Banc, are
hereby AFFIRMED. Costs against petitioner.

SO ORDERED.
G.R. No. L-41291 December 8, 1988
LOPEZ, LOCSIN, LEDESMA & CO., INC., petitioner,
vs.
HON. COURT OF APPEALS and CMS STOCK BROKERAGE, INC., respondents.
Augusto Kalaw for petitioner.
Sison, Dominguez & Associates for private respondent.
GUTIERREZ, J.:
This is a petition for review of the decision of the Court of Appeals, affirming except
as to the portion on damages a summary judgment for specific performance
promulgated by the trial court in favor of the private respondent.
On August 14 and 26,1969 CMS Stock Brokerage, Inc. (CMS for short) sold to Lopez,
Locsin, Ledesma and Co., Inc., (LLL for short) on the floor of the Makati Stock Exchange,
among others, 2,650 Benguet Consolidated shares for the total price of P297,650.00
on a ten (10) to twenty (20) days delayed delivery basis. The sale is evidenced by
Exchange Contracts Nos. B11807 and B-11814 both dated August 14, 1969 and B-
13084 dated August 26, 1969. Of these 2,650 shares, 500 shares were purchased for
and on orders of Jose Ma. Lopez, 1,600 shares for and on orders of' Alfredo Ramos;
275 shares for and on orders of Rene Ledesma; and 275 shares for and on orders of
Cesar A. Lopez, Jr.
CMS, however, failed to deliver to LLL the 2,650 Benguet Consolidated shares within
the ten (10) to twenty (20) days stipulated in the exchange contracts between them
alleging non-delivery as due to mere oversight owing to the huge volume of
transactions.
On or about January 5, 1970 or four (4) months later, in the course of an audit of CMS's
books of accounts and other records by Sycip, Gorres Velayo & Co., the auditors
discovered that the 2,650 Benguet Consolidated shares which CMS sold to LLL still
remained undelivered and unpaid by LLL.
So CMS made known the LLL that it would effect delivery of said shares of stocks the
following day. LLL in its letter dated January 7, 1970, however, refused to accept
delivery at that late time since its clients for whom the purchases were made had
"elected to cancel" the orders.
On January 8, 1970, CMS replied that, pursuant to the Rules and Regulations of the
Makati Stock Exchange, LLL had no right to cancel its orders, nevertheless, made a
disposal in favor of LLL the next day.
On January 9,1970, LLL refused to acknowledge receipt of and sign the covering
disposal letter. What CMS did was to deposit the letter with the Office of the Stock
Exchange's Executive Secretary with the notation: "Refused Acceptance pending
decision of the Exchange."
The foregoing dispute was referred to the Board of Governors of the Makati Stock
Exchange which rendered the following decision:
RESOLVED, that (1) Messrs. Lopez, Locsin, Ledesma & Co., Inc., as
buyer of 2,650 Benguet share per contracts executed August 14,
1969 for delivery within 10 to 20 days be held to have violated
Section I of Article VI of the Rules and Regulations of the Makati
Stock Exchange for failure to advise the selling broker in writing
within a reasonable time; (2) CMS Stock Brokerage, Inc., be, as it is
hereby held to have violated Section 1 (5) of Article XI of the Rules
and Regulations of the Makati Stock Exchange for failure to give
notice in writing on the agreed date of delivery of 2,650 Benguet
shares and even within a reasonable time from said agreed date of
delivery;
RESOLVED, FURTHER, that both parties to the disputed transaction
having violated the Rules and Regulations of the Makati Stock
Exchange, be left to settle their dispute by any means to them by
applicable laws;
RESOLVED, FINALLY, that for having violated the aforesaid Rules and
Regulations of the Exchange, Messrs. Lopez, Locsin, Ledesma & Co.,
Inc., and CMS Stock Brokerage, Inc., be, as they are hereby fined in
the sum of P6,000.00 each to be paid within ten (10) days from the
date of notice of this decision. (p. 9, Rollo)
On March 15,1971, CMS Stock Brokerage, Inc., filed a complaint docketed as Civil Case
No. 14518 in the Court of First Instance of Rizal against Lopez, Locsin, Ledesma & Co.,
Inc., to compel the latter to accept the shares of stock in question.
A motion to dismiss was filed by LLL on the ground of lack of cause of action to which
CMS filed an opposition. In an order dated May 21, 1971, the Court denied the motion
as "the ground does not appear to be indubitable."
In its answer with counterclaim, LLL, by way of affirmative defenses, alleged among
others: (1) the complaint states no cause of action; (2) the Rules and Regulations of
the Makati Stock Exchange do not affect the contractual relations between the parties
which are solely governed by Civil Laws; (3) plaintiff is in pari delicto having likewise
violated the said Rules and Regulations when it failed to comply with par. 5, Sec. 1,
Art. XI providing that:
On the agreed day of delivery, notice of writing shall be given by the
selling broker, said notice to reach the buying broker not later than
4:00 p.m. ...
and (4) considering the speculative or fluctuating value of the mining stocks, time is of
the essence of the contract; hence, the delivery made four (4) months later is not
within the contemplation of the sale in question which was on a 10-to-20 day delayed
delivery basis.
Upon motion of the defendant LLL, the lower court admitted its third-party complaint
against Jose Maria Lopez, Cesar A. Lopez, Jr., Alfredo Ramos and Rene Ledesma. The
third party complaint merely seeks reimbursement from the third-party defendants in
the event LLL is held liable in the case.
Third-party defendant, Rene Ledesma did not file any answer to the third-party
complaint.
The plaintiff and defendant third-party plaintiff filed their respective answers to the
counterclaims of third-party defendants Jose Maria Lopez and Cesar Lopez, Jr.
Resolving the case, the trial court rendered a decision, dated August 10, 1972, the
dispositive portion of which reads:
WHEREFORE, this Court hereby renders judgment as follows:
1. in favor of plaintiff on its complaint by—
(a) Compelling defendant Lopez, Locsin, Ledesma
& Co., Inc., to accept delivery from plaintiff of the
2,650 shares of Benguet Consolidated covered by
the latter's disposal letter of January 9, 1970 and
to pay plaintiff the amount of P297,650.00
representing the total price for which defendant
purchased the said shares on the trading floor of
the Makati Stock Exchange on Aug. 14 an d 26,
1969, plus legal interest thereon from the date of
extra-judicial demand on January 9,1970 until the
said amount shall have been fully paid, it being
understood that the interest due from January 9,
1970 lip to the filing of the Complaint on March
15, 1971, shall be compounded and shall earn
legal interest and
(b) Adjudging the defendant to pay plaintiff the
amount of P25,000.00 as and for attorney's fees.
2 In favor of plaintiff on its counterclaims against the counterclaims
of third-party defendants Cesar Lopez, Jr. and Jose Maria Lopez, by
condemning them, jointly and severally with the defendant and
third-party plaintiff, to pay plaintiff—
(a) By way of moral damages the amount of
P20,000.00; .
(b) By way of exemplary on collective damages
the amount of P50,000.00 as an example or
correction for public good; and
3. In favor of third-party plaintiff and against the third-party
defendants on the third-party complaint by-
(a) Ordering the third-party defendants, pro rata,
to reimburse the third-party plaintiff the principal
amount of P297,650.00 plus legal interest
thereon, referred to in the preceding paragraph 1
of the dispositive portion of this decision, which it
may have paid to the plaintiff under this
judgment; and
(b) Dismissing the counterclaims of the third-
party defendants against the third-party plaintiff
for attorney's fees, moral and exemplary
damages, and the expenses of litigation;
4. The defendant (third-party plaintiff) and the fourth third-party
defendants are jointly and severally liable to payment of attorney's
fees, moral and exemplary or corrective damages awarded to
plaintiff under this judgment.
With costs of suit against the defendant- (pp. 364-367, PRA). (PP.
67-68, Rollo).
Consequently, Lopez, Locsin, Ledesma & Co., Inc., and third-party defendants Jose Ma.
Lopez and Cesar Lopez, Jr., and Alfredo Ramos appealed to the Court of Appeals.
On June 5, 1975, the Court of Appeals affirmed the decision of the trial court. The
dispositive portion of the appellate decision reads:
WHEREFORE, the appealed judgment is hereby affirmed with the
exception of the award of damages and attorney's fees in favor of
plaintiff-appellee which is hereby set aside. The records of this case
are remanded to the trial court for the determination of the claim
for damages and attorney's fees. No pronouncement as to costs.
(p. 96, Rollo)
Hence, this present petition.
Herein petitioners made the following assignments of errors:
I
THE RESPONDENT COURT ERRED IN SUSTAINING THE LOWER
COURT BY FINDING 'THAT PLAINTIFF (RESPONDENT CMS) HAS A
CAUSE OF ACTION AGAINST DEFENDANT-APPELLANT (PETITIONER
LLL)' DESPITE ITS AGREEING THAT 'IN EVERY STOCK EXCHANGE
CONTRACT, TIME IS OF THE ESSENCE AND THE ADMISSION IN THE
COMPLAINT THAT RESPONDENT CMS FAILED TO DELIVER TO THE
PETITIONER LLL 'THE AFOREMENTIONED SHARES WITHIN THE
PERIOD OF 10- 20 DAYS STIPULATED IN THE EXCHANGE OF
CONTRACTS BETWEEN THEM.'
II
THE RESPONDENT COURT ERRED IN HOLDING THAT THE ALLEGED
OVERSIGHT OF THE PRIVATE RESPONDENT, IN DELIVERING THE
SUBJECT SHARES OF STOCK ON TIME, IS 'NOT MATERIAL TO THE
CASE AND IS NOT A GENUINE TRIABLE ISSUE.'
III
THE RESPONDENT COURT ERRED IN HOLDING THAT, BECAUSE
PETITIONER LLL ALLEGED NO KNOWLEDGE OF THE AVERRED
'OVERSIGHT' BY RESPONDENT CMS 'TO PROCEED TO TRIAL ABOUT
THE MATTER IS A USELESS ONE.'
IV
THE RESPONDENT COURT ERRED IN FINDING WITHOUT MERIT THE
CONTENTION THAT THE EXCHANGE CONTRACTS SUBJECT MATTER
OF THE PRESENT LITIGATION ARE NOT COVERED BY THE ABOVE
RULES (OF THE EXCHANGE).
V
 RESPONDENT COURT ERRED WHEN IT RULED THAT THE RULES OF
THE EXCHANGE SUPPLANT RATHER THAN SUPPLEMENT THE CIVIL
CODE AND IN FINDING THE PETITIONER LLL TO HAVE VIOLATED SAID
RULES.
VI
THE RESPONDENT COURT ERRED IN HOLDING 'THAT THERE IS NO
PLACE FOR THE APPLICATION OF THE DOCTRINE OF IN PARI DELICTO
IN THE PRESENT CASE.
VII
THE RESPONDENT COURT ERRED IN SUSTAINING THE TRIAL
COURT'S MISTAKEN APPLICATION OF JUSTICE AND EQUITY AND THE
ERRONEOUS MEANING IT GAVE TO THE RULES OF THE EXCHANGE.
VIII
THE RESPONDENT COURT ERRED IN FINDING THAT THE LOWER
COURT DID NOT COMMIT ANY ERROR IN GRANTING THE MOTION
FOR SUMMARY JUDGMENT OF PLAINTIFF-APPELLEE (RESPONDENT
CMS).
(Brief for Petitioner, Rollo, p. 209)
It is the petitioner's main contention that the law on contracts is controlling in this
case: Hence, CMS' failure to deliver the 2,650 Benguet Consolidated shares of stocks
within the stipulated time of ten (10) to twenty (20) days warrants the rescission of
the exchange contracts in question. The petitioner states that it cannot, therefore, be
compelled to accept the belated delivery of these shares of stocks about four (4)
months after they were ordered. To resolve the issues raised by the parties, we first
examine the nature and purposes of an exchange—
An exchange is a voluntary association or corporation organized for
the purpose of furnishing to its members a convenient and suitable
place to transact their business of promoting uniformity in the
customs and usages of merchants, of inculcating principles of justice
and equity in trade, of facilitating the speedy adjustment of business
disputes, of acquiring and disseminating valuable commercial and
economic information and generally of securing to its members the
benefits of cooperation in the furtherance of their legitimate
pursuits. (See Nicole v. Ames, 173 US 509, 43 L Ed 786, 19 S Ct 522).
Like any other association, an exchange has the power to adopt its own constitution,
by-laws, rules and regulations so far as they are not contrary to law or public policy
and which will secure to the members exclusive rights and privileges which the courts
have fully recognized. (Hyde v. Woods, 94 US 523, 24 L Ed 264; Zell v. Baltimore Stock
Exchange, 102 Md. 489, 62 A 808). Anyone who becomes a member of the exchange
voluntarily submits himself to the operation of these rules and is expected to be bound
by and to respect them. As held in the case of Belton v. Hatch (109 NY 593,17 NE 225,
226):
xxx xxx xxx
... The interest of each member in the property of the association is
equal, but it is subject to the constitution and by-laws, which are the
basis on which is founded the association. They express the contract
by which each member has consented to be bound and which
measures his duties, rights and privileges as such. It seems most
clear to me that this constitution and the by- laws derive a binding
force from the fact that they are signed by all the members, and that
they are conclusive upon each of them in respect of the regulations
of the mode of transaction of his business, and of his right to
continue to be a member. ... (Emphasis supplied)
There is no dispute that the exchange contracts in question were drawn up on the
floor of the Makati Stock Exchange between two (2) member stockbrokers, CMS as
the seller and LLL, as the buyer for and on orders of the third parties. As members of
the stock exchange, they are bound by the rules and by-laws of the exchange. We
agree with the observation of the respondent court that:
xxx xxx xxx
... in every stock exchange contract, time is of the essence. We
believe, however, that it is precisely for this reason why the Makati
Stock Exchange, Inc., and the members thereof agreed to have a set
of Rules and Regulations which shall govern the members in
dealings and transactions with one another. Both plaintiff-appellee
and defendant-appellant are members of the Makati Stock
Exchange, Inc. As such, they are bound by the Rules and Regulations
of the Exchange. (p. 79, Rollo).
The above observation is supported by the constitution of the Makati Stock Exchange,
particularly Article 11, Section 4 of which provides:
The Board shall prescribe rules for dealing on the Exchange. It shall
prescribe rules as to insolvency and as to Exchange Contracts the
performance thereof, and default thereon, and may extend or
postpone the time for the performance of exchange contracts,
whenever in its opinion, such action is called for by the public
interest or by just and equitable principles of trade.
It may adopt such rules as may be deemed necessary or proper in
respect to exchange contracts." (p. 82, Rollo)
The rule at issue in the instant case is Section I, Article V of the Rules and Regulations.
It reads:
In the event of a Selling Member failing to make delivery within a
reasonable period of time of shares sold under delayed delivery
contract, it shall be the Buying Member duty to advise the Selling
Member in writing giving him 1 full business day from the time of
receipt of said letter of demand to make delivery.
The Buying Member shall obtain a written receipt from the Selling
Member on the duplicate copy of the letter of demand. This receipt
 must state the time of delivery of the letter of demand to the Selling
Member.
Fifteen days shall be considered a reasonable period of time within
which to effect delivery unless otherwise stated in the sales
contract.
In the event a Selling Member is unable to make delivery within said
period, the Buying Member shall deliver a copy of his letter of
demand to the Chairman of the Floor Trading & Arbitration
Committee who may purchase the shares for the Selling Member's
Account. (pp. 43-44, Rollo)
The petitioner contends that the exchange contracts, subject matter of the litigation,
are not covered by the above rule because the rule refers to delivery of stocks made
within a reasonable time whereas in the case at bar, delivery must be made within the
stipulated time of ten (10) to twenty (20) days. LLL further argues that the rules and
regulations of the exchange govern only the "rights and duties of its members among
themselves" and do not affect contracts involving third persons.
The petitioner's contentions are untenable.
Paragraph 3, Section 1 of Article V states: "Fifteen days shall be considered a
reasonable period of time within which to effect delivery unless otherwise stated in
the sales contract." The rule is clear that the exchange contracts in question fall under
the last clause. The parties have merely specified the period within which delivery
must be made which is ten (10) to twenty (20) days. Such qualification does not in any
way change the nature of the exchange contracts. The buying member's duty under
the rules remains.
Paragraph 1 of said rule states that: ... it shall be the buying member's duty to advise
the selling member in writing", in case the latter fails to deliver the stocks sold under
"delayed delivery contract". The rule further stipulates that "in the event the selling
member is unable to make delivery within said period, the buying member shall deliver
a copy of his letter of demand to the chairman of the Floor Trading and Arbitration
Committee who may purchase the shares for the selling member's accounts.
(Paragraph 4, Sec. 1, Article V, Rules and Regulations)
More than any person, it is the buyer who should be aware whether or not what he
purchased has been delivered to him. Because of this awareness, the Exchange
imposes upon him the primary obligation of giving notice.
The rule also provides a remedy in case the selling member fails to deliver the stocks
ordered from the seller. It would, therefore, be safe to say that unless the buying
member timely notifies the seller that he is canceling his orders, then the orders
placed by the buying member still stand. LLL must, therefore, accept the delivery of
the shares of stocks. If the shares had doubled or trebled in value, it could demand
delivery of what it purchased. The rule is clear. It was the duty of LLL to make a demand
in the event CMS failed to deliver within the stipulated time. We quote with favor the
distinction made by the trial court between a "duty" and a "right".:
The wording of Article V, Sec. V, Sec. 1 of the
Exchange Rules is clear and indubitable. Under
the same, as already stated, when plaintiff failed
to deliver the Benguet Consolidated shares after
the lapse of 20 days it was the unavoidable duty
of the defendant to make a demand for the
delivery. It must also be noted that Article V,
Section 1 of the Exchange Rules does not vest the
defendant with the right to make a demand nor
the right to rescind once the plaintiff defaults. On
the contrary, it expressly imposes on said
defendant the duty to make a demand, thus
clearly implying that even if plaintiff defaulted,
rescission by defendant was impossible.
Right is one thing; duty is quite another. A right
need not be exercised. It might even be waived. A
duty, however, must be performed and one who
does not discharge the same must necessarily be
prepared to face the consequence of his
dereliction or omission.
Had Article V, Section 1 of the Exchange Rules
vested the defendant with the right to make a
demand, perhaps, such a right may be waived
and, after such a waiver, automatic rescission
might ensue if really time were of the essence of
the Exchange Contracts. But this is not so, Article
V, Section 1 imposes upon the defendant the duty
to make a demand and this duty cannot be
waived, as all duties cannot be waived. And if
defendant does not perform such a duty, it is not
far fetched to say that it can be called upon to
perform such duty even upon belated tender of
delivery of the Benguet Consolidated shares by
the plaintiff.
It must be added thereto the rescission under the New Civil Code
was not even contemplated by said Rules because under the oft-
mentioned Section 1, Article V of the Rules, in the event that the
selling member fails to deliver the ordered shares despite the
demand of the Buying Member, the recourse of defendant-
appellant under said Rules is to deliver a copy of his letter of demand
to the Chairman of the Floor Trading and Arbitration Committee
who is authorized to purchase the same from the Selling Member's
Account. (pp. 86-87, Rollo)
Moreover, the contention that rules and regulations of the exchange should not apply
to or affect contracts which may involve third persons is likewise without merit.
In the case of Carolina Industries, Inc., v. CMS Stock Brokerage, Inc. (97 SCRA 734) we
held that the rules and regulations of the Stock Exchange form part of the contract.
We stated:
We have consistently held that under such situation, such rules and
regulations become special terms of the contract. It was held
in Benett v. Logan, (80 Cal. App. 571, 252 Pac. 662 [1972]) that,
where a customer orders securities to be purchased "subject to the
rules, regulations, and customs of the exchange in which the order
is executed", such rules, regulations and customs thereby become
special terms of the contract. This very same doctrine has been
consistently adopted in interpreting contracts in this jurisdiction and
We have never deviated therefrom. (De Borja v. CAR, 79 SCRA 557;
Basa, et al., v. FOITAF et al. 61 SCRA 93; Central Bank v. Hon. Cloribel
and Banco Filipino, 44 SCRA 307; Maritime Co., of the Phils. v.
Reparations Commission, 40 SCRA 70; Lakas ng mga Manggagawang
Makabayan v. Hon. Carlos Abiera, 36 SCRA 437). (at 790)
In the instant case, the shares of stocks were bought by petitioner for and on orders
of Rene Ledesma, Jose Ma. Lopez, Alfredo Ramos and Cesar A. Lopez, Jr. As a general
rule and subject to certain limitations, a customer who engages a broker to execute
an order on a stock or produce exchange confers authority on such broker to conduct
the transaction according to the rules and established customs of the exchange on
which he deals, and the customer is thereby bound by such rules and customs, even
though he may not have actual knowledge of them. (Clews v. Jamieson 182 US 461,
45 L Ed 1183, 21 S Ct. 845; Hansen v. Boyd 161 US 397, 40 L Ed 746, 16 S Ct. 571; Bibb
v. Allen, 149 US 481, 37 L Ed 819,13 S Ct 950; Cisler v. Ray, 213 Cal 620, 2 P 2d 987, 79
A LR 584; Scott v. Shook, 80 Colo 40, 249 P 259, 47 A LR 1108; Skiff v. Stoddard 63
Conn 198, 26 A 874, 28 A 104). There are certain limitations such as when the rules
and customs of the exchange vary or contradict the contract between the customer
and his broker, or change the legal relations of the parties (Irwin v. Williar, 110 US 499,
28 L Ed 225, 4 S Ct. 160; Baker v. Drake, 66 NY 518) or when they are illegal or
unreasonable (Scott v. Shook, supra; Hallet v. Aggergaard, 21 SD 554,114 N.W. 696)
where the customers are not bound. However, these limitations are not at all
attendant in the present case. By its very nature, the rule calling for notice or advise
to the selling member in the event of delayed delivery or bringing the matter to the
Floor Trading and Arbitration Committee of the Exchange is one which should also
apply to the real buyers. Hence, the exchange contracts in question are definitely
subject to the rules and regulations of the exchange.
Furthermore, the petitioner contends that CMS has likewise violated the rules and
regulations particularly paragraph 5, Section I of Article XI on Delayed Delivery which
reads:
On the agreed date of delivery, notice in writing shall be given by
the selling broker to the buying broker, said notice to reach the
buying broker not later than 4:00 p.m. and both brokers shall report
it to the clearing house in the same manner as if it were a
transaction for that day.
The petitioner argues that CMS has violated the above rule and is, therefore, in
estoppel to set up the violation of Article V committed by the petitioner.
The respondent court disposed of this contention as follows:
As already shown earlier, the failure of plaintiff-appellee to deliver
the ordered shares to defendant-appellant within twenty days is of
no significant consequence under Section 1, Article V of the Rules
and Regulations of the Exchange. Said Rules do not give plaintiff-
appellee any value advantage over defendant-appellant. To repeat,
due to its failure or refusal to make the delivery, it may be compelled
through the Chairman of the Floor Trading & Arbitration Committee
to purchase the same for the Selling Member's Account. Hence,
there is no place for the application of the doctrine of "in pari
delicto" in the present case. (pp. 47-48, Decision, Annex "A"). (p. 29,
Rollo).
We agree that time is of the essence in these particular contracts because of the
speculative and fluctuating value of stocks. Delivery four (4) months after purchase is
obviously not within the contemplation of the sale of shares in question. Because of
the peculiarity of the business involved in a stock exchange, rules were adopted to
govern not only the members but the transactions between the members as well.
(Pacaud v. Waite, 218 III. 138, 75 NE 7 79). And as long as these rules are not contrary
to law, then the courts will not interfere to control their enforcement. (In re
Rosenbaum Grain Corporation, D.C. III. 13 F Supp. 601; Walsh v. New Orleans Cotton
Exchange, 177 So 68,188 La 338) Under the applicable rule, the failure of the seller to
deliver the stocks does not give the buying member the right to rescind the contract.
If the selling member fails or refuses to deliver, it may be compelled through the
Chairman of the Floor Trading and Arbitration Committee to purchase the same for
the selling member's account. There being a special remedy agreed upon by the
members, the right of rescission under the New Civil Code as invoked by the petitioner
is inapplicable. On this point, we adopt the lower court's conclusions as it states:
xxx xxx xxx
Basic is the rule that in the interpretation of rules, regulations or
statutes, the interpretation that should be adopted is the one which
would subserve the ends of justice and equity. To interpret now
Article V, Section 1 of the Exchange Rules the way defendant would
like this Court to do would result in the anomalous situation in which
defendant would have the sole say on whether or not to accept
delivery. If the price of Benguet Consolidated shares were up, it
could demand delivery; but if the price were down, it need not make
such a demand and would even have the right to rescind. This is
practically allowing defendant to have its cake and eat it, too. This
Court, nay, any court, cannot give its imprimatur to such heads-I-
win-tails-you-lose interpretation.
Furthermore, exchange contracts are peculiar in certain ways.
Firstly, they are affected with public interest. The business of stock
exchange is fueled by the money of the investing public and,
therefore, they are, or should be, clothed with greater sanctity than
ordinary contracts between private persons. Consequently, unless
there are clear and insuperable obstacles to their enforcement, they
should be enforced. The investing public must be absolutely assured
that, once a contract shall have almost the finality of death. (sic) This
Court can well imagine what pandemonium would ensure if, after a
trader in securities buys, say, 1,000 shares of a certain company,
sells after a rise in price of two points, buys back after one hour 500
of said shares after a down fluctuation of three points, sells again
450 of same shares and then, after the day's closing his original
purchase of 1,000 shares is questioned! Multiply this instance a
hundred times, and this is a conservative estimate in an active
market, and it can be readily seen that stock exchange operation
would be impossible if exchange contracts are not violated. (sic)
Secondly, exchange contracts are entered into with speed. They can
be closed in less than ten seconds flat even if they involve thousands
of pesos. Therefore, the Exchange Rules must be interpreted to
assure enforcement.
xxx xxx xxx
Thirdly, the stockbrokers usually do not invest their own money but
their clients'. Thus, the investor is practically dealing, through his
broker, with people who are complete strangers to him. He most
probably has not even heard of them. Consequently, exchange
contracts, although entered into by stockbrokers, are practically
between people unknown to each other. The inviolability of
exchange contracts and their enforcement must, therefore, be
guaranteed or else no stock exchange is possible. That is why when
Article V of the Exchange Rules on delayed delivery transactions was
amended by the addition of Section 5 thereunder, the said section,
in a language clear and unmistakable, stated that the contract must
be enforced by compelling the broker to accept and pay for them.
If this Court is reciting all this, it is simply to show that even
considerations of public policy demand that the defendant must be
compelled to accept the delivery of the disputed Benguet
Consolidated shares and to pay for them. Any other interpretation
of the Exchange Rules by which the defendant would be allowed to
shirk its responsibility to accept the shares would destroy the
Exchange itself. (pp. 92-94, Rollo)
xxx xxx xxx
On December 14, 1970, the Board of Governors of the Makati Stock Exchange
amended the Rules to cover the situation which led to the instant litigation. The new
Section 5 of Article V reads:
Sec. 5.—Members transacting on delayed delivery basis are
required to comply strictly with the provisions of Section 1, Article
V, above quoted and Section 1, paragraph 5, Article XI of the
Clearing Rules.
Failure to comply thereto will subject the defaulting broker to a fine
of 10% of the value of the transaction but not exceeding P6,000.00
plus payment in interest from date of default and in the latter case,
the amount goes to the other broker.
Should either party fail to comply with their respective duties under
the contract, both will be fined 10% of the value of the transaction
but not exceeding P6,000.00 each for the first offense; suspension
for a period of five (5) trading days for the second offense in addition
to the fine herein prescribed, and for the third offense expulsion.
Despite all these penalties, the contract must be enforced by
compelling the selling broker to deliver the shares and the buying
broker to accept and pay for them. (Record on Appeal, pp. 340-
341), pp. 89-90, Rollo).
The amendment, of course, cannot apply to the August 14 and 26, 1969 transactions.
The rules of Exchanges may be amended and revised in the light of changing
conditions (Exchange Buffet Corporation v. New York Stock Exchange, 244 F 2nd 507)
but the amendments cannot be made retroactive in their operation (M. Roth and Co.
v. New York Mercantile Exchange, 262 N.Y.S. 687, 146 Misc. 644). At any rate, while
not applicable, the amended rule illustrates what those directly affected by exchange
transactions, the persons with special expertise in the matter, consider as the most
fair, just, and equitable method of solving similar problems.
WHEREFORE, the petition is hereby DISMISSED for lack of merit. The questioned
decision of the respondent court is AFFIRMED.
SO ORDERED.